UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2007
OR
o 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
(Exact name of registrant as
specified in its charter)
|
Delaware
|
77-0239383
|
|
(State or other jurisdiction
of incorporation or organization)
|
(I.R.S. Employer
Identification Number)
|
|
585 West Beach
Street
|
|
|
Watsonville,
California
|
95076
|
|
(Address of principal
executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (831) 724-1011
Securities
registered pursuant to Section 12(b) of the Act:
|
Title of each
class
|
Name of each exchange
on which registered
|
|
Common
Stock, $0.01 par value
|
New
York Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x No o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for 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. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company (as defined by Rule 12b-2 of the Exchange
Act). Large
accelerated filer x Accelerated
filer o
Non-accelerated filer o Smaller reporting
company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No x
The
aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant was approximately $2.3
billion as of June 30, 2007, based upon the average of the bid and asked
prices per share of the registrant’s Common Stock as reported on the New York
Stock Exchange on such date. Shares of Common Stock held by each executive
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
At
February 13, 2008, 38,952,477
shares of Common Stock, par value $0.01, of the registrant were
outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE
Certain
information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Shareholders of Granite
Construction Incorporated to be held on May 19, 2008, which
will be filed with the Securities and Exchange Commission not later than 120
days after December 31, 2007.
FORWARD-LOOKING
DISCLOSURE
This Annual Report on Form
10-K contains statements 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. Words such as “outlook,”
“believes,” “expects,” “appears,” “may,” “will,”
“should,” “anticipates” or the negative thereof or comparable terminology,
are intended to identify these forward-looking statements. These
forward-looking statements are estimates reflecting the best judgment of
our senior management and are based on our current expectations and
projections 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 this Report 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 place undue reliance on these forward-looking
statements, which speak only as of the date of
this Report.
Introduction
We were
originally incorporated in 1922 as Granite Construction Company. In 1990,
Granite Construction Incorporated was incorporated in Delaware as the holding
company for Granite Construction Company and its wholly owned subsidiaries.
Unless otherwise indicated, the terms “we,” “us,” “our,”
“Company” and “Granite” refer to Granite Construction Incorporated and its
consolidated subsidiaries.
We are
one of the largest heavy civil construction contractors in the United States. We
operate nationwide, serving both public and private sector clients. Within the
public sector, we primarily concentrate on infrastructure projects, including
the construction of roads, highways, bridges, dams, canals, mass transit
facilities and airport infrastructure. Within the private sector, we perform
site preparation and infrastructure services for residential development,
commercial and industrial buildings, plants and other facilities. Our
diversification in both the public and private sectors and our mix of project
types and sizes have contributed to our profitability in various economic
environments.
We own
and lease substantial aggregate reserves and own a number of
construction materials processing plants. We also have one of the largest
contractor-owned heavy construction equipment fleets in the United States. We
believe that the ownership of these assets enables us to compete more
effectively by ensuring availability of these resources at a favorable
cost.
Operating
Structure
Historically,
we were organized into two operating segments, the Branch Division and the Heavy
Construction Division (“HCD”). The Branch Division was comprised of branch
offices that served local markets, while HCD was composed of regional offices
and pursued major infrastructure projects throughout the nation.
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 HCD
projects. This realignment involved 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 retains 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 includes the eastern portion of our large
project business that had been included in HCD and is aligned to focus on
enhancing project management oversight and discipline from estimating through
execution. With the Division office in Lewisville, Texas, Granite
East also operates out of three regional offices: the Central Region,
based in Lewisville, Texas; the Southeast Region, based in Tampa, Florida;
and the Northeast Region, based in Tarrytown, New York.
During 2007,
we completed the reassignment of our large projects in the West from our former
Heavy Construction Division to our Granite West Division (with the exception of
certain projects nearing completion which remain with our 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. Prior period results have
been reclassified to conform to the new organizational structure (see Note
1 of the “Notes to the Consolidated Financial
Statements”).
The
following table shows the impact on revenue and gross profit of the
three projects reassigned from our former Heavy Construction Division to
the newly created Granite West:
|
Granite
West
|
Years ended December
31,
|
|||||||||||
|
(in
thousands)
|
2007
|
|
2006
|
|
2005
|
|
||||||
|
Branch
Division revenue
|
|
$
|
1,828,024
|
|
|
$
|
1,848,725
|
|
|
$
|
1,591,545
|
|
|
Reassigned
projects revenue
|
|
|
100,727
|
|
|
|
79,271
|
|
|
|
7,913
|
|
|
Granite
West Division revenue
|
|
|
1,928,751
|
|
|
|
1,927,996
|
|
|
|
1,599,458
|
|
|
Branch
Division gross profit
|
|
|
357,871
|
|
|
|
364,878
|
|
|
|
253,890
|
|
|
Reassigned
projects gross profit (loss)
|
|
|
12,558
|
|
|
|
(14,291
|
)
|
|
|
-
|
|
|
Granite
West Division gross profit
|
|
|
370,429
|
|
|
|
350,587
|
|
|
|
253,890
|
|
|
Granite
East
|
Years ended December
31,
|
|
||||||||||
|
(in
thousands)
|
2007
|
|
2006
|
|
2005
|
|
||||||
|
Heavy
Construction Division revenue
|
|
$
|
869,178
|
|
|
$
|
1,085,888
|
|
|
$
|
1,030,109
|
|
|
Reassigned
projects revenue
|
|
|
(100,727
|
)
|
|
|
(79,271
|
)
|
|
|
(7,913
|
)
|
|
Granite
East Division revenue
|
|
|
768,451
|
|
|
|
1,006,617
|
|
|
|
1,022,196
|
|
|
Heavy
Construction Division gross profit (loss)
|
|
|
38,382
|
|
|
|
(86,856
|
)
|
|
|
50,470
|
|
|
Reassigned
projects gross profit
|
|
|
(12,558
|
)
|
|
|
14,291
|
|
|
|
-
|
|
|
Granite
East Division gross profit (loss)
|
|
|
25,824
|
|
|
|
(72,565
|
)
|
|
|
50,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
backlog related to the three reassigned projects was $208.0 million
and $122.1 million at December 31, 2006 and 2005,
respectively.
Granite West: In 2007 and
2006, Granite West contract revenue and sales of construction
materials was $1.9 billion (70.4% and 64.9% of our total revenue,
respectively). Granite West has both public and private sector
clients. Typical public sector projects include both new construction and
improvement of streets, roads, highways and bridges. Typical major private
sector contracts include site preparation for housing and commercial
development, including excavation, grading and street paving and installation of
curbs, gutters, sidewalks and underground
utilities.
Granite
West currently has 15 branch offices
in the western United States with additional satellite operations. Each
branch reports under one of three operating groups: Northwest, Northern
California and Southwest. 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 active projects,
each with total contract revenue greater than $50.0 million, including two
projects from our legacy Heavy Construction Division. In
2007, individual branch revenues ranged from $72.7 million to $236.4
million.
As part
of our strategy, our branches mine aggregates and/or operate plants that process
aggregates into construction materials for internal use and for sale to others.
These activities are vertically integrated into Granite West, providing
both a source of profits and a competitive advantage to our construction
business through the readily available supply of materials. We have significant
aggregate reserves that we have acquired by ownership in fee or through
long-term leases. The amount of aggregate products produced that were used
in our construction projects was approximately 43.0% during 2007 and has ranged
from 37.0% to 44.0% over the
last five years. The remainder is sold to unaffiliated parties and accounted for
the following:
|
Years Ended December
31,
|
2007
|
2006
|
2005
|
|||||||
| (in thousands) | ||||||||||
|
Material
sales to unaffiliated parties
|
$
|
375,700
|
$
|
410,159
|
$
|
334,290
|
||||
|
Percent
of total revenue
|
13.7
|
%
|
13.8
|
%
|
12.7
|
%
|
||||
|
Percent
of Granite West revenue
|
19.5
|
%
|
21.3
|
%
|
20.9
|
%
|
||||
Granite East: In 2007,
revenue from Granite East was $768.5 million (28.1% of our total revenue),
compared with $1.0 billion (33.9% of our total revenue) in 2006. 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, waterway locks and dams,
and airport infrastructure. It
also performs activities such as demolition, clearing, large-scale earthwork and
grading, dewatering, drainage improvements, structural concrete, rail
signalization, and concrete and asphalt paving. Granite
East also has the ability, if needed, to process locally sourced aggregates
into construction materials using owned or rented portable crushing, concrete
and asphalt processing plants.
With
Division offices in Lewisville, Texas, Granite East also operates out of three
regional offices: the Central Region, based in Lewisville, Texas; the Southeast
Region, based in Tampa, Florida; and the Northeast Region, based in Tarrytown,
New York. These
regional offices provide management and administrative support and are the
primary hubs for estimating efforts. Granite East construction contracts
are typically greater than two years in duration with an
average contract size of greater than $100.0 million.
Both
Granite East and Granite West participate in joint ventures with other
large construction companies. Joint ventures are used for large, technically
complex projects, including design/build projects, where it is desirable to
share risk and resources. Joint venture partners typically provide independently
prepared estimates, shared financing and equipment and often also
bring local knowledge and expertise (see “Joint Ventures; Off-Balance-Sheet
Arrangements” under “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operation”).
Design/build
is increasingly being used as a method of project delivery. Unlike
traditional projects where owners first hire a design firm or design a project
themselves and then put the project out to bid for construction, design/build
projects provide the owner with a single point of responsibility and a single
contact for both design and construction. Revenue from design/build
projects represented 62.2% and 65.3% of Granite East revenue in 2007
and 2006, respectively. Revenue from design/build projects represented 8.1%
and 6.0% of Granite West revenue in 2007 and 2006,
respectively. Although these projects carry additional risk as compared to
traditional bid/build projects, the profit potential can also be higher. We
frequently bid design/build projects as a part of a joint venture
team.
Granite Land Company: We
purchase, develop, operate, sell and otherwise invest in 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. In 2007, revenue
from GLC was $40.7 million (1.5% of our total revenue), compared with
$35.0 million (1.2% of our total revenue) in 2006.
Additional
information about our business segments is contained in Note
16
of the “Notes to the Consolidated Financial Statements.”
Business
Strategy
Our
fundamental objective is to increase long-term shareholder value by focusing on
consistent profitability from controlled revenue growth. Shareholder value is
measured by the appreciation of the value of our common stock over a period of
years as well as a return from dividends. Further, it is a specific measure of
our financial success to achieve a return on net assets greater than the cost of
capital, creating “Granite Value Added.” We believe that the following are key
factors in our ability to achieve this objective:
Employee
Development - We
believe that our employees are key to the successful implementation of our
business strategies. Significant resources are employed to attract, nurture and
retain extraordinary talent and fully develop each employee’s
capabilities.
