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, 2006
OR
o
TRANSITION
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from _____ to _____
Commission
file number 1-12911
Granite
Construction Incorporated
(Exact
name of registrant as specified in its charter)
|
Delaware
|
77-0239383
|
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification Number)
|
|
585
West Beach Street
|
|
|
Watsonville,
California
|
95076
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (831)
724-1011
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class
|
Name
of each exchange on which registered
|
|
Common
Stock, $0.01 par value
|
New
York Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes x No o
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined by Rule 12b-2 of
the
Exchange Act).
Large
accelerated filer x Accelerated
filer o
Non-accelerated filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No x
The
aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant was approximately $1.6 billion as of June
30, 2006, 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, 2007, 41,825,917 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 21, 2007, which will be filed
with
the Securities and Exchange Commission not later than 120 days after December
31, 2006.
FORWARD-LOOKING
DISCLOSURE
From
time to time, Granite makes certain comments and disclosures in reports
and
statements, including in this Annual Report on Form 10-K (“Report”), or
statements made by its officers or directors that are not based on historical
facts and which may be forward-looking in nature. Under the Private Securities
Litigation Reform Act of 1995, a “safe harbor” may be provided to us for certain
of these forward-looking statements. We wish to caution readers that
forward-looking statements are subject to risks regarding future events
and the
future results of Granite that are based on current expectations, estimates,
forecasts, and projections as well as the beliefs and assumptions of Granite’s
management. Words such as “outlook,” “believes,” “expects,”
“appears,” “may,” “will,” “should,” “anticipates” or the
negative thereof or comparable terminology, are intended to identify such
forward-looking statements. In addition, other written or oral statements
which
constitute forward-looking statements have been made and may in the future
be
made by or on behalf of Granite. These forward-looking statements are estimates
reflecting the best judgment of senior management that rely on a number
of
assumptions concerning future events, many of which are outside of our
control,
and involve a number of risks and uncertainties that could cause actual
results
to differ materially from those suggested by the forward-looking statements.
Factors that might cause or contribute to such differences include, but
are not
limited to, those more specifically described in this Report under “Item 1A.
Risk Factors.” Granite undertakes no obligation to publicly revise or update any
forward-looking statements for any reason. As a result, the reader is cautioned
not to rely on these forward-looking statements, which speak only as of
the date
of this Annual Report on Form 10-K.
Introduction
We
were
originally incorporated in 1922 as Granite Construction Company. In 1990,
Granite Construction Incorporated was incorporated in Delaware as the holding
company for Granite Construction Company and its wholly owned subsidiaries.
Unless otherwise indicated, the terms “we,” “us,” “our,”
“Company” and “Granite” refer to Granite Construction Incorporated and its
consolidated subsidiaries.
We
are
one of the largest heavy civil construction contractors in the United States.
We
operate nationwide, serving both public and private sector clients. Within
the
public sector, we primarily concentrate on infrastructure projects, including
the construction of roads, highways, bridges, dams, tunnels, canals, mass
transit facilities and airport infrastructure. Within the private sector,
we
perform site preparation and infrastructure services for residential
development, commercial and industrial buildings, plants and other facilities.
Our diversification in both the public and private sectors and our mix
of
project types and sizes have contributed to our profitability in various
economic environments.
We
own
and lease substantial aggregate reserves and own a number of construction
materials processing plants. We also have one of the largest contractor-owned
heavy construction equipment fleets in the United States. We believe that
the
ownership of these assets enables us to compete more effectively by ensuring
availability of these resources at a favorable cost.
Operating
Structure
We
are
currently
organized into two operating segments, the Branch Division and the
Heavy
Construction Division (“HCD”). The Branch Division is comprised of branch
offices that serve local markets, while HCD is composed of regional offices
and
pursues major infrastructure projects throughout the nation. HCD focuses
on
building larger heavy civil projects with contract durations that are generally
greater than two years, while Branch Division projects are typically smaller
in
size and shorter in duration.
As
decentralized profit centers, the branches and HCD regional offices
independently estimate, bid and complete contracts. Both divisions are
supported
by centralized functions, including finance, accounting, tax, human resources,
labor relations, safety, legal, risk management, corporate development
and
information technology. We believe that centralized support for decentralized
profit centers results in a more market-responsive business with effective
controls and reduced overhead.
On
February 14, 2007 we announced an organizational realignment of our business
operations which is designed to accommodate growth of our vertically
integrated
Branch business in the West and improve profitability of our large, complex
HCD
projects. This realignment will involve realigning our operating divisions
geographically into
“Granite West” and “Granite East” and is expected to take approximately
twelve months to complete.
Granite
West will include the operations of our current Branch Division as well
as the
western portion of our large project business that is currently included
in HCD.
Granite West will retain our successful decentralized operating structure,
with
each of its branch locations aligning under one of three operating groups:
Northwest, Northern California and Southwest. Each of these newly formed
operating groups will report to a Granite West Group Vice President who
will
oversee three to six branches and will have the responsibility to stimulate
strategic thinking and growth in their geographic territory. Among other
key
benefits, this structure will allow Granite West to utilize its resources
and
market knowledge to take advantage of the larger projects we expect to
be let as
a result of healthy funding in the West as well as the recently passed
infrastructure funding propositions in California.
Granite
East will include the eastern portion of our large project business that
is
currently included in HCD and will be aligned to focus on enhancing project
management oversight and discipline from estimating through execution.
Granite
East will leverage its resources and core capabilities in areas where
it has
local knowledge, local relationships and local resources. It will be
operated
out of three regional offices: the Central Region, based in Dallas, Texas;
the
Southeast Region, based in Tampa, Florida; and the Northeast Region,
based in
Tarrytown, New York.
In
addition to our two current
operating segments, we purchase, develop and sell real estate through
our
Granite Land Company subsidiary (“GLC”)
which also provides real estate services for other Granite
operations. GLC’s
portfolio of projects includes both commercial and residential
development and is geographically diversified throughout the West and
Texas. The amount invested by GLC in each project is typically less than
$5.0 million and the revenues and operating income of Granite Land Company
are
not included in either the Branch Division or HCD operating
segments.
Information
about our business segments is incorporated in Note 16 of the “Notes to the
Consolidated Financial Statements.”
Branch
Division.
In 2006,
Branch Division contract revenue and sales of aggregate products was $1.8
billion (62.3% of our total revenue), compared with $1.6 billion (60.3%
of our
total revenue) in 2005. The Branch Division has both public and private
sector
clients. Public sector projects include both new construction and
improvement of streets, roads, highways and bridges. Major private sector
contracts include site preparation for housing and commercial development,
including excavation, grading and street paving and installation of curbs,
gutters, sidewalks and underground utilities.
The
Branch Division currently has 12 branch offices in the western United
States with additional satellite operations. Our eight branch offices in
California are located in Bakersfield, Fresno (Central Valley), Indio (Southern
California), Sacramento (Northern California), Santa Clara (Bay Area), Santa
Barbara, Stockton and Watsonville (Monterey Bay Area). Our branch offices
outside of California are located in Arizona, Nevada, Utah, and our
majority-owned subsidiary Wilder Construction Company (“Wilder”), which has
locations in Alaska, Oregon and Washington. Each branch effectively operates
as
a local or regional construction company and our branch management is encouraged
to participate actively in the local community. While individual branch revenues
vary from year to year, in 2006 these revenues ranged from $73.3 million
to
$248.1 million.
As
part
of our strategy, our branches mine aggregates and operate plants that process
aggregates into construction materials for internal use and for sale to others.
These activities are integrated into the Branch Division construction business
providing both a source of profits and a competitive advantage to our
construction business through the readily available supply of materials. We have
significant aggregate reserves that we have acquired by ownership in fee
or
through long-term leases. The amount of aggregate products produced that
are
used in our construction projects was approximately 42.0% during 2006 and
has
ranged from 37.0% to 48.0% over
the
last five years. The remainder is sold to unaffiliated parties and accounted
for
the following:
|
Years
Ended December 31,
|
2006
|
2005
|
2004
|
|||||||
| (in thousands) | ||||||||||
|
Material
sales to unaffiliated parties
|
$
|
410,159
|
$
|
334,290
|
$
|
264,353
|
||||
|
Percent
of total revenue
|
13.8
|
%
|
12.7
|
%
|
12.4
|
%
|
||||
|
Percent
of Branch Division revenue
|
22.2
|
%
|
21.0
|
%
|
20.5
|
%
|
||||
Heavy
Construction Division.
In 2006,
revenue from HCD was $1.1 billion (36.6% of our total revenue), compared
with
$1.0 billion (39.0% of our total revenue) in 2005. Like
the
Branch Division, HCD builds infrastructure projects for both public and private
sector clients. Its projects have included major highways, large dams, mass
transit facilities, bridges, pipelines, canals, tunnels, waterway locks and
dams, and airport infrastructure. It also performs activities such as
demolition, clearing, large-scale earthwork and grading, dewatering, drainage
improvements, structural concrete, rail signalization, and concrete and asphalt
paving. HCD projects are usually larger and more complex than those performed
by
the Branch Division. HCD is working on or has completed projects
in 25 states from coast to coast.
HCD
currently
markets, estimates, bids and provides management oversight of its
projects from our Watsonville, California headquarters and its five
regional estimating offices in Davis,
California; Tampa, Florida; Bloomington, Minnesota; Tarrytown, New York and
Lewisville, Texas. HCD
has the ability, if needed, to process locally sourced aggregates into
construction materials using owned or rented portable crushing, concrete
and
asphalt processing plants.
HCD
participates in joint ventures with other large construction companies. Joint
ventures are used for large, technically complex projects, including
design/build projects, where it is desirable to share risk and resources.
Joint
venture partners typically provide independently prepared estimates, shared
financing and equipment and often also bring local knowledge and
expertise (see “Joint Ventures; Off-Balance-Sheet
Arrangements” under “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operation”).
Design/build
is increasingly being used as a method of project delivery. Unlike
traditional projects where owners first hire a design firm or design a project
themselves and then put the project out to bid for construction, design/build
projects provide the owner with a single point of responsibility and a single
contact for both design and construction. HCD’s revenue from design/build
projects has grown over the last several years and represented 65.3%
of HCD revenue (25.1% of total company revenue) in 2006 and 49.1% of HCD
revenue
(20.3% of total company revenue) in 2005. Although these projects carry
additional risk as compared to traditional bid/build projects, the
profit potential can also be higher. We frequently bid design/build
projects as a part of a joint venture team.
Business
Strategy
Our
fundamental objective is to increase long-term shareholder value by focusing
on
consistent profitability from controlled revenue growth. Shareholder value
is
measured by the appreciation of the value of our common stock over a period
of
years as well as a return from dividends. Further, it is a specific measure
of
our financial success to achieve a return on net assets greater than the
cost of
capital, creating “Granite Value Added.” We believe that the following are key
factors in our ability to achieve this objective:
Employee
Development
- We
believe that our employees are key to the successful implementation of
our
business strategies. Significant resources are employed to attract, nurture
and
retain extraordinary talent and fully develop each employee’s
capabilities.
Infrastructure
Construction Focus - We concentrate our core competencies on this
segment of the construction industry, which includes the building of roads,
highways, bridges, dams and tunnels, mass transit facilities, railroad
infrastructure and underground utilities as well as site preparation. This
focus allows us to most effectively utilize our specialized strengths,
which include grading, paving and concrete structures.
Ownership
of Aggregate Materials and Construction Equipment - We own and lease
aggregate reserves and own processing plants that are vertically integrated
into
our construction operations and we own a large fleet of carefully maintained
heavy construction equipment. By ensuring availability of these resources
at
favorable cost, we believe we have bidding advantages in many of our markets,
as
well as a reliable source of revenue and income from the sale of construction
materials to unaffiliated parties.
Selective
Bidding - We focus our resources to bid on jobs that meet our
selective bidding criteria, which include analyzing the risk of a potential
job
in relation to available personnel to estimate and prepare the proposal,
degree of competition, experience with the type of work, relationship with
the
owner, local resources and partnerships, equipment resources, and size
and
complexity of the job.
Diversification -
To mitigate the risks inherent in construction and general economic factors,
we
pursue projects: (i) in both the public and private sectors; (ii) for a
wide
range of customers within each sector (from the federal government to small
municipalities and from large corporations to individual homeowners); (iii)
in
diverse geographic markets; (iv) that are design/build, lump sum and fixed
unit
price; and (v) of various sizes, durations and complexities.
Decentralized
Profit Centers - We approach each selected market with a local focus
through our decentralized structure. Each of our branches and HCD
regional offices are individual profit centers.
Profit-based
Incentives - We compensate our profit center managers with base
salaries below the median point of salaries for similar positions in the
marketplace coupled with a substantial variable cash and restricted stock
incentive element based on the annual profit performance of their respective
profit centers.
Controlled
Expansion - We intend to continue our expansion by selectively
adding branches or branch satellite locations in the western United States,
exploring opportunities to establish branch-like businesses in other areas
of
the country through acquisitions, and selectively pursuing major infrastructure
projects throughout the nation where we have an established
presence. Additionally, we intend to leverage our financial capacity by
investing in a limited number of real estate development projects that
we
believe will provide an acceptable return on our investment.
Accident
Prevention - We believe that the prevention of accidents is both a
moral obligation and good business. By identifying and concentrating resources
to address jobsite hazards, we continually strive to reduce our incident
rates
and the costs associated with accidents.
Environmental
Responsibility - We believe it benefits everyone to maintain
environmentally responsible operations. We are committed to effective measures
to protect the environment and maintain good community relations. We continually
monitor our performance in this area and take our responsibilities to the
communities we work in and compliance with government agency requirements
seriously.
Quality
and High Ethical Standards - We emphasize the importance of performing
high quality work and maintaining high ethical standards through an established
code of conduct and an effective corporate compliance
program.
Customers
We
have
customers in both the public and private sectors. The Branch Division’s largest
volume customer is the California Department of Transportation
(“Caltrans”). In
2006,
contracts with Caltrans represented 8.3% of our revenue, and total public
sector
revenue generated in California represented 24.5% of our revenue. Other Branch
Division customers include departments of transportation of other states,
county and city public works departments, school districts and developers
and
owners of industrial, commercial and residential sites. HCD’s customers are
predominantly in the public sector and currently include the state departments
of transportation in a number of states as well as local transit authorities
and
federal agencies (see
“Concentrations”
in Note 1 of the “Notes to the Consolidated Financial
Statements”).
Backlog
Our
backlog includes the total value of awarded contracts that have not been
completed, including our proportionate share of unconsolidated joint venture
contracts. Our backlog was approximately $2.3 billion at both December 31,
2006
and
2005.
Approximately $1.6 billion of the December 31, 2006 backlog is expected
to be completed during 2007. With
the
exception of certain federal government contracts, we include a construction
project in our backlog at such time as a contract is awarded and funding
is in
place. Certain federal government contracts that extend beyond one year are
funded on a year-by-year basis. Backlog at December 31, 2006 includes
approximately $21.0 million from one federal government project for which
the
funding has not yet been fully allocated. Substantially
all of the contracts in our backlog may be canceled or modified at the election
of the customer; however, we have not been materially adversely affected
by
contract cancellations or modifications in the past (see “Contract Provisions
and Subcontracting”). A sizeable percentage of our anticipated contract revenue
in any year is not reflected in our backlog at the start of the year due
to the
short duration of smaller Branch Division projects that are initiated and
completed during each year (“turn business”). Backlog by segment is presented in
“Backlog” under “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operation.”
Equipment
and Plants
We own
many pieces of equipment, including cranes, bulldozers, barges, backhoes,
excavators, scrapers, motor graders, loaders, trucks, pavers and rollers
as well
as construction materials processing plants. In 2006 and 2005, we spent
approximately $91.0 million and $90.6 million, respectively, for construction
equipment, plants and vehicles. At December 31, 2006 and 2005, we owned the
following construction equipment, plants and vehicles:
| December 31, |
2006
|
|
|
2005
|
||||
|
Heavy
construction equipment (units)
|
2,641 |
2,467
|
||||||
|
Trucks,
truck-tractors and trailers and vehicles (units)
|
5,338 |
4,958
|
||||||
|
Aggregate
crushing plants
|
55
|
50
|
||||||
|
Asphalt
concrete plants
|
53
|
56
|
||||||
|
Portland
cement concrete batch plants
|
25
|
25
|
||||||
|
Asphalt
rubber plants
|
4
|
4
|
||||||
|
Lime
slurry plants
|
9
|
9
|
We
believe that ownership of equipment is generally preferable to leasing because
ownership ensures the equipment is available as needed and normally results
in
lower equipment costs. We attempt to keep our equipment as fully utilized
as
possible by pooling equipment for use by both the Branch Division and HCD.
We
regularly lease or rent equipment on a short-term basis to supplement existing
equipment and respond to construction activity peaks.
Employees
On
December 31, 2006, we employed approximately 2,100 salaried employees, who
work in management, estimating and clerical capacities, and 3,100 hourly
employees. The total number of hourly personnel employed by us is subject
to the
volume of construction in progress. During 2006, the number of hourly employees
ranged from 3,100 to 7,200 and averaged approximately 5,400. Our
wholly owned subsidiaries, Granite Construction Company and Granite Construction
Northeast, Inc. (formerly Granite Halmar Construction Company, Inc.) and
our
majority-owned subsidiary, Wilder Construction Company 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 17.6% equity
ownership through our Employee Stock Ownership Plan, our Profit Sharing and
401k
Plan and performance-based incentive compensation arrangements at December
31,
2006. Our managerial and supervisory personnel have an average of
approximately 10 years of service with us.
Competition
Factors
influencing our competitiveness include price, reputation for quality,
the
availability of aggregate materials, machinery and equipment, financial
strength, knowledge of local markets and conditions, and project management
and
estimating abilities. Although some of our competitors are larger than
us and
may possess greater resources, we believe that we compete favorably on
the basis
of the foregoing factors. Historically, the construction business has not
usually required large amounts of capital, particularly for the smaller
size
construction work pursued by our Branch Division, which can result in relative
ease of market entry for companies possessing acceptable qualifications.
Branch
Division competitors range from small local construction companies to large
regional and national construction companies. While the market areas of
these
competitors overlap with several of the markets served by our branches,
few
compete in all of our market areas. In addition, most of our branches own
and/or
have long-term leases on aggregate resources that provide an extra measure
of
competitive advantage in certain markets. HCD normally competes with large
regional and national construction companies, which may or may not be larger
than Granite. Although the construction business is highly competitive,
we
believe we are well positioned to compete effectively in the markets in
which we
operate.
Contract
Provisions and Subcontracting
Our contracts
with our customers are primarily either “fixed unit price” or “fixed price.”
Under fixed unit price contracts, we are committed to provide materials
or
services required by a project at fixed unit prices (for example, dollars
per
cubic yard of concrete poured or cubic yard of earth excavated). While
the fixed
unit price contract shifts the risk of estimating the quantity of units
required
for a particular project to the customer, any increase in our unit cost
over the
expected unit cost in the bid, whether due to inflation, inefficiency,
faulty
estimates or other factors, is borne by us unless otherwise provided in
the
contract. Fixed price contracts are priced on a lump-sum basis under which
we
bear the risk of performing all the work for the specified amount. The
percentage of fixed price contracts in our backlog increased from
approximately 63.0% at December 31, 2005 to approximately 67.7% at December
31,
2006. Our contracts are generally obtained through competitive bidding
in
response to advertisements by federal, state and local government agencies
and
private parties. Less frequently, contracts may be obtained through direct
negotiations with private owners. Our contract risk mitigation process
includes
identifying risks and opportunities during the bidding process, review
of bids
fitting certain criteria by various levels of management and, in some cases,
by
the executive committee of our Board of Directors.
There
are
a number of factors that can create variability in contract performance
and
results as compared to a project’s original bid. The most significant of these
include the completeness and accuracy of the original bid, costs associated
with added scope changes, extended overhead due to owner and weather delays,
subcontractor performance issues, changes in productivity expectations,
site
conditions that differ from those assumed in the original bid (to the extent
contract remedies are unavailable), the availability and skill level of
workers
in the geographic location of the project and a change in the availability
and
proximity of equipment and materials. All of these factors can impose
inefficiencies on contract performance, which can drive up costs and lower
profits. Conversely, if any of these or other factors are more positive
than the
assumptions in our bid, project profitability can improve. The ability
to
realize improvements on project profitability is more limited than the
risk of lower profitability. Design/build projects carry other risks
such as the risk inherent in estimating quantities and prices before the
project design is completed and design error risk, including additional
construction costs due to any design errors, liability to the contract
owner for
the design of the project and right-of-way and permit acquisition costs.
Although we manage this additional risk by adding contingencies to our
bid
amounts, obtaining errors and omissions insurance and obtaining indemnifications
from our design consultants where possible, there is no guarantee that
these
risk management strategies will always be successful.
All
state
and federal government contracts and most of our other contracts provide
for
termination of the contract for the convenience of the contract owner,
with
provisions to pay us for work performed through the date of termination.
We have
not been materially adversely affected by these provisions in the
past. Many of our contracts contain provisions that require us to pay
liquidated damages if specified completion schedule requirements are not
met and
these amounts can be significant.
We
act as
prime contractor on most of the construction projects we undertake. We
accomplish the majority of our projects with our own resources and subcontract
specialized activities such as electrical and mechanical work. As prime
contractor, we are responsible for the performance of the entire contract,
including subcontract work. Thus, we may be subject to increased costs
associated with the failure of one or more subcontractors to perform as
anticipated. We manage this risk by reviewing the size of the subcontract,
the
financial stability of the subcontractor and other factors and, based on
this
review, determine whether to require that the subcontractor furnish a bond
or
other type of security that guarantees their performance. Disadvantaged
business
enterprise regulations require us to use our best efforts to subcontract
a
specified portion of contract work done for governmental agencies to certain
types of disadvantaged subcontractors. As with all of
our subcontractors, some may not be able to obtain surety bonds or
other types of performance security.
Insurance
and Bonding
We
maintain general and excess liability, construction equipment and workers’
compensation insurance; all in amounts consistent with industry
practices.
In
connection with our business, we generally are required to provide various
types
of surety bonds that provide an additional measure of security for our
performance under certain public and private sector contracts. Our ability
to
obtain surety bonds depends upon our capitalization, working capital, past
performance, management expertise and external factors, including the capacity
of the overall surety market. Surety companies consider such factors in
light of
the amount of our backlog that we have currently bonded and their current
underwriting standards, which may change from time to time. The capacity
of the
surety market is subject to market-driven 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. Our majority owned subsidiary,
Wilder Construction Company, continues to work with a single surety and
obtains
surety bonds on a stand alone basis. Although we do not believe that
fluctuations in surety market capacity has significantly impacted our ability
to
grow our business, there is no assurance that it will not significantly
impact
our ability to obtain new contracts in the future (see “Item 1A. Risk
Factors”).
Government
and Environmental Regulations
Our
operations are subject to compliance with regulatory requirements of
federal,
state and local government agencies and authorities, including regulations
concerning workplace safety, labor relations and disadvantaged businesses.
Additionally, all of our operations are subject to various federal,
state and
local laws and regulations relating to the environment, including those
relating
to discharges to air, water and land, the handling and disposal of
solid and
hazardous waste, the handling of underground storage tanks and the
cleanup of
properties affected by hazardous substances. Certain environmental
laws impose
substantial penalties for non-compliance and others, such as the federal
Comprehensive Environmental Response, Compensation and Liability Act,
impose
strict, retroactive, joint and several liability upon persons responsible
for
releases of hazardous substances. We continually evaluate whether we
must take
additional steps at our locations to ensure compliance with environmental
laws.
While compliance with applicable regulatory requirements has not materially
adversely affected our operations in the past, there can be no assurance
that
these requirements will not change and that compliance will not adversely
affect
our operations in the future. In addition, our aggregate materials
operations
require operating permits granted by governmental agencies. We believe
that
tighter regulations for the protection of the environment and other
factors will
make it increasingly difficult to obtain new permits and renewal of
existing
permits may be subject to more restrictive conditions than currently
exist.
The
California Air Resources Board has proposed regulations that will require
equipment owners to reduce diesel particulate emissions from in-use
off-road
diesel equipment to meet emission targets proposed for each year from
2009 to
2020. A regulation is anticipated to be approved in 2007. The emission
targets
that are currently proposed will require California off-road diesel
equipment
owners to retrofit equipment with diesel particulate filters or replace
equipment with new engine technology as it becomes available. This
regulation is
still in the rule-making process and changes to the regulation may
be made prior
to its final approval.
As
is the
case with other companies in the same industry, some of our aggregate
products
contain varying amounts of crystalline silica, a common mineral. Also,
some of
our construction and material processing operations release as dust
crystalline
silica that is in the materials being handled. Excessive, prolonged
inhalation
of very small-sized particles of crystalline silica has allegedly been
associated with respiratory disease (including silicosis). The Mine
Safety and
Health Administration and the Occupational Safety and Health Administration
have
established occupational thresholds for crystalline silica exposure
as
respirable dust. We monitor to verify that our dust control procedures
are
keeping occupational exposures at or below the requisite thresholds
and to
verify that respiratory protective equipment is made available when
required. We
also communicate, through safety information sheets and other means,
what we
believe to be appropriate warnings and cautions to employees and customers
about
the risks associated with excessive, prolonged inhalation of mineral
dust in
general and crystalline silica in particular.
Website
Access
Our
website address is www.graniteconstruction.com. On our website we make
available, free of charge, our annual report on Form 10-K, quarterly reports
on
Form 10-Q, current reports on Form 8-K, and all amendments to those reports
as
soon as reasonably practicable after such material is electronically filed
with
or furnished to the Securities and Exchange Commission (“SEC”). The information
on our website is not incorporated into, and is not part of, this report.
These
reports, and any amendments to them, are also available at the website of
the
SEC, www.sec.gov.
Set
forth
below and elsewhere in this Report and in other documents we file with
the SEC
are various risks and uncertainties that could cause our actual results
to
differ materially from the results contemplated by the forward-looking
statements contained in the Report or otherwise adversely affect our
business.
|
·
|
Our
success depends on attracting and retaining
qualified personnel in a competitive environment. The
single largest factor in our ability to profitably execute
our work is our
ability to attract, develop and retain qualified personnel.
Our success in
attracting qualified people is dependent on the resources available
in
individual geographic areas and the impact on the labor supply
due to
general economic conditions as well as our ability to provide
a
competitive compensation package and work
environment.
|
|
·
|
Economic
downturns and reductions in government
funding could have a negative impact on our
business. Significant portions of our revenues
are derived from contracts that are funded by federal, state
and local
government agencies. Our ability to obtain future public sector
work at
reasonable margins is highly dependent on the amount of work
that is
available to bid, which is largely a function of the level of
government
funding available. We also perform commercial and residential
site
development and other work for customers in the private sector.
The
availability of this private sector work can be significantly
adversely
affected by general economic downturns.
|
|
·
|
Our
fixed price and fixed unit price contracts subject us to the
risk of
increased project cost. As more fully described under
“Contract Provisions and Subcontracting” above, the profitability of our
fixed price and fixed unit price contracts can be adversely affected
by a
number of factors that can cause our actual costs to materially
exceed the
costs estimated at the time of our original
bid.
|
|
·
|
Accounting
for our revenues and costs involves significant
estimates. As further described in “Critical Accounting
Estimates” under “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operation,” accounting for our contract
related revenues and costs, as well as other cost items, requires
management to make a variety of significant estimates and assumptions.
