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, 2009
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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No
o
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) 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. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in 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 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 $1.3 billion as
of June 30, 2009, 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 12, 2010, 38,629,378
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 7, 2010, which
will be filed with the Securities and Exchange Commission not later than 120
days after December 31, 2009.
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
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 risks described in this
Report under “Item 1A. Risk Factors.” Except as required by law, we undertake no
obligation to 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
Granite
Construction Company was originally incorporated in 1922. In 1990, Granite
Construction Incorporated was formed as the holding company for Granite
Construction Company and its wholly owned subsidiaries and was incorporated in
Delaware. 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 heavy-civil infrastructure projects,
including the construction of roads, highways, mass transit facilities, airport
infrastructure, bridges, dams and canals. Within the private sector, we
perform site preparation and infrastructure services for residential
development, commercial and industrial buildings, and other facilities.
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.
In 2000, we diversified into real estate investment and
development, investing our own capital in carefully selected real estate
projects throughout the western United States and Texas.
Operating
Structure
Our
construction business has been organized into two geographic segments, Granite
West and Granite East. Included in our Granite West segment is our
vertically integrated construction materials business. The Company also has
a real estate investment and development business, Granite Land Company (“GLC”).
Our results of operations discussed herein have been reported with the segment
structure that was in place during 2009. See Note 20 of “Notes to the
Consolidated Financial Statements” for additional information about our
operating segments.
On August
31, 2009, we announced changes to our organizational structure designed to
improve operating efficiencies and position the Company for long-term
growth. In
conjunction with the reorganization we are changing our reportable segments to
reflect our business product lines. Beginning in fiscal 2010, the Company’s new
reportable segments are: Construction, Large Project Construction, Construction
Materials and Real Estate. The Real Estate segment will contain what was
previously known as Granite Land Company. We will continue to
provide geographic information within the new segment structure.
Granite
West: In 2009
and 2008, Granite West contract revenue and sales of construction materials
was $1.4 billion and $2.0 billion (71.9% and 73.7% of our total revenue),
respectively. Granite West revenue is derived from both public and private
sector clients. Typical public sector projects include both new
construction and improvement of roads, highways, airport infrastructure and
bridges. Major private sector contracts typically 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’s decentralized operating structure includes 14 branch offices in the
western United States, several with additional satellite operations. In
2009, individual branch revenues ranged from $47.0 million
to $210.1 million. Although most Granite West projects are started and
completed within a year, the division also has the capability of constructing
larger projects and, as of December 31, 2009, had four active large
projects, each with total contract revenue greater than $50.0
million.
The
Company mines aggregates and/or operates plants that process aggregates into
construction materials for internal use and for sale to third parties. These
activities are vertically integrated into Granite West and provide 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.
Aggregate
products used in our construction projects represented approximately 54.9%
of our aggregate sales during 2009 and ranged from 42.3% to 54.9% over the
last five years. The remainder is sold to third parties.
Granite East: In 2009,
revenue from Granite East was $550.2 million (28.0% of our total
revenue), compared with $695.0 million (26.0% of our total revenue) in
2008. Granite East’s focus is on large, complex infrastructure projects and
included major highways, mass transit facilities, bridges, tunnels,
waterway locks and dams, pipelines, canals, 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 to process locally sourced aggregates into
construction materials using owned or rented portable crushing, concrete and
asphalt processing plants.
Granite
East operates out of three regional offices that 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 contract values ranging from $12.0 million to $466.5 million
at December 31, 2009.
3
Joint Ventures and Design/Build
Projects: We participate in joint ventures with other
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 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 Operations”).
We also
utilize the design/build 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 final design and construction. Revenue from design/build
projects represented 64.0% and 66.4% of Granite East revenue in 2009
and 2008, respectively, and 10.1% and 14.1% of Granite West
revenue in 2009 and 2008, respectively. Although these projects
carry additional risk as compared to traditional bid/build projects, the
profit potential can also be higher.
Granite Land Company: GLC is
an investor in a diversified portfolio of land assets and provides real estate
services for other Granite operations. GLC’s current portfolio consists of
residential, retail and office site development projects for sale to home and
commercial property developers, or held for rental income. The range of our
involvement in an individual project may vary from passive investment to
management of land rights or entitlement (use of land authorized by government
agency), development, construction, leasing and eventual sale of the project.
GLC projects have long lead times affording us the flexibility to stage our land
entitlement and construction activities to meet market demand. Our strategy is
to remain flexible, and to evaluate opportunities to sell any of our
investments at any stage of the development process.
Generally,
we team with partners who have local knowledge and expertise in the development
of each property. Each of these developments is affected by such factors as
changes in general economic conditions, bank-lending practices, interest rate
fluctuations, and demand for real estate. In addition, each project is subject
to issues unique to that property such as environmental conditions, local
entitlement policies and market conditions.
Our
current investments are located in Washington, Oregon, California
and Texas. In 2009, revenue from GLC was $2.3 million (0.1% of our
total revenue), compared with $9.0 million (0.3% of our total revenue) in
2008.
Business
Strategy
Our
fundamental objective is to increase long-term shareholder value as
measured by the appreciation of the value of our common stock over a period of
time as well as dividend yields. A specific measure of our financial
success is the achievement of a return on net assets greater than the cost of
capital, creating “Granite Value Added.” The following are key factors in our
ability to achieve these objectives:
Controlled Growth - We intend
to grow our business by working on many types of infrastructure projects as well
as by expanding into new geographic areas. In addition, we are focusing our
efforts on larger projects wherein our financial strength and project experience
provide us with a competitive
advantage.
Decentralized Profit
Centers - Each of
our operating groups is established as an individual profit center which
encourages entrepreneurial activity while allowing the offices to benefit from
centralized administrative and
support functions.
Diversification -
To mitigate the risks inherent in the
construction business as the result of 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.
Employee
Development - We believe that our employees are key to the successful
implementation of our business strategies. Significant resources are employed to
attract, develop and retain extraordinary talent and fully promote 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, 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.
Aggregate
Materials - We own and lease aggregate reserves
and own processing plants that are vertically integrated into our construction
operations. By ensuring availability of these resources and providing quality
products, we believe we have a competitive advantage in many of our
markets as well as a source of revenue and income from the sale of construction
materials to third parties.
Ownership
of Construction Equipment - We own a large fleet of well maintained
heavy construction equipment. We
believe that ownership of construction equipment enables us to compete more
effectively by ensuring availability of the equipment at a favorable
cost.
Profit-based
Incentives - Profit
center managers are incentivized with cash compensation and restricted stock,
payable upon the attainment of pre-established annual financial and
non-financial metrics.
Selective
Bidding - We focus our resources on bidding jobs that meet our
selective bidding criteria, which include analyzing the risk of a potential job
relative to: (i) available personnel to estimate and prepare the
proposal, (ii) available personnel to effectively manage and build the project,
(iii) the competitive environment, (iv) our experience with the type
of work, (v) our experience with the owner, (vi) local resources and
partnerships, (vii) equipment resources, (viii) the size and
complexity of the job and (ix) profitability.
Our operating
principles include:
Accident
Prevention - We believe accident prevention is a moral
obligation as well as 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 in environmentally responsible
operations. We are committed to protecting the environment, maintaining good
community relations and ensuring compliance with government agency
requirements.
Quality
and High Ethical Standards - We believe in the importance
of performing high quality work and maintaining high ethical standards through
an established code of conduct and an effective corporate compliance
program.