Infrastructure Construction
Focus - We concentrate our core competencies on this segment of the
construction industry, which includes the building of roads, highways, bridges,
dams and tunnels, mass transit facilities, railroad infrastructure and
underground utilities as well as site preparation. This focus allows us to
most effectively utilize our specialized strengths, which include grading,
paving and concrete structures.
Ownership of Aggregate Materials and
Construction Equipment - We own and lease aggregate reserves and own
processing plants that are vertically integrated into our construction
operations and we own a large fleet of carefully maintained heavy construction
equipment. By ensuring availability of these resources and providing quality
products, we believe we have bidding advantages in many of our markets, as well
as a reliable source of revenue and income from the sale of construction
materials to unaffiliated parties.
Selective
Bidding - We focus our resources to bid on jobs that meet our
selective bidding criteria, which include analyzing the risk of a potential job
in relation to available personnel to estimate and prepare the proposal, as
well as personnel to effectively manage and build the project, degree of
competition, experience with the type of work, relationship with the owner,
local resources and partnerships, equipment resources, size and complexity
of the job and profitability.
Diversification - To
mitigate the risks inherent in construction and general economic factors, we
pursue projects: (i) in both the public and private sectors; (ii) for a wide
range of customers within each sector (from the federal government to small
municipalities and from large corporations to individual homeowners); (iii) in
diverse geographic markets; (iv) that are design/build, lump sum and fixed unit
price; and (v) of various sizes, durations and complexity.
Decentralized Profit
Centers - We approach each selected market with a local focus
through our decentralized structure. Each of our Granite West branch
offices and Granite East regional offices are individual
profit centers.
Profit-based
Incentives - We incentivize our profit center managers with a
substantial variable cash and restricted stock incentive element based
primarily on the annual profit performance of their respective profit
centers.
Controlled
Expansion - We intend to continue our expansion by selectively
adding branches or branch satellite locations in the western United States,
exploring opportunities to establish branch-like businesses in other areas of
the country through acquisitions, and selectively pursuing major infrastructure
projects throughout the nation where we have an established
presence. Additionally, we intend to leverage our financial capacity by
investing in a limited number of real estate development projects that we
believe will provide an acceptable return on our investment.
Accident Prevention - We
believe that preventing accidents is both a moral obligation and good
business. By identifying and concentrating resources to address jobsite hazards,
we continually strive to reduce our incident rates and the costs associated with
accidents.
Environmental
Responsibility - We believe it benefits everyone to maintain
environmentally responsible operations. We are committed to effective measures
to protect the environment and maintain good community relations. We continually
monitor our performance in this area and take our responsibilities to the
communities where we work and compliance with government agency
requirements seriously.
Quality and High Ethical
Standards - We emphasize the importance of performing high quality
work and maintaining high ethical standards through an established code of
conduct and an effective corporate compliance program.
Customers
We have
customers in both the public and private sectors. The largest volume
customer of Granite West is the California Department of Transportation
(“Caltrans”). In 2007,
contracts with Caltrans represented 10.0% of our total revenue, and total public
sector revenue generated in California represented 23.5% of our total revenue.
Other Granite West customers include departments of
transportation of other states, county and city public works departments, school
districts and developers and owners of industrial, commercial and residential
sites. Granite East’s customers are predominantly in the public sector and
currently include the numerous state departments of transportation as
well as local transit authorities and federal agencies (see
“Concentrations”
in Note 1 of the “Notes to the Consolidated Financial
Statements”).
Backlog
Our
backlog includes the total value of awarded contracts that have not been
completed, including our proportionate share of unconsolidated joint venture
contracts. Our backlog was approximately $2.1 billion and $2.3 billion
at December 31, 2007 and 2006,
respectively. Approximately $1.2 billion of the December 31, 2007 backlog is
expected to be completed during 2008. With the
exception of certain federal government contracts, we include a construction
project in our backlog at such time as a contract is awarded and funding is in
place. Substantially
all of the contracts in our backlog may be canceled or modified at the election
of the customer; however, we have not been materially adversely affected by
contract cancellations or modifications in the past (see “Contract Provisions
and Subcontracting”). Certain
Granite West projects are added and completed within each year and therefore not
reflected in our year-end backlog. Backlog by segment is presented in
“Backlog” under “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operation.”
Equipment and
Plants
We own
many pieces of equipment, including cranes, bulldozers, barges, backhoes,
excavators, scrapers, motor graders, loaders, trucks, pavers and rollers as well
as construction materials processing plants. In 2007 and 2006, we spent
approximately $88.4 million and
$91.0 million, respectively, for construction equipment, plants and vehicles.
Additionally, our equipment fleet increased in 2007 as a result of our
acquisitions (see Note 17 of the “Notes to the Consolidated Financial
Statements”). At December 31, 2007 and 2006, we owned the following construction
equipment, plants and vehicles:
| December 31, |
2007
|
|
|
2006
|
||||
|
Heavy
construction equipment (units)
|
3,366 |
2,641
|
||||||
|
Trucks,
truck-tractors and trailers and vehicles (units)
|
5,579 |
5,338
|
||||||
|
Aggregate
crushing plants
|
55
|
55
|
||||||
|
Asphalt
concrete plants
|
69
|
53
|
||||||
|
Portland
cement concrete batch plants
|
25
|
25
|
||||||
|
Asphalt
rubber plants
|
5
|
4
|
||||||
|
Lime
slurry plants
|
9
|
9
|
We
believe that ownership of equipment is generally preferable to leasing because
ownership ensures the equipment is available as needed and normally results in
lower equipment costs. We keep our equipment as fully utilized as possible
by pooling certain equipment for use by both Granite West and Granite East. We
regularly lease or rent equipment on a short-term basis to supplement existing
equipment and respond to construction activity peaks.
Employees
On
December 31, 2007, we employed approximately 2,100 salaried employees,
who work in management, estimating and clerical capacities, plus
2,100 hourly employees. The total number of hourly personnel employed by us
is subject to the volume of construction in progress. During 2007, the number of
hourly employees ranged from 2,100 to 5,400
and averaged approximately 4,600. Three of our wholly owned subsidiaries -
Granite Construction Company, Granite Construction Northeast,
Inc. and Wilder Construction Company (“Wilder”) are parties to craft
collective bargaining agreements in many areas in which they work.
We
believe our employees are our most valuable resource and that our workforce
possesses a strong dedication to and pride in our company. Among salaried and
non-union hourly employees, this dedication is reinforced by 16.8% equity
ownership through our Employee Stock Ownership Plan, our Profit Sharing and 401k
Plan and performance-based incentive compensation arrangements at December 31,
2007. Our managerial and supervisory personnel have an average of
approximately 10 years
of service with us.
Competition
Factors
influencing our competitiveness include price, reputation for quality, the
availability of aggregate materials, machinery and equipment, financial
strength, knowledge of local markets and conditions, and project management and
estimating abilities. Although some of our competitors are larger than us and
may possess greater resources, we believe that we compete favorably on the basis
of the foregoing factors. Historically, the construction business has not
usually required large amounts of capital, particularly for the smaller size
construction work pursued by Granite West, which can result in relative ease of
market entry for companies possessing acceptable qualifications. Granite West
competitors range from small local construction companies to large regional and
national construction companies. While the market areas of these competitors
overlap with several of the markets served by our branches, few compete in all
of our market areas. Many of
our Granite West competitors have the ability to perform work in either the
private or public sectors. When the market for projects in one sector contracts,
these competitors will move to the other. This greater competition can reduce
revenue growth and/or increase pressure on gross profit margins. In
addition, we own and/or have long-term leases on aggregate resources that
provide an extra measure of competitive advantage in certain markets.
Granite East normally competes with large regional and national
construction companies, which may or may not be larger than Granite. Although
the construction business is highly competitive, we believe we are well
positioned to compete effectively in the markets in which we
operate.
Contract Provisions and
Subcontracting
Our contracts
with our customers are primarily either “fixed unit price” or “fixed price.”
Under fixed unit price contracts, we are committed to provide materials or
services required by a project at fixed unit prices (for example, dollars per
cubic yard of concrete poured or cubic yard of earth excavated). While the fixed
unit price contract shifts the risk of estimating the quantity of units required
for a particular project to the customer, any increase in our unit cost over the
expected unit cost in the bid, whether due to inflation, inefficiency, faulty
estimates or other factors, is borne by us unless otherwise provided in the
contract. Fixed price contracts are priced on a lump-sum basis under which we
bear the risk of performing all the work for the specified amount. The
percentage of fixed price contracts in our backlog increased to
approximately 72.0% at December 31, 2007 compared with approximately
68.0% at December 31, 2006. Our contracts are generally obtained through
competitive bidding in response to advertisements by federal, state and local
government agencies and private parties. Less frequently, contracts may be
obtained through direct negotiations with private owners. Our contract risk
mitigation process includes identifying risks and opportunities during the
bidding process, review of bids fitting certain criteria by various levels of
management and, in some cases, by the executive committee of our Board of
Directors.
There are
a number of factors that can create variability in contract performance and
results as compared to a project’s original bid. The most significant of these
include the completeness and accuracy of the original bid, costs associated
with added scope changes, extended overhead due to owner and weather delays,
subcontractor performance issues, changes in productivity expectations, site
conditions that differ from those assumed in the original bid (to the extent
contract remedies are unavailable), the availability and skill level of workers
in the geographic location of the project and a change in the availability and
proximity of equipment or materials. All of these factors can impose
inefficiencies on contract performance, which can drive up costs and lower
profits. Conversely, if any of these or other factors are more positive than the
assumptions in our bid, project profitability can improve. However, the ability
to realize improvements on project profitability is more limited than
the risk of lower profitability. Design/build projects
carry additional risks such as the risk inherent in estimating quantities
and prices before the project design is completed and design error risk,
including higher construction costs due to any design errors, liability to
the contract owner for the design of the project and right-of-way and permit
acquisition costs. Although we manage this additional risk by adding
contingencies to our bid amounts, obtaining errors and omissions insurance and
obtaining indemnifications from our design consultants where possible, there is
no guarantee that these risk management strategies will always be
successful.
All of
our state and federal government contracts and most of our other contracts
provide for termination of the contract for the convenience of the contract
owner, with provisions to pay us for work performed through the date of
termination. We have not been materially adversely affected by these provisions
in the past. Many of our contracts contain provisions that require us to
pay liquidated damages if specified completion schedule requirements are not met
and these amounts can be significant.