Although we believe we have sufficient experience and processes
to enable
us to formulate appropriate assumptions and produce reasonably
dependable
estimates, these assumptions and estimates may change significantly
in the
future, and these changes could result in the reversal of
previously recognized revenue and profit and have a material
adverse
effect on our financial position and the results of our
operations.
|
|
·
|
Many
of our contracts have penalties for late
completion. In some instances, including many of
our fixed price contracts, we guarantee that we will complete
a project by
a scheduled date. If we subsequently fail to complete the project
as
scheduled we may be held responsible for cost impacts resulting
from any
delay, generally in the form of contractually agreed-upon liquidated
damages. To the extent that these events occur, the total costs
of the
project could exceed our original estimates and we could experience
reduced profits or, in some cases, a loss for that
project.
|
|
·
|
Weather
can significantly impact our quarterly revenues and
profitability. Our ability to perform work is
significantly impacted by weather conditions such as precipitation
and
temperature. Changes in weather conditions can create significant
variability in our quarterly revenues and profitability, particularly
in
the first and fourth quarters of the year. Additionally, delays
and other
weather impacts may increase a project’s cost and decrease its
profitability.
|
|
·
|
We
work in a highly competitive marketplace. As more
fully described under “Competition” above, we have multiple competitors in
all of the areas in which we work. During economic down cycles
or times of
lower government funding for public works projects, competition
for the
fewer available projects intensifies and this increased competition
may
result in a decrease in our ability to be competitive at acceptable
margins.
|
|
·
|
An
inability to secure and permit aggregate
reserves could negatively impact our future operations and
results. Tighter regulations for the protection of the
environment and the finite nature of property containing suitable
aggregate reserves are making it increasingly challenging and
costly to
secure and permit aggregate reserves. Although we have thus far
been able
to secure and permit reserves to support our business, it is
likely to
become increasingly difficult to do so and there is no assurance
that we
will be able to secure and permit reserves in the
future.
|
|
·
|
We
are subject to environmental and other
regulation. As more fully described under
“Government and Environmental Regulations” above, we are subject to a
number of federal, state and local laws and regulations relating
to the
environment, workplace safety and a variety of socioeconomic
requirements, the noncompliance of which can result in substantial
penalties, termination or suspension of government contracts as well
as civil and criminal liability. While compliance with these
laws and
regulations has not materially adversely affected our operations
in the
past, there can be no assurance that these requirements will
not change
and that compliance will not adversely affect our operations
in the
future.
|
|
·
|
Strikes
or work stoppages could have a negative impact on our operations
and
results. We are party to collective bargaining
agreements covering a portion of our craft workforce. Although our
results and operations have not been significantly impacted
by strikes or
work stoppages in the past, such labor actions could have a
significant
impact on our operations if they occur in the
future.
|
|
·
|
Unavailability
of insurance coverage could have a negative impact on our operations
and
results. We maintain insurance coverage as part of our
overall risk management strategy and pursuant to requirements to
maintain specific coverage that are contained in our financing
agreements
and in most of our construction contracts. Although we have been
able to
obtain insurance coverage to meet our requirements in the past,
there is
no assurance that such insurance coverage will be available in
the
future.
|
|
·
|
An
inability to obtain bonding would have a
negative impact on our operations and results. As more
fully described in “Insurance and Bonding” above, we generally are
required to provide surety bonds securing our performance under
the
majority of our public and private sector contracts. Our inability
to
obtain surety bonds in the future would significantly impact
our ability
to obtain new contracts, which would have a material adverse
effect on our
business.
|
|
·
|
Our
joint venture contracts with project owners subject us to joint
and
several liability. If a joint venture partner fails to
perform we could be liable for completion of the entire contract
and, if
the contract were unprofitable, this could result in a material
adverse
effect on our financial position, results of operations and
cash
flows.
|
|
·
|
We
use certain commodity products that are subject to significant
price
fluctuations. Diesel fuel, liquid asphalt and
other petroleum-based products are used to fuel and
lubricate our equipment and fire our asphalt concrete
processing plants and also constitute a significant part of the
asphalt paving materials that are used in many of our construction
projects and sold to outside parties. Although we are partially
protected by asphalt or fuel price escalation clauses in some
of our
contracts, many contracts provide no such protection. We also use
cement, steel and other commodities in our construction projects that
can be subject to significant price fluctuations. We have not
been
significantly adversely affected by price fluctuations in the
past;
however, there is no guarantee that we will not be in the
future.
|
|
·
|
As
a part of our growth strategy we expect to make future acquisitions
and
acquisitions involve many risks. These risks include
difficulties integrating the operations and personnel of the
acquired
companies, diversion of management’s attention from our ongoing
operations, potential difficulties and increased costs associated
with
completion of any assumed construction projects, insufficient
revenues to
offset increased expenses associated with acquisitions and the
potential
loss of key employees or customers of the acquired companies.
Acquisitions
may also cause us to increase our liabilities, record goodwill
or other
non-amortizable intangible assets that will be subject to subsequent
impairment testing and potential impairment charges and incur
amortization
expenses related to certain other intangible assets. Failure
to manage and
successfully integrate acquisitions could harm our business and
operating
results significantly.
|
|
· |
Our goodwill may be impaired and result in a charge to income. We have accounted for our past acquisitions using the “purchase” method of accounting. Under the purchase method, we recorded, at fair value, assets acquired and liabilities assumed, and we recorded as goodwill the difference between the cost of acquisitions and the sum of the fair value of tangible and identifiable intangible assets acquired, less liabilities assumed. At December 31, 2006, our goodwill balance was $9.9 million. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” our recorded goodwill is not amortized but instead is subject to an impairment review on at least an annual basis. In the future, if our goodwill is determined to be impaired, the impairment would result in a charge to income from operations in the year of the impairment with a resulting decrease in our recorded net worth. |
|
·
|
Failure
of our subcontractors to perform as anticipated could have a
negative
impact on our results. As further described under
“Contract Provisions and Subcontracting” above, we subcontract a portion
of many of our contracts to specialty subcontractors and we are
ultimately
responsible for the successful completion of their work. Although
we seek
to require bonding or other forms of guarantees, we are not always
successful in obtaining those bonds or guarantees from our higher
risk
subcontractors, and there is no guarantee that we will not incur
a
material loss due to subcontractor performance
issues.
|
|
·
|
We
may be unable to identify qualified Disadvantaged Business Enterprise
(“DBE”) contractors to perform as subcontractors. Certain of
our government agency projects contain minimum DBE participation
clauses.
If we subsequently fail to complete these projects with the minimum
DBE
participation we may be held responsible for damages due to breach
of
contract including restrictions on our ability to bid on future
projects
and monetary damages.
To the extent that these events occur, the total costs of the
project
could exceed our original estimates and we could experience reduced
profits or, in some cases, a loss for that
project.
|
|
|
·
|
A
significant portion of our revenue is from government funded
contracts.
Approximately
68% of our consolidated revenue in 2006 was derived from
performing
contracts funded by federal, state and local government agencies
and
authorities. These government contracts are subject to specific
procurement regulations, contract provisions and a variety
of
socioeconomic requirements relating to their formation, administration,
performance and accounting. Many of these contracts include
express or
implied certifications of compliance with applicable laws
and contract
provisions. As a result of our government contracting, claims
for civil or
criminal fraud may be brought by the government for violations
of these
regulations, requirements or statutes. We may also be subject
to qui tam
litigation brought by private individuals on behalf of the
government
under the Federal Civil False Claims Act, which could include
claims for
up to treble damages. Further, if we fail to comply with
any of these
regulations, requirements or statutes, our existing government
contracts
could be terminated, we could be suspended from government
contracting or
subcontracting, including federally funded projects at the
state level. If
our government contracts are terminated for any reason, or
if we are
suspended from government work, we could suffer a significant
reduction in
expected revenue.
|
|
|
·
|
Our
long-term debt and credit arrangements contain restrictive covenants
and
failure to meet these covenants could significantly harm our
financial
condition. Our long-term debt and credit arrangements
and related restrictive covenants are more fully described in
Note 10
of the “Notes to the Consolidated Financial Statements” included in this
report. In most cases, failure to meet the restrictive covenants
would
result in an immediate repayment of all amounts due and cancellation
of
open lines of credit. Additionally, failure to meet restrictive
covenants
related to our debt and credit agreements would trigger cross-default
provisions that would cause us to also be in default of our surety
agreements. Although we have not had difficulty meeting these
covenants in
the past, failure to do so in the future could have material
adverse
effects on our business and financial
condition.
|
|
|
||
|
·
|
Our
backlog is subject to unexpected adjustments and cancellations
and could
be an uncertain indicator of our future earnings. We cannot
guarantee that the revenues projected in our backlog will be
realized or,
if realized, will result in profits. Projects may remain in our
backlog
for an extended period of time. In addition, project cancellations
or
scope adjustments may occur, from time to time, with respect
to contracts
reflected in our backlog. Backlog reductions can adversely affect
the
revenue and profit we actually receive from contracts reflected
in our
backlog. Future project cancellations and scope adjustments could
further
reduce the dollar amount of our backlog and the revenues and
profits that
we actually receive.
|
|
Not
applicable.
The
following table provides our estimate of certain information about our
properties as of December 31, 2006:
|
|
Land
Area (acres)
|
Building
Square Feet
|
Permitted
Aggregate Reserves (tons)
|
Unpermitted
Aggregate Reserves
(tons)
|
|
Office
and shop space (owned and leased)
|
1,400
|
1,050,000
|
N/A
|
N/A
|
|
Owned
quarry property
|
N/A
|
N/A
|
430.0
million
|
125.0
million
|
|
Leased
quarry property
|
N/A
|
N/A
|
355.0
million
|
645.0
million
|
|
Real
estate held for sale
|
2,800
|
60,000
|
N/A
|
N/A
|
Approximately
80% of the office and shop space is used by the Branch Division at their
various
locations throughout the western United States and the remainder is primarily
used by HCD. The quarry property is located at Branch Division locations
throughout the western United States. We consider our available and future
aggregate reserves adequate to meet our expected operating needs. We pursue
a
plan of acquiring new sources of aggregate reserves to replenish those depleted
and to support future growth with a goal of maintaining approximately thirty
years of aggregate reserves at most of our Branch locations.
Eldredge
A
$9.3
million judgment was entered in June 2005 against our wholly owned
subsidiary
Granite Construction Company (“GCCO”) by the District Court Clark County;
Nevada, in an action entitled Eldredge
vs. Las Vegas Valley Water District, GCCO, et al. The
civil
lawsuit was initially brought by a former employee of GCCO against
the Las Vegas
Water District in June 2000. The plaintiff subsequently filed an amended
complaint on June 10, 2003, bringing GCCO into the action and seeking
compensation in addition to the worker’s compensation payments the employee
previously accepted for injuries sustained when a trench collapsed.
The jury
issued a verdict finding against GCCO on two causes of action, assault
and
battery and intentional infliction of emotional distress. The judgment
awarded
damages for past and future lost wages, medical expenses and pain and
suffering.
After the verdict was issued, the plaintiff filed a motion seeking
monetary
sanctions against GCCO in the amount of $26.8 million (a multiple of
the jury
verdict) based on allegations that GCCO and/or its trial counsel improperly
withheld and/or attempted to influence testimony in respect to the
case.
Pursuant
to the parties written agreement to resolve this dispute, on January
11, 2007
the $9.3 million judgment was dismissed with prejudice making the judgment
against GCCO null and void and plaintiff’s motion seeking monetary sanctions
against GCCO in the amount of $26.8 million (a multiple of the jury
verdict)
deemed withdrawn with prejudice.
Silica
GCCO
is one of approximately 100 to 300 defendants in ten active
California Superior Court lawsuits. Of the ten lawsuits, five were filed
against
GCCO in 2005 and five were filed against GCCO in 2006, in Alameda County
(Riley vs. A-1 Aggregates, et al.; Molina vs. A-1 Aggregates, et
al.;
Dominguez vs. A-1 Aggregates, et al.; Cleveland vs. A. Teichert & Son.;
Guido vs. A. Teichert & Son, Inc.; Williams vs. A. Teichert & Son, Inc.;
Horne vs. Teichert & Son, Inc.; Harris vs. A-1 Aggregates, et al.;
Kammer vs.A-1 Aggregates, et al.; and Solis vs. The 3M Company et al.).
Each lawsuit was brought by a single plaintiff who is seeking money damages
by
way of various causes of action, including strict product and market
share
liability, and alleges personal injuries caused by exposure to silica
products
and related materials during the plaintiffs’ use or association with sand
blasting or grinding concrete. The plaintiff in each lawsuit has categorized
the
defendants as equipment defendants, respirator defendants, premises defendants
and sand defendants. We have been identified as a sand defendant, meaning
a
party that manufactured, supplied or distributed silica-containing products.
Our
preliminary investigation revealed that we have not knowingly sold or
distributed abrasive silica sand for sandblasting, and therefore, we
believe the
probability of these lawsuits resulting in an incurrence of a material
liability
is remote. We have been dismissed from fourteen other similar lawsuits.
In
addition, we have been apprised of three complaints that are based on
similar
allegations of exposure to silica containing products being filed, but
not
served, against GCCO and more than 100 other defendants in California
Superior
Court.
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 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. The 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 as
represented by MnTC. There has been no formal administrative subpoena
issued,
nor has a civil complaint been filed in connection with the administrative
reviews or the investigation. The MnTC is fully cooperating with all
of
the agencies involved and will be provided an opportunity to informally
present its response to the initial determinations of
the
Agencies as well as the investigation of the USDOJ.
Other
We
are a
party to a number of other legal proceedings arising in the normal
course of
business which, from time to time, includes 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 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 these proceedings,
individually and in the aggregate, will not have a material adverse
effect on
our financial position or overall trends in results of operations or
cash flows,
litigation is subject to inherent uncertainties. Were an unfavorable
ruling to
occur, there exists the possibility of a material adverse impact on
the results
of operations, cash flows and/or financial position for the period
in which the
ruling occurs. While any one of our pending legal proceedings is subject
to
early resolution as a result of our ongoing efforts to settle, whether
or when
any legal proceeding will resolve through settlement is neither predictable
nor
guaranteed.
We
did
not submit any matters to a vote of security holders during the fourth quarter
of the year ended December 31, 2006.
Executive
Officers of the Registrant
Our
executive officers are as follows:
|
Name
|
Age
|
Position
|
|
William
G. Dorey
|
62
|
President,
Chief Executive Officer and Director
|
|
Mark
E. Boitano
|
58
|
Executive
Vice President and Chief Operating Officer
|
| William E. Barton | 62 |
Senior
Vice President and Chief Financial Officer
|
| Michael F. Donnino | 52 |
Senior
Vice President and Heavy Construction Division Manager
|
|
James
H. Roberts
|
50
|
Senior
Vice President and Branch Division
Manager
|
Granite
Construction Incorporated was incorporated in Delaware in January 1990
as the
holding company for Granite Construction Company, which was incorporated
in
California in 1922. All dates of service for our executive officers include
the
periods in which they served for Granite Construction
Company.
Mr. Dorey
has been an employee of Granite since 1968 and has served in various
capacities,
including President and Chief Executive Officer since January 2004, President
and Chief Operating Officer from February 2003 to December 2003, Executive
Vice
President and Chief Operating Officer from 1998 to February 2003, Senior
Vice
President and Manager, Branch Division from 1987 to 1998, and Vice President
and
Assistant Manager, Branch Division from 1983 to 1987. Mr. Dorey has also
served
as a member of our Board of Directors since January 2004. Mr. Dorey also
served
as a director of TIC Holdings, Inc. from 1997 to 2002. He received a
B.S. degree
in Construction Engineering from Arizona State University in 1967.
Mr.
Boitano has been an employee of the Company since 1977 and has served
in various
capacities, including Chief Operating Officer since January 2004 and
Executive
Vice President since February 2003. He also served as Branch Division
Manager
from 1998 to January 2004, and Senior Vice President from 1998 to February
2003.
In 2001, he became a director of Wilder Construction Company. Mr. Boitano
received a B.S. degree in Civil Engineering from Santa Clara University
in 1971
and an M.B.A. degree from California State University, Fresno in
1977.
Mr. Barton
has been an employee of the Company since 1980 and has served as Senior
Vice
President and Chief Financial Officer since 1999 and as Vice President
and Chief
Financial Officer from 1990 to 1999. In 1997, Mr. Barton became a director
of
TIC Holdings, Inc., and in January 2000 he also became a director of
Wilder
Construction Company. He received a B.S. degree in Accounting and Finance
from
San Jose State University in 1967 and an M.B.A. degree from Santa Clara
University in 1973.
Mr.
Donnino joined Granite in 1977 and has served as Senior Vice President
and Heavy
Construction Division Manager since January 2005. He served as Vice President
and Heavy Construction Division Assistant Manager during 2004, Texas
Regional
Manager from 2000 to 2003 and Dallas Estimating Office Area Manager from
1991 to
2000. Mr. Donnino received a B.S.C.E. in Structural, Water and Soils
Engineering
from the University of Minnesota in 1976.
Mr. Roberts
joined Granite in 1981 and has served in various capacities, including
Senior
Vice President and Branch Division Manager since May 2004, Vice President
and
Assistant Branch Division Manager from 1999 to 2004, Regional Manager
of Nevada
and Utah Operations from 1995 to 1999 and became a Director of Wilder
Construction Company in 2006. He received a B.S.C.E. in 1979 and an M.S.C.E.
in
1980 from the University of California, Berkeley, and an M.B.A. from
the
University of Southern California in 1981.
Item
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Our
common stock trades on the New York Stock Exchange under the ticker symbol
GVA.
See “Quarterly Results” under “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operation” for a two-year summary of
quarterly dividends and high and low sales prices of our stock.
We
have
paid quarterly cash dividends since the second quarter of 1990, and
we expect to continue to pay quarterly cash dividends. However, declaration
and payment of dividends is within the sole discretion of our Board of
Directors, subject to limitations imposed by Delaware law and compliance
with
our credit agreements, and will depend on our earnings, capital requirements,
financial condition and such other factors as the Board of Directors deems
relevant.
As
of
February 12, 2007, there were 41,825,917 shares of our common stock
outstanding held by 986 shareholders of record.
During
the three months ended December 31, 2006, 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,
2006:
|
Period
|
Total
number of shares purchased1
|
Average
price paid per share
|
Total
number of shares purchased as part of publicly announced plans
or
programs2
|
Approximate
dollar value of shares that may yet be purchased under the plans
or
programs2
|
|||||||||
|
October
1, 2006 through October 31, 2006
|
-
|
-
|
-
|
$
|
22,787,537
|
||||||||
|
November
1, 2006 through November 30, 2006
|
-
|
-
|
-
|
$
|
22,787,537
|
||||||||
|
December
1, 2006 through December 31, 2006
|
19,512
|
$ |
51.08
|
-
|
$
|
22,787,537
|
|||||||
|
|
19,512 | $ |
51.08
|
-
|
|||||||||
1The
total
number of shares purchased represents shares purchased in connection with
employee tax withholding for shares granted under our Amended and Restated
1999
Equity Incentive Plan.
2On
October 16, 2002, we publicly announced that our Board of Directors had
authorized us to repurchase up to $25.0 million worth of shares of our
common stock at management’s discretion on the open market or in privately
negotiated block purchases, exclusive of repurchases related to employee
benefit
plans.
Performance
Graph
The
following graph compares the cumulative 5-year cumulative total return
to
shareholders on Granite Construction Incorporated’s
common stock relative to the cumulative total returns of the S&P 500 index
and the Dow Jones US Heavy Construction index. The Dow Jones US Heavy
Construction index includes the following companies: EMCOR Group Inc.,
Fluor Corp., Granite Construction Inc., Insituform Technologies Inc., Jacobs
Engineering Group Inc., McDermott International Inc., Quanta Services Inc.
and Shaw Group Inc. An investment of $100 (with reinvestment of all
dividends) is assumed to have been made in our common stock and in each of
the indexes on December 31, 2001 and its relative performance is tracked
through
December 31, 2006.
The
comparisons in the graph below are based on historical data and are not
intended
to forecast the possible future performance of our common
stock.
|
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
||||||||||||||
|
Granite
Construction Incorporated
|
$ |
100
|
$ |
65.43
|
$ |
101.27
|
$ |
116.72
|
$ |
159.63
|
$ |
225.54
|
|||||||
|
S
& P 500
|
100
|
77.90
|
100.24
|
111.15
|
116.61
|
135.03
|
|||||||||||||
|
Dow
Jones US Heavy Construction
|
100
|
83.87
|
114.41
|
138.74
|
200.48
|
250.08
|
|||||||||||||
Item
6. SELECTED CONSOLIDATED FINANCIAL
DATA
The
selected consolidated operations data for 2006, 2005 and 2004 and consolidated
balance sheet data as of December 31, 2006 and 2005 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 2002 and 2003 and the
consolidated balance sheet data as of December 31, 2002, 2003 and 2004 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,
|
2006
|
2005
|
2004*
|
2003
|
2002
|
|||||||||||
|
Operating
Summary
|
(In
Thousands, Except Per Share Data)
|
|||||||||||||||
|
Revenue
|
$ |
2,969,604
|
$ |
2,641,352
|
$ |
2,136,212
|
$ |
1,844,491
|
$ |
1,764,742
|
||||||
|
Gross
profit
|
295,720
|
319,372
|
222,021
|
226,450
|
224,584
|
|||||||||||
|
As
a percent of revenue
|
10.0
|
12.1
|
10.4
|
12.3
|
12.7
|
|||||||||||
|
General
and administrative expenses
|
204,281
|
183,392
|
157,035
|
151,879
|
146,467
|
|||||||||||
|
As
a percent of revenue
|
6.9
|
6.9
|
7.4
|
8.2
|
8.3
|
|||||||||||
|
Provision
for (reversal of) legal judgment
|
(4,800
|
) |
9,300
|
-
|
-
|
-
|
||||||||||
|
Goodwill
impairment charge**
|
18,011
|
-
|
-
|
-
|
-
|
|||||||||||
|
Net
income
|
80,509
|
83,150
|
57,007
|
60,504
|
49,279
|
|||||||||||
|
As
a percent of revenue
|
2.7
|
3.1
|
2.7
|
3.3
|
2.8
|
|||||||||||
|
Net
income per share:
|
||||||||||||||||
|
Basic
|
$ |
1.97
|
$ |
2.05
|
$ |
1.41
|
$ |
1.51
|
$ |
1.23
|
||||||
|
Diluted
|
1.94
|
2.02
|
1.39
|
1.48
|
1.21
|
|||||||||||
|
Weighted
average shares of common stock:
|
||||||||||||||||
|
Basic
|
40,874
|
40,614
|
40,390
|
40,175
|
40,016
|
|||||||||||
|
Diluted
|
41,471
|
41,249
|
41,031
|
40,808
|
40,723
|
|||||||||||
|
Balance
Sheet
|
||||||||||||||||
|
Total
assets
|
$ |
1,632,838
|
$ |
1,472,230
|
$ |
1,277,954
|
$ |
1,060,410
|
$ |
983,819
|
||||||
|
Cash,
cash equivalents and marketable securities
|
394,878
|
301,381
|
277,692
|
201,985
|
182,694
|
|||||||||||
|
Working
capital
|
319,762
|
367,801
|
355,927
|
274,947
|
220,396
|
|||||||||||
|
Current
maturities of long-term debt
|
28,660
|
26,888
|
15,861
|
8,182
|
8,640
|
|||||||||||
|
Long-term
debt
|
78,576
|
124,415
|
148,503
|
126,708
|
132,380
|
|||||||||||
|
Other
long-term liabilities
|
58,419
|
46,556
|
40,641
|
29,938
|
13,742
|
|||||||||||
|
Shareholders’
equity
|
694,544
|
621,560
|
550,474
|
504,891
|
454,869
|
|||||||||||
|
Book
value per share
|
16.60
|
14.91
|
13.23
|
12.16
|
11.03
|
|||||||||||
|
Dividends
per share
|
0.40
|
0.40
|
0.40
|
0.40
|
0.32
|
|||||||||||
|
Common
shares outstanding
|
41,834
|
41,682
|
41,612
|
41,528
|
41,257
|
|||||||||||
|
Backlog
|
$ |
2,256,587
|
$ |
2,331,540
|
$ |
2,437,994
|
$ |
1,985,788
|
$ |
1,856,451
|
||||||
*
Effective January 1, 2004, we adopted Financial Accounting Standards Board
Interpretation No. 46 (revised December 2003) “Consolidation of Variable
Interest Entities” (see Note 5 of the “Notes to the Consolidated Financial
Statements”).
**During
the year ended December 31, 2006 we recorded a goodwill impairment charge
of approximately $18.0 million related to our Granite Northeast operation
in New
York (see Note 8 of the “Notes to the Consolidated Financial
Statements”).
Item
7. MANAGEMENT’S
DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
General
We
are
one of the largest heavy civil contractors in the United States as well
as one
of the largest construction materials production companies in the Western
United
States. We are engaged in the construction of highways, dams, airport
infrastructure, mass transit facilities and other infrastructure-related
projects. We have offices in Alaska, Arizona, California,
Florida, Minnesota, Nevada, New York, Oregon, Texas, Utah and Washington.
Our business involves two operating segments: the Branch Division and the
Heavy
Construction Division.
Our
contracts are obtained primarily through competitive bidding in response
to
advertisements by federal, state and local agencies and private parties
and to a
lesser extent through negotiation with private parties. Our bidding activity
is
affected by such factors as backlog, current utilization of equipment and
other
resources, ability to obtain necessary surety bonds and competitive
considerations. Bidding activity, backlog and revenue resulting from the
award
of new contracts may vary significantly from period to period.
The
two
primary economic drivers of our business are (1) federal, state and local
public
funding levels and (2) the overall health of the economy, both nationally
and
locally. The level of demand for our services will have a direct correlation
to
these drivers. For example, a weak economy will generally result in a reduced
demand for construction in the private sector. This reduced demand increases
competition for fewer private sector projects and will ultimately also
increase
competition in the public sector as companies migrate from bidding
on scarce private sector work to projects in the public sector. Greater
competition can reduce revenue growth and/or increase pressure on gross
profit
margins. A weak economy also tends to produce less tax revenue, thereby
decreasing the funds available for spending on public infrastructure
improvements. There are funding sources that have been specifically earmarked
for infrastructure spending, such as gasoline taxes, which are not necessarily
directly impacted by a weak economy. However, even these funds can be
temporarily at risk as state and local governments struggle to balance
their
budgets. Conversely, higher public funding and/or a robust economy will
increase demand for our services and provide opportunities for revenue
growth
and margin improvement.
Our
general and administrative costs include salaries and related expenses,
incentive compensation, discretionary profit sharing and other variable
compensation, as well as other overhead costs to support our overall business.
In general, these costs will increase in response to the growth and the
related
increased complexity of our business. These costs may also vary depending
on the
number of projects in process in a particular area and the corresponding
level
of estimating activity. For example, as large projects are completed or
if the
level of work slows down in a particular area, we will often re-assign
project
employees to estimating and bidding activities until another
project gets underway, temporarily moving their salaries
and related costs from cost of revenue to general and administrative
expense. Additionally, our compensation strategy for selected management
personnel is to rely heavily on a variable cash and restricted stock
performance-based incentive element. The cash portion of these incentives
is
expensed when earned while the restricted stock portion is expensed over
the
vesting period of the stock (generally five years). Depending on the mix of
cash and restricted stock, these incentives can have the effect of increasing
general and administrative expenses in very profitable years and decreasing
expenses in less profitable years.