Raw
Materials
We
purchase raw materials consisting of aggregate products, cement, diesel fuel,
liquid asphalt, natural gas, propane and steel from numerous sources. Our
aggregate reserves supply a portion of the raw materials needed in our
construction projects. The price and availability of raw materials may vary from
year to year due to market conditions and production capacities. We do not
foresee the lack of availability of any raw materials.
Seasonality
The first
and fourth quarter of our fiscal year are typically affected by weather
conditions, primarily in the West, which may alter our construction schedules
and can create variability in our revenues, profitability and the required
number of employees.
Customers
We have
customers in both the public and private sectors. Our largest volume
customer is the California Department of Transportation (“Caltrans”).
Contracts with Caltrans represented 11.9% and 9.6% of our total
revenue and 16.6% and 13.1% of our Granite West revenue in 2009 and 2008,
respectively. Public sector revenue in California represented 28.1% and 27.7% of
our total revenue in 2009 and 2008, respectively. Other Granite
West customers include certain federal agencies, 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 various state departments of transportation, local
transit authorities, and federal agencies.
Contract
Backlog
Our
contract backlog is comprised of the unearned portion of revenue on awarded
contracts that have not been completed, including 100% of the unearned revenue
of our consolidated joint ventures and our proportionate share of unconsolidated
joint venture contracts. We include a construction project in our contract
backlog at the time a contract is awarded and funding is in place, with the
exception of certain federal government contracts for which funding is
appropriated on a periodic basis. Substantially all of the contracts in our
contract 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”). Most Granite West projects are added and completed within each
year and therefore are not reflected in our year-end contract backlog. Contract
backlog by segment is presented in “Contract Backlog” under “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” Our contract backlog was approximately $1.4 billion and $1.7
billion at December 31, 2009 and 2008, respectively.
Approximately $931.2 million of the December 31, 2009 contract backlog is
expected to be completed during 2010.
Equipment
At
December 31, 2009 and 2008, we owned the following construction equipment and
vehicles:
|
December
31,
|
2009
|
2008
|
||||||
|
Heavy
construction equipment
|
2,362
|
2,775
|
||||||
|
Trucks,
truck-tractors, trailers and vehicles
|
5,254
|
5,812
|
Our
portfolio of equipment includes loaders, bulldozers, excavators, rollers, motor
graders, pavers, scrapers,
cranes, trucks, backhoes and barges.
We believe that ownership of equipment is generally preferable to leasing
because it ensures the equipment is available as needed and normally results in
lower costs. We pool certain equipment for use by both Granite West and
Granite East to maximize utilization. On a short-term basis, we lease or
rent equipment to supplement existing equipment in response to construction
activity peaks. In 2009 and 2008, we spent approximately $17.6 million and
$36.5 million, respectively, on purchases of construction equipment and
vehicles.
Employees
On
December 31, 2009, we employed approximately 1,800 salaried employees,
who work in management, estimating and clerical capacities, plus
approximately 600 hourly employees. The total number of hourly personnel we
employ is subject to the volume of construction in progress and is seasonal.
During 2009, the number of hourly employees ranged from approximately
600 to 3,600 and averaged approximately 2,700. Two of our wholly owned
subsidiaries - Granite Construction Company and Granite Construction
Northeast, Inc. - 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 a 14.6% equity
ownership at December 31, 2009 through our Employee Stock Ownership Plan, our
Profit Sharing and 401(k) Plan and performance-based incentive compensation
arrangements. Our managerial and supervisory personnel have an average of
approximately 11 years
of service with us.
Competition
Granite
West competitors range from small local construction companies to large
regional, national and global 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
opportunities for work in one sector are reduced, competitors tend to look for
opportunities in the other sector. This migration has the potential to
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, national and global
construction companies.
Factors
influencing our competitiveness include price, estimating abilities, knowledge
of local markets and conditions, project management, financial strength,
reputation for quality, the availability of aggregate materials, and
machinery and equipment. 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
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. 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 “fixed unit price” or “fixed price.” Under
fixed unit price contracts, we are committed to providing materials or services
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, errors in our 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 contract backlog increased to approximately 75.1% at
December 31, 2009 compared with approximately 68.7% at December 31,
2008.
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 review process includes identifying risks and
opportunities during the bidding process and managing these risks through
mitigation efforts such as insurance and pricing. Contracts fitting certain
criteria of size and complexity are reviewed 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, weather and
other 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 increase costs and
lower profits. Conversely, positive variations in any of these or other
factors can decrease costs and improve profitability. However, the ability to
realize improvements on project profitability is often
more limited than the risk of lower profitability.
Design/build projects typically incur additional costs such as right-of-way and
permit acquisition costs and carry additional risks such as design
error risk and the risk associated with estimating quantities and
prices before the project design is completed. These unknown factors
may cause higher than anticipated construction costs and additional
liability to the contract owner. 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.
However, there is no guarantee that these risk management strategies will
always be successful.
Most of
our contracts, including those with the government, provide for termination at
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 could
be significant.
We act as
prime contractor on most of our construction projects. We complete 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. Based on our
analysis of their construction and financial capabilities, among other criteria,
we determine whether to require the subcontractor to furnish a bond or other
type of security to guarantee 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 contract 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 have
significantly affected our ability to grow our business, there is no
assurance that it will not significantly affect our ability to obtain new
contracts in the future (see “Item 1A. Risk Factors”).
Environmental
Regulations
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 and nitrogen oxide emissions from in-use off-road diesel equipment and to meet progressively more restrictive emission targets proposed for each year from 2010 to 2020. In December 2008, CARB approved a similar regulation for in-use on-road diesel equipment that includes more restrictive emission targets from 2010 to 2022. The emission targets will require California off-road and on-road diesel equipment owners to retrofit equipment with diesel emission control devices or replace equipment with new engine technology as it becomes available, which will result in higher equipment related expenses. To date, costs to prepare the Company for compliance have been minimal. However, it is too early to determine what the full cost of compliance will be.
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 have implemented dust control procedures to measure
compliance with requisite thresholds and to verify that respiratory protective
equipment is made available as necessary. 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 this Report or otherwise adversely affect our
business.
|
·
|
Reductions
in governmental infrastructure spending could have a negative impact on
our business. A
significant portion of our revenue is generated from infrastructure work
funded by various government entities, including state departments of
transportation such as Caltrans. Infrastructure spending by
government entities could be negatively affected by the overall
condition of the economy and declining tax revenues. Our ability to obtain
future public sector work at reasonable margins is highly dependent on the
amount of work that is available to bid. It may also affect our
customer base, subcontractors and suppliers and could materially affect
our contract backlog, operating results, cash flows and our ability to
implement our strategic plan.
|
|
·
|
We work in
a highly competitive marketplace. 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 public projects
intensifies and this increased competition may result in a decrease in new
awards at acceptable profit margins. In addition, downturns in residential
and commercial construction activity increases the competition for
available public sector work, further impacting our revenue, contract
backlog and profit
margins.
|
|
·
|
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
Operations,” accounting for our contract related revenues and costs, as
well as other expenses, 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 could result
in the reversal of previously recognized revenue and profit. Such
changes could have a material adverse effect on our financial position,
results of operations, and cash
flows.
|
|
·
|
Our success
depends on attracting and retaining qualified personnel in a competitive
environment. The single largest factor affecting our ability to
profitably execute our work is our ability to attract, develop and retain
qualified personnel. Our success in attracting qualified people is
dependent on the resources available in individual geographic areas and
changes in the labor supply as a result of general economic conditions, as
well as our ability to provide compensation packages and a work
environment that are
competitive.
|
|
·
|
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.
|
|
·
|
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 certain date. If we subsequently fail to complete
the project as scheduled we may be held responsible for costs resulting
from the delay, generally in the form of contractually agreed-upon
liquidated damages. To the extent these events occur, the total cost of
the project could exceed our original estimate and we could experience
reduced profits or, in some cases, a loss on that
project.
|
|
·
|
Weather can
significantly affect our quarterly revenues and profitability.