We act as
prime contractor on most of the construction projects we undertake. We
accomplish the majority of our projects with our own resources and subcontract
specialized activities such as electrical and mechanical work. As prime
contractor, we are responsible for the performance of the entire contract,
including subcontract work. Thus, we may be subject to increased costs
associated with the failure of one or more subcontractors to perform as
anticipated. We manage this risk by reviewing the size of the subcontract, the
financial stability of the subcontractor and other factors and, based on this
review, determine whether to require that the subcontractor furnish a bond or
other type of security that guarantees their performance. Disadvantaged business
enterprise regulations require us to use our best efforts to subcontract a
specified portion of contract work done for governmental agencies to certain
types of disadvantaged subcontractors. As with all of
our subcontractors, some may not be able to obtain surety bonds or
other types of performance security.
Insurance and
Bonding
We
maintain general and excess liability, construction equipment and workers’
compensation insurance; all in amounts consistent with industry
practices.
In
connection with our business, we generally are required to provide various types
of surety bonds that provide an additional measure of security for our
performance under certain public and private sector contracts. Our ability to
obtain surety bonds depends upon our capitalization, working capital, past
performance, management expertise and external factors, including the capacity
of the overall surety market. Surety companies consider such factors in light of
the amount of our backlog that we have currently bonded and their current
underwriting standards, which may change from time to time. The capacity of the
surety market is subject to market-based fluctuations driven primarily by the
level of surety industry losses and the degree of surety market consolidation.
When the surety market capacity shrinks it results in higher premiums and
increased difficulty obtaining bonding, in particular for larger, more complex
projects throughout the market. In order to help mitigate this risk, we employ a
co-surety structure involving three sureties. Although we do not believe
that fluctuations in surety market capacity has significantly impacted our
ability to grow our business, there is no assurance that it will not
significantly impact our ability to obtain new contracts in the future (see
“Item 1A. Risk Factors”).
Government and Environmental
Regulations
Our
operations are subject to compliance with regulatory requirements of federal,
state and local government agencies and authorities, including regulations
concerning workplace safety, labor relations and disadvantaged businesses.
Additionally, all of our operations are subject to various federal, state and
local laws and regulations relating to the environment, including those relating
to discharges to air, water and land, the handling and disposal of solid and
hazardous waste, the handling of underground storage tanks and the cleanup of
properties affected by hazardous substances. Certain environmental laws impose
substantial penalties for non-compliance and others, such as the federal
Comprehensive Environmental Response, Compensation and Liability Act, impose
strict, retroactive, joint and several liability upon persons responsible for
releases of hazardous substances. We continually evaluate whether we must take
additional steps at our locations to ensure compliance with environmental laws.
While compliance with applicable regulatory requirements has not materially
adversely affected our operations in the past, there can be no assurance that
these requirements will not change and that compliance will not adversely affect
our operations in the future. In addition, our aggregate materials operations
require operating permits granted by governmental agencies. We believe that
tighter regulations for the protection of the environment and other factors will
make it increasingly difficult to obtain new permits and renewal of existing
permits may be subject to more restrictive conditions than currently
exist.
In July
2007, the California Air Resources Board (“CARB”) approved a regulation that
will require California equipment owners/operators to reduce diesel particulate
emissions from in-use off-road diesel equipment to meet emission targets
proposed for each year from 2010 to 2020. The emission targets will require
California off-road diesel equipment owners to retrofit equipment with diesel
particulate filters or replace equipment with new engine technology as it
becomes available. Between
now and the year 2020, Granite will be required to implement an equipment
management strategy that includes accelerated turnover of off-road diesel
equipment and retrofitting equipment with CARB approved diesel particulate
filters. This will increase equipment related expenses in an amount
which has not yet been determined.
As is the
case with other companies in our industry, some of our aggregate products
contain varying amounts of crystalline silica, a common mineral. Also, some of
our construction and material processing operations release as dust crystalline
silica that is in the materials being handled. Excessive, prolonged inhalation
of very small-sized particles of crystalline silica has allegedly been
associated with respiratory disease (including silicosis). The Mine Safety and
Health Administration and the Occupational Safety and Health Administration have
established occupational thresholds for crystalline silica exposure as
respirable dust. We monitor to verify that our dust control procedures are
keeping occupational exposures at or below the requisite thresholds and to
verify that respiratory protective equipment is made available when required. We
also communicate, through safety information sheets and other means, what we
believe to be appropriate warnings and cautions to employees and customers about
the risks associated with excessive, prolonged inhalation of mineral dust in
general and crystalline silica in particular.
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 (“SEC”). 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
SEC, www.sec.gov.
Set forth
below and elsewhere in this Report and in other documents we file with the SEC
are various risks and uncertainties that could cause our actual results to
differ materially from the results contemplated by the forward-looking
statements contained in the Report or otherwise adversely affect our
business.
|
·
|
Our success depends on
attracting and retaining qualified personnel in a competitive
environment. The single largest factor in our ability
to profitably execute our work is our ability to attract, develop and
retain qualified personnel particularly as we grow. Our success in
attracting qualified people is dependent on the resources available in
individual geographic areas and the impact on the labor supply due to
general economic conditions as well as our ability to provide a
competitive compensation package and work
environment.
|
|
·
|
Reductions in government
funding could have a negative impact on our business. A substantial
majority of our revenues are derived from contracts that are funded by
federal, state and local government agencies. Our ability to obtain future
public sector work at reasonable margins is highly dependent on the amount
of work that is available to bid, which is largely a function of the level
of government funding available.
|
|
·
|
Our commercial and residential
site development work may be affected by economic downturns.
The
availability of private sector work can be adversely affected by
economic downturns in the residential housing market, demand for
commercial property or the availability of credit. To the extent these
events occur, our operating results will be adversely
affected.
|
|
·
|
Our fixed price and fixed unit
price contracts subject us to the risk of increased project
cost. As more fully described under “Contract
Provisions and Subcontracting” above, the profitability of our fixed price
and fixed unit price contracts can be adversely affected by a number of
factors that can cause our actual costs to materially exceed the costs
estimated at the time of our original
bid.
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|
·
|
Accounting for our revenues
and costs involves significant estimates. As further
described in “Critical Accounting Estimates” under “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operation,”
accounting for our contract related revenues and costs, as well as other
cost items, requires management to make a variety of significant estimates
and assumptions. Although we believe we have sufficient experience and
processes to enable us to formulate appropriate assumptions and produce
reasonably dependable estimates, these assumptions and estimates may
change significantly in the future, and these changes could result
in the reversal of previously recognized revenue and profit and have
a material adverse effect on our financial position and the results of our
operations.
|
|
·
|
Many of our contracts have
penalties for late completion. In some instances,
including many of our fixed price contracts, we guarantee that we will
complete a project by a scheduled date. If we subsequently fail to
complete the project as scheduled we may be held responsible for cost
impacts resulting from any delay, generally in the form of contractually
agreed-upon liquidated damages. To the extent that these events occur, the
total costs of the project could exceed our original estimates and we
could experience reduced profits or, in some cases, a loss for that
project.
|
|
·
|
Weather can significantly
impact our quarterly revenues and profitability. Our
ability to perform work is significantly impacted by weather conditions
such as precipitation and temperature. Changes in weather conditions can
create significant variability in our quarterly revenues and
profitability, particularly in the first and fourth quarters of the year.
Additionally, delays and other weather impacts may increase a project’s
cost and decrease its profitability.
|
|
· |
Our Granite Land Company is greatly affected by the performance of the real estate industry. Our real estate development activities are subject to numerous factors beyond our control, including local real estate market conditions, substantial existing and potential competition, general national, regional and local economic conditions, fluctuations in interest rates and mortgage availability and changes in demographic conditions. If our outlook for a project’s forecasted profitability deteriorates, we may find it necessary to curtail our development activities and evaluate our real estate assets for possible impairment. If our real estate assets are determined to be impaired, the impairment would result in a charge to income from operations in the year of the impairment with a resulting decrease in our recorded net worth. |
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·
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We work in a highly
competitive marketplace. As more fully described
under “Competition” above, we have multiple competitors in all of the
areas in which we work. During economic down cycles or times of lower
government funding for public works projects, competition for the fewer
available projects intensifies and this increased competition may result
in a decrease in our ability to be competitive at acceptable
margins.
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·
|
An inability to secure and
permit aggregate reserves could negatively impact our future operations
and results. Tighter regulations for the protection of
the environment and the finite nature of property containing suitable
aggregate reserves are making it increasingly challenging and costly to
secure and permit aggregate reserves. Although we have thus far been able
to secure and permit reserves to support our business, it is likely to
become increasingly difficult to do so and there is no assurance that we
will be able to secure and permit reserves in the
future.
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|
·
|
We are subject to
environmental and other regulation. As more fully
described under “Government and Environmental Regulations” above, we are
subject to a number of federal, state and local laws and regulations
relating to the environment, workplace safety and a variety of
socioeconomic requirements, the noncompliance of which can result in
substantial penalties, termination or suspension of government
contracts as well as civil and criminal liability. While compliance
with these laws and regulations has not materially adversely affected our
operations in the past, there can be no assurance that these requirements
will not change and that compliance will not adversely affect our
operations in the future.
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|
·
|
Strikes or work stoppages
could have a negative impact on our operations and
results. We are party to collective bargaining
agreements covering a portion of our craft workforce. Although our
results and operations have not been significantly impacted by strikes or
work stoppages in the past, such labor actions could have a significant
impact on our operations if they occur in the
future.
|
|
·
|
Unavailability of insurance
coverage could have a negative impact on our operations and
results. We maintain insurance coverage as part of our
overall risk management strategy and pursuant to requirements to
maintain specific coverage that are contained in our financing agreements
and in most of our construction contracts. Although we have been able to
obtain insurance coverage to meet our requirements in the past, there is
no assurance that such insurance coverage will be available in the
future.
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|
·
|
An inability to obtain bonding
would have a negative impact on our operations and
results. As more fully described in “Insurance and
Bonding” above, we generally are required to provide surety bonds securing
our performance under the majority of our public and private sector
contracts. Our inability to obtain surety bonds in the future would
significantly impact our ability to obtain new contracts, which would have
a material adverse effect on our business.
|
|
·
|
Our joint venture contracts
with project owners subject us to joint and several
liability. If a joint venture partner fails to perform we
could be liable for completion of the entire contract and, if the contract
were unprofitable, this could result in a material adverse effect on our
financial position, results of operations and cash
flows.
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|
·
|
We use certain commodity
products that are subject to significant price
fluctuations. Diesel fuel, liquid asphalt and
other petroleum-based products are used to fuel and
lubricate our equipment and fire our asphalt concrete
processing plants and also constitute a significant part of the
asphalt paving materials that are used in many of our construction
projects and sold to outside parties. Although we are partially
protected by asphalt or fuel price escalation clauses in some of our
contracts, many contracts provide no such protection. We also use
cement, steel and other commodities in our construction projects that
can be subject to significant price fluctuations. We have not been
significantly adversely affected by price fluctuations in the past;
however, there is no guarantee that we will not be in the
future.