Current
Year Overview
|
|
||||||||||
| Comparative Financial Summary | ||||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
| (in thousands) | ||||||||||
|
Total
revenue
|
$
|
2,969,604 |
$
|
2,641,352
|
$
|
2,136,212
|
||||
|
Gross
profit
|
295,720
|
|
319,372
|
|
222,021
|
|
||||
|
General
and administrative expenses
|
|
204,281
|
|
183,392
|
|
157,035
|
||||
|
Provision
for (reversal of) legal judgment
|
(4,800
|
)
|
9,300
|
|
-
|
|
||||
| Goodwill impairment charge | 18,011 | - |
-
|
|||||||
|
Gain
on sale of property and equipment
|
|
10,408
|
|
8,235
|
|
|
18,566
|
|
||
|
Operating
income
|
|
88,636
|
|
134,915
|
|
83,552
|
||||
|
Net
income
|
|
80,509
|
|
|
83,150
|
|
|
57,007
|
|
|
Our
results of operations for the year ended December 31, 2006
reflect increased operating income from our Branch Division
compared with the corresponding period in 2005, which was primarily driven
by
the strong economy in the West and the ability to work well into the fourth
quarter due to mild weather conditions. The Branch Division’s
2006 operating results also include the results of the fourth
quarter settlement and partial reversal of a provision related to an
unfavorable legal judgment previously recorded in 2005. These
improved results were offset by an operating loss in our Heavy Construction
Division due primarily to additional costs recorded as a result of changes
in
the estimates of the cost to complete certain projects and a goodwill impairment
charge of approximately $18.0 million related to our Granite Northeast
operation
in New York. Operating income for the year ended December 31,
2006 includes approximately $17.9 million related to sales of certain real
estate development assets by our Granite Land Company subsidiary (approximately
$10.2 million net of our minority partners’ share). Additionally, our net income
for the year ended December 31, 2006 reflects an increase in
non-operating income of approximately $17.0 million due primarily to higher
interest income in 2006.
Critical
Accounting Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management
to make
estimates and assumptions that affect the reported amounts of assets
and
liabilities and disclosure of contingent assets and liabilities at the
date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our estimates, judgments and assumptions
are
continually evaluated based on available information and experience;
however,
actual amounts could differ from those estimates.
Certain
of our accounting policies and estimates require higher degrees of judgment
than
others in their application. These include the recognition of revenue
and
earnings from construction contracts, the valuation of long-lived assets
and insurance estimates. We evaluate all of our estimates and judgments
on an
on-going basis.
Revenue
Recognition for Construction Contracts: Our contracts with our
customers are primarily either “fixed unit price” or “fixed price.” Under fixed
unit price contracts, we are committed to provide materials or services
required
by a project at fixed unit prices (for example, dollars per cubic yard
of
concrete poured or cubic yards of earth excavated). While the fixed unit
price
contract shifts the risk of estimating the quantity of units required
for a
particular project to the customer, any increase in our unit cost over
the
expected unit cost in the bid, whether due to inflation, inefficiency,
faulty
estimates or other factors, is borne by us unless otherwise provided
in the
contract. Fixed price contracts are priced on a lump-sum basis under
which we
bear the risk that we may not be able to perform all the work profitably
for the
specified contract amount. The percentage of fixed price contracts in
our
backlog increased from approximately 63.0% at December 31, 2005 to
approximately 67.7% at December 31, 2006. All state and federal government
contracts and many of our other contracts provide for termination of
the
contract for the convenience of the party contracting with us, with provisions
to pay us for work performed through the date of termination.
We
use
the percentage of completion accounting method for construction contracts
in
accordance with the American Institute of Certified Public Accountants
Statement
of Position 81-1, “Accounting for Performance of Construction-Type and Certain
Production-Type Contracts.” Revenue and earnings on construction contracts,
including construction joint ventures, are recognized using the percentage
of completion method in the ratio of costs incurred to estimated final
costs.
Revenue in an amount equal to cost incurred is recognized prior to contracts
reaching 25% completion. The related profit is deferred until the period
in
which such percentage completion is attained. It is our judgment that
until a
project reaches 25% completion, there is insufficient information to
determine
what the estimated profit on the project will be with a reasonable level
of
assurance. Additionally, as a result of experience gained on past
design/build projects, we now evaluate each design/build project
individually to determine whether it is appropriate to begin profit recognition
at 25% completion or at a later point. The factors considered in this
evaluation
of risk associated with each design/build project include the stage of
design completion, the stage of construction completion, status of outstanding
purchase orders and subcontracts, certainty of quantities, certainty
of schedule
and the relationship with the owner.
Revenue
from contract claims is recognized when we have a signed settlement agreement
and payment is assured. Revenue from contract change orders, which occur
in most
large projects, is recognized when the owner has agreed to the change
order in
writing. Provisions are recognized in the statement of income for the
full
amount of estimated losses on uncompleted contracts whenever evidence
indicates
that the estimated total cost of a contract exceeds its estimated total
revenue.
Contract cost consists of direct costs on contracts, including labor
and
materials, amounts payable to subcontractors, direct overhead costs and
equipment expense (primarily depreciation, fuel, maintenance and repairs).
Depreciation is provided using accelerated methods for construction equipment.
Contract cost is recorded as incurred and revisions in contract revenue
and cost
estimates are reflected when known. The completion threshold for the start
of contract profit recognition is applied to all percentage of completion
projects without exception unless and until we project a loss on the
project, in
which case the estimated loss is immediately recognized.
The
accuracy of our revenue and profit recognition in a given period is almost
solely dependent on the accuracy of our estimates of the cost to complete
each
project. Our cost estimates for all of our significant projects use a
highly
detailed “bottom up” approach and we believe our experience allows us to
provide materially reliable estimates. There
are
a number of factors that can contribute to changes in estimates of contract
cost
and profitability. The most significant of these include the completeness
and
accuracy of the original bid, costs associated with added scope changes,
extended overhead due primarily to owner and weather delays, subcontractor
performance issues, changes in productivity expectations, site conditions
that
differ from those assumed in the original bid (to the extent contract
remedies
are unavailable), the availability and skill level of workers in the
geographic
location of the project and a change in the availability and proximity
of
equipment and materials. The foregoing factors as well as the stage of
completion of contracts in process and the mix of contracts at different
margins
may cause fluctuations in gross profit between periods and these fluctuations
may be significant. Substantial changes in cost estimates, particularly
in the
larger, more complex projects in our Heavy Construction Division, have had
and can in future periods have a significant effect on our
profitability.
Valuation
of Long-Lived Assets: Long-lived assets, which include property, equipment
and acquired identifiable intangibles, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset
may not be recoverable. Impairment evaluations involve management estimates
of
asset useful lives and future cash flows. Actual useful lives and cash
flows
could be different from those estimated by management and this could
have a
material effect on our operating results and financial position.
We
had
approximately $9.9 million in goodwill at December 31, 2006 relating
to our
Branch Division primarily associated with our majority owned Wilder
Construction Company subsidiary. We perform goodwill impairment tests
on an
annual basis and more frequently when events and circumstances occur
that
indicate a possible impairment of goodwill. In determining whether there
is an
impairment of goodwill, we calculate the estimated fair value of the
reporting
unit in which the goodwill is recorded using a discounted future cash
flow
method. We then compare the resulting fair value to the net book value
of the
reporting unit, including goodwill. If the net book value of a reporting
unit
exceeds its fair value, we would measure the amount of the impairment
loss by
comparing the implied fair value of the reporting unit’s goodwill with the
carrying amount of that goodwill. To the extent that the carrying amount
of a
reporting unit’s goodwill exceeds its implied fair value, we recognize a
goodwill impairment loss. We performed our annual impairment test in
2006 and we
determined that no impairment had occurred with respect to the Branch
Division
goodwill. Additionally, we performed our annual impairment test in 2006
for
approximately $18.0 million in goodwill related to our Heavy Construction
Division and determined that it was fully impaired (see Note 8 of the “Notes
to the Consolidated Financial Statements”).
The
discounted future cash flow method used in the first step of our impairment
test
involves significant estimates including future cash inflows from estimated
revenues, future cash outflows from estimated project cost and general
and
administrative costs, estimates of timing of collection and payment of
various
items and future growth rates as well as discount rate and terminal value
assumptions. Although we believe the estimates and assumptions that we
used in
testing for impairment are reasonable and supportable, significant changes
in
any one of these assumptions could produce a significantly different
result.
Insurance
estimates: We carry insurance policies to cover various risks,
primarily general liability and workers compensation, under which we
are liable
to reimburse the insurance company for a portion of each claim paid.
The amounts
that we are liable for generally range from the first $250,000 to
$1.0 million per occurrence. We accrue for the estimated ultimate liability
for incurred losses, both reported and unreported, using actuarial methods
based
on historic trends modified, if necessary, by recent events. Changes
in our loss
assumptions caused by changes in actual experience would result in a
change in
our assessment of the ultimate liability that could have a material effect
on
our operating results and financial position.
Current
Year
Revenue
| Total Revenue | |||||||||||||||||||
| Years ended December 31, |
2006
|
2005
|
2004
|
||||||||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
Revenue
by Division:
|
|||||||||||||||||||
|
Branch
Division
|
$
|
1,848,725
|
62.3
|
|
$
|
1,591,545
|
60.3
|
|
$
|
1,287,615
|
60.3
|
|
|||||||
|
Heavy
Construction Division
|
1,085,888
|
36.6
|
|
1,030,109
|
39.0
|
|
848,597
|
39.7
|
|
||||||||||
|
Other
|
34,991 | 1.1 | 19,698 | 0.7 | - | - | |||||||||||||
|
Total
|
$ | 2,969,604 |
100.0
|
|
$
|
2,641,352
|
100.0
|
|
$
|
2,136,212
|
100.0
|
|
|||||||
| Branch Division Revenue | |||||||||||||||||||
| Years ended December 31, |
2006
|
2005
|
2004
|
||||||||||||||||
| (in thousands) |
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
California:
|
|||||||||||||||||||
|
Public
sector
|
$ |
537,967
|
48.5
|
|
$ |
374,642
|
43.0
|
|
$ |
397,349
|
53.9
|
|
|||||||
|
Private
sector
|
300,245
|
27.0
|
|
282,752
|
32.4
|
|
174,282
|
23.6
|
|
||||||||||
|
Material
sales
|
272,039
|
24.5
|
|
214,520
|
24.6
|
|
165,379
|
22.5
|
|
||||||||||
|
Total
|
$ | 1,110,251 |
100.0
|
|
$ |
871,914
|
100.0
|
|
$ |
737,010
|
100.0
|
|
|||||||
|
West
(excluding California):
|
|||||||||||||||||||
|
Public
sector
|
$ |
429,288
|
58.1
|
|
$ |
437,677
|
60.8
|
|
$ |
355,143
|
64.5
|
|
|||||||
|
Private
sector
|
171,166
|
23.2
|
|
164,821
|
22.9
|
|
97,641
|
17.7
|
|
||||||||||
|
Material
sales
|
138,020
|
18.7
|
|
117,133
|
16.3
|
|
97,821
|
17.8
|
|
||||||||||
|
Total
|
$ | 738,474 |
100.0
|
$ |
719,631
|
100.0
|
$ |
550,605
|
100.0
|
||||||||||
| Total Branch Division Revenue: | |||||||||||||||||||
|
Public
sector
|
$ | 967,255 | 52.3 | $ | 812,319 | 51.0 | $ | 752,492 | 58.4 | ||||||||||
|
Private
sector
|
471,411 | 25.5 | 447,573 | 28.1 | 271,923 | 21.1 | |||||||||||||
|
Material
sales
|
410,059 | 22.2 | 331,653 | 20.9 | 263,200 | 20.5 | |||||||||||||
|
Total
|
$ | 1,848,725 | 100.0 | $ | 1,591,545 | 100.0 | $ | 1,287,615 | 100.0 | ||||||||||
Branch
Division Revenue: Revenue from our
Branch Division increased $257.2 million, or 16.2%, in the year ended December
31, 2006 from the year ended December 31, 2005. The
increased revenue from both construction and the sale of materials was driven
by
higher levels of public spending, particularly in California. Increased
revenue
from the sale of materials reflects an increase in average selling prices
in 2006. Although our private sector revenue remains strong, we continue to
see a reduction in residential development opportunities. A
portion of the increase in Branch Division revenue was also attributable
to mild
weather in the fourth quarter of 2006 which enabled many of our locations
to
complete more work in the
quarter than in the fourth quarter of 2005.
|
|
|||||||||||||||||||
|
HCD
Revenue
|
|||||||||||||||||||
| Years ended December 31, |
2006
|
2005
|
2004
|
||||||||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
Revenue
by Geographic Area:
|
|||||||||||||||||||
|
Midwest
|
$
|
58,726
|
5.4
|
$
|
92,931
|
9.0
|
$
|
96,041
|
11.3
|
||||||||||
| Northeast |
281,552
|
25.9
|
324,477
|
31.5
|
346,704 |
40.9
|
|||||||||||||
|
South
|
|
219,978
|
20.3
|
|
|
231,133
|
22.4
|
|
|
168,803
|
19.9
|
|
|||||||
| Southeast |
244,233
|
22.5
|
176,088
|
17.1
|
167,925
|
19.8
|
|||||||||||||
|
West
|
281,399
|
25.9
|
|
205,480
|
20.0
|
|
69,124
|
8.1
|
|
||||||||||
|
Total
|
$ | 1,085,888 |
100.0
|
|
$
|
1,030,109
|
100.0
|
|
$
|
848,597
|
100.0
|
|
|||||||
|
Revenue
by Market Sector:
|
|||||||||||||||||||
|
Public
sector
|
$
|
1,058,746
|
97.5
|
|
$
|
995,707
|
96.7
|
|
$
|
800,605
|
94.3
|
|
|||||||
|
Private
sector
|
27,042
|
2.5
|
|
31,765
|
3.1
|
|
46,839
|
5.5
|
|
||||||||||
|
Material
sales
|
100 | - | 2,637 | 0.2 | 1,153 | 0.2 | |||||||||||||
|
Total
|
$ | 1,085,888 |
100.0
|
|
$
|
1,030,109
|
100.0
|
|
$
|
848,597
|
100.0
|
|
|||||||
|
Revenue
by Contract Type:
|
|||||||||||||||||||
|
Fixed
unit price
|
$
|
243,103
|
22.4
|
|
$
|
323,048
|
31.4
|
|
$
|
338,790
|
39.9
|
|
|||||||
|
Fixed
price, including design/build
|
842,666
|
77.6
|
|
704,424
|
68.4
|
|
508,654
|
59.9
|
|
||||||||||
|
Other
|
119
|
-
|
|
2,637
|
0.2
|
|
1,153
|
0.2
|
|
||||||||||
|
Total
|
$ | 1,085,888 |
100.0
|
|
$
|
1,030,109
|
100.0
|
|
$
|
848,597
|
100.0
|
|
|||||||
HCD
Revenue: Revenue from our Heavy Construction
Division increased $55.8 million, or 5.4%, in the year ended December 31,
2006
from the year ended December 31, 2005, due primarily to the increase in volume
from a higher backlog at the beginning of 2006 and a large project award
received in the first quarter of 2006. Revenue generated from projects with
a
contract value greater than $100 million increased to 72.9% of total HCD
revenue
in 2006 from 57.6% in 2005, and our minority partners’ share of our consolidated
joint venture revenue increased to approximately $214.6 million in 2006 from
approximately $175.0 million in 2005 (see Note 5 of the “Notes to the
Consolidated Financial Statements”). Geographically, the increased revenue in
the West in 2006 was primarily attributable to a large design/build
project in Utah which was awarded in late 2005. In the Southeast, the
increased revenue for 2006 was due primarily to a large design/build
project in Mississippi which was awarded in the first quarter of 2006. Decreases
in revenue in the Northeast in 2006 were due primarily to more projects in
New
York reaching substantial completion during 2006 than in 2005 and a lack
of new
project awards during 2006. Revenue from fixed price contracts
increased from 68.4% of HCD revenue in 2005 to 77.6% of HCD revenue in 2006
due
primarily to growth in design/build projects in our backlog.
Backlog
|
Total
Backlog
|
|
||||||||||||
|
December
31,
|
2006
|
2005
|
|||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||
|
Backlog
by Division:
|
|||||||||||||
|
Branch
Division
|
$
|
807,648
|
35.8
|
|
$
|
728,256
|
31.2
|
|
|||||
|
Heavy
Construction Division
|
1,448,939
|
64.2
|
|
1,603,284
|
68.8
|
|
|||||||
|
Total
|
$ | 2,256,587 |
100.0
|
|
$
|
2,331,540
|
100.0
|
|
|||||
| Branch Division Backlog | |||||||||||||
| December 31, |
2006
|
2005
|
|||||||||||
| (in thousands) |
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||
|
California:
|
|||||||||||||
|
Public
sector
|
$ |
423,542
|
84.2
|
|
$ |
266,767
|
66.7
|
|
|||||
|
Private
sector
|
79,718
|
15.8
|
|
133,202
|
33.3
|
|
|||||||
|
Total
|
$ | 503,260 |
100.0
|
|
$ |
399,969
|
100.0
|
|
|||||
|
West
(excluding California):
|
|||||||||||||
|
Public
sector
|
$ |
230,230
|
75.6
|
|
$ |
270,687
|
82.5
|
|
|||||
|
Private
sector
|
74,158
|
24.4
|
|
57,600
|
17.5
|
|
|||||||
|
Total
|
$ | 304,388 |
100.0
|
|
$ |
328,287
|
100.0
|
|
|||||
| Total Branch Division backlog: | |||||||||||||
|
Public
sector
|
$ | 653,772 | 80.9 | $ | 537,454 | 73.8 | |||||||
|
Private
sector
|
153,876 | 19.1 | 190,802 | 26.2 | |||||||||
|
Total
Branch Division backlog
|
$ | 807,648 | 100.0 | $ | 728,256 | 100.0 | |||||||
Branch
Division Backlog: Branch
Division backlog at December 31, 2006 was $807.7 million, an increase of
$79.4
million, or 10.9%, from December 31, 2005. The
increase was due primarily to higher public sector awards in
California, partially offset by a decrease in private sector backlog
in California. Although
our private sector backlog remains strong, we are experiencing a reduction
in
residential development opportunities. The increase in California public
sector backlog includes a $51.9 million share of a joint venture highway
reconstruction project for the California Department of Transportation
(“Caltrans”) that was awarded in the first quarter of 2006 and a $30.5
million highway widening project for Caltrans that was awarded in the third
quarter of 2006. Branch Division awards in the fourth quarter of 2006
included a $26.3 million highway reconstruction project and a
$24.8 million road construction project in Southern
California. Other Branch Division awards in 2006 included an
$81.8 million joint venture highway reconstruction project in Northern
California, a $44.9 million road construction project near Bakersfield,
California and a $21.3 million residential site development project in
Nevada.
|
HCD
Backlog
|
|||||||||||||
| December 31, |
2006
|
2005
|
|||||||||||
| (in thousands) |
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||
|
Backlog
by Geographic Area:
|
|||||||||||||
| Midwest | $ |
443,909
|
30.6
|
$ |
76,464
|
4.8
|
|||||||
| Northeast | 248,605 |
17.2
|
491,944
|
30.7
|
|||||||||
|
South
|
214,809
|
14.8
|
|
354,400
|
22.1
|
|
|||||||
|
Southeast
|
272,881
|
18.8
|
224,549
|
14.0
|
|||||||||
|
West
|
268,735
|
18.6
|
|
455,927
|
28.4
|
|
|||||||
|
Total
|
$ | 1,448,939 |
100.0
|
|
$
|
1,603,284
|
100.0
|
|
|||||
|
Backlog
by Market Sector:
|
|||||||||||||
|
Public
sector
|
$
|
1,413,778
|
97.6
|
|
$
|
1,546,370
|
96.5
|
|
|||||
|
Private
sector
|
35,161
|
2.4
|
|
56,914
|
3.5
|
|
|||||||
|
Total
|
$ | 1,448,939 |
100.0
|
|
$
|
1,603,284
|
100.0
|
|
|||||
|
Backlog
by Contract Type:
|
|||||||||||||
|
Fixed
unit price
|
$
|
171,239
|
11.8 |
|
$
|
391,494
|
24.4
|
|
|||||
|
Fixed
price including design/build
|
1,277,700
|
88.2
|
|
1,211,790
|
75.6
|
|
|||||||
|
Total
|
$ | 1,448,939 |
100.0
|
|
$
|
1,603,284
|
100.0
|
|
|||||
HCD
Backlog: Backlog in our Heavy Construction Division at December
31, 2006 was $1,448.9 million, a decrease of $154.3 million, or 9.6%, from
backlog at December 31, 2005. Decreases
in HCD backlog reflect our strategy of bidding work at higher margins
and focusing on successful execution of a lower volume of work. HCD backlog
includes approximately $22.7 million related to our 20% portion of a joint
venture project to construct a transportation hub at the World Trade Center
in
New York. We currently expect the total revenue on that contract to be
approximately $1.5 billion of which our share would be approximately $300.0
million. HCD awards in the fourth quarter of 2006 included a $420.0
million design/build consolidated joint venture highway reconstruction
project in St. Louis, Missouri.
Approximately
26.2% of the HCD backlog at December 31, 2006 relates to projects that
have
forecasted a loss. The forecasted losses have been recognized in the
period(s) they were identified. Assuming no further changes, either upward
or downward, in the forecasted results for these projects this backlog
will earn
no profit or loss in future periods.
Gross
Profit
|
|
||||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
| (in thousands) | ||||||||||
|
Branch
Division gross profit
|
$
|
364,878
|
$
|
253,890
|
$
|
185,509
|
||||
|
Percent
of division revenue
|
19.7
|
%
|
16.0
|
%
|
14.4
|
%
|
||||
|
Heavy
Construction Division gross profit
|
$
|
(86,856
|
) |
$
|
50,470
|
$
|
41,036
|
|||
|
Percent
of division revenue
|
(8.0 |
)%
|
4.9
|
%
|
4.8
|
%
|
||||
|
Other
|
$
|
17,698
|
$
|
15,012
|
|
$
|
(4,524
|
)
|
||
|
Total
gross profit
|
$
|
295,720
|
$
|
319,372
|
$
|
222,021
|
||||
|
Percent
of revenue
|
10.0
|
%
|
12.1
|
%
|
10.4
|
%
|
||||
Gross
Profit: As more fully described under “Critical Accounting
Estimates” we recognize revenue only equal to cost, deferring profit
recognition, until a project reaches 25% completion. In
certain cases, such as large, complex design/build projects, we may continue
to
defer profit recognition beyond the point of 25% completion until such time
as
we believe we have enough information to make a reasonably dependable estimate
of contract revenue and cost. Because we have a large number of projects
at various stages of completion in our Branch Division, this policy generally
has very little impact on the Branch Division’s gross profit on a quarterly or
annual basis. However, HCD has fewer projects in process at any given time
and
those projects tend to be much larger than Branch Division projects. As a
result, HCD gross profit as a percent of revenue can vary significantly in
periods where one or several very large projects reach our completion
threshold and the deferred profit is recognized or conversely, in periods
where
backlog is growing rapidly and a higher percentage of projects are in their
early stages with no associated gross margin recognition. Revenue from projects
less than our completion threshold, for which no margin has been
recognized, was as follows:
|
Revenue
from Contracts with Deferred Profit
|
||||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
| (in thousands) | ||||||||||
|
Branch
Division
|
$
|
22,227
|
$
|
19,457
|
$
|
21,085
|
||||
|
Heavy
Construction Division
|
|
19,038
|
|
56,655
|
|
111,126
|
||||
|
Total
revenue from contracts with deferred profit
|
$ | 41,265 | $ | 76,112 | $ | 132,211 | ||||
Additionally,
as we also describe under “Critical Accounting Estimates” we do not recognize
revenue from contract claims until we have a signed agreement and payment
is
assured and we do not recognize revenue from contract change orders until
the
contract owner has agreed to the change order in writing. However, we do
recognize the costs related to any contract claims or pending change orders
in
our forecasts when we are contractually obligated to incur them. As a result,
our gross profit as a percent of revenue can vary during periods where a
large
volume of change orders or contract claims are pending resolution (reducing
gross profit percent) or, conversely, during periods where large change orders
or contract claims are agreed or settled (increasing gross profit percent).
Although this variability can occur in both our Branch Division and HCD,
it can
be much more pronounced in HCD because of the larger size of its
projects.
Gross
profit as a percent of revenue in our Branch Division increased to 19.7%
in 2006
from 16.0% in 2005. The
increase in 2006 is attributable to higher profit margins for both construction
and the sale of materials due to strong demand in both the private and public
sectors. Branch Division construction gross profit as a percent of revenue
in 2006 increased to 18.6% from 14.3% in 2005. Branch
Division gross profit from the sale of materials as a percent of
revenue in 2006 increased to 23.6% from 22.3% in 2005.
Branch
Division gross profit for 2006 includes the effects of changes in the estimates
of the profitability of certain projects. The net impact of these estimate
changes for 2006 was an increase to gross profit of approximately $3.8 million
due primarily to the settlement of outstanding issues on two projects with
no
associated cost, partially offset by increases in estimated costs on several
other projects. The net impact of such estimate changes for 2005 was a
decrease to gross profit of approximately $2.5 million due primarily to
unanticipated costs related to quality issues in work originally performed
by a
subcontractor on one project and changes in site conditions from our original
expectations on a second project.
HCD
recognized a negative gross margin of 8.0% for the year
ended December 31, 2006 compared to a gross profit margin of 4.9% for
2005. The reduction in gross margin was primarily due to additional
estimated project costs that had the effect of reducing gross profit
by approximately $145.0 million in 2006. This compares with reduced
gross margin from reductions in estimated project profitability of approximately
$31.0 million in 2005 (See Note 2 of the “Notes to the
Consolidated Financial Statements”). Additionally HCD’s gross margin in 2006 was
negatively impacted by lower estimated profitability in the division’s backlog
at the beginning of 2006 resulting from the deterioration in estimated
project
margins experienced during 2005. When
there are contract forecast changes having the significance of those we
experienced in 2006, we undergo a process that includes reviewing the nature
of
the changes to ensure that there are no material amounts that should have
been recorded in a prior period rather than as a change in estimate. In
our
review of these changes,
we did not identify any material amounts that should have been recorded
in a
prior period.
Other
gross profit in 2006 and 2005 is primarily related to sales of
certain real estate development projects by consolidated subsidiaries of
approximately $17.6 million and $12.3 million, respectively. The minority
partners’ share of these gross profit amounts was approximately $7.8 million and
$6.1 million, respectively.
Cost
of
revenue consists of direct costs on contracts, including labor and materials,
subcontractor costs, direct overhead costs and equipment expense (primarily
depreciation, maintenance and repairs and fuel).
General
and Administrative Expenses
|
|
||||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands)
|
|
|||||||||
|
Salaries
and related expenses
|
$
|
102,935
|
$
|
94,901
|
$
|
84,490
|
||||
|
Incentive
compensation, discretionary profit sharing and other variable
compensation
|
33,094
|
28,294
|
23,356
|
|||||||
|
Other
general and administrative expenses
|
68,252
|
60,197
|
49,189
|
|||||||
|
Total
|
$
|
204,281
|
$
|
183,392
|
$
|
157,035
|
||||
|
Percent
of revenue
|
6.9
|
%
|
6.9
|
%
|
7.4
|
%
|
||||
General
and Administrative Expenses: General and administrative
expenses increased by $20.9 million, or 11.4%, from 2005 to 2006. Salaries
and
related expenses increased in 2006 due primarily to additional staffing needed
to support a higher volume of work. Incentive compensation, discretionary
profit
sharing and other variable compensation increased in 2006 due to higher
profitability in our Branch Division and higher restricted stock amortization
cost. The increase in other general and administrative expenses in 2006
related primarily to increased bidding activity and other costs related to
higher revenue volume. Other general and administrative expenses also
includes information technology, occupancy, office equipment and supplies,
depreciation, travel and entertainment, outside services, advertising and
marketing, training and other miscellaneous expenses, none of which individually
exceeded 10% of total general and administrative expenses.
Provision
for (Reversal of) Legal Judgment
|
|
||||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands)
|
|
|||||||||
|
Provision
for (reversal
of) legal judgment
|
$
|
(4,800
|
) |
$
|
9,300
|
$
|
-
|
|||
Provision
for (Reversal of) Legal Judgment: In
June
2005, we recorded a provision of $9.3 million related to an unfavorable judgment
in a legal proceeding. In January 2007, we entered into an agreement to
resolve the related dispute which resulted
in a partial reversal of the provision during the year ended December 31,
2006 (see Note 15 of the “Notes to the Consolidated Financial
Statements”).