Our ability
to perform work is significantly affected by weather conditions such as
precipitation and temperature. Changes in weather conditions can cause
delays and otherwise significantly affect our project costs. The impact of
weather conditions can result in variability in our quarterly revenues and
profitability, particularly in the first and fourth quarters of the
year.
|
|
·
|
Design/build
contracts subject us to the risk of design errors and omissions.
Design/build is
increasingly being used as a method of project delivery as it provides the
owner with a single point of responsibility for both design and
construction. We generally subcontract design responsibility to
architectural and engineering firms. However, in the event of a design
error or omission causing damages, there is risk that the subcontractor or
their errors and omissions insurance would not be able to absorb the
liability. In this case we may be responsible, resulting in a
potentially material adverse effect on our financial position, results of
operations and cash
flows.
|
|
·
|
Failure of
our subcontractors to perform as anticipated could have a negative effect
on our results. As further described under
“Contract Provisions and Subcontracting” above, we subcontract portions of
many of our contracts to specialty subcontractors, but 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. In this case we may be responsible, resulting in
a potentially adverse effect on our financial position, results of
operations and cash
flows.
|
|
·
|
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 breach of contract damages
which may include restrictions on our ability to bid on future projects as
well as monetary damages. To the extent we are responsible for monetary
damages, 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.
|
|
·
|
Government
contracts generally have strict regulatory requirements. Approximately 86.0% of our
consolidated revenue in 2009 was derived from contracts funded by federal,
state and local government agencies and authorities. Government contracts
are subject to specific procurement regulations, contract provisions and a
variety of socioeconomic requirements relating to their formation,
administration, performance and accounting and often include express or
implied certifications of compliance. Claims for civil or criminal fraud
may be brought for violations of 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 the regulations, requirements or
statutes, our existing government contracts could be terminated
and we could be suspended from government contracting or
subcontracting, including federally funded projects at the state level.
Should one of these events occur, it could have a material adverse
effect on our financial position, results of operations, and cash
flows.
|
|
·
|
We are
subject to environmental and other regulation. As more fully described
under “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 with 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.
|
|
·
|
Strikes or
work stoppages could have a negative effect 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
affected by strikes or work stoppages in the past, such labor actions
could have a significant effect on our operations if they occur in the
future.
|
|
·
|
Unavailability
of insurance coverage could have a negative effect 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 reasonably
priced insurance coverage to meet our requirements in the past, there is
no assurance that we will be able to do so in the future, and our
inability to obtain such coverage could materially affect our
financial position, results of operations and cash
flows.
|
|
·
|
An
inability to obtain bonding would have a negative effect 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 reasonably priced surety
bonds in the future could significantly affect our ability to be awarded
new contracts, which would have a material adverse effect on our financial
position, results of operations and cash
flows.
|
|
·
|
Our joint
venture contracts with project owners subject us to joint and several
liability. As further described in
“Joint Ventures; Off-Balance Sheet Arrangements” under “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” if a joint venture partner fails to perform we could be
liable for completion of the entire contract. If the contract were
unprofitable, this could result in a material adverse effect on our
financial position, results of operations and cash
flows.
|
|
·
|
Our
contract 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 contract backlog will be realized or, if
realized, will be profitable. Projects reflected in our contract backlog
may be affected by project cancellations, scope adjustments, time
extensions or other changes. Such changes may adversely affect the revenue
and profit we ultimately realize on these
projects.
|
|
·
|
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. In addition, they constitute a
significant part of the asphalt paving materials that are used in many of
our construction projects and are sold to third 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 steel and other commodities in our construction projects that can
be subject to significant price fluctuations. We enter into supply
agreements or pre-purchase commodities to secure pricing. 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.
|
|
·
|
An
inability to secure and permit aggregate reserves could negatively affect
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, our
operating results and financial conditions may be adversely affected by an
increasingly difficult permitting
process.
|
|
·
|
Private
sector work can 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.
|
|
·
|
Granite
Land Company is greatly affected by the strength 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. Our evaluation includes
a variety of estimates and assumptions and future changes in these
estimates and assumptions could affect future impairment analyses. 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.
|
|
·
|
Our real
estate investments may require additional funding. Granite Land Company’s
real estate investments generally utilize short-term debt financing for
their development activities. Due to the tightening of the credit markets,
banks have required lower loan-to-value ratios often resulting in the need
to pay a portion of the debt when short-term financing is
renegotiated. If our real estate investment partners are unable to make
their proportional share of a required repayment, GLC may be required to
provide the additional funding which could materially affect our financial
position and cash flows. Also, if we assume full financial management
responsibility, additional real estate investments may need to be
consolidated in our financial
statements.
|
|
·
|
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 11 of “Notes to the Consolidated Financial Statements”
included in this report. In most cases, failure to meet the restrictive
covenants would result in the acceleration of outstanding indebtedness
requiring 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 could 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 a material adverse
effect on our business and financial
condition.
|
|
·
|
As a part
of our growth strategy we may 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 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, as well as
amortization expenses related to certain other intangible assets. Failure
to manage and successfully integrate acquisitions could harm our financial
position, results of operations and cash
flows.
|
The
foregoing list is not all-inclusive. 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 affect 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.
Quarry Properties
We have
53 active and 37 inactive quarry properties available for the
extraction of sand and gravel and hard rock, all of which are located in
the western United States. All of our quarries are open-pit and are primarily
accessible by road. We process aggregates into construction materials for
internal use and for sale to third parties. The following map shows the
approximate locations of our permitted quarry properties as of December 31,
2009.
We estimate our permitted
proven1 and probable2 aggregate reserves to be
752 million tons with an average permitted life of approximately
38 years at present operating levels. Present operating levels are
determined based on a three-year annual average aggregate production rate
of 15.9 million tons. Reserve estimates were made by our geologists
and engineers based primarily on drilling studies. Our plant equipment is
powered mostly by electricity provided by local utility
companies.
1Proven
reserves are determined through the testing of samples obtained from closely
spaced subsurface drilling and/or exposed pit faces. Proven reserves are
sufficiently understood so that quantity, quality, and engineering conditions
are known with sufficient accuracy to be mined without the need for any further
subsurface work. Actual required spacing is based on geologic judgment about the
predictability and continuity of each deposit.
2Probable
reserves are determined through the testing of samples obtained from subsurface
drilling but the sample points are too widely spaced to allow detailed
prediction of quantity, quality, and engineering conditions. Additional
subsurface work may be needed prior to mining the
reserve.