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·
|
As a part of our growth
strategy we expect to make future acquisitions and acquisitions involve
many risks. These risks include difficulties
integrating the operations and personnel of the acquired companies,
diversion of management’s attention from our ongoing operations, potential
difficulties and increased costs associated with completion of any assumed
construction projects, insufficient revenues to offset increased expenses
associated with acquisitions and the potential loss of key employees or
customers of the acquired companies. Acquisitions may also cause us to
increase our liabilities, record goodwill or other non-amortizable
intangible assets that will be subject to subsequent impairment testing
and potential impairment charges and incur amortization expenses related
to certain other intangible assets. Failure to manage and successfully
integrate acquisitions could harm our business and operating results
significantly.
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·
|
Failure of our subcontractors
to perform as anticipated could have a negative impact on our
results. As further described under “Contract
Provisions and Subcontracting” above, we subcontract a portion of many of
our contracts to specialty subcontractors and we are ultimately
responsible for the successful completion of their work. Although we seek
to require bonding or other forms of guarantees, we are not always
successful in obtaining those bonds or guarantees from our higher risk
subcontractors, and there is no guarantee that we will not incur a
material loss due to subcontractor performance
issues.
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·
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We may be unable to identify
qualified Disadvantaged Business Enterprise (“DBE”) contractors to perform
as subcontractors. Certain of our government agency projects
contain minimum DBE participation clauses. If we subsequently fail to
complete these projects with the minimum DBE participation we may be held
responsible for damages due to breach of contract including restrictions
on our ability to bid on future projects and monetary damages.
To the extent that these events occur, the total costs of the project
could exceed our original estimates and we could experience reduced
profits or, in some cases, a loss for that
project.
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|
|
·
|
A significant portion of our
revenue is from government funded contracts. Approximately
70% of our consolidated revenue in 2007 was derived from contracts funded
by federal, state and local government agencies and authorities. These
government contracts are subject to specific procurement regulations,
contract provisions and a variety of socioeconomic requirements relating
to their formation, administration, performance and accounting. Many of
these contracts include express or implied certifications of compliance
with applicable laws and contract provisions. As a result of our
government contracting, claims for civil or criminal fraud may be brought
by the government for violations of these regulations, requirements or
statutes. We may also be subject to qui tam (“Whistle Blower”) litigation
brought by private individuals on behalf of the government under the
Federal Civil False Claims Act, which could include claims for up to
treble damages. Further, if we fail to comply with any of these
regulations, requirements or statutes, our existing government contracts
could be terminated, we could be suspended from government contracting or
subcontracting, including federally funded projects at the state level. If
our government contracts are terminated for any reason, or if we are
suspended from government work, we could suffer a significant reduction in
expected revenue.
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·
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Our long-term debt and credit
arrangements contain restrictive covenants and failure to meet these
covenants could significantly harm our financial
condition. Our long-term debt and credit arrangements
and related restrictive covenants are more fully described in Note
10
of the “Notes to the Consolidated Financial Statements”
included in this report. In most cases, failure to meet the restrictive
covenants would result in an immediate repayment of all amounts due and
cancellation of open lines of credit. Additionally, failure to meet
restrictive covenants related to our debt and credit agreements would
trigger cross-default provisions that would cause us to also be in default
of our surety agreements. Although we have not had difficulty meeting
these covenants in the past, failure to do so in the future could have
material adverse effects on our business and financial
condition.
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||
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·
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Our backlog is subject to
unexpected adjustments and cancellations and could be an uncertain
indicator of our future earnings. We cannot guarantee that
the revenues projected in our backlog will be realized or, if realized,
will result in profits. Projects may remain in our backlog for an extended
period of time. In addition, project cancellations or scope adjustments
may occur, from time to time, with respect to contracts reflected in our
backlog. Backlog reductions can adversely affect the revenue and profit we
actually receive from contracts reflected in our backlog. Future project
cancellations and scope adjustments could further reduce the dollar amount
of our backlog and the revenues and profits that we actually receive.
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|
The
foregoing list is not exhaustive. There can be no assurance that we have
correctly identified and appropriately assessed all factors affecting our
business or that the publicly available and other information with respect to
these matters is complete and correct. Additional risks and uncertainties not
presently known to us or that we currently believe to be immaterial also may
adversely impact us. These developments could have material adverse effects on
our business, financial condition and results of operations. For these reasons,
the reader is cautioned not to place undue reliance on our forward-looking
statements.
None.
The
following table provides our estimate of certain information about our
properties as of December 31, 2007:
|
|
Land Area
(acres)
|
Building Square
Feet
|
Permitted Aggregate
Reserves (tons)
|
Unpermitted
Aggregate Reserves (tons)
|
|
Office
and shop space (owned and leased)
|
1,300
|
1,300,000
|
N/A
|
N/A
|
|
Owned
quarry property
|
N/A
|
N/A
|
424.0 million
|
435.0 million
|
|
Leased
quarry property
|
N/A
|
N/A
|
359.0 million
|
565.0 million
|
|
Real
estate held for development and sale
|
2,500
|
57,000
|
N/A
|
N/A
|
Approximately
83% of the office and shop space is used by Granite West at their various
locations throughout the western United States and the remainder is primarily
used by Granite East. The quarry property is located at Granite West locations
throughout the western United States. We consider our available and future
aggregate reserves adequate to meet our expected operating needs. We pursue a
plan of acquiring new sources of aggregate reserves to replenish those depleted
and to support future growth.
Item 3. LEGAL
PROCEEDINGS
Silica
Litigation
Our
wholly owned subsidiary Granite Construction Company (“GCCO”) is one of
approximately 100 to 300 defendants in nine active California Superior Court
lawsuits. Of the nine lawsuits, five were filed against GCCO in 2005 and four
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.;
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 fifteen 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. Although there
has been no formal administrative subpoena issued, nor has a civil complaint
been filed in connection with the administrative reviews or the investigation,
MnDOT has proposed a monetary sanction of $4.3 million against MnTC and
specified DBE training for personnel from the members of the MnTC
joint venture as a condition of future bidding on MnDOT work by joint venture
members of MnTC. MnTC is fully cooperating with the Agencies and the
USDOJ and, on July 2, 2007, presented its response to the initial determinations
of the Agencies as well as the investigation by the USDOJ. We have
yet to receive a formal reply from the Agencies or the USDOJ, although informal
discussions have been continuing and we cannot rule out the possibility of a
criminal action being brought against MnTC or one of its members.
I-494
Project DBE Issues
The I-494
project was performed by a joint venture (“JV”) that consisted of GCCO and
another unrelated party. 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. Although there has been no formal
administrative subpoena, nor has a civil complaint been filed in connection with
the administrative reviews, MnDOT has proposed a monetary sanction of $200,000
against the JV and specified DBE training for personnel from the members of the
JV as a condition of future bidding on MnDOT work by joint venture members of
the JV. The JV is fully cooperating with MnDOT and has the
opportunity to present its response to MnDOT’s initial
determinations. The JV is investigating MnDOT’s initial
determinations and preparing its response thereto. Therefore, we
cannot reasonably estimate the amount of any monetary sanction or what, if any,
other sanction conditions might ultimately be imposed.
US
Highway 20 Project
GCCO and
its subsidiary, Wilder 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 (“DEQ”) has issued notices of violation and fine of
$90,000 to ODOT and $240,000 to YRC for these alleged violations. YRC
has filed an answer to the notice of violation and is attempting to negotiate
resolution with the DEQ. The Oregon Department of Justice is conducting a
criminal investigation in connection with stormwater runoff from the
project. YRC and its members are fully cooperating in the investigation,
but YRC does not know whether criminal or civil charges, if any, will be
brought or against whom. Therefore, we cannot estimate what, if any, criminal or
civil penalty or conditional assessment will result from this
investigation.
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. 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.
During
the fourth quarter of 2007, no matter was submitted to a vote of security
holders through the solicitation of proxies or otherwise.
Executive Officers of the
Registrant
Our
executive officers are as follows:
|
Name
|
Age
|
Position
|
|
William
G. Dorey
|
63
|
President,
Chief Executive Officer and Director
|
|
Mark
E. Boitano
|
59
|
Executive
Vice President and Chief Operating Officer
|
| William E. Barton | 63 |
Senior
Vice President and Chief Financial Officer
|
| Michael F. Donnino | 53 |
Senior
Vice President and Granite East Division Manager
|
|
James
H. Roberts
|
51
|
Senior
Vice President and Granite West Division
Manager
|
Granite
Construction Incorporated was incorporated in Delaware in January 1990 as the
holding company for Granite Construction Company, which was incorporated in
California in 1922. All dates of service for our executive officers include the
periods in which they served for Granite Construction Company.
Mr. Dorey has been an employee of
Granite since 1968 and has served in various capacities, including President and
Chief Executive Officer since January 2004, President and Chief Operating
Officer from February 2003 to December 2003, Executive Vice President and Chief
Operating Officer from 1998 to February 2003, Senior Vice President and Manager,
Branch Division from 1987 to 1998, and Vice President and Assistant Manager,
Branch Division from 1983 to 1987. Mr. Dorey has also served as a member of our
Board of Directors since January 2004 and as a director of TIC Holdings, Inc.
from 1997 to 2002. He received a B.S. degree in Construction Engineering from
Arizona State University in
1967.
Mr. Boitano
has been an employee of the Company since 1977 and has served in various
capacities, including Chief Operating Officer since January 2004 and Executive
Vice President since February 2003. He also served as Branch Division Manager
from 1998 to January 2004, and Senior Vice President from 1998 to February 2003.
Mr. Boitano received a B.S. degree in Civil Engineering from Santa Clara University in 1971 and an M.B.A. degree from
California State University, Fresno in
1977.
Mr. Barton
has been an employee of the Company since 1980 and has served as Senior Vice
President and Chief Financial Officer since 1999, and as Vice President and
Chief Financial Officer from 1990 to 1999. In 1997, he became a director of TIC
Holdings, Inc. Mr. Barton received a B.S. degree in Accounting and Finance from
San Jose State University in 1967 and an M.B.A. degree from Santa
Clara University in 1973.
Mr.
Donnino joined Granite in 1977 and has served as Senior Vice President since
January 2005, Manager of Granite East since February 2007, and Heavy
Construction Division Manager from January 2005 to February 2007. He served as
Vice President and Heavy Construction Division Assistant Manager during 2004,
Texas Regional Manager from 2000 to 2003 and Dallas Estimating Office Area
Manager from 1991 to 2000. Mr. Donnino received a B.S.C.E. in Structural, Water
and Soils Engineering from the University of Minnesota in 1976.