Goodwill
Impairment Charge
|
|
||||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands)
|
|
|||||||||
|
Goodwill
impairment charge
|
$
|
18,011
|
$
|
-
|
$
|
-
|
||||
Goodwill
Impairment Charge: The
goodwill balance represented the excess of the purchase price over the
fair
value assigned to the net assets acquired in our 2001 acquisition of our
Granite
Northeast operation in New York (“GNE”), a reporting unit in our HCD operating
segment. During the fourth quarter of 2006 we performed our annual impairment
test and determined that the carrying amount of the goodwill exceeded its
implied fair value and that a full impairment of goodwill existed. This
impairment conclusion was reached due to continuing losses at GNE, including
significant unexpected losses in the quarter ended December 31, 2006 which
have
caused us to re-evaluate our strategy in New York. We continue to believe
that
the New York market will present opportunities for us to build profitable
work.
However, in order to return to profitability we believe it is necessary
to
reduce the number of ongoing GNE projects so that we can devote the resources
necessary to successfully manage and execute the work. See
Note 8
of the
“Notes to the Consolidated Financial Statements” for additional information
about the impairment charge.
Gain
on Sales of Property and Equipment
|
|
||||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands)
|
|
|||||||||
|
Gain
on sales of property and equipment
|
$
|
10,408
|
$
|
8,235
|
$
|
18,566
|
||||
Gain
on Sales of Property and Equipment: Gain on sales of property and
equipment for the year ended December 31, 2006 included
approximately $2.3 million from the sale of a rental property recognized
in the
first quarter of 2006.
Other
Income (Expense)
|
|
||||||||||
| Years ended December 31, |
2006
|
2005
|
2004
|
|||||||
| (in thousands) |
|
|||||||||
|
Interest
income
|
$ |
24,112
|
$ |
11,573
|
$ |
7,962
|
||||
|
Interest
expense
|
(4,492
|
) |
(6,932
|
)
|
(7,191
|
)
|
||||
|
Equity
in income of affiliates
|
2,157
|
1,497
|
6,162
|
|||||||
|
Other,
net
|
2,604
|
1,258
|
4,439
|
|||||||
|
Total
|
$ |
24,381
|
$ |
7,396
|
$ |
11,372
|
||||
Other
Income (Expense): Interest income increased $12.5 million, or
108.3%, in 2006 compared with 2005 due primarily to a higher average yield
on
higher average balances of interest bearing investments. Interest
expense decreased $2.4 million, or 35.2% in 2006 compared with 2005
primarily due to a lower amount of debt outstanding during 2006.
Additionally,
in January 2007, we entered into an agreement to resolve a dispute which
resulted in the reversal of accrued interest expense of approximately $337,000
(see Note 15 of the “Notes
to the Consolidated Financial Statements”).
Other, net in 2006 includes approximately $3.2 million recognized on
the sale of gold in the second quarter. The gold is produced as a by-product
of
one of our aggregate mining operations and held for
investment.
Provision
for Income Taxes
|
|
||||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands)
|
|
|||||||||
|
Provision
for income taxes
|
$
|
38,678
|
$
|
41,413
|
$
|
28,477
|
||||
|
Effective
tax rate
|
34.2
|
%
|
29.1
|
%
|
30.0
|
%
|
||||
Provision
for Income Taxes: Our effective tax rate increased to
34.2% in 2006 from 29.1% in 2005 due primarily
to the impact on the tax rate of minority interest losses in several of our
construction joint ventures, which are not subject to income taxes on a stand
alone basis.
Minority
Interest in Consolidated Subsidiaries
|
|
||||||||||
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands)
|
|
|||||||||
|
Minority
interest in consolidated subsidiaries
|
$
|
6,170
|
$
|
(17,748
|
)
|
$
|
(9,440
|
)
|
||
Minority
Interest in Consolidated Subsidiaries: Our
minority interest in consolidated subsidiaries represents the minority owners’
share of the income or loss of our consolidated subsidiaries, primarily Wilder
Construction Company, certain real estate development entities and various
consolidated construction joint ventures. We recognized net minority
interest benefit of approximately $6.2 million for the year ended
December 31, 2006 primarily due to losses on certain construction joint
venture projects.
Four
of
our joint venture projects are currently forecast at a loss and will require
additional capital contributions from our minority partners if the forecasts
do
not improve. Our joint venture agreements require that such capital
contributions be made if needed. Based on our most recent assessment of our
partners’
financial condition, we currently believe that two of our
partners do not have the ability to contribute all of the additional
capital that will be needed if the project forecasts do not
improve. During
the fourth quarter of 2006, we received updated financial information that
caused concerns about these partners’ liquidity. Included in the net
minority
interest benefit for
the
year ended December 31, 2006 is expense related to these potentially
uncollectible partner balances of approximately $9.4 million. The
remaining minority interest balance related to these loss projects of $14.8
million at December 31, 2006 has been included in other long-term assets
in our
consolidated balance sheet.
Outlook
On
February 14, 2007, we announced a strategic and organizational realignment
of
our business which
is
expected to be completed over the next 12 months. The realignment is
designed to accommodate growth of our vertically integrated Branch
business in
the West and improve profitability on our large, complex Heavy Construction
Division (“HCD”) projects. A key component of our corporate strategy over the
coming years is to expand our vertically integrated branch business
model into
new geographies in the West and right-size our large projects business.
By
realigning our business and resources into Granite West and Granite
East, we
feel that we will be in better position to take full advantage of
the long-term
opportunities and strong market conditions we foresee for our
business.
Led
by
Senior Vice President James H. Roberts, Granite West will be structured
to
strategically support the growth of our construction and construction
materials
businesses. The western portion of our current large projects business
will be
integrated into Granite West by carefully capitalizing on Granite
West’s
capacity, people and assets, as well as its extensive and proven
management and
support structure.
We
will
retain our successful decentralized operating structure within Granite
West,
with each branch location aligning under one of three Operating Groups:
Northwest, Northern California and Southwest. Each branch will remain
intact
with little or no change in their operations and will report to a
newly created
position, Granite West Group Vice President. Each of the three Group
Vice
Presidents will oversee three to six branches and will have the responsibility
to stimulate strategic thinking and growth in their geographic territory.
Among
other key benefits, this structure will allow Granite West to utilize
its
resources and market knowledge to take advantage of the larger projects
we
expect to be let as a result of healthy state funding and the recently
passed
Propositions in California.
Led
by
Senior Vice President Michael F. Donnino, Granite East will be aligned
to focus
on enhancing project management oversight and discipline from estimating
through
execution. Granite East will leverage its resources and core capabilities
in
areas where it has local knowledge, local relationships, and local
resources. It
will be operated out of three regional offices: the Central Region,
based in
Dallas, Texas; the Southeast Region, based in Tampa, Florida; and
the Northeast
Region, based in Tarrytown, New York.
The
demand for our construction services in the public sector is very
high. State
and federal funding for transportation projects is very promising.
Last
November, California voters approved a major bond issue that should provide
$19.9 billion for transportation-related improvements over the next ten
years. Voters also approved a measure that would require
California to stop diverting revenues from the state sales tax on
motor vehicle
fuels to non-transportation purposes. Early assessments of the California
Department of Transportation (“Caltrans”) contracting levels for the 2007-08
fiscal year (beginning July 1) may reach or exceed record levels.
We currently
expect the bond monies to translate into new work by the second half
of 2007
with bottom-line impact evident in 2008 and beyond.
While
residential
housing work in our private sector markets has slowed considerably,
we
believe the robust public sector market as
well
as continued strength in private sector commercial construction may
offset the slowdown in the residential market. In addition to California,
our
markets in Utah, Arizona and Washington are also expected to be strong
in 2007.
However, public sector funding in Nevada is more restricted than
normal due to a
large highway project that is reducing monies available for smaller
projects
throughout the state.
The
ownership of aggregate materials has proven to be extremely valuable
both as a
resource for our core construction business as well as a strategic
and
profitable retail business. Our long-term plan is to continue to
invest in this
part of our business by acquiring additional aggregate reserves,
permitting or
“green fielding” new facilities and expanding our existing operations to have at
least a 30-year reserve life at all of our locations. We expect demand
for our
construction materials to remain healthy throughout the coming year.
While sales
volumes to third parties are expected to remain relatively flat,
we believe that
if we are able to manage production costs effectively and aggregates
prices
continue to improve, the prospects are good for another successful
year for our
construction materials business in the West.
Congress
recently appropriated and the President signed into law SAFETEA-LU
level funding
of $39.1 billion for the federal highway program. The approved amount
is a 10%
increase over the fiscal 2006 level. SAFETEA-LU is a six-year federal
transportation bill that runs through fiscal 2009 and calls for $286.5
billion
in guaranteed funding for highways, transit and highway safety. These
guaranteed
funding levels established under SAFETEA-LU help guide Congress through
the
annual appropriations process, which determines yearly funding for
the federal
highway, transit and airport construction programs.
Our
industry continues to be challenged with a shortage of skilled labor,
and we
expect the industry will continue to face this challenge as the demand
for
construction-related services remains strong or grows across the
United States.
At Granite, we are working diligently to implement specialized training
programs
to develop our people and improve their skills while proactively
hiring skilled
employees, both professional and craft, and continuing to focus on
retention.
Our investment in our Employee Development Initiative is an important
strategic
initiative that we believe will allow us to turn the shortage of
labor in the
marketplace into an advantage for Granite.
As
we
have stated previously, we are subject to oil price volatility as
it relates to
our use of liquid asphalt and diesel fuel. Some of our projects are
indexed and
include price escalation clauses that provide protection in the event
that
petroleum product prices increase significantly. Although we are
exposed to
price spikes in projects that do not include such clauses, we have
historically
been able to recover some or all of those costs when prices come
down. With
respect to steel, we are exposed to price increases and steel delivery
delays on
some of our HCD projects that are currently under construction. While
we do have
some exposure in these areas of our business, we have not been materially
adversely impacted to date. In an effort to minimize our exposure
on future
projects, we are closely monitoring the industry’s outlook on future pricing so
that we can reflect anticipated future price escalation in our
bids.
In
the
short term, our business in the West is poised to take advantage
of a number of
opportunities that lie ahead in 2007. Pricing for construction materials
is
expected to be healthy next year as demand for aggregates remains
strong.
In
HCD,
we expect consolidated revenue to be approximately $800.0 million
next year.
This compares with $1.1 billion in revenue for the division in 2006.
In
addition, we are currently forecasting HCD to break even in 2007
followed by a
return to acceptable operating margins as the older backlog is worked
off and
the benefits of the organizational realignment are realized.
Overall,
we are encouraged by the on-going demand for our construction services
and
materials as well as the positive outlook for transportation-related
funding
throughout most of our markets. We are excited about the strategic
and
organizational realignment of our large projects business and the
opportunities
it will provide for us to continue to build long-term shareholder
value.
Prior
Years
Revenue: Revenue
from our Branch Division increased $303.9 million, or 23.6%, in the year
ended December 31, 2005 from the year ended December 31, 2004. This increase
was
largely driven by a strong housing market, particularly in California and
Nevada. A strong housing market increases demand for our services, including
housing and commercial site development and related infrastructure such as
roads
and sewer systems. This private sector demand was also a major factor in
the
increased sales of materials in California, which grew by $49.1 million,
or
29.7%, in the year ended December 31, 2005 from the year ended December 31,
2004. A portion of the Branch Division increase was also attributable to
mild
weather in the fourth quarter of 2005 which enabled many of our locations
to
complete more work in the quarter than in the fourth quarter of
2004.
Revenue
from our Heavy Construction Division increased $181.5 million, or 21.4%,
in the
year ended December 31, 2005 from the year ended December 31, 2004, due
primarily to the increase in volume from a higher backlog at the beginning
of
2005 and several large project awards received in the first quarter of 2005.
Revenue generated from projects with a contract value greater than $100 million
increased to 57.6% of total HCD revenue in 2005 from 39.8% in 2004 and our
minority partners’ share of our consolidated joint venture revenue increased to
approximately $175.0 million in 2005 from approximately $111.6 million in
2004.
Geographically, the largest increase was seen in the West, due primarily
to a
large design/build project in California that was awarded in 2004. Revenue
from
fixed price contracts increased from 59.9% of HCD revenue in 2004 to 68.4%
of HCD revenue in 2005 due primarily to growth in design/build projects in
our
backlog.
Backlog:
Branch
Division backlog at December 31, 2005 was $728.3 million, an increase of
$166.4
million, or 29.6%, from December 31, 2004. The increase was due primarily
to higher backlog in California, particularly from contracts in the public
sector, including a $62.6 million freeway reconstruction project for the
California Department of Transportation (“Caltrans”) that was awarded in the
fourth quarter 2005. Branch Division awards in the fourth quarter of 2005
also
included a $14.7 million road construction project in California.
Backlog
in our Heavy Construction Division at December 31, 2005 was
$1,603.3 million, a decrease of $272.8 million, or 14.5%, from backlog at
December 31, 2004. Additions to HCD backlog in the fourth quarter of 2005
included a $14.4 million levee repair project in New Orleans and
HCD’s portion of a $182.9 million consolidated joint venture highway
project in Utah which is being shared with the Branch Division.
Gross
Profit: Revenue from projects that were less than 25%
complete was $76.1 million in 2005 and $132.2 million in 2004. This decrease
in
revenue from projects less than 25% complete had the effect of increasing
our
overall gross margin.
Gross
profit as a percent of revenue in our Branch Division increased to 16.0%
in 2005
from 14.4% in 2004. Gross profit margins for both construction and the
sale of
materials in the Branch Division reflected our ability to capitalize on
the
continued strong private development market in many of the Division’s
locations.
HCD
gross
profit as a percent of revenue in 2005 and 2004 of 4.9% and 4.8%,
respectively, reflected the impact of downward revisions in the estimated
profitability of certain contracts. The net impact of these estimate changes
on
recognized gross profit during 2005 was a reduction in gross profit of
approximately $31.0 million. This compares with a net reduction in gross
profit
in 2004 of approximately $40.0 million (see Note 2 of the “Notes to
the Consolidated Financial Statements”).
Other
gross profit in 2005 is primarily related to sales of certain
real estate development projects by consolidated subsidiaries of approximately
$12.3 million. The minority partners’ share of this gross profit amount was
approximately $6.1 million.
General
and Administrative Expenses: General and administrative
expenses increased by $26.4 million, or 16.8%, from 2004 to 2005. Salaries
and
related expenses increased in 2005 due primarily to additional staffing
needed
to support a higher volume of work. Incentive compensation, discretionary
profit
sharing and other variable compensation increased in 2005 due to higher
profitability. The increase in other general administrative costs in
2005
related primarily to increased bidding activity and other costs related
to
higher revenue volume. Additionally, other general and administrative
expense
includes $3.5 million related to a reserve recorded in the fourth quarter
of
2005 against a $3.5 million receivable that we accepted as a partial
payment for
work on a large private mass transit project which became operational
in the
latter half of 2004. The receivable is part of a series of bonds that
formed the
basis for the project owners’ funding for the entire project and is payable out
of future fare revenues. In March 2005, one of the two services rating
a series
of these bonds reduced their rating to below investment grade. On February
10,
2006, the second rating service also reduced its rating, citing serious
concerns
about whether the project’s fare revenues would be adequate to pay the series of
bonds that we hold. There is currently no market for these bonds and
we have
determined that a reserve of 100% of the carrying amount is appropriate.
Other
general and administrative costs also includes information technology,
occupancy, office equipment and supplies, depreciation, travel and
entertainment, outside services, advertising and marketing, training
and other
miscellaneous expenses, none of which individually exceeded 10% of total
general
and administrative expenses.
Provision
for Legal Judgment: In
June
2005, we recorded a provision of $9.3 million related to an unfavorable
judgment
in a legal proceeding (see Note 15 of the “Notes to the Consolidated
Financial Statements”).
Gain
on Sales of Property and Equipment: Gain on sales of property and
equipment for the year ended December 31, 2004 included a $10.0 million
gain on
the sale of certain assets related to our redi-mix concrete business
in Utah in
March 2004.
Other
Income (Expense): Interest income increased $3.6 million, or
45.4%, in the year ended December 31, 2005 compared with the year ended
December
31, 2004 due primarily to a higher average yield on higher interest bearing
investments. The decrease in equity in income of affiliates in 2005 was due
to a $6.7 million gain recorded in 2004 related to the sale of certain
assets by two partnerships in which we hold an equity method investment.
The
decrease in other, net in 2005 was due to a gain recognized in the fourth
quarter of 2004 on the sale of certain shares of T.I.C. Holdings, Inc.
(“TIC”) back to TIC (see Note 6 of the “Notes to the Consolidated
Financial Statements”).
Provision
for Income Taxes: Our effective tax rate decreased to 29.1% in
2005 from 30.0% in 2004 due in part to an increase in our partners’ share
of consolidated construction joint venture income. Generally, our construction
joint ventures are not subject to income taxes on a stand-alone basis.
Also
contributing to the decreased effective tax rate in 2005 was the impact
of a
deduction based on income from qualified domestic production activities
under the American Jobs Creation Act of 2004.
Minority
Interest in Consolidated Subsidiaries: The
increase in minority interest in 2005 compared with 2004 was due to
higher
profitability of our consolidated subsidiaries in
2005.
Liquidity
and Capital Resources
|
|
||||||||||
|
December
31,
|
2006
|
2005
|
2004
|
|||||||
| (in thousands) |
|
|||||||||
|
Cash
and cash equivalents excluding consolidated joint ventures
|
$
|
110,913
|
$
|
147,525
|
$
|
93,830
|
||||
| Consolidated joint venture cash and cash equivalents | 93,980 | 52,356 | 67,797 | |||||||
|
Total
consolidated cash and cash equivalents
|
$ | 204,893 | $ | 199,881 | $ | 161,627 | ||||
|
Net
cash provided by (used in):
|
||||||||||
|
Operating
activities
|
$ |
259,643
|
$ |
146,501
|
$ |
79,233
|
||||
|
Investing
activities
|
(183,683
|
) |
(64,785
|
)
|
(41,427
|
)
|
||||
|
Financing
activities
|
(70,948
|
) |
(43,462
|
)
|
(15,812
|
)
|
||||
|
Capital
expenditures
|
116,238
|
102,829
|
89,636
|
|||||||
|
Working
capital
|
319,762
|
367,801
|
355,927
|
|||||||
Our
primary sources of liquidity are cash flows from operations and borrowings
under
our credit facilities. We expect the principal use of funds for the foreseeable
future will be for acquisitions, capital expenditures, working capital, debt
service and other investments. We have budgeted approximately $110.0 million
for
capital expenditures in 2007, which includes amounts for construction equipment,
aggregate and asphalt plants, buildings, leasehold improvements and the purchase
of land and aggregate reserves.
Our
cash
and cash equivalents and short-term and long-term marketable securities totaled
$394.9 million at December 31, 2006 and included $94.0 million of cash from
our consolidated joint ventures (see Note 5 of the “Notes to the
Consolidated Financial Statements”). This joint venture cash is for the working
capital needs of each joint venture’s project. The decision to distribute cash
must generally be made jointly by all of the partners. We believe that our
current cash and cash equivalents, short-term investments, cash generated
from
operations and amounts available under our existing credit facilities will
be
sufficient to meet our expected working capital needs, capital expenditures,
financial commitments and other liquidity requirements associated with our
existing operations through the next twelve months and beyond. If we
experience a significant change in our business such as the execution of
a
significant acquisition, we would likely need to acquire additional sources
of
financing, which may be limited by the terms of our existing debt covenants,
or
may require the amendment of our existing debt agreements.
Cash
provided by operating activities of $259.6 million for the year ended
December 31, 2006 represents an increase of $113.1 million from the amount
provided by operating activities during 2005. Although accounts receivable
were higher at December 31, 2006 than at December 31, 2005 due to higher
revenue
in 2006, the balance increased at a lower rate in the year ended December
31, 2006 than in 2005 due to higher cash collections contributing to the
increase in cash from operations. Additionally, the increase was due to
higher
net income prior to the non-cash goodwill impairment charge and higher net
billings in excess of costs and estimated earnings resulting primarily
from
large cash payments received to mobilize projects in the early stages of
construction, which have the effect of increasing cash flow in the periods
received and decreasing cash flow in subsequent periods as cash is expended
towards project completion.
Cash
used
in investing activities of $183.7 million for the year ended December 31,
2006
represents an increase of approximately $118.9 million from the amount used
in 2005 due primarily to increased net purchases of marketable securities
and net additions to property and equipment in 2006.
Cash
used
in financing activities was $70.9 million for the year ended December 31,
2006, representing an increase of $27.5 million from the amount used in
2005 due
primarily to increases in net repayments of long-term debt and net
distributions to minority partners in the 2006 period.
Contractual
Obligations
The
following table summarizes our significant contractual obligations outstanding
as of December 31, 2006:
| Contractual Obligations |
Payments
due by period
|
|||||||||||||||
| (in thousands) |
Total
|
Less
than 1 year
|
1-3
years
|
3-5
years
|
More
than 5 years
|
|||||||||||
|
Long
term debt (1)
|
$
|
107,236
|
$
|
28,660
|
$
|
37,460
|
$
|
23,667
|
$
|
17,449
|
||||||
|
Operating
leases (2)
|
42,707
|
11,702
|
7,094
|
5,529
|
18,382
|
|||||||||||
|
Purchase
obligations under construction contracts (3)
|
1,196,732
|
834,101
|
322,047
|
40,584
|
-
|
|||||||||||
|
Other
purchase obligations (4)
|
22,802
|
18,335
|
2,071
|
129
|
2,267
|
|||||||||||
|
Deferred
compensation obligations (5)
|
28,154
|
1,340
|
4,557
|
8,625
|
13,632
|
|||||||||||
|
Wilder
stock repurchase obligation (6)
|
19,680
|
1,420
|
1,464
|
5,260
|
11,536
|
|||||||||||
|
Total
|
$
|
1,417,311
|
$
|
895,558
|
$
|
374,693
|
$
|
83,794
|
$
|
63,266
|
||||||
(1) These
obligations represent the aggregate minimum principal maturities of long-term
debt and do not include interest. See Note 10 of the “Notes to the
Consolidated Financial Statements.”
(2) These
obligations represent the minimum rental commitments and minimum royalty
requirements under all noncancellable operating leases. See Note 15 of the
“Notes to the Consolidated Financial Statements.”
(3) These
obligations represent our best estimate of future purchases of materials
and
subcontract services related to our current contract backlog.
(4) These
obligations represent firm purchase commitments for equipment and other goods
and services not connected with our construction backlog which are individually
greater than $10,000 and have an expected purchase after February 28,
2007.
(5) The
timing of expected payment of deferred compensation is based on estimated
dates
of retirement. Actual dates of retirement could be different and would
cause the timing of payments to change.
(6) The timing
of expected payment for redemptions is based on
estimates including dates of retirement which could differ from
actual dates of retirement and would cause the timing of payments
to change. See Note 15 of the “Notes to the Consolidated Financial
Statements.”
In
2002,
our Board of Directors authorized us to repurchase up to $25.0 million of
our
common stock of which $22.8 million remained at December 31, 2006.
We
had
standby letters of credit totaling approximately $4.7 million outstanding
at
December 31, 2006, all of which expire between February 2007
and March 2008. We are generally required by the beneficiaries of
these standby letters of credit to replace them upon expiration. Additionally,
we generally are required to provide various types of surety bonds that provide
an additional measure of security under certain public and private sector
contracts. At December 31, 2006, approximately $2.2 billion of our backlog
was
bonded and performance bonds totaling approximately $10.0 billion were
outstanding. Performance bonds do not have stated expiration dates; rather,
we
are generally released from the bonds when each contract is accepted by the
owner. The ability to maintain bonding capacity to support our current and
future level of contracting requires that we maintain cash and working capital
balances satisfactory to our sureties.
We
have a
$150.0 million bank revolving line of credit, which allows for unsecured
borrowings through June 24, 2010, with interest rate options. Interest
on
outstanding borrowings under the revolving line of credit is at our choice
of
selected LIBOR rates plus a margin that is recalculated quarterly. The
margin
was 0.60% at December 31, 2006. The unused and available portion of this
line of
credit was $145.6 million at December 31, 2006. Additionally, our Wilder
subsidiary has a bank revolving line of credit of $10.0 million that
expires in June 2008. The unused and available portion of this line of
credit was $9.8 million at December 31, 2006.
Restrictive
covenants under the terms of our debt agreements require the maintenance
of
certain financial ratios and the maintenance of tangible net worth (as
defined)
(see Note 10 of the “Notes to the Consolidated Financial Statements”). We
were in compliance with these covenants at December 31, 2006. Additionally,
our
Wilder subsidiary has restrictive covenants (on a Wilder stand-alone basis)
under the terms of its debt agreements that include the maintenance of
certain
ratios of working capital, liabilities to net worth and tangible net worth
and
restricts Wilder capital expenditures in excess of specified limits. Wilder
was
in compliance with these covenants at December 31, 2006. Failure to comply
with
these covenants could cause the amounts due under the debt agreements to
become
currently payable.
Joint
Ventures; Off-Balance-Sheet Arrangements
We
participate in various construction joint venture partnerships in order
to share
expertise, risk and resources for certain highly complex projects. Generally,
each construction joint venture is formed to accomplish a specific project
and is jointly controlled by the joint venture partners. We select our
joint venture partners based on our analysis of their construction and
financial
capabilities, expertise in the type of work to be performed and past working
relationships with us, among other criteria. The joint venture agreements
typically provide that our interests in any profits and assets, and our
respective share in any losses and liabilities that may result from the
performance of the contract are limited to our stated percentage interest
in the
project.
Under
each joint venture agreement, one partner is designated as the sponsor.
The
sponsoring partner typically provides all administrative, accounting and
most of
the project management support for the project and generally receives a
fee from
the joint venture for these services. We have been designated as the sponsoring
partner in certain of our current joint venture projects and are a
non-sponsoring partner in others.
We
also
participate in various “line item” joint venture agreements under which each
partner is responsible for performing certain discrete items of the total
scope
of contracted work. The revenue for these discrete items is defined in
the
contract with the project owner and each venture partner bears the profitability
risk associated with its own work. All partners in a line item joint venture
are
jointly and severally liable for the completion of the total project under
the
terms of the contract with the project owner. There is not a single set
of books
and records for a line item joint venture. Each partner accounts for its
items
of work individually as it would for any self-performed contract. We account
for
our portion of these contracts as project revenues and costs in our
accounting system and include receivables and payables associated with
our work
in our consolidated financial statements.
The
venture’s contract with the project owner typically requires joint and several
liability among the joint venture partners. Although our agreements with
our
joint venture partners for both construction joint ventures and line item
joint
ventures provide that each party will assume and pay its share of any losses
resulting from a project, if one of our partners was unable to pay its
share we
would be fully liable under our contract with the project owner. Circumstances
that could lead to a loss under these guarantee arrangements include a
partner’s
inability to contribute additional funds to the venture in the event that
the
project incurred a loss or additional costs that we could incur should
the
partner fail to provide the services and resources toward project completion
that had been committed to in the joint venture agreement. At December
31, 2006,
approximately $447.0 million of work representing either our partners’
proportionate share of unconsolidated construction joint ventures or work
that
our partners are directly responsible for in line item joint ventures,
had yet
to be completed. During
2006 we recorded approximately $9.4 million in additional minority interest
cost
related to our assessment that our partners in two construction joint venture
projects would be unable to pay their full share of the projects’ projected
losses. Prior to 2006 we had never incurred a loss under these joint and
several
liability provisions, however, it is possible that we could record additional
losses in the future and such losses could be
significant.
Recent
Accounting Pronouncements
See
Note
1 of the “Notes to the Consolidated Financial Statements” for a description of
recent accounting pronouncements, including the expected dates of adoption
and
effects on our financial position, results of operations and cash
flows.