The
following tables present information about our quarry properties as of December
31, 2009:
|
Type
|
Permitted | Unpermitted | Three-Year Annual Average |
||||||||
|
Quarry
Properties
|
Sand
& Gravel
|
Hard
Rock
|
Aggregate
Reserves (tons)
|
Aggregate
Reserves (tons)
|
Production
Rate (tons)
|
Average
Reserve Life
|
|||||
|
Owned
quarry properties
|
31
|
8
|
416.0 million
|
540.0 million
|
8.0 million
|
47 years
|
|||||
|
Leased
quarry properties1
|
35
|
16
|
336.3 million
|
644.0 million
|
7.9 million
|
33 years
|
|||||
1
Our leases have expiration dates which range from 5 to 50 years
with most including an option to renew.
|
Permitted
Reserves
for
Each Product Type (tons)
|
Percentage
of Permitted Reserves Owned and Leased
|
|||||||||||||||||||
|
State
|
Number
of Properties
|
Sand
& Gravel
|
Hard
Rock
|
Owned
|
Leased
|
|||||||||||||||
|
California
|
49
|
210.6
million
|
264.2
million
|
51
|
%
|
49
|
%
|
|||||||||||||
|
Non-California
|
41
|
184.2 million
|
93.3 million
|
63
|
%
|
37
|
%
|
|||||||||||||
Plant
Properties
We
operate plants at our quarry sites to process aggregates into construction
materials. Some of our quarry sites may have more than one crushing, concrete or
asphalt processing plant. At December 31, 2009 and
2008, we owned the following plants:
|
December
31,
|
2009
|
2008
|
||||||
|
Aggregate
crushing plants
|
52
|
54
|
||||||
|
Asphalt
concrete plants
|
69
|
68
|
||||||
|
Portland
cement concrete batch plants
|
22
|
24
|
||||||
|
Asphalt
rubber plants
|
5
|
5
|
||||||
|
Lime
slurry plants
|
9
|
9
|
Other Properties
The
following table provides our estimate of certain information about other
properties as of December 31, 2009:
|
Land
Area (acres)
|
Building
Square Feet
|
|
|
Office
and shop space (owned and leased)
|
1,200
|
1,100,000
|
|
Real
estate held for development and sale and use
|
3,600
|
108,000
|
Granite
West uses approximately 86% of our office and shop space with the
remainder being primarily utilized by Granite East.
Silica
Litigation
Our
wholly-owned subsidiary Granite Construction Company (“GCCO”) is one of
approximately 100 to 300 defendants in six active California Superior Court
lawsuits. Of the six lawsuits, four were filed against GCCO in 2005 and two were
filed against GCCO in 2006, in Alameda County (Dominguez vs. A-1 Aggregates, et
al.; 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 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
eighteen 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. The
Metropolitan Council is the local agency conduit for providing federal funds to
MnDOT for the HLRT 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 awarding future projects to joint venture members of MnTC on
MnDOT and Metropolitan Council work. MnTC is fully cooperating with the
Agencies and the USDOJ and has presented its detailed written responses to
the initial determinations of the Agencies as well as the investigation by the
USDOJ. On September 17, 2009, the USDOJ replied to MnTC’s
responses. MnTC and the USDOJ are continuing to engage in informal
discussions in an attempt to resolve this matter. Such discussions, if
successful, are expected to include resolution of issues with the USDOT and with
the state agencies. We cannot, however, rule out the possibility of civil
or criminal actions being brought against MnTC or one or more of its members
which could result in civil and criminal penalties.
US
Highway 20 Project
GCCO and
our wholly-owned subsidiary, Granite Northwest, Inc. 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 YRC’s stormwater permit. In June 2009, YRC was
informed that the USDOJ had assumed the criminal investigation that
the Oregon Department of Justice had previously been conducting in connection
with stormwater runoff from the project. YRC and its members are fully
cooperating in the investigation. We do not know whether any criminal
charges or civil lawsuits will be brought or against whom, as a result of the
investigation. Therefore, we cannot estimate what, if any, criminal or civil
penalty or conditional assessment may result from this
investigation.
City
of San Diego Fire Debris Cleanup
In the
aftermath of the 2007 San Diego County wildfires, GCCO bid for and was awarded a
fixed unit price, variable quantity contract with the City of San Diego (the
“City”) to perform specified debris cleanup work. GCCO began work in
November 2007 and completed the work in April 2008. In August 2008, the City
announced that it would conduct an independent audit of the project. In
December 2008, the City’s audit report was released with findings that, while
some GCCO billings contained mistakes, rates paid to GCCO appear to be generally
reasonable. GCCO has reimbursed the City for the undisputed overbilled
amount of less than $3,000. The former San Diego City Attorney, after conducting
a separate investigation of GCCO’s work on the project, filed a civil lawsuit in
California Superior Court, County of San Diego on October 17, 2008 against GCCO
and another contractor that had been awarded a similar cleanup contract
with the City. In the complaint, the City alleges that both
contractors knowingly presented to the City false claims for payment in
violation of the California False Claims Act. The City seeks trebled
damages in an amount to be determined, and a civil penalty in the amount of
$10,000 for each false claim made. After the November 2008 election in which a
new City Attorney was elected, GCCO and the City Attorney agreed to stay the
lawsuit in order to allow the City Attorney time to complete its investigation.
The stay expired in January 2010, and the parties have agreed to jointly request
a further stay. GCCO believes the allegations in the City’s complaint to be
without factual or legal basis and, therefore, the City’s entitlement to relief
sought under the California False Claims Act is remote.
Grand
Avenue Project DBE Issues
On
March 6, 2009, the U.S. Department of Transportation, Office of Inspector
General (“OIG”) served upon our wholly-owned subsidiary, Granite Construction
Northeast, Inc. (“Granite Northeast”), a United States District Court Eastern
District of New York subpoena to testify before a grand jury by producing
documents. The subpoena seeks all documents pertaining to a Granite
Northeast Disadvantaged Business Enterprise (“DBE”) subcontractor (the
“Subcontractor”), and the Subcontractor’s non-DBE lower tier
subcontractor/consultant, relating to the Subcontractor’s work on the Grand
Avenue Bus Depot and Central Maintenance Facility for the Borough of Queens
Project (the “Grand Avenue Project”). The subpoena also seeks all documents
regarding Granite Northeast’s use of the Subcontractor as a DBE on the Grand
Avenue Project and all documents related to the Subcontractor as a DBE on any
other contract including other public works construction projects. We have
complied with the subpoena and are fully cooperating with the OIG’s
investigation. To date, Granite Northeast has not been notified that it is
either a subject or target of the OIG’s investigation. As a result, we do not
know whether any criminal charges or civil lawsuits will be brought or against
whom, as a result of the investigation. Therefore, we cannot estimate what, if
any, criminal or civil penalty or conditional assessment may result from this
investigation.
Other
Legal Proceedings/Government Inquiries
We are a
party to a number of other legal proceedings arising in the normal course of
business. From time to time, we also receive 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 pending proceedings and compliance inquiries, individually and in the
aggregate, will not have a material adverse affect 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 affect on our results of operations, cash
flows and/or financial position for the period in which the ruling occurs. While
any one of our pending legal proceedings is subject to early resolution as a
result of our ongoing efforts to settle, whether or when any legal proceeding
will be resolved through settlement is neither predictable nor
guaranteed.
During
the fourth quarter of 2009, no matter was submitted to a vote of security
holders through the solicitation of proxies or otherwise.
Executive
Officers of the Registrant
Our
current executive officers are as follows:
|
Name
|
Age
|
Position
|
|
William
G. Dorey
|
65
|
President,
Chief Executive Officer and Director
|
|
James
H. Roberts
|
53 |
Executive
Vice President and Chief Operating Officer
|
|
LeAnne
M. Stewart
|
45 |
Senior
Vice President and Chief Financial Officer
|
|
Michael
F. Donnino
|
55 |
Senior
Vice President and Group
Manager
|
| John A. Franich | 53 | Vice President and Group Manager |
| Thomas S. Case | 47 | Vice President and Group 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 Chief Executive Officer since January 2004 and President since
February 2003. He also served as Chief Operating Officer from May 1998 to
January 2004, Executive Vice President from November 1998 to February 2003,
Senior Vice President from 1990 to 1998, Branch Division Manager from 1987 to
1998, and Vice President and Branch Division Assistant Manager from 1983 to
1987. Mr. Dorey has also served as a member of our Board of Directors since
January 2004. He received a B.S. degree in Construction Engineering from Arizona
State University in 1967.