Mr. Roberts joined Granite in 1981
and has served in various capacities, including Senior Vice President since May
2004, Granite West Manager since February 2007, Branch Division Manager from May
2004 to February 2007, Vice President and Assistant Branch Division Manager from
1999 to 2004, and Regional Manager of Nevada and Utah
Operations from 1995 to 1999. He received a B.S.C.E. in 1979 and an M.S.C.E. in
1980 from the University of California,
Berkeley, and an M.B.A. from the University of
Southern California in 1981.
Item 5. MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Our
common stock trades on the New York Stock Exchange under the ticker symbol GVA.
See “Quarterly Results” under “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operation” for a two-year summary of
quarterly dividends and high and low sales prices of our stock.
We have
paid quarterly cash dividends since the second quarter of 1990, and
we expect to continue to pay quarterly cash dividends. However, declaration
and payment of dividends is within the sole discretion of our Board of
Directors, subject to limitations imposed by Delaware law and compliance with
our credit agreements, and will depend on our earnings, capital requirements,
financial condition and other such factors as the Board of Directors deems
relevant.
As of
February 13, 2008, there were 38,952,477 shares of our common stock
outstanding held by 1,259 shareholders of record.
During
the three months ended December 31, 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 December 31,
2007:
|
Period
|
Total number of shares
purchased
|
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
|
|||||||||
|
October
1, 2007 through October 31, 2007
|
-
|
-
|
-
|
$
|
200,000,000
|
||||||||
|
November
1, 2007 through November 30, 2007
|
1,672,930
|
$ |
36.13
|
1,672,930
|
$
|
139,552,782
|
|||||||
|
December
1, 2007 through December 31, 20071
|
798,836
|
$ |
40.50
|
797,500
|
$
|
107,253,170
|
|||||||
|
|
2,471,766 | $ |
37.54
|
2,470,430
|
|||||||||
1The
number of shares purchased includes 1,336 shares purchased in connection
with employee tax withholding for shares granted under our Amended and Restated
1999 Equity Incentive Plan and shares purchased under our share repurchase
program.
2In October 2007, our Board
of Directors authorized us to repurchase, at management’s discretion, up to
$200.0 million of our common stock. Under the new repurchase program,
the Company may repurchase shares from time to time on the open market or in
private transactions. The specific timing and amount of repurchases will
vary based on market conditions, securities law limitations and other factors.
The share repurchase program may be suspended or discontinued at any time
without prior notice. This new program replaced a $25.0 million
share repurchase program announced in 2002.
Performance Graph
The
following graph compares the 5-year cumulative total return to shareholders
on Granite Construction Incorporated’s
common stock relative to the cumulative total returns of the S&P 500 index
and the Dow Jones US Heavy Construction index. The Dow Jones US Heavy
Construction index includes the following companies: EMCOR Group Inc.,
Fluor Corp., Granite Construction Inc., Insituform Technologies Inc., Jacobs
Engineering Group Inc., McDermott International Inc., Quanta Services Inc.
and Shaw Group Inc. An investment of $100 (with reinvestment of all
dividends) is assumed to have been made in our common stock and in each of
the indexes on December 31, 2002 and its relative performance is tracked through
December 31, 2007.
The
comparisons in the graph below are based on historical data and are not intended
to forecast the possible future performance of our common stock.
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
||||||||||||||
|
Granite
Construction Incorporated
|
$ |
100
|
$ |
154.79
|
$ |
178.40
|
$ |
243.98
|
$ |
344.72
|
$ |
250.01
|
|||||||
|
S
& P 500
|
100
|
128.68
|
142.69
|
149.70
|
173.34
|
182.87
|
|||||||||||||
|
Dow
Jones US Heavy Construction
|
100
|
136.41
|
165.42
|
239.03
|
298.17
|
566.39
|
|||||||||||||
Item 6.
SELECTED FINANCIAL DATA
The
selected consolidated operations data for 2007, 2006 and 2005 and consolidated
balance sheet data as of December 31, 2007 and 2006 set forth below have
been derived from our audited consolidated financial statements included herein,
and are qualified by reference to those consolidated financial statements. The
selected consolidated operations data for 2003 and 2004 and the
consolidated balance sheet data as of December 31, 2003, 2004 and 2005 have
been derived from our audited consolidated financial statements not included
herein. These historical results are not necessarily indicative of the results
of operations to be expected for any future period.
|
Selected Consolidated Financial
Data
|
||||||||||||||||
|
Years Ended December
31,
|
2007
|
2006
|
2005
|
2004*
|
2003
|
|||||||||||
|
Operating
Summary
|
(In Thousands, Except Per
Share Data)
|
|||||||||||||||
|
Revenue
|
$ |
2,737,914
|
$ |
2,969,604
|
$ |
2,641,352
|
$ |
2,136,212
|
$ |
1,844,491
|
||||||
|
Gross
profit
|
410,744
|
295,720
|
319,372
|
222,021
|
226,450
|
|||||||||||
|
As
a percent of revenue
|
15.0
|
10.0
|
12.1
|
10.4
|
12.3
|
|||||||||||
|
General
and administrative expenses
|
246,202
|
204,281
|
183,392
|
157,035
|
151,879
|
|||||||||||
|
As
a percent of revenue
|
9.0
|
6.9
|
6.9
|
7.4
|
8.2
|
|||||||||||
|
Provision
for (reversal of) legal judgment
|
-
|
(4,800
|
) |
9,300
|
-
|
-
|
||||||||||
|
Goodwill
impairment charge**
|
-
|
18,011
|
-
|
-
|
-
|
|||||||||||
| Acquisition expense*** | 7,752 | - | - | - | - | |||||||||||
|
Net
income
|
112,065
|
80,509
|
83,150
|
57,007
|
60,504
|
|||||||||||
|
As
a percent of revenue
|
4.1
|
2.7
|
3.1
|
2.7
|
3.3
|
|||||||||||
|
Net
income per share:
|
||||||||||||||||
|
Basic
|
$ |
2.74
|
$ |
1.97
|
$ |
2.05
|
$ |
1.41
|
$ |
1.51
|
||||||
|
Diluted
|
2.71
|
1.94
|
2.02
|
1.39
|
1.48
|
|||||||||||
|
Weighted
average shares of common stock:
|
||||||||||||||||
|
Basic
|
40,866
|
40,874
|
40,614
|
40,390
|
40,175
|
|||||||||||
|
Diluted
|
41,389
|
41,471
|
41,249
|
41,031
|
40,808
|
|||||||||||
|
Balance
Sheet
|
||||||||||||||||
|
Total
assets
|
$ |
1,786,418
|
$ |
1,632,838
|
$ |
1,472,230
|
$ |
1,277,954
|
$ |
1,060,410
|
||||||
|
Cash,
cash equivalents and marketable securities
|
485,348
|
394,878
|
301,381
|
277,692
|
201,985
|
|||||||||||
|
Working
capital
|
397,568
|
319,762
|
367,801
|
355,927
|
274,947
|
|||||||||||
|
Current
maturities of long-term debt
|
28,696
|
28,660
|
26,888
|
15,861
|
8,182
|
|||||||||||
|
Long-term
debt
|
268,417
|
78,576
|
124,415
|
148,503
|
126,708
|
|||||||||||
|
Other
long-term liabilities
|
46,441
|
58,419
|
46,556
|
40,641
|
29,938
|
|||||||||||
|
Shareholders’
equity
|
700,199
|
694,544
|
621,560
|
550,474
|
504,891
|
|||||||||||
|
Book
value per share
|
17.75
|
16.60
|
14.91
|
13.23
|
12.16
|
|||||||||||
|
Dividends
per share
|
0.43
|
0.40
|
0.40
|
0.40
|
0.40
|
|||||||||||
|
Common
shares outstanding
|
39,451
|
41,834
|
41,682
|
41,612
|
41,528
|
|||||||||||
|
Backlog
|
$ |
2,084,545
|
$ |
2,256,587
|
$ |
2,331,540
|
$ |
2,437,994
|
$ |
1,985,788
|
||||||
*
Effective January 1, 2004, we adopted Financial Accounting Standards Board
Interpretation No. 46 (revised December 2003) “Consolidation of Variable
Interest Entities”.
**During
the year ended December 31, 2006, we recorded a goodwill impairment charge
of approximately $18.0 million related to our Granite Northeast operation in New
York .
***During
the fourth quarter ended December 31, 2007, we incurred a charge of $7.8 million associated with the acquisition of
the remaining shares of Wilder Construction Company (see Note 15 of
the “Notes to the Consolidated Financial
Statements”).
Item 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
General
We are
one of the largest heavy civil contractors in the United States as well as one
of the largest construction materials production companies in the Western United
States. We are engaged in the construction of highways, dams, airport
infrastructure, mass transit facilities and other infrastructure-related
projects as well as residential and commercial site development. We have offices
in Alaska, Arizona, California, Florida, Minnesota, Nevada, New
York, Texas, Utah and Washington. Our business involves three operating
segments: Granite West, Granite East and Granite Land
Company (“GLC”) .
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, 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.
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 involved 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 retains 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 includes the eastern portion of our large
project business that had been included in HCD and is aligned to focus on
enhancing project management oversight and discipline from estimating through
execution. With the Division office in Lewisville, Texas, Granite
East also operates out of three regional offices: the Central Region,
based in Lewisville, Texas; the Southeast Region, based in Tampa, Florida;
and the Northeast Region, based in Tarrytown, New York.
During 2007,
we completed the reassignment of our large projects in the West from our former
Heavy Construction Division to our Granite West Division (with the exception of
certain projects nearing completion which remain with our 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. Prior period results have
been reclassified to conform to the new organizational structure (see Note
1 of the “Notes to the Consolidated Financial
Statements”).
Current
Year Overview
|
|
||||||||||
| Comparative Financial Summary | ||||||||||
|
Years ended December
31,
|
2007
|
2006
|
2005
|
|||||||
| (in thousands) | ||||||||||
|
Total
revenue
|
$
|
2,737,914 |
$
|
2,969,604
|
$
|
2,641,352
|
||||
|
Gross
profit
|
410,744
|
|
295,720
|
|
319,372
|
|
||||
|
General
and administrative expenses
|
|
246,202
|
|
204,281
|
|
183,392
|
||||
|
Provision
for (reversal of) legal judgment
|
-
|
|
(4,800
|
)
|
9,300
|
|
||||
| Goodwill impairment charge | - | 18,011 |
-
|
|||||||
|
Gain
on sales of property and equipment
|
|
10,343
|
|
10,408
|
|
|
8,235
|
|
||
|
Operating
income
|
|
174,885
|
|
88,636
|
|
134,915
|
||||
| Acquisition expense | 7,752 | - | - | |||||||
|
Net
income
|
|
112,065
|
|
|
80,509
|
|
|
83,150
|
|
|
Our
results of operations for the year ended December 31, 2007 reflect improved
results from Granite East which realized positive gross margins during the
year compared with negative gross margins for the year ended December 31, 2006
and higher gross profit from Granite West. Our operating results for
the year ended December 31, 2007 included increases in general and
administrative expenses due primarily to costs incurred to support our
acquisitions, growth strategy and higher variable compensation resulting from
improved profitability. Additionally, our net income for the year ended
December 31, 2007 reflects a one-time expense related to our acquisition
of the remaining shares of Wilder Construction Company which was
partially offset by an increase in non-operating income due primarily to the
gain on a sale of a building by a partnership in which we
hold an equity method investment which was recorded as equity in income of
affiliates in our statements of income.