Quarterly
Results
The
following table sets forth selected unaudited financial information for the
eight quarters in the two-year period ended December 31, 2006. This information
has been prepared on the same basis as the audited financial statements and,
in
the opinion of management, contains all adjustments necessary for a
fair statement thereof.
|
QUARTERLY
FINANCIAL DATA
|
|||||||||||||
| (unaudited - in thousands, except per share data) | |||||||||||||
|
2006
Quarters Ended
|
December
31
|
September
30
|
June
30
|
March
31
|
|||||||||
|
Revenue
|
$
|
719,927
|
$
|
941,672
|
$
|
812,037
|
$
|
495,968
|
|||||
|
Gross
profit
|
56,443
|
105,932
|
93,110
|
40,235
|
|||||||||
|
As
a percent of revenue
|
7.8
|
%
|
11.2
|
%
|
11.5
|
%
|
8.1
|
%
|
|||||
|
Net
income (loss)
|
2,917
|
45,725
|
33,289
|
(1,422
|
)
|
||||||||
|
As
a percent of revenue
|
0.4
|
%
|
4.9
|
%
|
4.1
|
%
|
(0.3
|
)%
|
|||||
|
Net
income (loss) per share:
|
|||||||||||||
|
Basic
|
$ |
0.07
|
$
|
1.12
|
$
|
0.81
|
$
|
(0.03
|
)
|
||||
|
Diluted
|
$ |
0.07
|
$
|
1.10
|
$
|
0.80
|
$
|
(0.03
|
)
|
||||
|
Dividends
per share
|
$
|
0.10
|
$
|
0.10
|
$
|
0.10
|
$
|
0.10
|
|||||
|
Market
price of common stock
|
|||||||||||||
|
High
|
$ |
63.73
|
$ |
56.14
|
$ |
51.65
|
$ |
49.75
|
|||||
|
Low
|
$ |
47.69
|
$ |
37.35
|
$ |
37.63
|
$ |
35.42
|
|||||
|
2005
Quarters Ended
|
December
31
|
September
30
|
June
30
|
March
31
|
|||||||||
|
Revenue
|
$
|
679,552
|
$
|
864,162
|
$
|
676,704
|
$
|
420,934
|
|||||
|
Gross
profit
|
|
106,024
|
|
109,701
|
|
76,707
|
|
26,940
|
|||||
|
As
a percent of revenue
|
15.6
|
%
|
12.7
|
%
|
11.3
|
%
|
6.4
|
%
|
|||||
|
Net
income (loss)
|
35,812
|
40,651
|
14,954
|
(8,267
|
)
|
||||||||
|
As
a percent of revenue
|
5.3
|
%
|
4.7
|
%
|
2.2
|
%
|
(2.0
|
)%
|
|||||
|
Net
income (loss) per share:
|
|||||||||||||
|
Basic
|
$
|
0.88
|
$
|
1.00
|
$
|
0.37
|
$
|
(0.20
|
)
|
||||
|
Diluted
|
$
|
0.86
|
$
|
0.98
|
$
|
0.36
|
$
|
(0.20
|
)
|
||||
|
Dividends
per share
|
$
|
0.10
|
$
|
0.10
|
$
|
0.10
|
$
|
0.10
|
|||||
|
Market
price of common stock
|
|||||||||||||
|
High
|
$
|
39.88
|
$
|
38.42
|
$
|
28.20
|
$
|
28.15
|
|||||
|
Low
|
$
|
31.50
|
$
|
27.97
|
$
|
22.00
|
$
|
24.01
|
|||||
Net
income (loss) per share calculations are based on the weighted average common
shares outstanding for each period presented. Accordingly, the sum of the
quarterly net income (loss) per share amounts may not equal the per share
amount
reported for the year.
Item
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We
are
exposed to financial market risks due largely to changes in interest rates,
which we have managed primarily by managing the maturities in our investment
portfolio. We currently do not have any material business transactions in
foreign currencies.
The
fair
value of our short-term held-to-maturity investment portfolio and related
income
would not be significantly impacted by changes in interest rates since the
investment maturities are short and the interest rates are primarily fixed.
The
fair value of our long-term held-to-maturity investment portfolio may be
impacted by changes in interest rates. Our mutual fund portfolio of $33.0
million is exposed to equity price risks.
We
had
senior notes payable of $26.7 million at December 31, 2006 which carry a
fixed
interest rate of 6.54% per annum with principal payments due in nine equal
annual installments that began in 2002 and senior notes payable of $58.3
million
at December 31, 2006 which carry a fixed interest rate of 6.96% per annum
with
principal payments due in nine equal annual installments which began in
2005.
The
table
below presents principal amounts and related weighted average interest rates
by
year for our cash and cash equivalents, held-to-maturity investments and
significant debt obligations (in thousands):
|
2007
|
2008
|
2009
|
2010
|
2011
|
Thereafter
|
Total
|
||||||||||||||||
|
Assets
|
||||||||||||||||||||||
|
Cash,
cash equivalents and held-to-maturity investments
|
$
|
312,952
|
$
|
42,555
|
$
|
2,199
|
$
|
4,194
|
$
|
-
|
$
|
-
|
$
|
361,900
|
||||||||
|
Weighted
average interest rate
|
4.98
|
%
|
5.05
|
%
|
3.64
|
%
|
5.36
|
%
|
-
|
%
|
-
|
%
|
4.98
|
%
|
||||||||
|
Liabilities
|
||||||||||||||||||||||
|
Fixed rate debt
|
||||||||||||||||||||||
|
Senior notes payable
|
$
|
15,000
|
$
|
15,000
|
$
|
15,000
|
$
|
15,000
|
$
|
8,333
|
$
|
16,667
|
$
|
85,000
|
||||||||
|
Weighted average interest rate
|
6.77
|
%
|
6.77
|
%
|
6.77
|
%
|
6.77
|
%
|
6.96
|
%
|
6.96
|
%
|
6.83
|
%
|
||||||||
The
estimated fair value of our cash, cash equivalents and short-term
held-to-maturity investments approximate the principal amounts reflected
above
based on the generally short maturities of these financial instruments. The
estimated fair value of our long-term held-to-maturity investments approximates
the principal amounts above due to the relatively minor difference between
the
effective yields of these investments and rates currently available on similar
instruments. Rates currently available to us for debt with similar terms
and
remaining maturities are used to estimate fair value of existing debt. Based
on
the lower fixed borrowing rates currently available to us for bank loans
with
similar terms and average maturities, the fair value of the senior notes
payable
was approximately $87.9 million as of December 31, 2006 and $104.9 million
as of December 31, 2005.
Item
8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
The
following consolidated financial statements of Granite and the independent
registered public accounting firm’s report are incorporated by reference from
Part IV, Item 15(1) and (2):
Report
of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets - At December 31, 2006 and 2005
Consolidated
Statements of Income - Years Ended December 31, 2006, 2005 and 2004
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income - Years Ended
December 31, 2006, 2005 and 2004
Consolidated
Statements of Cash Flows - Years Ended December 31, 2006, 2005 and
2004
Notes
to
the Consolidated Financial Statements
Schedule
II - Schedule of Valuation and Qualifying Accounts
Additionally,
a two-year Summary of Quarterly Financial Data (unaudited) is included
in “Quarterly Results” under “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operation.”
Not
applicable.
Item
9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures: We
carried out an evaluation, under the supervision of and with the participation
of management, including our Chief Executive Officer and our Chief Financial
Officer, of the design and operation of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act
of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of December
31,
2006, our disclosure controls and procedures were effective.
Changes
in Internal Control Over Financial Reporting: During the fourth quarter of
2006, there have been no changes in our internal control over financial
reporting that have materially affected, or were reasonably likely to materially
affect, our internal control over financial reporting.
Management’s
Report on Internal Control Over Financial Reporting : Our management is
responsible for establishing and maintaining adequate internal control
over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f)
and
15d -15(f). Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in “Internal Control—Integrated
Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation our management concluded that our
internal
control over financial reporting was effective as of December 31,
2006.
Our
management’s assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2006 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting
firm, as
stated in their report which is included herein.
Item
9B. OTHER INFORMATION
Not
applicable.
Certain
information required by Part III is omitted from this Report. We will file
our
definitive proxy statement for our Annual Meeting of Shareholders to be held
on
May 21, 2007 (the “Proxy Statement”) pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this Report, and certain
information included therein is incorporated herein by reference.
Item
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERANCE
For
information regarding our Directors and compliance with Section 16(a) of
the
Securities Exchange Act of 1934, we direct you to the sections entitled
“Election of Directors” and “Section 16(a) Beneficial Ownership Reporting
Compliance,” respectively, in the Proxy Statement. For information regarding our
Audit/Compliance Committee’s financial expert and our Committees of the Board,
we direct you to the section captioned “Committees of the Board” in the Proxy
Statement. For information regarding our Nomination Policy, we direct you
to the
section captioned “Board of Directors’ Nomination Policy” in the Proxy
Statement. For information regarding our Code of Conduct, we direct you to
the
section captioned “Code of Conduct” in the Proxy Statement. This
information is incorporated herein by reference. Information regarding our
executive officers is contained in the section entitled “Executive Officers of
the Registrant,” in Part I of this Report.
For
information regarding our Executive Compensation, we direct you to the section
captioned “Executive & Director Compensation and Other Matters” in the Proxy
Statement. This information is incorporated herein by reference.
Item
12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED SHAREHOLDER MATTERS
This
information is located in the sections captioned “Stock Ownership
of Beneficial Owners and Certain Management” and “Equity Compensation Plan
Information” in the Proxy Statement. This information is incorporated
herein by reference.
You
will
find this information in the section captioned “Certain Relationships and
Related Transactions” in the Proxy Statement. This information is
incorporated herein by reference.
You
will
find this information in the subsection captioned “Principal Accountant Fees and
Services” in the Proxy Statement. This information is incorporated herein by
reference.
Item
15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
The
following documents are filed as part of this Report:
1. Financial
Statements.
The
following consolidated financial statements and related documents are filed
as
part of this report:
|
Schedule
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets at December 31, 2006 and 2005
|
F-2
|
|
Consolidated
Statements of Income for the Years Ended December 31, 2006, 2005
and
2004
|
F-3
|
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income for the Years
Ended December
31, 2006, 2005 and 2004
|
F-4
|
|
Consolidated
Statements of Cash Flows for the Years Ended December
31, 2006, 2005 and 2004
|
F-5
|
|
Notes
to the Consolidated Financial Statements
|
F-6
to F-26
|
2. Financial
Statement Schedule.
The
following financial statement schedule of Granite for the years ended December
31, 2006, 2005 and 2004 is filed as part of this report and should be read
in
conjunction with the consolidated financial statements of
Granite.
|
Schedule
|
Page
|
|
Schedule
II - Schedule of Valuation and Qualifying Accounts
|
S-1
|
Schedules
not listed above have been omitted because the required information is either
not material, not applicable or is shown in the consolidated financial
statements or notes thereto.
3. Exhibits.
The
Exhibits listed in the accompanying Exhibit Index are filed or incorporated
by
reference as part of this report.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Shareholders and Board of Directors of
Granite
Construction Incorporated:
We
have
completed integrated audits of Granite Construction Incorporated’s consolidated
financial statements and of its internal control over financial reporting
as of
December 31, 2006 in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our
audits,
are presented below.
Consolidated
financial statements and financial statement schedule
In
our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(1) present fairly, in all material respects, the financial
position of Granite Construction Incorporated and its subsidiaries at December
31, 2006 and 2005, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2006 in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in
the
index appearing under Item 15(2) presents fairly, in all material respects,
the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits
of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit of financial
statements includes examining, on a test basis, evidence supporting the
amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Internal
control over financial reporting
Also,
in
our opinion, management’s assessment, included in Management’s Report on
Internal Control Over Financial Reporting appearing under Item 9A, that
the
Company maintained effective internal control over financial reporting
as of
December 31, 2006 based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the Company maintained,
in
all material respects, effective internal control over financial reporting
as of
December 31, 2006, based on criteria established in Internal Control -
Integrated Framework issued by the COSO. The Company’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express opinions on management’s assessment
and on the effectiveness of the Company’s internal control over financial
reporting based on our audit. We conducted our audit of internal control
over
financial reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management’s assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that
our
audit provides a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures
of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use,
or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting
may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PRICEWATERHOUSECOOPERS
LLP
San
Jose, California
February 26,
2007
|
GRANITE
CONSTRUCTION INCORPORATED
|
|||||||
|
CONSOLIDATED
BALANCE SHEETS
|
|||||||
|
(in
thousands, except share and per share
data)
|
|||||||
| December 31, |
2006
|
2005
|
|||||
|
ASSETS
|
|||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
204,893
|
$
|
199,881
|
|||
|
Short-term
marketable securities
|
141,037
|
68,540
|
|||||
|
Accounts
receivable, net
|
492,229
|
476,453
|
|||||
|
Costs
and estimated earnings in excess of billings
|
15,797
|
43,660
|
|||||
|
Inventories
|
41,529
|
33,161
|
|||||
| Real estate held for sale | 55,888 | 46,889 | |||||
|
Deferred
income taxes
|
36,776
|
22,996
|
|||||
|
Equity
in construction joint ventures
|
31,912
|
27,408
|
|||||
|
Other
current assets
|
63,144
|
57,960
|
|||||
|
Total
current assets
|
1,083,205
|
976,948
|
|||||
|
Property
and equipment, net
|
429,966
|
397,111
|
|||||
|
Long-term
marketable securities
|
48,948
|
32,960
|
|||||
|
Investments
in affiliates
|
21,471
|
15,855
|
|||||
|
Other
assets
|
49,248
|
49,356
|
|||||
|
Total
assets
|
$ | 1,632,838 |
$
|
1,472,230
|
|||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities
|
|||||||
|
Current
maturities of long-term debt
|
$
|
28,660
|
$
|
26,888
|
|||
|
Accounts
payable
|
257,612
|
232,807
|
|||||
|
Billings
in excess of costs and estimated earnings
|
287,843
|
208,883
|
|||||
|
Accrued
expenses and other current liabilities
|
189,328
|
140,569
|
|||||
|
Total
current liabilities
|
763,443
|
609,147
|
|||||
|
Long-term
debt
|
78,576
|
124,415
|
|||||
|
Other
long-term liabilities
|
58,419
|
46,556
|
|||||
|
Deferred
income taxes
|
22,324
|
37,325
|
|||||
|
Commitments
and contingencies
|
|||||||
|
Minority
interest in consolidated subsidiaries
|
15,532
|
33,227
|
|||||
|
Shareholders’
equity
|
|||||||
|
Preferred
stock, $0.01 par value, authorized 3,000,000 shares, none
outstanding
|
-
|
-
|
|||||
|
Common
stock, $0.01 par value, authorized 150,000,000 shares in 2006 and
100,000,000 shares in 2005; issued and outstanding 41,833,559 in 2006
and 41,682,010 in 2005
|
418
|
417
|
|||||
|
Additional
paid-in capital
|
78,620
|
80,619
|
|||||
|
Retained
earnings
|
612,875
|
549,101
|
|||||
|
Accumulated
other comprehensive income
|
2,631
|
1,602
|
|||||
|
Unearned
compensation
|
-
|
(10,179
|
)
|
||||
|
Total
shareholders’ equity
|
694,544 |
621,560
|
|||||
|
Total
liabilities and shareholders’ equity
|
$ | 1,632,838 |
$
|
1,472,230
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
GRANITE
CONSTRUCTION INCORPORATED
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF INCOME
|
||||||||||
|
(in
thousands, except per share data)
|
||||||||||
|
Years
Ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Revenue
|
||||||||||
|
Construction
|
$ |
2,559,445
|
$
|
2,307,062
|
$
|
1,871,859
|
||||
|
Material
sales
|
410,159
|
334,290
|
264,353
|
|||||||
|
Total
revenue
|
2,969,604
|
2,641,352
|
2,136,212
|
|||||||
|
Cost
of revenue
|
||||||||||
|
Construction
|
2,360,555
|
2,060,680
|
1,701,277
|
|||||||
|
Material
sales
|
313,329
|
261,300
|
212,914
|
|||||||
|
Total
cost of revenue
|
2,673,884
|
2,321,980
|
1,914,191
|
|||||||
|
Gross
Profit
|
295,720
|
319,372
|
222,021
|
|||||||
|
General
and administrative expenses
|
204,281
|
183,392
|
157,035
|
|||||||
|
Provision
for (reversal of) legal judgment
|
(4,800
|
) |
9,300
|
-
|
||||||
| Goodwill impairment charge | 18,011 | - | - | |||||||
|
Gain
on sales of property and equipment
|
10,408
|
8,235
|
18,566
|
|||||||
|
Operating
income
|
88,636
|
134,915
|
83,552
|
|||||||
|
Other
income (expense)
|
||||||||||
|
Interest
income
|
24,112
|
11,573
|
7,962
|
|||||||
|
Interest
expense
|
(4,492
|
) |
(6,932
|
)
|
(7,191
|
)
|
||||
|
Equity
in income of affiliates
|
2,157
|
1,497
|
6,162
|
|||||||
|
Other,
net
|
2,604
|
1,258
|
4,439
|
|||||||
|
Total
other income (expense)
|
24,381 |
7,396
|
11,372
|
|||||||
|
Income
before provision for income taxes and minority
interest
|
113,017
|
142,311
|
94,924
|
|||||||
|
Provision
for income taxes
|
38,678
|
41,413
|
28,477
|
|||||||
|
Income
before minority interest
|
74,339
|
100,898
|
66,447
|
|||||||
|
Minority
interest in consolidated subsidiaries
|
6,170
|
(17,748
|
)
|
(9,440
|
)
|
|||||
|
Net
income
|
$ |
80,509
|
$ |
83,150
|
$ |
57,007
|
||||
|
Net
income per share
|
||||||||||
|
Basic
|
$
|
1.97
|
$
|
2.05
|
$
|
1.41
|
||||
|
Diluted
|
$
|
1.94
|
$
|
2.02
|
$
|
1.39
|
||||
|
Weighted
average shares of common stock
|
||||||||||
|
Basic
|
40,874
|
40,614
|
40,390
|
|||||||
|
Diluted
|
41,471
|
41,249
|
41,031
|
|||||||
|
Dividends
per share
|
$
|
0.40
|
$
|
0.40
|
$
|
0.40
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
GRANITE
CONSTRUCTION INCORPORATED
|
||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME
|
||||||||||||||||||||||
|
(in
thousands, except share data)
|
||||||||||||||||||||||
|
Years
Ended December 31,
2004,
2005 and 2006
|
Outstanding
Shares
|
Common
Stock
|
Additional
Paid-in Capital
|
Retained
Earnings
|
Accumulated
Other Comprehensive Income (loss)
|
Unearned
Compensation
|
Total
|
|||||||||||||||
|
Balances,
December 31, 2003
|
41,528,317
|
$
|
415
|
$
|
73,651
|
$
|
442,272
|
$
|
76
|
|
$
|
(11,523
|
)
|
$
|
504,891
|
|||||||
|
Comprehensive
income:
|
||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
57,007
|
-
|
-
|
||||||||||||||||
|
Other
comprehensive income:
|
||||||||||||||||||||||
|
Changes
in net unrealized gains on investments
|
-
|
-
|
-
|
-
|
1,399
|
-
|
||||||||||||||||
|
Total
comprehensive income
|
58,406
|
|||||||||||||||||||||
|
Restricted
stock issued
|
166,650
|
2
|
4,367
|
-
|
-
|
(5,306
|
)
|
(937
|
)
|
|||||||||||||
|
Amortized
restricted stock
|
-
|
-
|
-
|
-
|
-
|
6,011
|
6,011
|
|||||||||||||||
|
Repurchase
of common stock
|
(293,239
|
)
|
(3
|
)
|
(6,424
|
)
|
-
|
-
|
-
|
(6,427
|
)
|
|||||||||||
|
Cash
dividends on common stock
|
-
|
-
|
-
|
(16,644
|
)
|
-
|
-
|
(16,644
|
)
|
|||||||||||||
| Common stock contributed to ESOP |
192,000
|
2 |
3,987
|
- | - | - |
3,989
|
|||||||||||||||
|
Excess
tax benefit on stock-based compensation
|
- | - | 703 | - | - | - | 703 | |||||||||||||||
|
Stock
options exercised and other
|
18,591
|
-
|
482
|
-
|
-
|
-
|
482
|
|||||||||||||||
|
Balances,
December 31, 2004
|
41,612,319
|
416
|
76,766
|
482,635
|
1,475
|
(10,818
|
)
|
550,474
|
||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
83,150
|
-
|
-
|
||||||||||||||||
|
Other
comprehensive income:
|
||||||||||||||||||||||
|
Changes
in net unrealized gains on investments
|
-
|
-
|
-
|
-
|
127
|
-
|
||||||||||||||||
|
Total
comprehensive income
|
83,277
|
|||||||||||||||||||||
|
Restricted
stock issued
|
187,563
|
2
|
5,019
|
-
|
-
|
(5,318
|
)
|
(297
|
)
|
|||||||||||||
|
Amortized
restricted stock
|
-
|
-
|
-
|
-
|
-
|
5,957
|
5,957
|
|||||||||||||||
|
Repurchase
of common stock
|
(204,543
|
)
|
(2
|
)
|
(5,261
|
)
|
-
|
-
|
-
|
(5,263
|
)
|
|||||||||||
|
Cash
dividends on common stock
|
- |
-
|
-
|
(16,684
|
)
|
-
|
-
|
(16,684
|
)
|
|||||||||||||
|
Common
stock contributed to ESOP
|
85,200
|
1
|
1,993
|
-
|
-
|
-
|
1,994
|
|||||||||||||||
|
Excess
tax benefit on stock-based compensation
|
- | - | 1,723 | - | - | - | 1,723 | |||||||||||||||
|
Stock
options exercised and other
|
1,471
|
-
|
379
|
-
|
-
|
-
|
379
|
|||||||||||||||
|
Balances,
December 31, 2005
|
41,682,010
|
417
|
80,619
|
549,101
|
1,602
|
(10,179
|
)
|
621,560
|
||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
80,509
|
-
|
-
|
||||||||||||||||
|
Other
comprehensive income:
|
||||||||||||||||||||||
|
Changes
in net unrealized gains on investments
|
-
|
-
|
-
|
-
|
1,029
|
-
|
||||||||||||||||
|
Total
comprehensive income
|
81,538
|
|||||||||||||||||||||
|
Reclassification
of unearned compensation on non-vested restricted stock balance
upon
adoption of SFAS 123-R
|
- | - | (10,179 | ) | - | - | 10,179 | - | ||||||||||||||
|
Restricted
stock issued
|
202,730
|
2
|
(2
|
) |
-
|
-
|
-
|
-
|
||||||||||||||
|
Amortized
restricted stock
|
-
|
-
|
7,572
|
-
|
-
|
-
|
7,572
|
|||||||||||||||
|
Repurchase
of common stock
|
(159,285
|
) |
(2
|
) |
(7,373
|
) |
-
|
-
|
-
|
(7,375
|
) | |||||||||||
|
Cash
dividends on common stock
|
- |
-
|
-
|
(16,735
|
) |
-
|
-
|
(16,735
|
) | |||||||||||||
|
Common
stock contributed to ESOP
|
45,300
|
-
|
1,995
|
-
|
-
|
-
|
1,995
|
|||||||||||||||
|
Excess
tax benefit on stock-based compensation
|
- | - | 3,390 | - | - | - | 3,390 | |||||||||||||||
|
Stock
options exercised and other
|
62,804
|
1
|
2,598 |
-
|
-
|
-
|
2,599
|
|||||||||||||||
|
Balances,
December 31, 2006
|
41,833,559
|
$
|
418
|
$
|
78,620
|
$
|
612,875
|
$
|
2,631
|
$
|
-
|
$
|
694,544
|
|||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
(in
thousands)
|
Years
Ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Operating
Activities
|
||||||||||
|
Net
income
|
$
|
80,509
|
$
|
83,150
|
$
|
57,007
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Goodwill
impairment charge
|
18,011 | - | - | |||||||
|
Depreciation,
depletion and amortization
|
69,180
|
65,801
|
62,459
|
|||||||
|
Gain
on sales of property and equipment
|
(10,408
|
) |
(8,235
|
)
|
(18,566
|
)
|
||||
|
Change
in deferred income taxes
|
(29,462
|
) |
(8,839
|
)
|
(5,868
|
) | ||||
|
Stock-based compensation
|
7,572
|
5,957
|
6,011
|
|||||||
|
Excess
tax benefit on stock-based compensation
|
(3,390 | ) |
-
|
-
|
||||||
|
Common
stock contributed to ESOP
|
1,995
|
1,994
|
3,989
|
|||||||
|
Minority
interest in consolidated subsidiaries
|
(6,170
|
) |
17,748
|
9,440
|
||||||
|
Equity
in income of affiliates
|
(2,157
|
) |
(1,497
|
)
|
(6,162
|
)
|
||||
|
Gain
on sale of equity investment
|
-
|
(1,187
|
)
|
(3,288
|
)
|
|||||
|
Changes
in assets and liabilities, net of the effects of acquisitions and
FIN 46
consolidations:
|
||||||||||
|
Accounts
receivable, net
|
(18,905
|
) |
(115,255
|
)
|
(28,222
|
)
|
||||
|
Inventories
|
(8,368
|
) |
(1,450
|
)
|
(1,833
|
) | ||||
|
Real
estate held for sale
|
(10,289 | ) |
(13,071
|
) |
(20,345
|
) | ||||
|
Equity
in construction joint ventures
|
(4,504
|
) |
(6,513
|
)
|
(208
|
)
|
||||
|
Other
assets
|
(10,073
|
) |
(16,061
|
)
|
(3,354
|
)
|
||||
|
Accounts
payable
|
24,805
|
41,025
|
38,431
|
|||||||
|
Billings
in excess of costs and estimated earnings, net
|
106,823
|
75,206
|
|
(25,037
|
) | |||||
|
Accrued
expenses and other liabilities
|
54,474
|
27,728
|
14,779
|
|||||||
|
Net
cash provided by operating activities
|
259,643
|
146,501
|
79,233
|
|||||||
|
Investing
Activities
|
||||||||||
|
Purchases
of marketable securities
|
(233,868
|
) |
(96,877
|
)
|
(96,975
|
)
|
||||
|
Maturities
and sales of marketable securities
|
153,024
|
111,975
|
113,243
|
|||||||
|
Additions
to property and equipment
|
(116,238
|
) |
(102,829
|
)
|
(89,636
|
)
|
||||
|
Proceeds
from sales of property and equipment
|
16,398
|
25,012
|
24,389
|
|||||||
|
Proceeds
from sales of equity investment
|
-
|
1,759
|
7,463
|
|||||||
|
Contributions
to affiliates
|
(6,982
|
) |
(5,405
|
) |
(2,552
|
) | ||||
|
Distributions
from affiliates
|
1,970 |
669
|
11,860
|
|||||||
|
Other
investing activities
|
2,013
|
911
|
(9,219
|
) | ||||||
|
Net
cash used in investing activities
|
(183,683
|
) |
(64,785
|
)
|
(41,427
|
)
|
||||
|
Financing
Activities
|
||||||||||
|
Proceeds
from long-term debt
|
56,869
|
29,100
|
70,703
|
|||||||
|
Repayments
of long-term debt
|
(92,873
|
) |
(44,498
|
)
|
(52,142
|
)
|
||||
|
Repurchase
of common stock
|
(7,375
|
) |
(5,263
|
)
|
(6,427
|
)
|
||||
|
Dividends
paid
|
(16,722
|
) |
(16,675
|
)
|
(16,636
|
)
|
||||
|
Contributions
from minority partners
|
6,171
|
946
|
5,601
|
|||||||
|
Distributions
to minority partners
|
(23,007
|
) |
(7,451
|
)
|
(17,229
|
)
|
||||
|
Excess
tax benefit on stock-based compensation
|
3,390 |
-
|
-
|
|||||||
|
Stock
options and other financing activities
|
2,599 |
379
|
318
|
|||||||
|
Net
cash used in financing activities
|
(70,948
|
) |
(43,462
|
)
|
(15,812
|
)
|
||||
|
Increase in
cash and cash equivalents
|
$ |
5,012
|
$ |
38,254
|
$ |
21,994
|
||||
| Cash and cash equivalent added in FIN 46 consolidations |
-
|
-
|
69,714
|
|||||||
| Cash and cash equivalents at beginning of year |
199,881
|
161,627
|
69,919
|
|||||||
| Cash and cash equivalents at end of year | $ |
204,893
|
$ |
199,881
|
$ |
161,627
|
||||
|
Supplementary
Information
|
||||||||||
|
Cash
paid during the period for:
|
||||||||||
|
Interest
|
$
|
5,009
|
$
|
6,801
|
$
|
7,000
|
||||
|
Income
taxes
|
79,511
|
49,551
|
29,557
|
|||||||
|
Non-cash
investing and financing activity:
|
||||||||||
|
Restricted
stock issued for services, net
|
$
|
9,774
|
$
|
5,021
|
$
|
4,369
|
||||
|
Dividends
accrued but not paid
|
4,184
|
4,170
|
4,161
|
|||||||
|
Financed
acquisition of assets
|
5,335
|
2,337
|
14,680
|
|||||||
|
Notes
received from sale of assets
|
-
|
-
|
8,893
|
|||||||
|
Debt
repayments from sale of assets
|
13,398 | - | - | |||||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
||||||||||
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL
STATEMENTS
1.