Mr. Roberts
joined Granite in 1981 and has served in various capacities, including Executive
Vice President and Chief Operating Officer since September 2009, Senior Vice
President from May 2004 to September 2009, Granite West Manager from February
2007 to September 2009, 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. He
also completed the Stanford Executive Program in 2009.
Ms.
Stewart has been a Senior Vice President of Granite since February 2008. In June
2008, she was appointed Chief Financial Officer. Prior to joining Granite, Ms.
Stewart was employed by Nash Finch Company as Senior Vice President
and Chief Financial Officer from October 2004 to January 2007 and as Vice
President and
Corporate Controller from April 2000 to October 2004. She has served on
the Board of Trustees of the College of St. Benedict since 1995. Ms. Stewart
became a Certified Public Accountant in 1987, received a B.A. in Accounting from
the College of St. Benedict in 1987 and an M.B.A. from the Wharton School at the
University of Pennsylvania in 1997.
Mr.
Donnino joined Granite in 1977 and has served as Senior Vice President and Group
Manager since January 2010, 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.
Franich joined Granite in 2005 and has served as Vice President and Group
Manager since January 2010, Vice President and Granite West Manager of
Construction from February 2007 to December 2009, and Vice President, Branch
Division Construction Manager from January 2005 through January 2007. Prior to
joining Granite in 2005, Mr. Franich has held various positions in the
construction industry since 1979 and was formerly the President of Associated
General Contractors of California. Mr. Franich received a B.S. in Business
Administration (Finance) from California State University, Chico in
1979.
Mr. Case
has been an employee of Granite since 1987 and has been Vice President and Group
Manager since January 2010. He also served as Southwest Operating Group Manager
from March 2007 to December 2009, Utah Operations Branch Manager
from August 2001 through March 2007, Utah Operations Construction
Manager during 2001, Utah Operations Materials Manager between 1996 and 2000,
and in various positions at Granite’s Nevada and Santa Barbara, California
operations between 1986 and 1996. Mr. Case received a B.S. degree in
Construction Management from California Polytechnic State University in
1986.
Our
common stock trades on the New York Stock Exchange under the ticker symbol GVA.
As of
February 12, 2010, there were 38,629,378
shares of our common stock outstanding held
by 1,529 shareholders of record.
We have
paid quarterly cash dividends since the second quarter of 1990, and
we expect to continue to do so. 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
such other factors as the Board of Directors deems relevant.
|
Market
Price and Dividends of Common Stock
|
|
|
||||||||||||||
|
2009
Quarters Ended
|
December
31,
|
September
30,
|
June 30,
|
March 31,
|
||||||||||||
|
High
|
$ | 34.58 | $ | 36.39 | $ | 45.94 | $ | 45.82 | ||||||||
|
Low
|
$ | 27.14 | $ | 29.41 | $ | 32.29 | $ | 30.14 | ||||||||
| Dividends per share |
$
|
0.13 | $ | 0.13 | $ | 0.13 |
$
|
0.13 | ||||||||
| 2008 Quarters Ended | December 31, |
September
30,
|
June
30,
|
March
31,
|
||||||||||||
| High | $ | 50.00 | $ | 42.24 | $ | 37.79 | $ | 39.84 | ||||||||
| Low | $ | 21.20 | $ | 30.22 | $ | 29.19 | $ | 26.64 | ||||||||
| Dividends per share | $ | 0.13 | $ | 0.13 | $ | 0.13 | $ | 0.13 | ||||||||
During
the three months ended December 31, 2009, 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,
2009:
|
Period
|
Total Number
of Shares Purchased1
|
Average
Price Paid per Share
|
Total Number of Shares Purchased as Part of
Publicly Announced Plans or
Programs
|
Approximate
Dollar Value of Shares that May yet be Purchased
Under the Plans or Programs2
|
||||||||||||
|
October
1 through October 31, 2009
|
479
|
$ |
29.52
|
-
|
$
|
64,065,401
|
||||||||||
|
November
1 through November 30, 2009
|
89
|
$
|
31.35
|
-
|
$
|
64,065,401
|
||||||||||
|
December 1 through
December 31, 2009
|
14,846
|
$
|
29.97
|
-
|
$
|
64,065,401
|
||||||||||
|
Total
|
15,414
|
$ |
29.97
|
-
|
||||||||||||
1The
number of shares purchased is in connection with employee tax withholding
for shares granted under our Amended and Restated 1999 Equity Incentive
Plan.
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 this 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.
Performance
Graph
The graph
below compares Granite Construction Incorporated’s cumulative 5-year total
shareholder return on common stock with the cumulative total returns of the
S&P 500 index and the Dow Jones U.S. Heavy Construction index. The Dow Jones
U.S. Heavy Construction index includes the following companies: EMCOR Group
Inc., Fluor Corp., Foster Wheeler Ltd., Granite Construction Inc., Insituform
Technologies Inc., Jacobs Engineering Group Inc., KBR Inc., McDermott
International Inc., Quanta Services Inc. and Shaw Group Inc. The graph tracks
the performance of a $100
investment in our common stock and in each of the indexes (with reinvestment of
all dividends) from December 31, 2004 to December 31,
2009.