Critical Accounting Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our estimates, judgments and assumptions are
continually evaluated based on available information and experience; however,
actual amounts could differ from those estimates.
Certain
of our accounting policies and estimates require higher degrees of judgment than
others in their application. These include the recognition of revenue and
earnings from construction contracts, the valuation of certain assets
and insurance estimates. We evaluate all of our estimates and judgments on an
on-going basis.
Revenue Recognition for Construction
Contracts: Our contracts with our customers are primarily either
“fixed unit price” or “fixed price.” Under fixed unit price contracts, we are
committed to provide materials or services required by a project at fixed unit
prices (for example, dollars per cubic yard of concrete poured or cubic yards of
earth excavated). While the fixed unit price contract shifts the risk of
estimating the quantity of units required for a particular project to the
customer, any increase in our unit cost over the expected unit cost in the bid,
whether due to inflation, inefficiency, faulty estimates or other factors, is
borne by us unless otherwise provided in the contract. Fixed price contracts are
priced on a lump-sum basis under which we bear the risk that we may not be able
to perform all the work profitably for the specified contract amount. The
percentage of fixed price contracts in our backlog increased from approximately
68.0% at December 31, 2006 to approximately 72.0% at December 31, 2007. All
state and federal government contracts and many of our other contracts provide
for termination of the contract for the convenience of the party contracting
with us, with provisions to pay us for work performed through the date of
termination.
We use
the percentage of completion accounting method for construction contracts in
accordance with the American Institute of Certified Public Accountants Statement
of Position 81-1, “Accounting for Performance of Construction-Type and Certain
Production-Type Contracts.” Revenue and earnings on construction contracts,
including construction joint ventures, are recognized using the percentage
of completion method in the ratio of costs incurred to estimated final costs.
Revenue in an amount equal to cost incurred is recognized prior to contracts
reaching 25% completion. The related profit is deferred until the period in
which such percentage completion is attained. It is our judgment that until a
project reaches 25% completion, there is insufficient information to
determine what the estimated profit on the project will be with a reasonable
level of assurance. In the case of large complex design/build projects we may
continue to defer profit recognition beyond the point of 25% completion based on
an evaluation of specific project risks. The factors considered in this
evaluation of risk associated with each design/build project include the
stage of design completion, the stage of construction completion, status of
outstanding purchase orders and subcontracts, certainty of quantities, certainty
of schedule and the relationship with the owner.
Revenue
from contract claims is recognized when we have a signed settlement agreement
and payment is assured. Revenue from contract change orders, which occur in most
large projects, is recognized when the owner has agreed to the change order in
writing. Provisions are recognized in the statements of income for the full
amount of estimated losses on uncompleted contracts whenever evidence indicates
that the estimated total cost of a contract exceeds its estimated total revenue.
Contract cost consists of direct costs on contracts, including labor and
materials, amounts payable to subcontractors, direct overhead costs and
equipment expense (primarily depreciation, fuel, maintenance and repairs).
Depreciation is provided using accelerated methods for construction equipment.
Contract cost is recorded as incurred and revisions in contract revenue and cost
estimates are reflected when known. The completion threshold for the start
of contract profit recognition is applied to all percentage of completion
projects unless and until we project a loss on the project, in which case the
estimated loss is immediately recognized.
The
accuracy of our revenue and profit recognition in a given period is almost
solely dependent on the accuracy of our estimates of the cost to complete each
project. Our cost estimates for all of our significant projects use a highly
detailed “bottom up” approach and we believe our
experience allows us to provide materially reliable estimates. There are
a number of factors that can contribute to changes in estimates of contract cost
and profitability. The most significant of these include the completeness and
accuracy of the original bid, costs associated with added scope changes,
extended overhead due primarily to owner and weather delays, subcontractor
performance issues, changes in productivity expectations, site conditions that
differ from those assumed in the original bid (to the extent contract remedies
are unavailable), the availability and skill level of workers in the geographic
location of the project and a change in the availability and proximity of
equipment and materials. The foregoing factors as well as the stage of
completion of contracts in process and the mix of contracts at different margins
may cause fluctuations in gross profit between periods and these fluctuations
may be significant. Substantial changes in cost estimates, particularly
in our larger, more complex projects have had and can in future
periods have a significant effect on our profitability.
Valuation of Real
Estate Held for Development and Sale and other Long Lived
Assets: Real
Estate held for development and sale and other long-lived assets, which
include property, equipment and intangible assets, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. We assess impairment of long-lived
assets in accordance with
FAS No. 144, “Impairment
of Long-Lived Assets” (“FAS 144”). Circumstances which could trigger an impairment review include, but are not limited to: significant decreases in
the market price of the
asset; significant adverse
changes in the business climate or legal factors; accumulation of costs
significantly in excess of the amount originally expected for the acquisition or
construction of the asset; current period cash flow or operating losses combined with a history of losses
or a forecast of continuing losses associated with the use of the asset; or
current expectation that the asset will more likely than not be sold or disposed
of significantly before the end of its estimated useful
life.
Recoverability is assessed based on the carrying amount of
the asset and its fair value, which is generally determined based on the sum of
the cash flows expected to result from the use and eventual disposal of the asset. An
impairment loss is recognized in the Statement of
Income when the carrying amount is not recoverable and exceeds fair value. In 2007, our analysis determined
that a $3.0 million portion of our real estate held for development and
sale was impaired. As a result, we recorded this amount as an impairment
charge in the quarter ended December 31, 2007.
The process of estimating future cash
flows related to an asset involves significant judgment, including future cash
inflows related to the use or eventual sale of the asset and future cash
outflows related to the development or use of the asset. Although we
believe the estimates and assumptions we used in testing for impairment are
reasonable and supportable, significant changes in any one of our assumptions
could produce a significantly different result.
Insurance estimates: We
carry insurance policies to cover various risks, primarily general liability and
workers compensation, under which we are liable to reimburse the insurance
company for a portion of each claim paid. The amounts that we are liable for
generally range from the first $250,000 to $1.0 million per occurrence. We
accrue for the estimated ultimate liability for incurred losses, both reported
and unreported, using actuarial methods based on historic trends modified, if
necessary, by recent events. Changes in our loss assumptions caused by changes
in actual experience would result in a change in our assessment of the ultimate
liability that could have a material effect on our operating results and
financial position.
Current Year
Revenue
| Total Revenue | |||||||||||||||||||
| Years ended December 31, |
2007
|
2006
|
2005
|
||||||||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
Revenue
by Division:
|
|||||||||||||||||||
|
Granite
West
|
$
|
1,928,751
|
70.4
|
|
$
|
1,927,996
|
64.9
|
|
$
|
1,599,458
|
60.6
|
|
|||||||
|
Granite
East
|
768,451
|
28.1
|
|
1,006,617
|
33.9
|
|
1,022,196
|
38.7
|
|
||||||||||
|
GLC
|
40,712
|
1.5
|
34,991 | 1.2 | 19,698 | 0.7 | |||||||||||||
|
Total
|
$ |
2,737,914
|
100.0
|
|
$
|
2,969,604
|
100.0
|
|
$
|
2,641,352
|
100.0
|
|
|||||||
| Granite West Revenue | |||||||||||||||||||
| Years ended December 31, |
2007
|
2006
|
2005
|
||||||||||||||||
| (in thousands) |
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
California:
|
|||||||||||||||||||
|
Public
sector
|
$ |
595,733
|
56.7
|
|
$ |
537,967
|
48.5
|
|
$ |
374,642
|
43.0
|
|
|||||||
|
Private
sector
|
215,770
|
20.5
|
|
300,245
|
27.0
|
|
282,752
|
32.4
|
|
||||||||||
|
Material
sales
|
239,660
|
22.8
|
|
272,039
|
24.5
|
|
214,520
|
24.6
|
|
||||||||||
|
Total
|
$ |
1,051,163
|
100.0
|
|
$ |
1,110,251
|
100.0
|
|
$ |
871,914
|
100.0
|
|
|||||||
|
West
(excluding California):
|
|||||||||||||||||||
|
Public
sector
|
$ |
563,392
|
64.2
|
|
$ |
508,559
|
62.2
|
|
$ |
445,590
|
61.2
|
|
|||||||
|
Private
sector
|
178,156
|
20.3
|
|
171,166
|
20.9
|
|
164,821
|
22.7
|
|
||||||||||
|
Material
sales
|
136,040
|
15.5
|
|
138,020
|
16.9
|
|
117,133
|
16.1
|
|
||||||||||
|
Total
|
$ |
877,588
|
100.0
|
$ |
817,745
|
100.0
|
$ |
727,544
|
100.0
|
||||||||||
| Total Granite West Revenue: | |||||||||||||||||||
|
Public
sector
|
$ |
1,159,125
|
60.1
|
$ | 1,046,526 | 54.3 | $ | 820,232 | 51.3 | ||||||||||
|
Private
sector
|
393,926
|
20.4
|
471,411 | 24.4 | 447,573 | 28.0 | |||||||||||||
|
Material
sales
|
375,700
|
19.5
|
410,059 | 21.3 | 331,653 | 20.7 | |||||||||||||
|
Total
|
$ |
1,928,751
|
100.0 | $ | 1,927,996 | 100.0 | $ | 1,599,458 | 100.0 | ||||||||||
Granite
West Revenue: Revenue from Granite West for the year
ended December 31, 2007 increased by $0.8 million, or
0.1%, compared with
the year ended December 31,
2006. Our California revenue in 2007 was most impacted by the
continued slowing of residential construction which led to decreases in both
private sector construction revenue and revenue from the sale of construction
materials. These decreases were partially offset by increased California public sector revenue, primarily driven
by a higher volume of projects available to bid. We continue to see
additional competition for the available public sector work, as competitors
migrate from the increasingly scarce private sector work. Our revenue from
the West (excluding California) in 2007 included approximately $89.0
million generated as a result of our acquisition of certain assets of the
Superior Group of Companies on April 3, 2007. Other than Northern Nevada, our
locations outside of California have generally been less impacted by the
slowing of residential construction.