Summary of Significant Accounting Policies
Description
of Business:
Granite
Construction Incorporated is a heavy civil contractor and a construction
materials producer. We are engaged in the construction of highways, dams,
airport infrastructure, mass transit facilities, real estate site development
and other infrastructure related projects with offices in Alaska, Arizona,
California, Florida, Minnesota, Nevada, New York, Oregon, Texas, Utah and
Washington. Unless otherwise indicated, the terms “we,” “us,” “our,”
and “Granite” refer to Granite Construction Incorporated and its consolidated
subsidiaries.
Principles
of Consolidation:
The
consolidated financial statements include the accounts of Granite Construction
Incorporated and its wholly owned and majority owned subsidiaries. All material
inter-company transactions and accounts have been eliminated. We use the
equity
method of accounting for affiliated companies where we have the ability to
exercise significant influence, but not control. Additionally, we participate
in
joint ventures with other construction companies. We have consolidated these
joint ventures where we have determined that through our participation in
these
joint ventures we have a variable interest and are the primary beneficiary
as
defined by Financial Accounting Standards Board Interpretation No. 46 (revised
December 2003) “Consolidation of Variable Interest Entities,” (“FIN 46”). Where
we have determined we are not the primary beneficiary we account for our
share
of the operations of jointly controlled construction joint ventures on a
pro
rata basis in the consolidated statements of income and as a single line
item in
the consolidated balance sheets in accordance with Emerging Issues Task Force
Issue 00-01, “Investor Balance Sheet and Income Statement Display under the
Equity Method for Investments in Certain Partnerships and Other
Ventures.”
Use
of Estimates in the Preparation of Financial Statements:
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue
Recognition: We
use
the percentage of completion accounting method for construction contracts
in
accordance with the American Institute of Certified Public Accountants Statement
of Position 81-1, “Accounting for Performance of Construction-Type and Certain
Production-Type Contracts.” Revenue and earnings on construction contracts,
including construction joint ventures, are recognized on the percentage of
completion method in the ratio of costs incurred to estimated final costs.
Revenue in an amount equal to cost incurred is recognized prior to contracts
reaching 25% completion. The related profit is deferred until the period
in
which such percentage completion is attained. It is our judgment that until
a
project reaches 25% completion, there is insufficient information to determine
what the estimated profit on the project will be with a reasonable level
of
assurance. Additionally, as a result of experience gained on past
design/build projects, we now evaluate each design/build project individually
to
determine whether it is appropriate to begin profit recognition at 25%
completion or at a later point. The factors considered in this evaluation
of
risk associated with each design/build project include the stage of design
completion, the stage of construction completion, status of outstanding purchase
orders and subcontracts, certainty of quantities, certainty of schedule and
the
relationship with the owner.
Revenue
from contract claims is recognized when we have a signed settlement agreement
and payment is assured. Revenue
from contract change orders, which occur in most large projects, is recognized
when the owner has agreed to the change order in writing. During 2006 we
settled
various contract issues for which the associated cost was included in prior
periods (see Note 2). Provisions are recognized in the statement of income
for
the full amount of estimated losses on uncompleted contracts whenever evidence
indicates that the estimated total cost of a contract exceeds its estimated
total revenue. Contract
cost consists of direct costs on contracts, including labor and materials,
amounts payable to subcontractors, direct overhead costs and equipment expense
(primarily depreciation, fuel, maintenance and repairs). Depreciation is
provided using accelerated methods for construction equipment. Contract cost
is
recorded as incurred and revisions in contract revenue and cost estimates
are
reflected when known. The completion threshold for the start of
contract profit recognition is applied to all percentage of completion
projects unless and until we project a loss on the project, in which case
the
estimated loss is immediately recognized.
Revenue
from the sale of materials is recognized when delivery occurs and risk of
ownership passes to the customer.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Real
Estate Transactions: In
recognizing revenue from real estate transactions, we follow the
provisions in Statement of Financial Accounting Standards No. 66,
“Accounting for Sales of Real Estate” (“SFAS 66”). The specific timing of a sale
is measured against various criteria in SFAS 66 related to the terms of the
transaction and any continuing involvement in the form of management or
financial assistance associated with the property. If the sales criteria
are not
met, we defer recognition and account for the continued operations of the
property by applying the deposit, finance, installment or cost recovery
methods,
as appropriate. When a sale occurs within one of our real estate
developments and we have not completed all infrastructure development related
to
the total project, we follow SFAS 66 and Statement of Financials Accounting
Standards No. 67, “Accounting for Costs and Initial Rental Operations of
Real Estate Projects,” to determine the appropriate cost of sales and the timing
of recognition of the sale. In the calculation of cost of sales, we use
estimates and forecasts to determine total costs at completion of the
development project.
Balance
Sheet Classifications: We
include in current assets and liabilities amounts receivable and payable
under
construction contracts (principally retentions) that may extend beyond one
year.
Additionally, we include the cost of property purchased for development and
sale
in current assets. A one-year time period is used as the basis for classifying
all other current assets and liabilities.
Cash
and Cash Equivalents:
Cash
equivalents are securities having maturities of three months or less from
the
date of purchase.
Marketable
Securities:
We
determine the classification of our marketable securities at the time of
purchase and reevaluate these determinations at each balance sheet date.
Debt
securities are classified as held-to-maturity when we have the positive intent
and ability to hold the securities to maturity. Held-to-maturity investments
are
stated at amortized cost. Debt securities for which we do not have the positive
intent or ability to hold to maturity are classified as available-for-sale,
along with any investments in equity securities. Securities available-for-sale
are carried at fair value with the unrealized gains and losses, net of income
taxes, reported as a separate component of other comprehensive income until
realized. We have no investments that qualify as trading.
The
amortized cost of debt securities is adjusted for amortization of premiums
and
accretion of discounts to maturity, which is included in interest income.
Realized gains and losses are included in other income, net. The cost of
securities sold is based on the specific identification method.
Financial
Instruments:
The
carrying value of marketable securities approximates their fair value as
determined by market quotes. Rates currently available to us for debt with
similar terms and remaining maturities are used to estimate the fair value
of
existing debt. The carrying value of receivables and other amounts arising
out
of normal contract activities, including retentions, which may be settled
beyond
one year, is estimated to approximate fair value.
Concentrations:
We maintain the majority of cash balances and all of our marketable securities
with several financial institutions. We invest with high credit quality
financial institutions and, by policy, limit the amount of credit exposure
to
any financial institution. A significant portion of our labor force is subject
to collective bargaining agreements. Collective bargaining agreements covering
approximately 20.0% of our labor force at December 31, 2006 will expire
during 2007.
Revenue
earned by both the Branch Division and the Heavy Construction Division from
federal, state and local government agencies amounted to $2,026.0
million (68.2%) in 2006, $1,808.0 million (68.5%) in 2005 and $1,553.1
million (72.7%) in 2004. Revenue from the California Department of
Transportation represented $245.2 million (8.3%) in 2006, $127.1
million (4.8%) in 2005 and $134.5 million (6.3%) in 2004. At December 31,
2006 and 2005, we had significant amounts receivable from these agencies.
We
perform ongoing credit evaluations of our customers and generally do not
require
collateral, although the law provides us the ability to file mechanics’ liens on
real property improved for private customers in the event of non-payment
by such
customers. We maintain an allowance for potential credit losses and
such losses have been within management’s expectations. We have no foreign
operations.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Inventories:
Inventories consist primarily of quarry products valued at the lower of average
cost or market.
Property
and Equipment:
Property and equipment are stated at cost. Depreciation for construction
and
other equipment is
primarily provided using accelerated methods over lives ranging from three
to
ten years and the straight-line method over lives from three to twenty years
for
the remaining depreciable assets. We believe that accelerated methods best
approximate the service provided by the construction and other equipment.
Depletion of quarry property is based on the usage of depletable reserves.
We
frequently sell property and equipment that has reached the end of its useful
life or no longer meets our needs, including depleted quarry property. Such
property is held in property and equipment until sold. The cost and accumulated
depreciation or depletion of property sold or retired is removed from the
accounts and gains or losses, if any, are reflected in earnings for the period.
We capitalized interest costs related to certain self-constructed assets
of $4.8 million in 2006, $3.3 million in 2005 and $1.9 million in
2004. Maintenance and repairs are charged to operations as
incurred.
Long-Lived
Assets:
Long-lived assets held and used by us are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset
may not be recoverable. An impairment loss is recorded when the asset’s carrying
value exceeds its estimated undiscounted future cash flows.
We
perform goodwill impairment tests annually during our fourth quarter and
more
frequently when events and circumstances occur that indicate a possible
impairment of goodwill. In determining whether there is an impairment of
goodwill, we calculate the estimated fair value of the reporting unit in
which
the goodwill is recorded using a discounted future cash flow method. We then
compare the resulting fair value to the net book value of the reporting unit,
including goodwill. If the net book value of a reporting unit exceeds its
fair
value, we measure the amount of the impairment loss by comparing the implied
fair value of the reporting unit’s goodwill with the carrying amount of that
goodwill. To the extent that the carrying amount of a reporting unit’s goodwill
exceeds its implied fair value, we recognize a goodwill impairment loss.
We
performed our annual impairment test in 2006 and we determined that goodwill
associated with one of our reporting units in the amount of $18.0 million
was
impaired. See Note 8 for additional information about this impairment
charge.
Other
intangible assets include covenants not to compete, permits and trade name
which
are being amortized on a straight-line basis over terms from two to fifteen
years.
Reclamation
Costs:
We
account for the costs related to legal obligations to reclaim aggregate mining
sites and other facilities in accordance with Statement of Financial Accounting
Standards No. 143, “Accounting for Asset Retirement Obligations” (“SFAS
143”). Accordingly, we record our estimated reclamation liability when
incurred, capitalize the estimated liability as part of the related asset’s
carrying amount and allocate it to expense over the asset’s useful life.
Warranties:
Many
of
our construction contracts contain warranty provisions covering defects in
equipment, materials, design or workmanship that generally run from six months
to one year after our customer accepts the project. Because of the nature
of our
projects, including contract owner inspections of the work both during
construction and prior to acceptance, we have not experienced material warranty
costs for these short-term warranties and therefore, do not believe an accrual
for these costs is necessary. Certain construction contracts carry longer
warranty periods, ranging from two to ten years for which we have accrued
an
estimate of warranty cost. The warranty cost is estimated based on our
experience with the type of work and any known risks relative to the project
and was not material at December 31, 2006 or December 31, 2005.
Accrued
Insurance Costs: We carry insurance policies to cover various risks,
primarily general liability and workers compensation, under which we are
liable
to reimburse the insurance company for a portion of each claim paid. The
amounts
that we are liable for generally range from the first $250,000 to $1.0 million
per occurrence. We accrue for the estimated ultimate liability for incurred
losses, both reported and unreported, using actuarial methods based on historic
trends modified, if necessary, by recent events.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Stock-Based
Compensation:
As more fully described in Note 12, we provide certain stock-based
compensation under our Amended and Restated 1999 Equity Incentive Plan
(the
“Plan”). Prior to January 1, 2006, we accounted for stock-based compensation
under Statement of Financial Accounting Standard No. 123. Effective January
1,
2006, we adopted FASB Statement No. 123 (revised 2004), “Share-Based Payment”
(“SFAS 123-R”) and Securities and Exchange Commission Staff Accounting Bulletin
No. 107 (“SAB 107”) using the modified prospective transition
method.
Income
Taxes:
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss
carry-forwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets
are
reduced by a valuation allowance when, in the opinion of management, it is
more
likely than not that some portion or all of the deferred tax assets will
not be
realized. Deferred tax assets and liabilities are adjusted for the effects
of
changes in tax laws and rates on the date of enactment.
Computation
of Earnings Per Share:
Basic
earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding,
excluding restricted common stock. Diluted earnings per share is computed
giving effect to all dilutive potential common shares that were outstanding
during the period. Dilutive potential common shares consist of the incremental
common shares issuable upon the exercise of stock options and upon the vesting
of restricted common stock.
Reclassifications:
Certain
financial statement items have been reclassified to conform to the current
year’s format. These reclassifications had no impact on previously reported net
income, financial position or cash flows.
Recent
Accounting Pronouncements: In
July
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement 109” (“FIN 48”). FIN 48 prescribes a comprehensive model for
recognizing, measuring, presenting and disclosing in the financial statements
tax positions taken or expected to be taken on a tax return, including a
decision whether to file or not to file in a particular jurisdiction. FIN
48 is
effective for fiscal years beginning after December 15, 2006. While we do
not
believe this will have a material effect, we have not yet completed our
evaluation of the impact of implementing FIN 48 on our consolidated
financial statements.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 108 (“SAB 108”). Due to diversity in practice among
registrants, SAB 108 expresses SEC staff views regarding the process by
which
misstatements in financial statements are evaluated. SAB 108 is effective
for
fiscal years ending after November 15, 2006 and its adoption did not have
an
effect on our financial position, results of operation or cash flows. However,
primarily in connection with our evaluation of SAB 108, we recorded
an adjustment of approximately $6.4 million during the fourth quarter 2006
which we determined was immaterial. The adjustment principally related
to a reduction of accrued insurance liabilities from periods prior to 2002,
the
majority of which reduced cost of revenue.
In
September 2006, the FASB issued Statement of Financial Accounting Standard
No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements, but does not change existing guidance as
to
whether or not an instrument is carried at fair value. SFAS 157 is effective
for
fiscal years beginning after November 15, 2007. We are currently evaluating
the impact of implementing SFAS 157 on our consolidated financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standard
No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS 159”). SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. Unrealized gains and
losses
on items for which the fair value option has been elected are reported
in
earnings. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. We are currently evaluating the impact of implementing
SFAS 159 on our consolidated financial statements.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2.
Change in Accounting Estimate
Our
gross
profit in the years ended December 31, 2006 and 2005 include the effects
of
significant changes in the estimates of the profitability of certain
of our
Heavy Construction Division (“HCD”) projects. The net effect of these estimate
changes decreased gross profit in each period. The following table
presents the changes in HCD accounting estimates for the years ended
December
31, 2006, 2005 and 2004 (dollars in millions):
|
Years
Ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Reduction
in gross profit from projects with downward estimate
changes
|
$
|
(175.0 | ) | $ | (62.0 | ) | $ | (51.0 | ) | |
|
Increase
in gross profit from projects with upward estimate changes
|
|
30.0
|
|
31.0
|
|
11.0
|
||||
|
Net
reduction in gross profit
|
$ |
(145.0
|
) | $ |
(31.0
|
) | $ |
(40.0
|
) | |
|
Number
of projects with significant downward estimate changes*
|
19
|
13
|
10
|
|||||||
|
Range
of reduction to gross profit from each project**
|
$ |
1.0
- 49.0
|
$ |
2.0
- 8.0
|
$ |
1.0
- 12.0
|
||||
|
Number
of projects with significant upward estimate changes*
|
9
|
4
|
3
|
|||||||
|
Range
of increase to gross profit from each project**
|
$ |
1.0
- 7.0
|
$ |
1.0
- 12.0
|
$ |
2.0
- 8.0
|
||||
|
*
Significant is defined as a change with a net gross margin impact
of $1.0 million or greater.
**
The reduction in gross profit from each project is net of any
increase in the respective periods. The increase in gross profit
from each project is net of any reduction in the respective
periods.
|
||||||||||
The
downward adjustments in estimated project profitability were made in response
to
unanticipated changes in project conditions occurring during the periods
when
recorded and were due to a variety of factors, including changes in productivity
and quantity estimates based on experience gained in the period, site conditions
that differed materially from our expectations, design issues on design/build
projects, issues related to subcontractors, costs associated with owner
directed scope changes and owner delays, changes in cost expectations in
response to market factors for labor and certain materials and liquidated
damages.
F-10
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
The
following table presents additional information about the nineteen projects
with
significant downward estimate changes in 2006 (dollars
in millions):
|
|
Number
of Projects
|
Total Contract
Value
|
2006
Gross Profit Reduction Impact
|
HCD
Backlog at December 31, 2006
|
Percent
of Total HCD Backlog at December 31, 2006
|
|||||||||||
|
Projects
either complete or greater than 90% complete with gross profit
impact less
than $20.0 million
|
9
|
$
|
556.0
|
$
|
18.0
|
$
|
13.0
|
0.9
|
||||||||
|
Projects
between 65% and 90% complete with gross profit impact less
than $20.0
million
|
6
|
787.0
|
69.0
|
164.0
|
11.3
|
|||||||||||
|
Projects
between 25% and 55% complete with gross profit impact less
than $20.0
million
|
2
|
123.0
|
13.0
|
71.0
|
4.9
|
|||||||||||
|
Highway
project in Oregon - 29% complete
|
1
|
130.0
|
22.0
|
83.0
|
5.7
|
|||||||||||
|
Highway
project in California - 87% complete
|
1
|
447.0
|
49.0
|
57.0
|
4.0
|
|||||||||||
|
Total
for projects with significant downward changes
|
19
|
$
|
2,043.0
|
$
|
171.0
|
$
|
388.0
|
26.8
|
||||||||
|
All
other projects with backlog greater than $5.0 million with
no significant
downward changes
|
13
|
|
$
|
1,042.00
|
71.9
|
|||||||||||
The
highway project in Oregon was awarded in 2005 and involves construction
of at
least eight new structures over creeks, rivers and a railroad and also
includes
construction of retaining walls, culverts and drainage improvements.
In our work
to date on this project we have encountered a number of issues, the
most
significant of which are related to the discovery of geotechnical issues
(landslide activity) in an unexpectedly high number of areas and a
significant
delay in being provided a necessary right-of-way. There is a significant
degree
of uncertainty associated with the geotechnical issues. This uncertainty
relates to difficulty in the identification of all areas of potential
landslide
activity and the associated design and cost impacts. We believe that
these
unexpected geotechnical issues represent a differing site condition
that is
compensable under our contract. However, the resolution of the amount
and timing
of any additional compensation is uncertain. We have forecasted the
cost to
complete this project using all of the information available to us
and the
project is currently forecasted at a loss of approximately
$20.0
million. It is reasonably possible that our cost estimate will increase
as more
information, especially concerning the geotechnical issues, becomes
available.
We also believe that we are entitled to and will receive additional
revenue for
any work that is out of the contract scope. However, we will not recognize
that
revenue in our forecast until we have a signed change order, which
could occur
after we recognize any additional costs associated with this issue.
The
highway project in California has been impacted by significant increased
costs
from lost productivity due to the accelerated schedule for completion of
the project as well as extended overhead and other costs related to scope
growth. We
are
pursuing additional compensation from the project owner for some of these
additional costs, but the amount and timing of any future recovery is highly
uncertain.
We
recorded minority interest related to these estimate changes of
approximately $24.0 million,
$3.4 million
and $2.9 million for years ended December 31, 2006, 2005 and
2004 respectively. Four of our joint venture projects are currently
forecasted at a loss and will require additional capital contributions from
our
minority partners if the forecasts do not improve. Our joint venture agreements
require that such capital contributions be made if needed. Based on our most
recent assessment of our partners’
financial condition, we currently believe that two of our partners do not
have
the ability to contribute all of the additional capital that will be needed
if
the project forecasts do not improve. During the fourth quarter of 2006,
we
received updated financial information that caused concerns about these
partners’ liquidity. Included in the net minority interest benefit for the
year ended December 31, 2006 is expense related to these potentially
uncollectible partner balances of approximately $9.4 million.
The
remaining minority interest balance related to these loss projects of $14.8
million at December 31, 2006 has been included in other long-term assets
in our
consolidated balance sheet.
When
there are contract forecast changes having the significance of those we
experienced in the year ended December 31, 2006, we undergo a process that
includes reviewing the nature of the changes to ensure that there are no
material amounts that should have been recorded in a prior period rather
than as
a change in estimate. In our review of the changes for 2006, we did
not identify any material amounts that should have been recorded in a prior
period.
F-11
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
We
believe we are entitled to additional compensation related to some of our
downward estimate changes and are actively pursuing these issues with the
contract owners, but the amount and timing of any future recovery is highly
uncertain. While we recognize the impact of estimated costs immediately
when
known, under our accounting policies we do not recognize revenue from contract
changes until we have a signed change order or executed claim settlement.
We
believe that our current estimates of the gross profit are achievable.
However,
it is possible that the actual cost to complete will vary from our current
estimate and any future estimate changes could be significant.
Additionally,
our gross profit in the year ended December 31, 2006 includes the effects
of
changes in the estimates of the profitability of certain of our Branch
Division
projects. The net impact of these estimate changes was an increase of
approximately $3.8
million
in gross profit due primarily to the settlement of outstanding issues on
two
projects with no associated cost, partially offset by additional estimated
costs
on several other projects. The net impact of these estimate changes for
2005
was
a decrease of approximately $2.5 million in gross profit due primarily
to
unanticipated costs related to quality issues in work originally performed
by a
subcontractor on one project and changes in site conditions from our original
expectations on a second project.
3.
Marketable Securities
The
carrying amounts of marketable securities were as follows at December 31,
2006
and 2005 (in thousands):
|
Held-to-Maturity
|
Available-for-Sale
|
Total
|
|||||||||||||||||
|
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
||||||||||||||
|
Securities
classified as current:
|
|||||||||||||||||||
|
U.S.
Government and agency obligations
|
$
|
34,529
|
$
|
6,540
|
$
|
-
|
$
|
-
|
$
|
34,529
|
$
|
6,540
|
|||||||
|
Commercial
paper
|
58,493
|
19,880
|
-
|
-
|
58,493
|
19,880
|
|||||||||||||
|
Municipal
bonds
|
15,037
|
16,094
|
-
|
-
|
15,037
|
16,094
|
|||||||||||||
|
Mutual
funds
|
-
|
- | 32,978 | 26,026 | 32,978 | 26,026 | |||||||||||||
|
Total
current marketable securities
|
108,059 |
42,514
|
32,978
|
26,026
|
141,037
|
68,540
|
|||||||||||||
|
Securities
classified as long-term:
|
|||||||||||||||||||
|
U.S.
Government and agency obligations
|
37,315
|
21,922
|
-
|
-
|
37,315
|
21,922
|
|||||||||||||
|
Municipal
bonds
|
11,633
|
11,038
|
-
|
-
|
11,633
|
11,038
|
|||||||||||||
|
Total
long-term marketable securities
|
48,948 |
32,960
|
-
|
-
|
48,948
|
32,960
|
|||||||||||||
|
Total
marketable securities
|
$ |
157,007
|
$ |
75,474
|
$ |
32,978
|
$ |
26,026
|
$ |
189,985
|
$ |
101,500
|
|||||||
Held-to-maturity
investments are carried at amortized cost, which approximates fair value.
Unrealized holding gains and losses for all debt securities were insignificant
for the years ended December 31, 2006 and 2005. We recognized unrealized
holding
gains of $1,710 ($1,029 after tax), $172 ($127 after tax) and $2,304
($1,399 after tax) related to our available-for-sale investment in mutual
funds
as a component of the other comprehensive income for the years ended December
31, 2006, 2005 and 2004, respectively. At December 31, 2006 and 2005, none
of
our investments in our mutual fund portfolio were in an unrealized loss
position.
At
December 31, 2006, scheduled maturities of held-to-maturity investments were
as
follows (in thousands):
|
Within
one year
|
$
|
108,059
|
||
|
After
one year through five years
|
48,948
|
|||
|
Total
|
$
|
157,007
|
F-12
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
For
the
years ended December 31, 2006 and 2005, changes in our marketable securities
were as follows (in thousands):
|
2006
|
2005
|
||||||||||||||||||
|
Held-to-Maturity
|
Available-for-Sale
|
Total
|
Held-to-Maturity
|
Available-for-Sale
|
Total
|
||||||||||||||
|
Purchases
|
$
|
228,626
|
$
|
5,242
|
$
|
233,868
|
$
|
90,110
|
$
|
6,767
|
$
|
96,877
|
|||||||
|
Maturities
and sales
|
(153,024
|
) |
-
|
(153,024
|
) |
(108,764
|
)
|
(3,211
|
)
|
(111,975
|
)
|
||||||||
|
Amortization
and other
|
5,931
|
-
|
5,931
|
361
|
|
-
|
361
|
|
|||||||||||
|
Unrealized
gains
|
-
|
1,710
|
1,710
|
-
|
172
|
172
|
|||||||||||||
|
Net
Change
|
$ |
81,533
|
$ |
6,952
|
$ |
88,485
|
$ |
(18,293
|
)
|
$ |
3,728
|
$ |
(14,565
|
)
|
|||||
4.
Accounts Receivable (in thousands)
|
|
|||||||
|
December
31,
|
2006
|
2005
|
|||||
|
Construction
contracts:
|
|||||||
|
Completed
and in progress
|
$
|
231,226
|
$
|
258,402
|
|||
|
Retentions
|
191,613
|
167,973
|
|||||
|
Total
construction contracts
|
422,839
|
426,375
|
|||||
|
Construction
material sales
|
47,082
|
43,232
|
|||||
|
Other
|
24,735
|
8,452
|
|||||
|
Total
gross accounts receivable
|
494,656
|
478,059
|
|||||
|
Less:
allowance for doubtful accounts
|
(2,427
|
) |
(1,606
|
) | |||
|
Total
net accounts receivable
|
$
|
492,229
|
$
|
476,453
|
|||
Accounts
receivable includes amounts billed and billable for public and private contracts
and do not bear interest. The balances billed but not paid by customers pursuant
to retainage provisions in construction contracts generally become due upon
completion of the contracts and acceptance by the owners. Retainage amounts
of
$191.6 million at December 31, 2006 are expected to be collected as follows:
$173.5 million in 2007, $14.1 million in 2008, $0.8 million in 2009, $0.6
million in 2010 and $2.6 million in 2011.
5.
Construction Joint Ventures
We
participate in various construction joint venture partnerships. Generally,
each construction joint venture is formed to accomplish a specific project
and
is jointly controlled by the joint venture partners. The joint venture
agreements typically provide that our interests in any profits and assets,
and
our respective share in any losses and liabilities that may result from the
performance of the contract is limited to our stated percentage interest
in the
project. Although the venture’s contract with the project owner typically
requires joint and several liability, our agreements with our joint venture
partners provide that each partner will assume and pay its full proportionate
share of any losses resulting from a project. We have no significant
commitments beyond completion of the contract.