|
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
||||||||||||||||||
|
Granite
Construction Incorporated
|
$ | 100.00 | $ | 136.76 | $ | 193.23 | $ | 140.14 | $ | 172.69 | $ | 134.32 | ||||||||||||
|
S&P
500
|
100.00 | 104.91 | 121.48 | 128.16 | 80.74 | 102.11 | ||||||||||||||||||
|
Dow
Jones U.S. Heavy Construction
|
100.00 | 144.50 | 180.25 | 342.40 | 153.66 | 175.65 | ||||||||||||||||||
The
selected consolidated operations data for 2009, 2008 and 2007 and consolidated
balance sheet data as of December 31, 2009 and 2008 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 2006 and 2005 and the
consolidated balance sheet data as of December 31, 2007, 2006 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,
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Operating
Summary
|
(Dollars
In Thousands, Except Per Share Data)
|
||||||||||||||||||||
|
Revenue
|
$ | 1,963,479 | $ | 2,674,244 | $ | 2,737,914 | $ | 2,969,604 | $ | 2,641,352 | |||||||||||
|
Gross
profit
|
346,373 | 468,720 | 410,744 | 295,720 | 319,372 | ||||||||||||||||
|
As
a percent of revenue
|
17.6 | % | 17.5 | % | 15.0 | % | 10.0 | % | 12.1 | % | |||||||||||
|
General
and administrative expenses
|
224,910 | 257,532 | 246,202 | 199,481 | 192,692 | ||||||||||||||||
|
As
a percent of revenue
|
11.5 | % | 9.6 | % | 9.0 | % | 6.7 | % | 7.3 | % | |||||||||||
| Restructuring charges1 | 9,453 | - | - | - | - | ||||||||||||||||
|
Goodwill
impairment charge2
|
- | - | - | 18,011 | - | ||||||||||||||||
| Net income | 100,201 | 165,738 | 132,924 | 74,339 | 100,898 | ||||||||||||||||
|
Amount
attributable to noncontrolling interests3
|
(26,701 | ) | (43,334 | ) | (20,859 | ) | 6,170 | (17,748 | ) | ||||||||||||
|
Net
income attributable to Granite
|
73,500 | 122,404 | 112,065 | 80,509 | 83,150 | ||||||||||||||||
|
As
a percent of revenue
|
3.7 | % | 4.6 | % | 4.1 | % | 2.7 | % | 3.1 | % | |||||||||||
|
Net
income per share attributable to common
shareholders4:
|
|||||||||||||||||||||
|
Basic
|
$ | 1.91 | $ | 3.19 | $ | 2.69 | $ | 1.93 | $ | 2.00 | |||||||||||
|
Diluted
|
1.90 | 3.18 | 2.68 | 1.92 | 1.99 | ||||||||||||||||
|
Weighted
average shares of common stock:
|
|||||||||||||||||||||
|
Basic
|
37,566 | 37,606 | 40,866 | 40,874 | 40,614 | ||||||||||||||||
|
Diluted
|
37,683 | 37,709 | 40,909 | 40,920 | 40,684 | ||||||||||||||||
|
Consolidated
Balance Sheet
|
|||||||||||||||||||||
|
Total
assets
|
$ | 1,709,575 | $ | 1,743,455 | $ | 1,786,418 | $ | 1,632,838 | $ | 1,472,230 | |||||||||||
|
Cash,
cash equivalents and marketable securities
|
458,341 | 520,402 | 485,348 | 394,878 | 301,381 | ||||||||||||||||
|
Working
capital
|
500,605 | 475,942 | 397,568 | 319,762 | 367,801 | ||||||||||||||||
|
Current
maturities of long-term debt
|
58,978 | 39,692 | 28,696 | 28,660 | 26,888 | ||||||||||||||||
|
Long-term
debt
|
244,688 | 250,687 | 268,417 | 78,576 | 124,415 | ||||||||||||||||
|
Other
long-term liabilities
|
48,998 | 43,604 | 46,441 | 58,419 | 46,556 | ||||||||||||||||
|
Granite
shareholders’ equity
|
830,651 | 767,509 | 700,199 | 694,544 | 621,560 | ||||||||||||||||
|
Book
value per share
|
21.50 | 20.06 | 17.75 | 16.60 | 14.91 | ||||||||||||||||
|
Dividends
per share
|
0.52 | 0.52 | 0.43 | 0.40 | 0.40 | ||||||||||||||||
|
Common
shares outstanding
|
38,635 | 38,267 | 39,451 | 41,834 | 41,682 | ||||||||||||||||
|
Contract
backlog
|
$ | 1,401,988 | $ | 1,699,396 | $ | 2,084,545 | $ | 2,256,587 | $ | 2,331,540 | |||||||||||
1
During 2009, we recorded restructuring charges of
approximately $9.5 million as part of our
reorganization.
2
In 2006, we recorded a goodwill impairment charge of
approximately $18.0 million related to our Granite Northeast operation in New
York.
3
Effective January 1, 2009, we adopted a new accounting standard
requiring net income attributable to both the parent and noncontrolling
interests to be disclosed separately as well as the components of equity
attributable to the parent and noncontrolling interests. Prior years have
been adjusted to conform to this new
standard.
4
Computed using the two-class method required by accounting
standards adopted January 1, 2009, which requires prior period per share data to
be restated retrospectively for comparability.
General
We are
one of the largest heavy civil contractors in the United States engaged in the
construction and improvement of streets, roads, highways, mass transit
facilities, airport infrastructure, bridges, dams and other
infrastructure-related projects. We produce construction materials through
the use of our aggregate reserves and plant facilities. We also operate a real
estate investment and development company on a significantly smaller scale. We
have three operating segments: Granite West, Granite East and Granite
Land Company (“GLC”). Our
offices are located in Alaska, Arizona, California, Florida, Nevada, New
York, Oregon, Texas, Utah and Washington.
Our
construction business has been organized into two geographic segments, Granite
West and Granite East. Included in our Granite West segment is our
vertically integrated construction materials business. The Company also has
a real estate investment and development business, Granite Land Company (“GLC”).
Our results of operations discussed herein have been reported with the segment
structure that was in place during 2009. See Note 20 of “Notes to the
Consolidated Financial Statements” for additional information about our
operating segments.
On August
31, 2009, we announced changes to our organizational structure designed to
improve operating efficiencies and position the Company for long-term
growth. In
conjunction with the reorganization we are changing our reportable segments to
reflect our business product lines. Beginning in fiscal 2010, the Company’s new
reportable segments are: Construction, Large Project Construction, Construction
Materials and Real Estate. The Real Estate segment will contain what was
previously known as Granite Land Company. We will continue to
provide geographic information within the new segment
structure.
Our
contracts are obtained primarily through competitive bidding in response to
advertisements by both public agencies and private parties and to a lesser
extent on a
negotiated basis as a result of direct solicitation by private parties.
Our bidding activity is affected by such factors as contract backlog,
available personnel, current utilization of equipment and other resources, our
ability to obtain necessary surety bonds and competitive considerations. Bidding
activity, contract backlog and revenue resulting from the award of new contracts
may vary significantly from period to period.
The three
primary economic drivers of our business are (1) the overall health of the
economy, (2) federal, state and local public funding levels and (3) population
growth with the resulting private development. For example, a stagnant or
declining economy will generally result in reduced demand for construction in
the private sector. This reduced demand increases competition for 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 our revenue growth and/or have
a downward affect on gross profit margins. In addition, a stagnant or
declining economy tends to produce less tax revenue, thereby
decreasing a source of funds available for spending on public
infrastructure improvements. Some funding sources that have been specifically
earmarked for infrastructure spending, such as diesel and gasoline taxes, are
not as directly affected by a stagnant or declining economy. However,
even these can be temporarily at risk as state and local governments struggle to
balance their budgets. Additionally, high fuel prices can have a dampening
effect on consumption, resulting in overall lower tax revenue. Conversely,
increased levels of public funding as well as an expanding or robust
economy will generally increase demand for our services and provide
opportunities for revenue growth and margin improvement.
Our
general and administrative expenses include salaries and related expenses,
incentive compensation, discretionary profit sharing, provision for doubtful
accounts and other costs to support our business. In general, these costs
will increase in response to the growth and the related increased complexity of
our business. These costs will 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 re-allocating 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 restricted stock award
(generally three to five years).
Critical
Accounting Policies and Estimates
The
financial statements included in “Item 8. Financial Statements and Supplementary
Data” have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”). The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
revenue and expenses, and related disclosure of contingent assets and
liabilities. Our estimates, judgments and assumptions are continually evaluated
based on available information and experiences; however, actual amounts could
differ from those estimates.
Certain
of our accounting policies and estimates require higher degrees of judgment in
their application. These include the recognition of revenue and earnings from
construction contracts, the valuation of real estate held for
development and sale and insurance estimates. The Audit and Compliance
Committee of our Board of Directors has reviewed our
disclosure of critical accounting estimates.
Revenue
Recognition for Construction Contracts
Revenue
and earnings on construction contracts, including construction joint ventures,
are recognized under the percentage of completion method using the
ratio of costs incurred to estimated total costs. Revenue in an amount equal to
cost incurred is recognized prior to contracts reaching 25% completion,
thus deferring the related profit. It is our judgment that until a project
reaches 25% completion, there is insufficient information to determine the
estimated profit on the project with a reasonable level of certainty. In
the case of large, complex design/build projects we may defer profit recognition
beyond the point of 25% completion based on an evaluation of specific project
risks. The factors considered in this evaluation include the stage of design
completion, the stage of construction completion, status of outstanding purchase
orders and subcontracts, certainty of quantities of labor and materials,
and certainty of schedule and the relationship with the owner.