|
|
|||||||||||||||||||
|
Granite
East Revenue
|
|||||||||||||||||||
| Years ended December 31, |
2007
|
2006
|
2005
|
||||||||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
Revenue
by Geographic Area:
|
|||||||||||||||||||
|
Midwest
|
$
|
93,896
|
12.2
|
$
|
43,480
|
4.3
|
$
|
77,104
|
7.5
|
||||||||||
| Northeast |
196,653
|
25.6
|
259,462
|
25.8
|
299,950 |
29.4
|
|||||||||||||
|
South
|
|
125,164
|
16.3
|
|
|
217,647
|
21.6
|
|
|
199,579
|
19.5
|
|
|||||||
| Southeast |
299,084
|
38.9
|
281,568
|
28.0
|
216,442
|
21.2
|
|||||||||||||
|
West
|
53,654
|
7.0
|
|
204,460
|
20.3
|
|
229,121
|
22.4
|
|
||||||||||
|
Total
|
$ |
768,451
|
100.0
|
|
$
|
1,006,617
|
100.0
|
|
$
|
1,022,196
|
100.0
|
|
|||||||
|
Revenue
by Market Sector:
|
|||||||||||||||||||
|
Public
sector
|
$
|
747,580
|
97.3
|
|
$
|
979,475
|
97.3
|
|
$
|
987,794
|
96.6
|
|
|||||||
|
Private
sector
|
20,871
|
2.7
|
|
27,042
|
2.7
|
|
31,765
|
3.1
|
|
||||||||||
|
Material
sales
|
-
|
- | 100 | - | 2,637 | 0.3 | |||||||||||||
|
Total
|
$ |
768,451
|
100.0
|
|
$
|
1,006,617
|
100.0
|
|
$
|
1,022,196
|
100.0
|
|
|||||||
|
Revenue
by Contract Type:
|
|||||||||||||||||||
|
Fixed
unit price
|
$
|
128,501
|
16.7
|
|
$
|
243,103
|
24.2
|
|
$
|
323,048
|
31.6
|
|
|||||||
|
Fixed
price, including design/build
|
639,950
|
83.3
|
|
763,395
|
75.8
|
|
696,511
|
68.1
|
|
||||||||||
|
Other
|
-
|
-
|
|
119
|
-
|
|
2,637
|
0.3
|
|
||||||||||
|
Total
|
$ |
768,451
|
100.0
|
|
$
|
1,006,617
|
100.0
|
|
$
|
1,022,196
|
100.0
|
|
|||||||
Granite
East Revenue: Revenue from Granite East for
the year ended December 31, 2007 decreased by $238.2 million, or
23.7%, compared with the year ended December 31,
2006. Geographically, the largest decreases were experienced in the
West, South and Northeast. Under the realignment,
Granite East retained a project in the West that was nearing completion and
the decrease in revenue in the West reflects progress on the
retained project over time. In the South and Northeast the decreases were due primarily
to certain large projects in Texas and New York nearing completion. Increases in
the Southeast resulted from revenue contributions from a large
design/build project in Mississippi that was awarded in February
2006. Increases in the Midwest resulted from revenue contributions
from a large design/build project in Missouri that was awarded in the fourth
quarter of 2006. The percent of our revenue from fixed price contracts
increased in 2007 due primarily to a higher percentage of design/build projects in our
backlog.
The following table provides additional information
about our revenue from large projects for the years ended December 31, 2007,
2006 and 2005:
|
Large Project
Revenue
|
||||||||||||
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
||||
| (in thousands) | ||||||||||||
|
Granite
West
|
|
$
|
160,232
|
|
|
$
|
185,474
|
|
|
$
|
72,476
|
|
|
Number of projects
*
|
|
6
|
|
|
6
|
|
|
3
|
|
|||
|
Granite
East
|
|
$
|
732,086
|
|
|
$
|
889,201
|
|
|
$
|
899,475
|
|
|
Number of projects
*
|
|
31
|
|
|
28
|
|
|
34
|
|
|||
|
Total
|
|
$
|
892,318
|
|
|
$
|
1,074,675
|
|
|
$
|
971,951
|
|
|
Number of projects
*
|
|
37
|
|
|
34
|
|
|
37
|
|
|||
*
Includes only projects with a total contract value greater than $50.0 million
and over $1.0 million of revenue in the respective
periods.
Granite
Land Company Revenue: Revenue from GLC for the year ended
December 31, 2007 increased by $5.7 million, or 16.4%, compared
with the year ended December 31,
2006. GLC’s revenue is dependent on the timing of real estate sales
transactions, which are relatively few in number and can cause variability
in the timing of revenue and profit
recognition.
Backlog
|
Total
Backlog
|
|
||||||||||||
|
December
31,
|
2007
|
2006
|
|||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||
|
Backlog
by Division:
|
|||||||||||||
|
Granite
West
|
$
|
854,142
|
41.0
|
|
$
|
1,015,674
|
45.0
|
|
|||||
|
Granite
East
|
1,230,403
|
59.0
|
|
1,240,913
|
55.0
|
|
|||||||
|
Total
|
$ |
2,084,545
|
100.0
|
|
$
|
2,256,587
|
100.0
|
|
|||||
| Granite West Backlog | |||||||||||||
| December 31, |
2007
|
2006
|
|||||||||||
| (in thousands) |
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||
|
California:
|
|||||||||||||
|
Public
sector
|
$ |
352,398
|
83.9
|
|
$ |
423,542
|
84.2
|
|
|||||
|
Private
sector
|
67,479
|
16.1
|
|
79,718
|
15.8
|
|
|||||||
|
Total
|
$ |
419,877
|
100.0
|
|
$ |
503,260
|
100.0
|
|
|||||
|
West
(excluding California):
|
|||||||||||||
|
Public
sector
|
$ |
398,380
|
91.7
|
|
$ |
438,256
|
85.5
|
|
|||||
|
Private
sector
|
35,885
|
8.3
|
|
74,158
|
14.5
|
|
|||||||
|
Total
|
$ |
434,265
|
100.0
|
|
$ |
512,414
|
100.0
|
|
|||||
| Total Granite West backlog: | |||||||||||||
|
Public
sector
|
$ |
750,778
|
87.9
|
$ | 861,798 | 84.8 | |||||||
|
Private
sector
|
103,364
|
12.1
|
153,876 | 15.2 | |||||||||
|
Total
Granite West backlog
|
$ |
854,142
|
100.0 | $ | 1,015,674 | 100.0 | |||||||
Granite West Backlog:
Granite West backlog of $854.1 million
at December 31, 2007 was $161.5 million, or 15.9%, lower than
at December 31, 2006. The lower private sector backlog at December 31, 2007
compared with December 31, 2006 is primarily a result of the slowing demand for
residential construction, particularly in certain California and Nevada markets.
The lower 2007 public sector backlog in California was largely due to increased
competition for the available work as contractors migrate from the increasingly
scarce private sector work. Additionally, the lower public sector backlog
reflects progress on a $234.2 million joint venture highway reconstruction
project in Utah
that was awarded at the
end of 2005. Granite West project awards in the fourth quarter
2007 included a $24.4
million highway reconstruction project near the California-Nevada
border.
|
Granite
East Backlog
|
|||||||||||||
| December 31, |
2007
|
2006
|
|||||||||||
| (in thousands) |
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||
|
Backlog
by Geographic Area:
|
|||||||||||||
| Midwest | $ |
328,971
|
26.8
|
$ |
422,942
|
34.1
|
|||||||
| Northeast | 133,052 |
10.8
|
219,835
|
17.7
|
|||||||||
|
South
|
144,210
|
11.7
|
|
213,447
|
17.2
|
|
|||||||
|
Southeast
|
613,057
|
49.8
|
322,619
|
26.0
|
|||||||||
|
West
|
11,113
|
0.9
|
|
62,070
|
5.0
|
|
|||||||
|
Total
|
$ |
1,230,403
|
100.0
|
|
$
|
1,240,913
|
100.0
|
|
|||||
|
Backlog
by Market Sector:
|
|||||||||||||
|
Public
sector
|
$
|
1,213,484
|
98.6
|
|
$
|
1,205,752
|
97.2
|
|
|||||
|
Private
sector
|
16,919
|
1.4
|
|
35,161
|
2.8
|
|
|||||||
|
Total
|
$ |
1,230,403
|
100.0
|
|
$
|
1,240,913
|
100.0
|
|
|||||
|
Backlog
by Contract Type:
|
|||||||||||||
|
Fixed
unit price
|
$
|
64,580
|
5.2
|
|
$
|
171,239
|
13.8
|
|
|||||
|
Fixed
price including design/build
|
1,165,823
|
94.8
|
|
1,069,674
|
86.2
|
|
|||||||
|
Total
|
$ |
1,230,403
|
100.0
|
|
$
|
1,240,913
|
100.0
|
|
|||||
Granite East Backlog:
Granite East backlog of $1.2
billion at December 31, 2007 was $10.5 million, or 0.8%, lower than
at December 31, 2006. The higher 2007 backlog in the Southeast
was largely driven by the award in March 2007 of a $464.0 million joint venture
design/build highway project in Maryland. The backlog increase in the
Southeast was offset by lower backlog in the other Granite East geographic areas
as
we continued our strategy of bidding at higher margins in our home
markets. Additional project
awards during the year ended December 31, 2007 included a $37.0 million freeway
project in Texas, a $93.0 million turnpike project in
Florida and approximately $76.7 million in additional awards 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.