We
have
determined that certain of these joint ventures are variable interest entities
as defined by FIN 46. Accordingly, we have consolidated those joint
ventures where we have determined that we are the primary beneficiary on
a
prospective basis beginning January 1, 2004. The joint ventures we
have consolidated are engaged in 13 active construction projects with total
contract values ranging from $14.6 million to $447.2 million. Our
proportionate share of the consolidated joint ventures ranges from 52.0%
to
79.0%.
Consistent
with Emerging Issues Task Force Issue 00-01, “Investor Balance Sheet and Income
Statement Display under the Equity Method for Investments in Certain
Partnerships and Other Ventures,” we account for our share of the operations of
construction joint ventures in which we have determined we are not the primary
beneficiary on a pro rata basis in the consolidated statements of income
and as
a single line item in the consolidated balance sheets. The joint ventures
in which we hold a significant interest but are not the primary beneficiary
are
engaged in 8 active construction projects with total contract values ranging
from $2.2 million to $347.9 million. Our proportionate share of equity in
these joint ventures ranges from 20% to 40%, the most significant of which
includes a 40% share and
a 20%
share, respectively, of two rapid transit projects in New
York.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
We
also participate in various “line item” joint venture agreements
under which each partner is responsible for performing certain discrete items
of
the total scope of contracted work. The revenue for these discrete items
is
defined in the contract with the project owner and each venture partner bears
the profitability risk associated with its own work. All partners in a line
item
joint venture are jointly and severally liable for the completion of the
total
project under the terms of the contract with the project owner. There is
not a
single set of books and records for a line item joint venture. Each partner
accounts for its items of work individually as it would for any self-performed
contract. We account for our portion of these contracts
as project revenues and costs in our accounting system and include
receivables and payables associated with our work in our consolidated financial
statements.
The
combined assets, liabilities and net assets of unconsolidated joint ventures
in
which we have determined we are not the primary beneficiary are as follows
(in
thousands):
|
|
|||||||
|
December
31,
|
2006
|
2005
|
|||||
|
Assets:
|
|||||||
|
Total
|
$
|
158,178
|
$
|
141,944
|
|||
|
Less
other partners’
interest
|
103,723
|
90,751
|
|||||
|
Company’s
interest
|
54,455
|
51,193
|
|||||
|
Liabilities:
|
|
||||||
|
Total
|
79,183
|
63,027
|
|||||
|
Less
other partners’
interest
|
56,640
|
39,242
|
|||||
|
Company’s
interest
|
22,543
|
23,785
|
|||||
|
Company’s
interest in net assets
|
$
|
31,912
|
$
|
27,408
|
|||
The
revenue and costs of revenue of unconsolidated joint ventures in which we
have
determined we are not the primary beneficiary are as follows (in thousands):
|
|
||||||||||
|
December
31,
|
2006
|
2005
|
2004
|
|||||||
|
Revenue:
|
||||||||||
|
Total
|
$
|
349,945
|
$
|
228,180
|
$
|
229,265
|
||||
|
Less
other partners’
interest
|
239,045
|
152,980
|
159,631
|
|||||||
|
Company’s
interest
|
110,900
|
75,200
|
69,634
|
|||||||
|
Cost
of revenue:
|
||||||||||
|
Total
|
281,622
|
213,176
|
211,715
|
|||||||
|
Less
other partners’
interest
|
192,802
|
144,022
|
147,599
|
|||||||
|
Company’s
interest
|
88,820
|
69,154
|
64,116
|
|||||||
|
Company’s
interest in gross profit
|
$
|
22,080
|
$
|
6,046
|
$
|
5,518
|
||||
6.
Real Estate Partnerships and Investment in Affiliates
We
participate in real estate partnerships. Generally, each partnership is
formed
to accomplish a specific real estate development project. We have determined
that certain of these partnerships are variable interest entities as defined
by
FIN 46. Accordingly, we have consolidated those partnerships where we have
determined that we are the primary beneficiary. At December 31, 2006, the
partnerships we have consolidated were engaged in development projects
with
total assets ranging from approximately $0.2 million to $23.3 million.
At
December 31, 2006, approximately $55.9 million was classified as real estate
held for sale on our consolidated balance sheet and of that balance
approximately $53.4 million was pledged as collateral for the obligations
of consolidated real estate partnerships. Our proportionate share of the
results
of these partnerships varies depending on the ultimate profitability of
the
partnerships.
F-14
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
We
account for our share of the operations of real estate partnerships in which
we
have determined we are not the primary beneficiary using the equity method.
Additionally we have other investments in affiliates that are accounted for
using the equity method. The most significant of these investments are a
50%
interest in a limited liability company which owns and operates an asphalt
terminal in Nevada, a 48% interest in a limited liability company which develops
land in Oregon, and a 42% interest in a limited partnership which
develops land in Texas. We have made advances to the asphalt terminal limited
liability company of which $5.5 million remained outstanding at December
31,
2006.
At
December 31, 2006, we held a minority interest in T.I.C. Holdings, Inc. (“TIC”)
which we account for under the cost method of accounting. In December 2004,
TIC repurchased 0.3 million shares of the TIC shares held by us for a cash
payment of $7.5 million. The transaction reduced our interest in TIC to
approximately 6% and resulted in a gain of $3.3 million, which was included
in
other income (expense) for the year ended December 31, 2004.
Our
investments in affiliates comprised (in thousands):
|
December
31,
|
2006
|
2005
|
|||||
|
Equity
method investments in affiliates
|
$
|
17,298
|
$
|
11,680
|
|||
|
Cost
method investment in TIC
|
4,173
|
4,175
|
|||||
|
Total
investments in affiliates
|
$
|
21,471
|
$
|
15,855
|
|||
The
following table provides summarized combined financial information on a combined
100% basis for our affiliates accounted for under the equity method (in
thousands):
|
December
31,
|
2006
|
2005
|
|||||
|
Balance
sheet data:
|
|
|
|||||
|
Current
assets
|
$ |
20,279
|
$ |
16,868
|
|||
|
Long-term
assets
|
107,562
|
94,371
|
|||||
|
Total
assets
|
127,841
|
111,239
|
|||||
|
Current
liabilities
|
17,433
|
5,827
|
|||||
|
Long-term
liabilities
|
73,208
|
73,846
|
|||||
|
Total
liabilities
|
90,641
|
79,673
|
|||||
|
Net
assets
|
$ |
37,200
|
$ |
31,566
|
|||
|
Company’s
interest in affiliates’ net assets
|
$ |
17,298
|
$ |
11,680
|
|||
|
|
||||||||||
|
Years
Ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Earnings
data:
|
||||||||||
|
Revenue
|
$
|
50,353
|
$
|
30,732
|
$
|
138,222
|
||||
|
Gross
profit
|
9,580
|
8,616
|
73,828
|
|||||||
|
Earnings
before taxes
|
3,158
|
2,170
|
60,301
|
|||||||
|
Net
income
|
3,158
|
2,170
|
60,301
|
|||||||
|
Company’s
interest in affiliates’ net income
|
2,157
|
1,497
|
6,162
|
|||||||
7.
Property and Equipment (in
thousands)
|
|
|||||||
|
December
31,
|
2006
|
2005
|
|||||
|
Land
|
$
|
56,797
|
$
|
54,782
|
|||
|
Quarry
property
|
112,654
|
104,662
|
|||||
|
Buildings
and leasehold improvements
|
72,975
|
77,788
|
|||||
|
Equipment
and vehicles
|
804,370
|
746,014
|
|||||
|
Office
furniture and equipment
|
26,006
|
21,047
|
|||||
|
Gross
property and equipment
|
1,072,802
|
1,004,293
|
|||||
|
Less
accumulated depreciation and depletion
|
642,836
|
607,182
|
|||||
|
Net
property and equipment
|
$
|
429,966
|
$
|
397,111
|
|||
F-15
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Depreciation
and depletion expense for the years ended December 31,
2006, 2005 and 2004 was $70.7 million, $65.1 million and $61.0 million,
respectively. We
have
recorded liabilities associated with our legally required obligations to
reclaim
owned and leased quarry property and related facilities in accordance with
SFAS
143. The following is a reconciliation of these asset retirement
obligations which are primarily included in other
long-term liabilities on our consolidated balance sheet (in
thousands):
|
|
|||||||
|
December
31,
|
2006
|
2005
|
|||||
|
Beginning
balance
|
$
|
11,901
|
$
|
11,496
|
|||
|
Liabilities
incurred and revisions to estimates
|
216
|
8
|
|||||
|
Liabilities
settled
|
(18
|
) |
(283
|
)
|
|||
|
Accretion
|
581
|
680
|
|||||
|
Ending
balance
|
$
|
12,680
|
$
|
11,901
|
|||
8.
Intangible Assets
The
following table indicates the allocation of goodwill by reportable segment
which
is included in other assets on our consolidated balance sheets (in
thousands):
|
December
31,
|
2006
|
2005
|
|||||
|
Goodwill
by segment:
|
|||||||
|
Heavy
Construction Division
|
$
|
-
|
$
|
18,011
|
|||
|
Branch
Division
|
9,900
|
9,900
|
|||||
|
Total
goodwill
|
$
|
9,900
|
$
|
27,911
|
|||
We
perform goodwill impairment tests in
accordance with Financial Accounting Standard No. 142, “Goodwill and Other
Intangible Assets” on an annual basis at the end of the fourth quarter
and more frequently when events and circumstances occur that indicate
a possible
impairment of goodwill. In determining whether there is an impairment
of
goodwill, we calculate the estimated fair value of the reporting unit
in which
the goodwill is recorded using a discounted future cash flow method.
We then
compare the resulting fair value to the net book value of the reporting
unit,
including goodwill (Step One). If the net book value of a reporting
unit exceeds
its fair value, we would measure the amount of the impairment loss
by comparing
the implied fair value of the reporting unit’s goodwill with the carrying amount
of that goodwill (Step Two). To the extent that the carrying amount
of a
reporting unit’s goodwill exceeds its implied fair value, we recognize a
goodwill impairment loss.
During
the fourth quarter of 2006, a goodwill impairment charge of $18.0 million
was recorded in the HCD segment associated with our New York based
Granite
Northeast (“GNE”) reporting unit. This impairment conclusion was reached due to
continuing losses at GNE, including significant unexpected losses in
the quarter
ended December 31, 2006 which have caused us to re-evaluate our strategy
in New
York. We continue to believe that the New York market will present
opportunities
for us to build profitable work. However, in order to return to profitability
we
believe it is necessary to reduce the number of ongoing GNE projects
so that we
can devote the resources necessary to successfully manage and execute
the work.
As a result, the revenue growth and gross profit margin assumptions
used in
estimating the fair value of the reporting unit for our annual impairment
test
changed and the resulting estimated fair value exceeded the book value
of the
reporting unit in step one of the test - indicating that the goodwill
was
impaired. We performed step two of the test to measure the amount of
the
impairment and determined that the goodwill was fully impaired. The
impairment
charge is presented as a separate line item in our Consolidated Statements
of
Income.
F-16
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
The
following other intangible assets are included in other assets on our
consolidated balance sheets (in thousands):
|
December
31, 2006
|
||||||||||
|
Gross
Value
|
Accumulated
Amortization
|
Net
Value
|
||||||||
|
Amortized
intangible assets:
|
|
|
|
|||||||
|
Covenants
not to compete
|
$
|
161
|
$
|
(109
|
)
|
$
|
52
|
|||
|
Permits
|
2,000
|
(761
|
)
|
1,239
|
||||||
|
Trade
names
|
1,425 |
(768
|
)
|
657
|
||||||
|
Other
|
603
|
(193
|
)
|
410
|
||||||
|
Total
amortized intangible assets
|
$
|
4,189
|
$
|
(1,831
|
)
|
$
|
2,358
|
|||
|
|
December
31, 2005
|
|||||||||
|
|
Gross
Value
|
Accumulated
Amortization
|
Net
Value
|
|||||||
|
Amortized
intangible assets:
|
||||||||||
|
Covenants
not to compete
|
$
|
439
|
$ |
(383
|
)
|
$ |
56
|
|||
|
Permits
|
2,000
|
(628
|
)
|
1,372
|
||||||
|
Trade
names
|
1,425
|
(565
|
)
|
860
|
||||||
|
Other
|
200
|
(198
|
)
|
2
|
||||||
|
Total
amortized intangible assets
|
$
|
4,064
|
$ |
(1,774
|
)
|
$ |
2,290
|
|||
Amortization
expense related to these intangible assets for the years ended December 31,
2006, 2005 and 2004 was $0.6 million, $0.7 million, and $0.9 million,
respectively. Amortization expense expected to be recorded in the future
is as
follows: $558,000 in 2007, $554,000 in 2008, $269,000 in 2009, $230,000 in
2010, $170,000 in 2011 and $577,000 thereafter.
9.
Accrued Expenses and Other Current Liabilities (in
thousands)
|
December
31,
|
2006
|
2005
|
|||||
|
Payroll
and related employee benefits
|
$
|
53,956
|
$
|
47,206
|
|||
|
Accrued
insurance
|
37,582
|
43,396
|
|||||
| Loss job reserves | 54,825 | 16,999 | |||||
|
Other
|
42,965
|
32,968
|
|||||
|
Total
|
$
|
189,328
|
$
|
140,569
|
|||
Loss
job reserves consist of the estimated
costs for the uncompleted portion of projects forecasted at a loss
(see Note 2).
10.
Long-Term Debt and Credit Arrangements (in
thousands)
|
December
31,
|
2006
|
2005
|
|||||
|
Senior
notes payable
|
$
|
85,000
|
$
|
100,000
|
|||
|
Bank
revolving line of credit
|
-
|
25,000
|
|||||
|
Mortgages
|
21,436
|
25,353
|
|||||
|
Other
notes payable
|
800 |
950
|
|||||
|
Total debt
|
107,236
|
151,303
|
|||||
|
Less
current maturities
|
28,660
|
26,888
|
|||||
|
Total long-term
debt
|
$
|
78,576
|
$
|
124,415
|
|||
The
aggregate minimum principal maturities of long-term debt for each of the
five
years following December 31, 2006 are as follows (in thousands): 2007 - $28,660;
2008 - $19,679; 2009 - $17,781; 2010 - $15,166; 2011 - $8,501; and beyond
2011 -
$17,449.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Senior
notes payable in the amount of $26.7 million are due to a group of institutional
holders. The notes are due in nine equal annual installments which began
in 2002 and bear interest at 6.54% per annum. Additional senior notes
payable in the amount of $58.3 million are due to a second group of
institutional holders. The notes are due in nine equal annual installments
which
began in 2005 and bear interest at 6.96% per annum. Based on the borrowing
rates
currently available to us for bank loans with similar terms and average
maturities, the fair value of the senior notes payable was approximately
$87.9
million
as of December 31, 2006 and $104.9 million as of December 31, 2005.
We
have a
$150.0 million bank revolving line of credit, which allows for unsecured
borrowings through June 24, 2010, with interest rate options. Interest on
outstanding borrowings under the revolving line of credit is at our choice
of
selected LIBOR rates plus a margin that is recalculated quarterly. The margin
was 0.60% at December 31, 2006. At December 31, 2006 we had no
amounts outstanding under this line of credit. We also have standby letters
of credit totaling $4.4 million that reduce the amount available under the
line of credit. The unused and available portion of this line of credit was
$145.6 million at December 31, 2006. Additionally, our Wilder subsidiary
has a
bank revolving line of credit of $10.0 million that expires in 2008, with
borrowings collateralized by certain of Wilder’s equipment, accounts receivable,
inventory and general intangibles. Outstanding borrowings under this line
are
charged interest at the bank’s prime rate (8.25% as of December 31, 2006) less
1.0%. There were no amounts outstanding at December 31, 2006.
Mortgages
consist of notes incurred in connection with the purchase of property
connected with our Granite Land Company subsidiary. These notes are
collateralized by the property purchased and bear interest at 6.50% to
9.75%
per
annum with principal and interest payable in installments through 2019. The
carrying amount of property pledged as collateral was approximately $56.4
million at December 31, 2006.
Restrictive
covenants under the terms or our debt agreements require the maintenance
of
certain levels of working capital and cash flow, financial ratios and the
maintenance of tangible net worth (as defined) of approximately $504.7 million.
We were in compliance with these covenants at December 31, 2006. Our Wilder
subsidiary has restrictive covenants (on a Wilder stand-alone basis) under
the
terms of its debt agreements that require the maintenance of certain ratios
of working capital, liabilities to net worth and tangible net worth and restrict
Wilder capital expenditures in excess of specified limits. Wilder was in
compliance with these covenants at December 31, 2006.
11.
Employee Benefit Plans
Employee
Stock Ownership Plan:
Our
Employee Stock Ownership Plan (“ESOP”) covers all employees not included in
collective bargaining agreements, except employees of our majority owned
subsidiary, Wilder, and of our consolidated construction joint
ventures.
As of
December 31, 2006, the ESOP owned 5,961,621 shares of our common stock.
Dividends on shares held by the ESOP are charged to retained earnings and
all
shares held by the ESOP are treated as outstanding in computing our earnings
per
share.
Contributions
to the ESOP have been discretionary and
comprised shares of our stock that were purchased on the market and immediately
contributed to the plan. Compensation cost is measured as the cost to purchase
the shares (market value on the date of purchase and contribution). Contribution
expense was
$2.0
million in each of the years ended December 31, 2006, 2005 and 2004. Effective
January 1, 2007, the ESOP was amended to effectively freeze the plan. Under
the
amended plan, no new participants will be added and no further contributions
will be made.
Profit
Sharing and 401k Plan:
The
plan is a defined contribution plan covering all employees not included in
collective bargaining agreements, except employees of our majority owned
subsidiary, Wilder, and our consolidated construction joint ventures. Each
employee can elect to have up to 15% of gross pay contributed to the 401k
plan
on a before-tax basis. The plan allows for company matching and additional
contributions at the discretion of the Board of Directors. Our
contributions to the Profit Sharing and 401k Plan for the years ended December
31, 2006, 2005 and 2004 were $8.1 million, $7.0 million and $6.2 million,
respectively. Included in the contributions were 401k matching contributions
of
$5.6 million, $4.9 million and $4.5 million, respectively. Additionally,
Wilder
provides a 401k plan covering all of its employees and a separate defined
contribution plan covering employees not covered by other plans. Wilder’s
contributions under these plans totaled approximately $2.6 million, $2.4
million
and $2.1 million in the years ended December 31, 2006, 2005 and 2004,
respectively.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Other:
Two of
our wholly owned subsidiaries, Granite Construction Company and Granite
Construction Northeast, Inc. (formerly Granite Halmar Construction Company,
Inc.) and our majority owned subsidiary, Wilder, also contribute to various
multi-employer pension plans on behalf of union employees. Under the Employee
Retirement Income Security Act, a contributor to a multi-employer plan is
liable, upon termination or withdrawal from a plan, for its proportionate
share
of a plan’s unfunded vested liability. We currently have no intention of
withdrawing from any of the multi-employer pension plans in which we
participate. Contributions to these plans for the years ended December 31,
2006,
2005 and 2004 were $25.3 million, $20.4 million and $20.5 million, respectively.
We also provide non-qualified deferred compensation plans to certain of our
highly compensated employees that provide the participants the opportunity
to
defer payment of certain compensation as defined in the plan and provides
for
matching of certain amounts deferred as part of a retirement plan excess
feature
of the plan.
12.
Stock-based Compensation
We
provide certain stock-based compensation under our Amended and Restated
1999
Equity Incentive Plan (the “Plan”). Prior to January 1, 2006, we accounted for
stock-based compensation under Statement of Financial Accounting Standard
No.
123. Effective January 1, 2006, we adopted FASB Statement No. 123 (revised
2004), “Share-Based Payment” (“SFAS 123-R”) and Securities and Exchange
Commission Staff Accounting Bulletin No. 107 (“SAB 107”) using the modified
prospective transition method.
The
primary change to our accounting for stock-based compensation as a result
of
this change in accounting principle is that forfeitures of restricted
stock are now estimated and accounted for at the time of grant and
updated based on actual forfeitures over the vesting period rather than
accounting for forfeitures as they occur. The cumulative effect of our
transition to SFAS 123-R, resulting from the change in accounting for
forfeitures, was not significant and therefore was recognized as an adjustment
to compensation cost, representing previously recognized compensation cost
on
restricted shares outstanding as of January 1, 2006 which we do not expect
to
vest. Additionally, prior to our adoption of SFAS 123-R, we presented all
tax
benefits for deductions resulting from our stock-based compensation as
operating
cash flows on our consolidated statements of cash flows. SFAS 123-R requires
the
benefits of tax deductions in excess of recognized compensation expense
(“Excess
Tax Benefits”) to be reported as a financing cash flow, rather than as an
operating cash flow. This requirement will reduce net operating cash flows
and
increase net financing cash flows in periods after adoption. Total cash
flow
will remain unchanged from what would have been reported under prior accounting
rules. Excess
tax benefits of $3.4 million, $1.7 million and $0.7
million were
recorded in the years ended December 31, 2006, 2005 and 2004,
respectively.
The
Plan
provides for the grant of restricted common stock, incentive and nonqualified
stock options, performance units and performance shares to employees and
awards
to members of our Board of Directors in the form of stock units or stock
options
(“Director Options”). A total of 4,250,000 shares of our common stock have been
reserved for issuance under the Plan of which approximately 2,333,100 remained
available as of December 31 2006.
Restricted
Stock: Restricted common stock is issued for
services to be rendered and may not be sold, transferred or pledged for such
period as determined by our compensation committee. Restricted stock
compensation cost is measured as the stock’s fair value based on the market
price at the date of grant. We recognize compensation cost only on restricted
shares that will ultimately vest. We estimate the number of shares that will
ultimately vest at each grant date based on our historical experience and
adjust
compensation cost and the carrying amount of unearned compensation based
on
changes in those estimates over time. Prior to our adoption of SFAS 123-R,
we
did not estimate forfeitures at the time of grant; rather, we recognized
the
effects of forfeitures in the period in which the forfeitures
occurred.
Restricted
stock compensation cost is recognized ratably over the shorter of the vesting
period (generally three to five years) or the period from grant date to the
first maturity date after the holder reaches age 62 and has completed certain
specified years of service, when all restricted shares become fully vested.
Vesting of restricted shares is not subject to any market or performance
conditions and
vesting provisions are at the discretion of the Compensation Committee of our
Board of Directors. An employee may not sell or otherwise transfer
unvested shares and, in the event that employment is terminated prior to the
end
of the vesting period, any unvested shares are surrendered to us. We have no
obligation to repurchase restricted stock.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
A
summary
of the changes in our restricted stock during the years ended December
31, 2006, 2005 and 2004 are as follows (shares in
thousands):
|
December
31,
|
2006
|
2005
|
2004
|
||||||||||||||||
|
|
Shares
|
Weighted-average
grant-date fair value per share
|
Shares
|
Weighted-average
grant-date fair value per share
|
Shares
|
Weighted-average
grant-date fair value per share
|
|||||||||||||
|
Restricted
shares outstanding, beginning balance
|
1,005
|
$ |
21.44
|
1,163
|
$ |
19.58
|
1,131
|
$ |
18.57
|
||||||||||
|
Restricted
shares granted
|
216
|
47.94
|
214
|
26.07
|
237
|
23.92
|
|||||||||||||
|
Restricted
shares vested
|
(331
|
) |
23.55
|
(343
|
) |
18.00
|
(147
|
) |
19.18
|
||||||||||
|
Restricted
shares forfeited
|
(13
|
) |
29.22
|
(29
|
) |
21.63
|
(58
|
) |
18.62
|
||||||||||
|
Restricted shares outstanding, ending balance
|
877
|
$ |
27.06
|
1,005
|
$ |
21.44
|
1,163
|
$ |
19.58
|
||||||||||
Compensation
cost related to restricted shares was approximately $7.6 million ($5.0
million
net of tax), $6.0 million ($4.2 million net of tax) and $6.0 million
($4.2
million net of tax) for the years ended December 31, 2006, 2005 and
2004, respectively. The grant date fair value of restricted shares vested
during the years ended December 31, 2006, 2005 and 2004 was
approximately $7.8 million, $6.2 million and $2.8 million, respectively.
As of
December 31, 2006 there was $12.0 million of unrecognized compensation
cost
related to restricted shares which will be recognized over a remaining
weighted-average period of 2.1 years. Prior to the adoption of SFAS 123-R,
unrecognized compensation cost related to restricted shares was included
in
unearned compensation on our condensed consolidated balance sheet. Upon
adoption
of SFAS 123R, we reclassified the unrecognized compensation cost, approximately
$10.2 million, to additional paid-in capital.
Options
and Stock Units:
To date
we have granted options and stock units only to members of our Board of
Directors, who are required to receive at least 50% of their director’s fees in
the form of a stock-based award in lieu of cash. Options granted to our Board
of
Directors are immediately exercisable and expire over varying terms not to
exceed 10 years. We estimate and record the fair value of each option grant
using the Black-Scholes option-pricing model. Each stock unit can be exchanged
for a share of our common stock, has no vesting requirement and is recorded
at
fair value using the market price of our common stock at the date of grant.
There were 44,000 options and 18,000 stock units outstanding at December
31,
2006. The number and financial impact of Director Options and units are
considered immaterial for further disclosure.
Wilder
Common Stock:
We
currently own approximately 75% of the outstanding common stock of Wilder
Construction Company. All of the remaining non-Granite held common shares
are
redeemable by the holders upon retirement, voluntary termination, death or
permanent disability. A portion of these shares are accounted for as stock-based
compensation and are carried at fair value which is equivalent to the current
redemption price. Changes in the redemption price are recorded as compensation
expense and were not significant in years ended December 31, 2006, 2005 or
2004.
Prior to our adoption of SFAS 123-R, the redemption value of these shares
was
included in minority interest. Upon adoption of SFAS 123-R, we reclassified
the
redemption value of these shares, approximately $8.6 million, to other long-term
liabilities.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
13.
Weighted Average Shares Outstanding
A
reconciliation of the weighted average shares outstanding used in calculating
basic and diluted net income per share in the accompanying Consolidated
Statements of Income is as follows (in thousands):
|
Years
Ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Weighted
average shares outstanding:
|
||||||||||
|
Weighted
average common stock outstanding
|
41,803
|
41,678
|
41,580
|
|||||||
|
Less:
weighted average non-vested restricted stock outstanding
|
929
|
1,064
|
1,190
|
|||||||
|
Total
basic weighted average shares outstanding
|
40,874
|
40,614
|
40,390
|
|||||||
|
Diluted
weighted average shares outstanding:
|
||||||||||
|
Basic
weighted average shares outstanding
|
40,874
|
40,614
|
40,390
|
|||||||
|
Effect
of dilutive securities:
|
||||||||||
|
Common
stock options and units
|
46
|
70
|
52
|
|||||||
|
Restricted
stock
|
551
|
565
|
589
|
|||||||
|
Total
weighted average shares outstanding assuming dilution
|
41,471
|
41,249
|
41,031
|
|||||||
Restricted
stock representing approximately 127,000 shares, 42,000 shares and 254,000
shares for the years ended December 31, 2006, 2005 and 2004, respectively,
have
been excluded from the calculation of diluted net income per share because
their
effects are anti-dilutive. We calculate dilutive shares on a quarterly
basis and average the quarterly amounts to determine the year-end
amount.
14.
Income Taxes
Provision
for income taxes (in thousands):
|
Years
Ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Federal:
|
||||||||||
|
Current
|
$
|
57,416
|
$
|
42,399
|
$
|
28,238
|
||||
|
Deferred
|
(26,444
|
) |
(7,682
|
)
|
(4,861
|
) | ||||
|
Total
federal
|
30,972
|
34,717
|
23,377
|
|||||||
|
State:
|
||||||||||
|
Current
|
10,724
|
7,853
|
6,107
|
|||||||
|
Deferred
|
(3,018
|
) |
(1,157
|
)
|
(1,007
|
) | ||||
|
Total
state
|
7,706
|
6,696
|
5,100
|
|||||||
|
Total provision
for income taxes
|
$
|
38,678
|
$
|
41,413
|
$
|
28,477
|
||||
Reconciliation
of statutory to effective tax rate:
|
Years
Ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Federal
statutory tax rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
||||
|
State
taxes, net of federal tax benefit
|
3.6
|
|
3.2
|
|
3.5
|
|
||||
|
Percentage
depletion deduction
|
(3.1
|
)
|
(2.8
|
)
|
(2.3
|
)
|
||||
|
Minority
interest in joint ventures
|
2.2
|
|
(4.1
|
)
|
(3.2
|
)
|
||||
|
Other
|
(3.5
|
)
|
(2.2
|
)
|
(3.0
|
)
|
||||
|
Effective
tax rate
|
34.2
|
%
|
29.1
|
%
|
30.0
|
%
|
||||
The
impact on the effective tax rate related to minority interest in consolidated
joint ventures is a result of the consolidation of construction joint ventures
as required by FIN 46 (see Note 5), which are not subject to income taxes on
a
stand-alone basis.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Deferred
tax assets and liabilities (in thousands):
|
December
31,
|
2006
|
2005
|
|||||
|
Deferred
tax assets:
|
|||||||
|
Accounts
receivable
|
$
|
3,333
|
$
|
1,625
|
|||
|
Inventory
|
4,390
|
3,680
|
|||||
|
Property
and equipment
|
-
|
373
|
|||||
|
Insurance
|
1,098
|
2,793
|
|||||
|
Deferred
compensation
|
10,833
|
4,537
|
|||||
|
Other
accrued liabilities
|
11,633
|
17,282
|
|||||
|
Contract
recognition
|
21,061
|
1,831
|
|||||
|
Net
operating loss carryforward
|
9,947
|
7,133
|
|||||
|
Valuation
allowance
|
(9,947
|
) |
(7,133
|
)
|
|||
|
Total
deferred tax assets
|
$ |
52,348
|
$ |
32,121
|
|||
|
Deferred
tax liabilities:
|
|||||||
|
Property
and equipment
|
$ |
35,300
|
$ |
44,962
|
|||
|
Unrealized
gain on marketable securities
|
1,675 | 994 | |||||
|
Other
|
921
|
494
|
|||||
|
Total
deferred tax liabilities
|
$
|
37,896
|
$
|
46,450
|
|||
The
deferred tax asset for other accrued liabilities relates to various items
including accrued vacation and accrued reclamation costs which are
deductible in future periods.
Our
deferred tax asset for net operating loss carryforward relates to state and
local tax carryforwards for our Granite Northeast subsidiary, which
expire between 2021 and 2026. We have provided a valuation allowance on these
assets because of uncertainty regarding their realizability due to recent
losses
and uncertainty regarding the impact of any future tax law changes. The increase
in the carryforward and associated valuation allowance for the years ended
December 31, 2006 and 2005 was a result of taxable losses generated by the
subsidiary in those years.
15.
Commitments, Contingencies and Guarantees
Leases:
Minimum
rental commitments and minimum royalty requirements under all noncancellable
operating leases, primarily quarry property, in effect at December 31, 2006
were
(in thousands):
|
Years
Ending December 31,
|
||||
|
2007
|
$
|
11,702
|
||
|
2008
|
3,850
|
|||
|
2009
|
3,244
|
|||
|
2010
|
2,739
|
|||
|
2011
|
2,790
|
|||
|
Later
years (through 2056)
|
18,382
|
|||
|
Total
|
$
|
42,707
|
||
Operating
lease rental expense was $14.6 million in 2006, $9.5 million in 2005 and $8.0
million in 2004.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Litigation:
Eldredge
A
$9.3
million judgment was entered in June 2005 against our wholly owned
subsidiary
Granite Construction Company (“GCCO”) by the District Court Clark County;
Nevada, in an action entitled Eldredge
vs. Las Vegas Valley Water District, GCCO, et al. The
civil
lawsuit was initially brought by a former employee of GCCO against
the Las Vegas
Water District in June 2000. The plaintiff subsequently filed an amended
complaint on June 10, 2003, bringing GCCO into the action and seeking
compensation in addition to the worker’s compensation payments the employee
previously accepted for injuries sustained when a trench collapsed.
The jury
issued a verdict finding against GCCO on two causes of action, assault
and
battery and intentional infliction of emotional distress. The judgment
awarded
damages for past and future lost wages, medical expenses and pain and
suffering.
After the verdict was issued, the plaintiff filed a motion seeking
monetary
sanctions against GCCO in the amount of $26.8 million (a multiple of
the jury
verdict) based on allegations that GCCO and/or its trial counsel improperly
withheld and/or attempted to influence testimony in respect to the
case.
Pursuant
to the parties written agreement to resolve this dispute, on January
11, 2007
the $9.3 million judgment was dismissed with prejudice making the judgment
against GCCO null and void and plaintiff’s motion seeking monetary sanctions
against GCCO in the amount of $26.8 million (a multiple of the jury
verdict)
deemed withdrawn with prejudice. During 2005,
we recorded a provision of $9.3 million for this dispute. The total
cost
incurred to resolve this matter by way of stipulated dismissal with
prejudice,
and inclusive of a dismissal with prejudice of the sanctions motion,
was $4.5
million. As a result, during the fourth quarter of 2006, we recorded
approximately $4.8 million as a partial reversal of the provision and
approximately $337,000 as a reversal of accrued
interest.
Silica
GCCO
is
one of approximately 100 to 300 defendants in ten active California Superior
Court lawsuits. Of the ten lawsuits, five were filed against GCCO in
2005 and
five were filed against GCCO in 2006, in Alameda County (Riley vs. A-1
Aggregates, et al.; Molina vs A-1 Aggregates, et al.; Dominguez vs. A-1
Aggregates, et al.; Cleveland vs. A. Teichert & Son.; Guido vs. A. Teichert
& Son, Inc.; Williams vs. A. Teichert & Son, Inc.; Horne vs. Teichert
& Son, Inc.; Harris vs. A-1 Aggregates, et al.; Kammer vs.A-1
Aggregates, et al.; and Solis vs. The 3M Company et al.). Each lawsuit was
brought by a single plaintiff who is seeking money damages by way of
various
causes of action, including strict product and market share liability,
and
alleges personal injuries caused by exposure to silica products and related
materials during the plaintiffs’ use or association with sand blasting or
grinding concrete. The plaintiff in each lawsuit has categorized the
defendants
as equipment defendants, respirator defendants, premises defendants and
sand
defendants. We have been identified as a sand defendant, meaning a party that
manufactured, supplied or distributed silica-containing products. Our
preliminary investigation revealed that we have not knowingly sold or
distributed abrasive silica sand for sandblasting, and therefore, we
believe the
probability of these lawsuits resulting in an incurrence of a material
liability
is remote. We have been dismissed from fourteen other similar lawsuits.
In
addition, we have been apprised of three complaints that are based on
similar
allegations of exposure to silica containing products being filed, but
not
served, against GCCO and more than 100 other defendants in California
Superior
Court.
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 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. The 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 as
represented by MnTC. There has been no formal administrative subpoena
issued,
nor has a civil complaint been filed in connection with the administrative
reviews or the investigation. The MnTC is fully cooperating with all
of
the agencies involved and will be provided an opportunity to informally
present its response to the initial determinations of
the
Agencies as well as the investigation of the USDOJ.
F-23
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Other
We
are a
party to a number of other legal proceedings arising in the normal course
of
business which, from time to time, includes 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 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 these proceedings,
individually and in the aggregate, will not have a material adverse effect
on
our financial position or overall trends in results of operations or
cash flows,
litigation is subject to inherent uncertainties. Were an unfavorable
ruling to
occur, there exists the possibility of a material adverse impact on the
results
of operations, cash flows and/or financial position for the period in
which the
ruling occurs. While any one of our pending legal proceedings is subject
to
early resolution as a result of our ongoing efforts to settle, whether
or when
any legal proceeding will resolve through settlement is neither predictable
nor
guaranteed.
Guarantees:
As discussed in Note 5, we participate in various construction joint
venture partnerships. All partners in these joint ventures are jointly
and severally liable for completion of the total project under the terms of
the
contract with the project owner. Although
our agreements with our joint venture partners provide that each party will
assume and pay its share of any losses resulting from a project, if one of
our
partners was unable to pay its share we would be fully liable under our contract
with the project owner. Circumstances that could lead to a loss under these
guarantee arrangements include a partner’s inability to contribute additional
funds to the venture in the event that the project incurred a loss or additional
costs that we could incur should the partner fail to provide the services and
resources toward project completion that had been committed to in the joint
venture agreement. At December 31, 2006, approximately $447.0 million of work
representing either our partners’ proportionate share of unconsolidated
construction joint ventures or work that our partners are directly responsible
for in line item joint ventures, had yet to be completed. During 2006, we
recorded approximately $9.4 million in additional minority interest cost related
to our assessment that our partners in two construction joint venture projects
would be unable to pay their full share of the projects’ projected losses. Prior
to 2006, we had never incurred a loss under these joint and several liability
provisions, however, it is possible that we could record additional losses
in
the future and such losses could be significant.
Wilder
Common Stock: We currently own approximately 75% of the Wilder common
shares. All
of the
remaining non-Granite held common shares are redeemable by the holders upon
retirement, voluntary termination, death or permanent disability. Approximately
52%
of
these non-Granite shares are held by Wilder founders or non-employees and are
accounted for under Statement of Financial Accounting Standards No. 150
“Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity” and related pronouncements, and accordingly, the
redemption value of these shares is included in other long-term liabilities.
The
remaining 48% are
accounted for as stock-based compensation. Prior to our adoption of SFAS 123-R,
the redemption value of these shares was included in minority interest. Upon
adoption of SFAS 123-R, we reclassified the redemption value of these shares,
approximately $8.6 million, to other long-term liabilities. Wilder generally
has
up to eight years to pay the redemption price following a redemption event,
as
defined in its shareholder agreements, and the redemption price is adjusted
each
year, primarily for the Wilder net income attributable to the shares. If all
of
these Wilder shares had been redeemed at the December 31, 2006 redemption price,
a payment of $19.7 million would have been required.
16.
Business Segment Information
We
have
two reportable segments: the Branch Division and HCD. The Branch Division
is comprised of branch offices, including our majority owned subsidiary, Wilder
Construction Company, that serve local markets, while HCD pursues major
infrastructure projects throughout the nation. HCD focuses on building larger
heavy civil projects with contract durations that are frequently greater than
two years, while the Branch Division projects are typically smaller in size
and
shorter in duration. HCD has been the primary participant in our construction
joint ventures. Substantially all of our revenue from the sales of materials
is
from the Branch Division. On
February 14, 2007 we announced an organizational realignment of our business
operations which will involve reorganizing our operating divisions
geographically into “Granite West” and “Granite East” and is expected to take
approximately twelve months to complete. Upon completion of this reorganization,
the composition of our reportable segments will likely
change.
The
accounting policies of the segments are the same as those described in the
Summary of Significant Accounting Policies (see Note 1). We evaluate performance
based on operating profit or loss (excluding gain on sales of property and
equipment), and do not include income taxes, interest income, interest expense
or other income (expense). Unallocated other corporate expenses principally
comprise corporate general and administrative expenses.
F-24
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Branch
Division operating income for the year ended December 31, 2005 includes a $9.3
million provision for a legal judgment and a $4.8 million partial reversal
of
this provision in the year ended December 31, 2006 (see Note 15).
HCD
operating loss for the year ended December 31, 2006 includes a goodwill
impairment charge of $18.0 million (see Note 8).
During
the year ended December 31, 2006, we also recorded revenue and operating income
of $35.0 million and $17.9 million, respectively, primarily related to sales
of
certain real estate development assets by our Granite Land Company that are
not
included in either Branch Division or HCD. This compares to revenue of $19.7
million and operating income of $9.8 million for the year ended December 31,
2005 and no revenue and $1.7 million of operating loss for the year ended
December 31, 2004. Of the $17.9 million and $9.8 million of operating income
in
Granite Land Company for the years ended December 31, 2006 and 2005,
respectively, our partners’
share was approximately $7.7 million and $6.0 million,
respectively.
Summarized
segment information (in thousands):
| Years Ended December 31, |
HCD
|
Branch
|
Total
|
|||||||
|
2006
|
||||||||||
|
Revenues
from external customers
|
$
|
1,122,418
|
$
|
1,812,195
|
$
|
2,934,613
|
||||
|
Intersegment
revenue transfer
|
(36,530
|
) |
36,530
|
-
|
||||||
|
Net
revenue
|
1,085,888
|
1,848,725
|
2,934,613
|
|||||||
|
Depreciation,
depletion and amortization
|
14,545
|
51,222
|
65,767
|
|||||||
|
Operating
(loss) income
|
(137,343
|
) | 264,508 |
127,165
|
||||||
|
Property
and equipment
|
44,743
|
360,989
|
405,732
|
|||||||
|
2005
|
||||||||||
|
Revenues
from external customers
|
$
|
1,061,441
|
$
|
1,560,213
|
$
|
2,621,654
|
||||
|
Intersegment
revenue transfer
|
(31,332
|
)
|
31,332
|
-
|
||||||
|
Net
revenue
|
1,030,109
|
1,591,545
|
2,621,654
|
|||||||
|
Depreciation,
depletion and amortization
|
15,372
|
44,651
|
60,023
|
|||||||
|
Operating
income
|
12,472
|
153,675
|
166,147
|
|||||||
|
Property
and equipment
|
48,862
|
314,746
|
363,608
|
|||||||
|
2004
|
||||||||||
|
Revenues
from external customers
|
$
|
872,812
|
$
|
1,263,400
|
$
|
2,136,212
|
||||
|
Intersegment
revenue transfer
|
(24,215
|
)
|
24,215
|
-
|
||||||
|
Net
revenue
|
848,597
|
1,287,615
|
2,136,212
|
|||||||
|
Depreciation,
depletion and amortization
|
14,386
|
42,581
|
56,967
|
|||||||
|
Operating
income
|
8,957
|
106,016
|
114,973
|
|||||||
Reconciliation
of segment operating income to consolidated totals (in
thousands):
|
Years
ended December 31,
|
2006
|
2005
|
2004
|
|||||||
|
Total
operating income for reportable segments
|
$
|
127,165
|
$
|
166,147
|
$
|
114,973
|
||||
|
Other
income
|
24,381
|
7,396
|
11,372
|
|||||||
|
Gain
on sales of property and equipment
|
10,408
|
8,235
|
18,566
|
|||||||
| Unallocated other corporate expenses | (63,864 | ) | (48,894 | ) | (48,297 | ) | ||||
|
Granite
Land Company operating income (loss) excluding gain on sales of property
and equipment
|
14,927 | 9,427 | (1,690 | ) | ||||||
|
Income
before provision for income taxes and minority interest
|
$
|
113,017
|
$
|
142,311
|
$
|
94,924
|
||||
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Reconciliation
of segment assets to consolidated totals (in thousands):
|
|
|
|
|||||
|
December
31,
|
2006
|
2005
|
|||||
|
Total property
and equipment for reportable segments
|
$
|
405,732
|
$
|
363,608
|
|||
|
Assets
not allocated to segments:
|
|
|
|||||
|
Cash
and cash equivalents
|
204,893
|
199,881
|
|||||
|
Marketable
securities
|
189,985
|
101,500
|
|||||
|
Deferred
income taxes
|
36,776
|
22,996
|
|||||
|
Other
current assets
|
700,499
|
685,531
|
|||||
|
Property
and equipment
|
24,234
|
33,503
|
|||||
|
Other
assets
|
70,719
|
65,211
|
|||||
|
Consolidated
total assets
|
$
|
1,632,838
|
$
|
1,472,230
|
|||
17.
Sale of Assets
In
March
2004, we sold certain assets related to our ready-mix concrete business
in Utah
for cash of $10.0 million and promissory notes with an estimated fair
value of
$8.9 million which are payable in installments through 2010, the first
two of
which have been paid. The sale transaction resulted in the recognition
of a gain
of approximately $10.0 million, which was included in gain on sales of
property
and equipment for the year ended December 31, 2004.
F-26
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of
1934, the Registrant has duly caused this report to be signed
on its behalf by
the undersigned, thereunto duly authorized.
GRANITE
CONSTRUCTION
INCORPORATED
By: /s/
William E.
Barton
William
E. Barton,
Senior Vice President and
Chief
Financial
Officer
Date:
February 26, 2007
Pursuant
to the requirements of the Securities Exchange Act of 1934,
this report has been
signed below on February 26, 2007, by the following persons in the
capacities indicated.
|
/s/
William G.
Dorey
|
|
William
G. Dorey, President, Chief Executive Officer
and
Director
|
|
/s/
William E.
Barton
|
|
William
E. Barton, Senior Vice President and Chief Financial
Officer, Principal
Accounting and Financial Officer
|
|
/s/
David H.
Watts
|
|
David
H. Watts, Chairman of the Board and Director
|
|
/s/
Claes G.
Bjork
|
|
Claes
G. Bjork, Director
|
|
/s/
James W.
Bradford
|
|
James
W. Bradford, Director
|
|
/s/
Gary M.
Cusumano
|
|
Gary
M. Cusumano, Director
|
|
/s/
Linda
Griego
|
|
Linda
Griego, Director
|
|
/s/
David H.
Kelsey
|
|
David
H. Kelsey, Director
|
|
/s/
Rebecca A.
McDonald
|
|
Rebecca
A. McDonald, Director
|
|
/s/
J. Fernando
Niebla
|
|
J.
Fernando Niebla, Director
|
|
/s/
William H.
Powell
|
|
William
H. Powell, Director
|
SCHEDULE
II
GRANITE
CONSTRUCTION INCORPORATED
SCHEDULE
OF VALUATION AND QUALIFYING ACCOUNTS
(in
thousands)
|
Description
|
Balance
at Beginning of Year
|
Charged to
Expense
|
Deductions
|
Balance
at End of Year
|
|||||||||
|
YEAR
ENDED DECEMBER 31, 2006
|
|||||||||||||
|
Allowance
for long-term receivable
|
$ | 3,500 | $ |
-
|
$ | - | $ | 3,500 | |||||
|
YEAR
ENDED DECEMBER 31, 2005
|
|||||||||||||
|
Allowance
for long-term receivable
|
$ | - | $ | 3,500 | $ | - | $ | 3,500 | |||||
|
YEAR
ENDED DECEMBER 31, 2004
|
|||||||||||||
|
Allowance
for long-term receivable
|
$ | - | $ | - | $ | - | $ | - | |||||
|
S-1
|
|||||||||||||
INDEX
TO 10-K EXHIBITS
|
Exhibit
No.
|
|
Exhibit
Description
|
|
|
|
|
|
3.1
|
*
|
Certificate
of Incorporation of Granite Construction Incorporated [Registration
Statement on Form S-1, File No. 33-33795]
|
|
3.1.a
|
*
|
Amendment
to the Certificate of Incorporation of Granite Construction Incorporated
[Exhibit 3.1.a to 10-K for year ended December 31, 1998]
|
|
3.1.b
|
*
|
Amendment
to Certificate of Incorporation of Granite Construction Incorporated
[Exhibit 3.1.b to 10-K for year ended December 31, 2000]
|
|
3.1.c
|
*
|
Certificate
of Correction of Certificate of Incorporation of Granite Construction
Incorporated effective January 31, 2001 [Exhibit 3.1.c to 10-K
for year
ended December 31, 2000]
|
|
3.1.d
|
*
|
Certificate
of Correction of Certificate of Incorporation of Granite Construction
Incorporated filed May 22, 1998, effective January 31, 2001 [Exhibit
3.1.d
to 10-K for year ended December 31, 2000]
|
|
3.1.e
|
*
|
Certificate
of Correction of Certificate of Incorporation of Granite Construction
Incorporated filed May 23, 2000, effective January 31, 2001 [Exhibit
3.1.e
to 10-K for year ended December 31, 2000]
|
|
3.1.f
|
*
|
Amendment
to the Certificate of Incorporation of Granite Construction Incorporated
effective May 25, 2001 [Exhibit 3.1 to 10-Q for quarter ended June
30,
2001]
|
|
3.1.g
|
*
|
Certificate
of Incorporation of Granite Construction Incorporated as Amended
effective
May 25, 2001 [Exhibit 3.1.a to 10-Q for quarter ended June 30,
2001]
|
|
3.1.h
|
*
|
Certificate
of Amendment to Granite’s Certificate of Incorporation, filed with the
Delaware Secretary of State on May 25, 2006 [Exhibit 3.1.a to 10-Q
for
quarter ended June 30, 2006]
|
|
3.2.a
|
*
|
Bylaws
of Granite Construction Incorporated, as amended and restated effective
February 27, 1991 [Exhibit 3.2 to 10-K for year ended December
31,
1991]
|
|
3.2.b
|
*
|
Bylaws
of Granite Construction Incorporated, as amended effective March
23, 2006
[Exhibit 3.2 to 8-K filed March 29, 2006]
|
|
10.1
|
*
**
|
Amendment
to and Restatement of the Granite Construction Incorporated Key
Management
Deferred Compensation Plan adopted and effective January 1, 1998
[Exhibit
10.8 to 10-K for year ended December 31, 1998]
|
|
10.1.a
|
*
**
|
Amendment
1 to Granite Construction Incorporated Key Management Deferred
Compensation Plan dated April 23, 1999 [Exhibit 10.6.a to 10-K
for year
ended December 31, 1999]
|
|
10.1.b
|
*
**
|
Amendment
2 to Granite Construction Incorporated Key Management Deferred
Compensation Plan dated March 24, 2003 [Exhibit 10.1 to 10-Q for
quarter
ended March 31, 2003]
|
|
10.1.c
|
*
**
|
Amendment
3 to Granite Construction Incorporated Key Management Deferred
Compensation Plan dated December 12, 2005 [Exhibit 10.1.c to 10-K
for year
ended December 31, 2005]
|
|
10.2
|
*
**
|
Amendment
to and Restatement of the Granite Construction Incorporated Key
Management
Deferred Incentive Compensation Plan adopted and effective January
1, 1998
[Exhibit 10.9 to 10-K for year ended December 31, 1998]
|
|
10.2.a
|
*
**
|
Amendment
1 to Granite Construction Incorporated Key Management Deferred
Incentive
Compensation Plan dated April 23, 1999 [Exhibit 10.7.a to 10-K
for year
ended December 31, 1999]
|
|
10.2.b
|
*
**
|
Amendment
2 to Granite Construction Incorporated Key Management Deferred
Incentive
Compensation Plan dated November 1, 2001 [Exhibit 10.9.b to 10-K
for year
ended December 31, 2001]
|
|
10.2.c
|
*
**
|
Amendment
3 to Granite Construction Incorporated Key Management Deferred
Incentive
Compensation Plan dated December 12, 2005 [Exhibit 10.2.c to 10-K
for year
ended December 31, 2005]
|
|
10.3
|
*
**
|
Granite
Construction Incorporated Amended and Restated 1999 Equity Incentive
Plan
as amended effective January 1, 2005 [Exhibit 10.1 to 8-K filed
March 29,
2006]
|
|
10.4
|
*
|
Credit
Agreement dated as of June 24, 2005 [Exhibit 10.1 to 10-Q for quarter
ended June 30, 2005]
|
|
10.4.a
|
*
|
Amendment
No. 1 to the June 24, 2005 Credit Agreement dated as of June 23,
2006
[Exhibit 10.1 to 10-Q for quarter ended June 30, 2006]
|
|
10.5
|
*
|
Guaranty
Agreement dated as of June 24, 2005 from the Subsidiaries of Granite
Construction Incorporated as Guarantors of financial accommodations
pursuant to the terms of the Credit Agreement dated June 24, 2005
[Exhibit
10.2 to 10-Q for quarter ended June 30, 2005]
|
|
10.6
|
*
|
Note
Purchase Agreement between Granite Construction Incorporated and
certain
purchasers dated May 1, 2001 [Exhibit 10.3 to 10-Q for quarter
ended June
30, 2001]
|
|
10.6.a
|
*
|
First
Amendment to Note Purchase Agreement between Granite Construction
Incorporated and certain purchasers dated June 15, 2003 [Exhibit
10.4 to
10-Q for quarter ended June 30, 2003]
|
|
10.7
|
*
|
Subsidiary
Guaranty Agreement from the Subsidiaries of Granite Construction
Incorporated as Guarantors of the Guaranty of Notes and Note Agreement
and
the Guaranty of Payment and Performance dated May 1, 2001 [Exhibit
10.4 to
10-Q for quarter ended June 30, 2001]
|
|
10.8
|
*
|
Amendment
to and Restated Note Purchase Agreement between Granite Construction
Incorporated and certain purchasers dated November 1, 2001 [Exhibit
10.12
to 10-K for year ended December 31, 2001]
|
|
10.8.a
|
*
|
First
Amendment to Amended and Restated Note Purchase Agreement between
Granite
Construction Incorporated and certain purchasers dated June 15,
2003
[Exhibit 10.3 to 10-Q for quarter ended June 30, 2003]
|
|
10.9
|
*
|
Subsidiary
Guaranty Supplement from the Subsidiaries of Granite Construction
Incorporated as Guarantors of the Guaranty of Notes and Note Agreement
and
the Guaranty of Payment and Performance dated November 15, 2001
[Exhibit
10.13.a to 10-K for year ended December 31, 2001]
|
|
10.10
|
*
|
International
Swap Dealers Association, Inc. Master Agreement between BNP Paribas
and
Granite Construction Incorporated dated as of February 10, 2003
[Exhibit
10.5 to 10-Q for quarter ended June 30, 2003]
|
|
10.11
|
*
**
|
Form
of Amended and Restated Director and Officer Indemnification Agreement
[Exhibit 10.10 to 10-K for year ended December 31, 2002]
|
|
10.12
|
*
|
Employment
Agreement for William G. Dorey, dated April 20, 1990 [Exhibit 10.14
to
10-K/A for year ended December 31, 2004, filed May 18, 2005]
|
|
10.12.a
|
*
|
Assignment
and Amendment to Employment Agreement for William G. Dorey, dated
February
1, 1997 [Exhibit 10.14.a to 10-K/A for year ended December 31,
2004, filed
May 12, 2005]
|
|
10.13
|
*
|
Employment
Agreement for Mark E. Boitano, dated April 20, 1990 [Exhibit 10.15
to
10-K/A for year ended December 31, 2004, filed May 18, 2005]
|
|
10.13.a
|
*
|
Assignment
and Amendment to Employment Agreement for Mark E. Boitano, dated
February
1, 1997 [Exhibit 10.15.a to 10-K/A for year ended December 31,
2004, filed
May 12, 2005]
|
|
10.14
|
*
|
Employment
Agreement for William E. Barton, dated April 20, 1990 [Exhibit
10.16 to
10-K/A for year ended December 31, 2004, filed May 12, 2005]
|
|
10.14.a
|
*
|
Assignment
and Amendment to Employment Agreement for William E. Barton, dated
February 1, 1997 [Exhibit 10.16.a to 10-K/A for year ended December
31,
2004, filed May 12, 2005]
|
|
10.15
|
*
|
Employment
Agreement for James H. Roberts, dated March 18, 1999 [Exhibit 10.18
to
10-K/A for year ended December 31, 2004, filed May 12, 2005]
|
|
10.16
|
*
|
Employment
Agreement for Michael F. Donnino, dated January 22, 2004 [Exhibit
10.20 to
10-K for year ended December 31, 2005, filed March 2, 2006]
|
|
21
|
*
|
List
of Subsidiaries of Granite Construction Incorporated [Exhibit 21
to 10-K
for year ended December 31, 2005, filed March 2, 2006]
|
|
|
||
|
|
||
|
|
||
|
|
* Incorporated
by reference
** Compensatory
plan or management contract
† Filed
herewith
†† Furnished
herewith