Revenue
from contract claims is recognized when we have a signed 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 consolidated 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. All contract costs,
including those associated with claims and change orders, are recorded
as incurred and revisions to estimated total costs are reflected as
soon as the obligation to perform is determined. 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).
The
accuracy of our revenue and profit recognition in a given period is dependent on
the accuracy of our estimates of the cost to complete each project. 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 to owner, weather and other 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.
|
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
contract backlog increased from approximately 68.7% at December 31,
2008 to approximately 75.1% at December 31, 2009. All state and federal
government contracts and many of our other contracts provide for termination of
the contract at the convenience of the party contracting with us, with
provisions to pay us for work performed through the date of
termination.
Valuation of Real
Estate Held for Development and Sale
We assess impairment of
our real estate held for development and sale at least annually or whenever
events or changes in circumstances indicate that carrying values of these
assets may not be recoverable. Events or changes in 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 legal factors or the business
climate;
|
|
·
|
accumulation of
costs significantly in excess of the amount originally expected for the
acquisition, development or construction of the asset;
and
|
|
·
|
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.
|
If events and changes in
circumstances indicate that the carrying amounts of the real estate held for
development and sale might not be fully recoverable, we compare projected
undiscounted net cash flows associated with the related asset or group of assets
against their respective carrying amounts. Future undiscounted cash flows are
estimated based on entitlement status, market conditions, cost of construction,
debt load, development schedules, status of joint venture partners and other
factors applicable to the specific project. In the event that the
projected undiscounted cash flows are not sufficient to recover the carrying
value of the assets, the assets are written down to their estimated fair values.
Fair value is estimated based on the expected future cash flows
attributable to the asset or group of assets and on other assumptions
that market participants would use in determining fair value, such as market
discount rates, transaction prices for other comparable assets, and other market
data. Our
estimates of cash flows may differ from actual cash flows due to, among other
things, fluctuations in interest rates, decisions made by jurisdictional
agencies, economic conditions, or changes to our business
operations.
In 2009 and 2008, we
recorded impairment charges of $1.7 million and $4.5 million,
respectively. The impairments were due to changes in sales and pricing
projections for three of our residential real estate investments that
reduced the estimated fair value of the assets below the carrying amounts. Given
the current economic environment surrounding real estate, we regularly evaluate
the recoverability of our real estate held for development and sale and have
determined that no further impairment loss was required.
A
continued decline in the residential and/or commercial real estate markets may
decrease the expected profitability for certain development activities to the
point we would be required to recognize additional impairments in the
future.
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. Payment for claim
amounts generally range from the first $0.5
million 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 affect our assessment of
the ultimate liability and could have a material effect on our operating results
and financial position.
Current Economic Environment and
Outlook for 2010
Challenging
market conditions negatively affected our overall revenue and contract backlog
in 2009. The continued weak residential and commercial development
markets significantly reduced demand for our construction materials and created
a highly competitive bidding environment for available public sector work. In
addition, the slow pace of the economic recovery has affected the financial
health of state and local agencies and ultimately the amount of work available
to bid.
We
currently expect 2010 to be a challenging year for our business due to the
ongoing competitive climate and uncertainty surrounding both federal and state
funding. Despite an increase in contract backlog in Granite East, our contract
backlog in Granite West is substantially lower and includes projects with lower
projected gross profit margins than recent years. In response, we have reduced
our planned capital spending from recent levels and will continue to focus on
reducing our costs.
Results of
Operations
|
Comparative
Financial Summary
|
||||||||||
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||||
|
Total
revenue
|
$
|
1,963,479
|
$
|
2,674,244
|
$
|
2,737,914
|
||||
|
Gross
profit
|
346,373
|
468,720
|
410,744
|
|||||||
| Restructuring charges | 9,453 | - | - | |||||||
|
Operating
income
|
129,179
|
216,691
|
174,885
|
|||||||
|
Other
income
|
9,672
|
16,739
|
23,509
|
|||||||
|
Provision
for income taxes
|
38,650
|
67,692
|
65,470
|
|||||||
|
Amount
attributable to noncontrolling interests
|
(26,701
|
) |
(43,334
|
) |
(20,859
|
) | ||||
|
Net
income attributable to Granite
|
73,500
|
122,404
|
112,065
|
|||||||
Revenue
|
Total
Revenue
|
|||||||||||||||||||
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
||||||||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
Revenue
by Segment:
|
|||||||||||||||||||
|
Granite
West
|
$
|
1,411,016
|
71.9
|
$
|
1,970,196
|
73.7
|
$
|
1,928,751
|
70.4
|
||||||||||
|
Granite
East
|
550,189
|
28.0
|
695,035
|
26.0
|
768,451
|
28.1
|
|||||||||||||
|
Granite
Land Company
|
2,274
|
0.1
|
9,013
|
0.3
|
40,712
|
1.5
|
|||||||||||||
|
Total
|
$
|
1,963,479
|
100.0
|
$
|
2,674,244
|
100.0
|
$
|
2,737,914
|
100.0
|
||||||||||
|
Granite
West Revenue
|
||||||||||||||||||||
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||||
|
California:
|
||||||||||||||||||||
|
Public
sector
|
$
|
512,111
|
75.7
|
$
|
697,551
|
67.8
|
$
|
595,733
|
56.7
|
|||||||||||
|
Private
sector
|
36,499
|
5.4
|
106,489
|
10.4
|
215,770
|
20.5
|
||||||||||||||
|
Construction
materials
|
127,649
|
18.9
|
224,736
|
21.8
|
239,660
|
22.8
|
||||||||||||||
|
Total
|
$
|
676,259
|
100.0
|
$
|
1,028,776
|
100.0
|
$
|
1,051,163
|
100.0
|
|||||||||||
|
West
(excluding California):
|
||||||||||||||||||||
|
Public
sector
|
$
|
624,517
|
85.0
|
$
|
721,922
|
76.7
|
$
|
563,392
|
64.2
|
|||||||||||
|
Private
sector
|
31,944
|
4.3
|
91,119
|
9.7
|
178,156
|
20.3
|
||||||||||||||
|
Construction
materials
|
78,296
|
10.7
|
128,379
|
13.6
|
136,040
|
15.5
|
||||||||||||||
|
Total
|
$
|
734,757
|
100.0
|
$
|
941,420
|
100.0
|
$
|
877,588
|
100.0
|
|||||||||||
|
Total
Granite West:
|
||||||||||||||||||||
|
Public
sector
|
$
|
1,136,628
|
80.5
|
$
|
1,419,473
|
72.0
|
$
|
1,159,125
|
60.1
|
|||||||||||
|
Private
sector
|
68,443
|
4.9
|
197,608
|
10.0
|
393,926
|
20.4
|
||||||||||||||
|
Construction
materials
|
205,945
|
14.6
|
353,115
|
18.0
|
375,700
|
19.5
|
||||||||||||||
|
Total
|
$
|
1,411,016
|
100.0
|
$
|
1,970,196
|
100.0
|
$
|
1,928,751
|
100.0
|
|||||||||||
Granite
West Revenue:
Revenue
from Granite West for the year ended December 31, 2009 decreased by $559.2
million, or 28.4%, compared to the year ended December 31, 2008 as a result of
the economic downturn and decline in residential development in the
West. The decrease in revenue affected all sectors of our Granite West
segment. With less private work available, competition has
migrated into the public sector. In addition, lack of available private
sector work has reduced the demand for construction materials. There is
also less work available for bid in the public sector as a result of reduced
state and local government budgets.