The following tables provide additional information about our large
project backlog at December 31, 2007 and 2006:
|
|
|
|
|
||
|
Large Project
Backlog
|
|
|
|
||
|
2007
|
|
2006
|
|||
| (in thousands) | |||||
|
Granite
West
|
$
|
223,952
|
|
$
|
313,522
|
|
Number
of projects**
|
5
|
|
5
|
||
|
Granite
East
|
$
|
1,189,998
|
|
$
|
1,193,919
|
|
Number of projects**
|
18
|
|
24
|
||
|
Total
|
$
|
1,413,950
|
|
$
|
1,507,441
|
|
Number
of projects**
|
23
|
|
29
|
||
** Includes only projects
with total contract value greater than $50.0 million and remaining backlog over
$1.0 million at the respective date.
|
Large Project
Backlog by Expected Profitability
|
|
|
|
|
|
|
|
|
|
|||
|
December 31,
2007
(in
thousands)
|
Number of
Projects***
|
Average Percent
Complete
|
|
|
Backlog
Amount
|
|
Percent of Large Project
Backlog
|
|
|
|||
|
Projects with forecasted
loss
|
|
|
|
|
|
|
|
|
|
|||
|
Granite
West
|
|
1
|
|
38
|
%
|
|
$
|
80,688
|
|
5.7
|
%
|
|
|
Granite
East
|
|
9
|
|
58
|
%
|
|
|
145,016
|
|
10.3
|
%
|
|
|
Total
projects with a forecasted loss
|
|
10
|
|
51
|
%
|
|
|
225,704
|
|
16.0
|
%
|
|
| Projects with forecasted profit | ||||||||||||
|
Granite
West
|
|
4
|
|
44
|
%
|
|
|
143,264
|
|
10.1
|
%
|
|
|
Granite
East
|
|
9
|
|
24
|
%
|
|
|
1,044,982
|
|
73.9
|
%
|
|
|
Total
projects with forecasted profit
|
|
13
|
|
27
|
%
|
|
|
1,188,246
|
|
84.0
|
%
|
|
|
Total
|
|
23
|
|
|
|
|
$
|
1,413,950
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
December 31,
2006
(in
thousands)
|
Number of
Projects***
|
Average Percent
Complete
|
|
|
Backlog
Amount
|
|
Percent of Large Project
Backlog
|
|
|
|||
|
Projects with forecasted
loss
|
|
|
|
|
|
|
|
|
|
|||
|
Granite
West
|
|
1
|
|
29
|
%
|
|
$
|
92,648
|
|
6.2
|
%
|
|
|
Granite
East
|
|
9
|
|
70
|
%
|
|
|
294,699
|
|
19.5
|
%
|
|
|
Total
projects with a forecasted loss
|
|
10
|
|
60
|
%
|
|
|
387,347
|
|
25.7
|
%
|
|
| Projects with forecasted profit | ||||||||||||
|
Granite
West
|
|
4
|
|
32
|
%
|
|
|
220,874
|
|
14.6
|
%
|
|
|
Granite
East
|
|
15
|
|
23
|
%
|
|
|
899,220
|
|
59.7
|
%
|
|
|
Total
projects with forecasted profit
|
|
19
|
|
25
|
%
|
|
|
1,120,094
|
|
74.3
|
%
|
|
|
Total
|
|
29
|
|
|
|
|
$
|
1,507,441
|
|
100.0
|
%
|
|
***
Includes only projects with total contract value greater
than $50.0 million and remaining backlog over $1.0
million.
Gross
Profit
|
|
||||||||||
|
Years ended December
31,
|
2007
|
2006
|
2005
|
|||||||
| (in thousands) | ||||||||||
|
Granite
West
|
$
|
370,429
|
$
|
350,587
|
$
|
253,890
|
||||
|
Percent
of division revenue
|
19.2
|
%
|
18.2
|
%
|
16.0
|
%
|
||||
|
Granite
East
|
$
|
25,824
|
$
|
(72,565
|
) |
$
|
50,470
|
|||
|
Percent
of division revenue
|
3.4 |
%
|
(7.2
|
)%
|
4.9
|
%
|
||||
| GLC | $ | 15,840 | $ | 17,570 | $ | 12,271 | ||||
|
Percent
of division revenue
|
38.9 |
%
|
50.2 |
%
|
62.3 |
%
|
||||
|
Other
|
$
|
(1,349
|
) |
$
|
128
|
|
$
|
2,741
|
|
|
|
Total
gross profit
|
$
|
410,744
|
$
|
295,720
|
$
|
319,372
|
||||
|
Percent
of total revenue
|
15.0
|
%
|
10.0
|
%
|
12.1
|
%
|
||||
Gross Profit: As
more fully described under “Critical Accounting Estimates” we recognize revenue
only equal to cost, deferring profit recognition, until a project reaches 25%
completion. In the
case of 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’s gross profit on a quarterly or annual basis.
However, Granite East has fewer projects in process at any given time
and those projects tend to be much larger than 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
our completion threshold 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 projects less than our completion threshold, for which no margin has
been recognized, was as follows:
|
Revenue from Contracts with
Deferred Profit
|
||||||||||
|
Years ended December
31,
|
2007
|
2006
|
2005
|
|||||||
| (in thousands) | ||||||||||
|
Granite
West
|
$
|
43,590
|
$
|
24,868
|
$
|
26,498
|
||||
|
Granite
East
|
|
131,694
|
|
16,397
|
|
49,614
|
||||
|
Total
revenue from contracts with deferred profit
|
$ | 175,284 | $ | 41,265 | $ | 76,112 | ||||
Additionally,
as we also describe under “Critical Accounting Estimates” we do not recognize
revenue from contract claims until we have a signed 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 in
our forecasts when we are contractually obligated to incur them. As a result,
our gross profit as a percent of revenue can vary during periods where 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 or settled (increasing gross profit percent).
Although this variability can occur in both Granite West and Granite East, it
can be much 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 2007 increased to 19.2% from 18.2% for
2006. The increase was
largely due to the positive effect of project forecast changes in 2007 of
approximately $23.0
million due to the
settlement of outstanding issues with contract owners, higher productivity than
originally estimated and the resolution of certain project
uncertainties. Additionally, in 2006 Granite West was negatively
impacted by approximately $18.0
million in net project
forecast changes – primarily from the estimated loss recorded on our highway
project in western Oregon (see Note 2 of the “Notes to the Consolidated
Financial Statements”). Construction
materials gross profit as a percent of materials sales for 2007 decreased to 20.1% from 23.6% for 2006 primarily due
to a change in product mix resulting from the reduced demand for certain
products typically utilized in residential construction.
Granite East gross profit as a percent
of revenue for 2007 increased to 3.4% from a negative gross margin of 7.2% for
2006. The improved gross profit margin in 2007 was driven
by a significantly lower impact from negative forecast estimate changes. The net
impact of project forecast estimate changes for 2007 was an increase in gross
profit of approximately $3.0
million compared with a decrease
of approximately
$123.0 million for 2006 (see Note 2 of the “Notes to the
Consolidated Financial Statements”).
When we
experience significant contract forecast changes, we undergo a process that
includes reviewing the nature of the changes to ensure that there are no
material amounts that should have been recorded in a prior period rather than as
a change in estimate. In our review of these changes, we did not identify
any material amounts that should have been recorded in a prior
period.
GLC gross profit in 2007 and 2006
of $15.8 million and $17.6 million, respectively,
included approximately $8.8 million and $7.8 million, respectively, related
to our minority partners’ share. Included in GLC’s cost of revenue for
2007 was $3.0 million resulting from the partial impairment of a residential
development project in California (see Note 6 of the
“Notes to the Consolidated Financial Statements”).
General and Administrative
Expenses
|
|
||||||||||
|
Years ended December
31,
|
2007
|
2006
|
2005
|
|||||||
|
(in
thousands)
|
|
|||||||||
|
Salaries
and related expenses
|
$
|
124,804
|
$
|
102,935
|
$
|
94,901
|
||||
|
Incentive
compensation, discretionary profit sharing and other variable
compensation
|
37,745
|
33,094
|
28,294
|
|||||||
|
Other
general and administrative expenses
|
83,653
|
68,252
|
60,197
|
|||||||
|
Total
|
$
|
246,202
|
$
|
204,281
|
$
|
183,392
|
||||
|
Percent
of revenue
|
9.0
|
%
|
6.9
|
%
|
6.9
|
%
|
||||
General and Administrative
Expenses: General
and administrative expenses increased by $41.9 million, or 20.5%, to $246.2
million in 2007 from $204.3 million in 2006. Salaries and related expenses in
2007 increased $21.9 million, or 21.2%, compared to 2006 primarily due to
increased personnel and associated costs to support the addition
of our new business in the state of Washington and our
overall growth strategy - particularly in Granite West. Incentive
compensation, discretionary profit sharing and other variable compensation in
2007 increased $4.7 million, or 14.1%, when compared to 2006 due to higher
income and greater participation in our incentive compensation plans. Other
general and administrative expenses in 2007 increased $15.4 million, or
22.6%, compared to 2006 due primarily to the addition of our new
business in the state of Washington, increased costs related to technology
upgrades and higher reserves for doubtful accounts. 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
|
|
||||||||||
|
Years ended December
31,
|
2007
|
2006
|
2005
|
|||||||
|
(in
thousands)
|
|
|||||||||
|
Gain
on sales of property and equipment
|
$
|
10,343
|
$
|
10,408
|
$
|
8,235
|
||||
Gain on Sales of Property and
Equipment: Gain on sales of property and equipment
for the year ended
December 31, 2007 was comparable to the prior
year.
Other Income
(Expense)
|
|
||||||||||
| Years ended December 31, |
2007
|
2006
|
2005
|
|||||||
| (in thousands) |
|
|||||||||
|
Interest
income
|
$ |
26,925
|
$ |
24,112
|
$ |
11,573
|
||||
|
Interest
expense
|
(6,367
|
) |
(4,492
|
)
|
(6,932
|
)
|
||||
| Acquisition expense | (7,752 | ) | - | - | ||||||
|
Equity
in income of affiliates
|
5,205
|
2,157
|
1,497
|
|||||||
|
Other,
net
|
5,498
|
2,604
|
1,258
|
|||||||
|
Total
|
$ |
23,509
|
$ |
24,381
|
$ |
7,396
|
||||
Other Income (Expense):
Interest income increased $2.8
million, or 11.7%, in 2007 compared with 2006 due to higher balances
of interest bearing investments. Interest expense increased in 2007 compared to
2006 due primarily
to an increase in
average debt outstanding under our
revolving line of credit. Equity in income of affiliates for 2007 included
a gain of approximately $3.9 million on a sale of a building by a partnership in
which we hold an equity method investment. In December of 2007, we purchased all
remaining shares of Wilder, which resulted in a charge of
approximately $7.8 million
(see Note 15 of the “Notes
to the Consolidated Financial Statements”). The increase in other (net) during 2007
was primarily related to capital gains of $2.9 million from certain mutual fund
investments.
Provision for Income
Taxes
|
|
||||||||||
|
Years ended December
31,
|
2007
|
2006
|
2005
|
|||||||
|
(in
thousands)
|
|
|||||||||
|
Provision
for income taxes
|
$
|
65,470
|
$
|
38,678
|
$
|
41,413
|
||||
|
Effective
tax rate
|
33.0
|
%
|
34.2
|
%
|
29.1
|
%
|
||||
Provision for Income Taxes:
Our effective tax rate decreased to
33.0% in 2007 from 34.2% in 2006. The decrease was primarily driven by higher minority interest in income of consolidated joint ventures and other entities which are not subject to income taxes on a
stand-alone basis. The impact
of higher minority interest was partially offset by the effect of the $7.8
million charge taken related to the purchase of the remaining Wilder shares
which is not deductible for tax purposes (see Note 15 of the “Notes to the
Consolidated Financial
Statements”).
Minority Interest in Consolidated
Subsidiaries
|
|
||||||||||
|
Years ended December
31,
|
2007
|
2006
|
2005
|
|||||||
|
(in
thousands)
|
|
|||||||||
|
Minority
interest in consolidated subsidiaries
|
$< | |||||||||