|
Granite
East Revenue
|
|||||||||||||||||||
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
||||||||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
Revenue
by Geographic Area:
|
|||||||||||||||||||
|
Midwest
|
$
|
157,338
|
28.6
|
$
|
175,763
|
25.3
|
$
|
93,896
|
12.2
|
||||||||||
|
Northeast
|
117,783
|
21.4
|
125,024
|
18.0
|
196,653
|
25.6
|
|||||||||||||
|
South
|
95,612
|
17.4
|
128,454
|
18.5
|
125,164
|
16.3
|
|||||||||||||
|
Southeast
|
178,467
|
32.4
|
221,167
|
31.8
|
299,084
|
38.9
|
|||||||||||||
|
West
|
989
|
0.2
|
44,627
|
6.4
|
53,654
|
7.0
|
|||||||||||||
|
Total
|
$
|
550,189
|
100.0
|
$
|
695,035
|
100.0
|
$
|
768,451
|
100.0
|
||||||||||
|
Revenue
by Market Sector:
|
|||||||||||||||||||
|
Public
sector
|
$
|
544,719
|
99.0
|
$
|
675,188
|
97.1
|
$
|
747,580
|
97.3
|
||||||||||
|
Private
sector
|
5,470
|
1.0
|
19,847
|
2.9
|
20,871
|
2.7
|
|||||||||||||
|
Total
|
$
|
550,189
|
100.0
|
$
|
695,035
|
100.0
|
$
|
768,451
|
100.0
|
||||||||||
Granite
East Revenue: Revenue
from Granite East for the year ended December 31, 2009 decreased
by $144.8 million, or 20.8%, compared to the year ended December 31,
2008. This
decrease was the result of an increased number of large projects nearing
completion in 2009 compared to 2008, the stage of a large project when
revenue recognition typically slows. Additionally, in
2009, delays in notices to proceed on three awarded projects
contributed to lower revenue. Included in Granite East revenue for the years
ended 2009 and 2008, were settlements of negotiated claims with contract owners
in the amounts of $16.0 million and $39.3 million, respectively, both of
which improved revenue.
The
following table provides information about revenue from our large projects
for the years ended December 31, 2009, 2008 and 2007:
|
Large
Project Revenue
|
||||||||||
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||
|
(dollars
in thousands)
|
||||||||||
|
Granite
West
|
$
|
142,555
|
$
|
245,514
|
$
|
160,232
|
||||
|
Number
of projects1
|
6
|
8
|
6
|
|||||||
|
Granite
East
|
$
|
496,561
|
$
|
621,215
|
$
|
732,086
|
||||
|
Number
of projects1
|
19
|
19
|
31
|
|||||||
|
Total
|
$
|
639,116
|
$
|
866,729
|
$
|
892,318
|
||||
|
Number
of projects1
|
25
|
27
|
37
|
|||||||
1 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, 2009 decreased by $6.7 million, or 74.8%,
compared to the year ended December 31, 2008. GLC’s
revenues have been negatively impacted by the downturn in the real estate
market.
Contract
Backlog
Our contract backlog is comprised of
the unearned revenue on awarded contracts that have not been completed,
including 100% of our consolidated joint ventures and our proportionate share of
unconsolidated joint venture contracts. We include a construction project in
our contract backlog at such time as a contract is awarded and funding is in
place, with the exception of certain federal government contracts for which
funding is appropriated on a periodic basis. Substantially all of the contracts
in our contract 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.
The
following tables illustrate our contract backlog as of the respective
dates:
|
Total
Contract Backlog
|
|||||||||||||
|
December
31,
|
2009
|
2008
|
|||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||
|
Contract
Backlog by Segment:
|
|||||||||||||
|
Granite
West
|
$
|
439,155
|
31.3
|
$
|
788,872
|
46.4
|
|||||||
|
Granite
East
|
962,833
|
68.7
|
910,524
|
53.6
|
|||||||||
|
Total
|
$
|
1,401,988
|
100.0
|
$
|
1,699,396
|
100.0
|
|||||||
|
Granite
West Contract Backlog
|
|||||||||||||
|
December
31,
|
2009
|
2008
|
|||||||||||
|
(in thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||
|
California:
|
|||||||||||||
|
Public
sector
|
$
|
218,701
|
96.6
|
$
|
430,421
|
94.8
|
|||||||
|
Private
sector
|
7,608
|
3.4
|
23,841
|
5.2
|
|||||||||
|
Total
|
$
|
226,309
|
100.0
|
$
|
454,262
|
100.0
|
|||||||
|
West
(excluding California):
|
|||||||||||||
|
Public
sector
|
$
|
208,215
|
97.8
|
$
|
319,271
|
95.4
|
|||||||
|
Private
sector
|
4,631
|
2.2
|
15,339
|
4.6
|
|||||||||
|
Total
|
$
|
212,846
|
100.0
|
$
|
334,610
|
100.0
|
|||||||
|
Total
Contract Backlog:
|
|||||||||||||
|
Public
sector
|
$
|
426,916
|
97.2
|
$
|
749,692
|
95.0
|
|||||||
|
Private
sector
|
12,239
|
2.8
|
39,180
|
5.0
|
|||||||||
|
Total
|
$
|
439,155
|
100.0
|
$
|
788,872
|
100.0
|
|||||||
Granite
West Contract
Backlog:
Granite West contract backlog of $439.2 million at December 31,
2009 was $349.7 million, or 44.3%, lower
than at December 31, 2008. The
decrease in contract backlog was due to a number of projects being completed
or nearing completion in 2009. Additionally, the current economic
climate and increased competition significantly reduced new awards in
contract backlog at December 31, 2009 relative to
2008.
|
Granite
East Contract Backlog
|
|||||||||||||
|
December
31,
|
2009
|
2008
|
|||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||
|
Contract
Backlog by Geographic Area:
|
|||||||||||||
|
Midwest
|
$
|
13,604
|
1.4
|
$
|
163,795
|
18.0
|
|||||||
|
Northeast
|
434,873
|
45.2
|
250,232
|
27.5
|
|||||||||
|
South
|
78,285
|
8.1
|
91,720
|
10.0
|
|||||||||
|
Southeast
|
434,343
|
45.1
|
402,062
|
44.2
|
|||||||||
|
West
|
1,728
|
0.2
|
2,715
|
0.3
|
|||||||||
|
Total
|
$
|
962,833
|
100.0
|
$
|
910,524
|
100.0
|
|||||||
|
Contract
Backlog by Market Sector:
|
|||||||||||||
|
Public
sector
|
$
|
960,926
|
99.8
|
$
|
906,470
|
99.6
|
|||||||
|
Private
sector
|
1,907
|
0.2
|
4,054
|
0.4
|
|||||||||
|
Total
|
$
|
962,833
|
100.0
|
$
|
910,524
|
100.0
|
Granite East Contract
Backlog:
Granite East contract backlog of $962.8 million at December 31,
2009 was $52.3 million, or 5.7%, higher than at December 31,
2008. The increase reflects new
projects awarded in 2009, including our portion of the work for the
expansion of Houston’s light rail project, as well as our participation in joint
ventures for a tunnel in New York City and a highway reconstruction project in
North Carolina. The decrease in contract backlog in the Midwest was due to the
substantial completion of a large design/build project in St. Louis, Missouri.
Not included in contract backlog is approximately $400.0
million associated with the Houston light rail project that will be booked
into contract backlog as additional notices to proceed are
received.
The following
tables provide additional information about our large project contract
backlog at December 31, 2009 and 2008: