UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2014 | |
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
State of Incorporation: | I.R.S. Employer Identification Number: |
Delaware | 77-0239383 |
Address of principal executive offices:
585 W. Beach Street
Watsonville, California 95076
(831) 724-1011
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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. xYes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). xYes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of April 23, 2014.
Class | Outstanding | |
Common Stock, $0.01 par value | 39,101,185 | |
Index
EXHIBIT 101.INS | ||
EXHIBIT 101.SCH | ||
EXHIBIT 101.CAL | ||
EXHIBIT 101.DEF | ||
EXHIBIT 101.LAB | ||
EXHIBIT 101.PRE | ||
2
PART I. FINANCIAL INFORMATION
Item 1. | FINANCIAL STATEMENTS |
GRANITE CONSTRUCTION INCORPORATED | ||||||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||||||
(Unaudited - in thousands, except share and per share data) | ||||||||||||
March 31, 2014 | December 31, 2013 | March 31, 2013 | ||||||||||
ASSETS | ||||||||||||
Current assets | ||||||||||||
Cash and cash equivalents ($27,612, $38,800 and $98,738 related to consolidated construction joint ventures (“CCJVs”)) | $ | 205,780 | $ | 229,121 | $ | 260,773 | ||||||
Short-term marketable securities | 41,143 | 49,968 | 44,841 | |||||||||
Receivables, net ($39,014, $38,372 and $47,040 related to CCJVs) | 245,281 | 313,598 | 260,231 | |||||||||
Costs and estimated earnings in excess of billings | 53,311 | 33,306 | 48,428 | |||||||||
Inventories | 77,407 | 62,474 | 66,291 | |||||||||
Real estate held for development and sale | 11,742 | 12,478 | 50,303 | |||||||||
Deferred income taxes | 55,874 | 55,874 | 36,687 | |||||||||
Equity in construction joint ventures | 168,045 | 162,673 | 171,265 | |||||||||
Other current assets | 40,142 | 30,711 | 37,401 | |||||||||
Total current assets | 898,725 | 950,203 | 976,220 | |||||||||
Property and equipment, net ($19,801, $22,216 and $39,486 related to CCJVs) | 432,398 | 436,859 | 477,666 | |||||||||
Long-term marketable securities | 65,969 | 67,234 | 57,958 | |||||||||
Investments in affiliates | 33,336 | 32,480 | 30,742 | |||||||||
Goodwill | 53,799 | 53,799 | 53,593 | |||||||||
Other noncurrent assets | 76,944 | 76,580 | 82,531 | |||||||||
Total assets | $ | 1,561,171 | $ | 1,617,155 | $ | 1,678,710 | ||||||
LIABILITIES AND EQUITY | ||||||||||||
Current liabilities | ||||||||||||
Current maturities of long-term debt | $ | 21 | $ | 21 | $ | 8,353 | ||||||
Current maturities of non-recourse debt | 1,226 | 1,226 | 4,132 | |||||||||
Accounts payable ($22,136, $16,937 and $26,354 related to CCJVs) | 141,241 | 160,706 | 169,940 | |||||||||
Billings in excess of costs and estimated earnings ($43,087, $60,185 and $71,821 related to CCJVs) | 125,618 | 138,375 | 124,609 | |||||||||
Accrued expenses and other current liabilities ($7,074, $11,299 and $8,983 related to CCJVs) | 193,307 | 197,242 | 188,685 | |||||||||
Total current liabilities | 461,413 | 497,570 | 495,719 | |||||||||
Long-term debt | 270,127 | 270,127 | 270,148 | |||||||||
Long-term non-recourse debt | 6,435 | 6,741 | 7,628 | |||||||||
Other long-term liabilities | 48,662 | 48,580 | 49,231 | |||||||||
Deferred income taxes | 9,803 | 7,793 | 8,055 | |||||||||
Commitments and contingencies | ||||||||||||
Equity | ||||||||||||
Preferred stock, $0.01 par value, authorized 3,000,000 shares, none outstanding | — | — | — | |||||||||
Common stock, $0.01 par value, authorized 150,000,000 shares; issued and outstanding 39,098,549 shares as of March 31, 2014, 38,917,728 shares as of December 31, 2013 and 38,810,255 shares as of March 31, 2013 | 391 | 389 | 388 | |||||||||
Additional paid-in capital | 126,937 | 126,449 | 118,265 | |||||||||
Retained earnings | 629,443 | 655,102 | 685,023 | |||||||||
Total Granite Construction Incorporated shareholders’ equity | 756,771 | 781,940 | 803,676 | |||||||||
Non-controlling interests | 7,960 | 4,404 | 44,253 | |||||||||
Total equity | 764,731 | 786,344 | 847,929 | |||||||||
Total liabilities and equity | $ | 1,561,171 | $ | 1,617,155 | $ | 1,678,710 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
GRANITE CONSTRUCTION INCORPORATED | |||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||||
(Unaudited - in thousands, except per share data) | |||||||||
Three Months Ended March 31, | 2014 | 2013 | |||||||
Revenue | |||||||||
Construction | $ | 157,040 | $ | 177,119 | |||||
Large Project Construction | 187,336 | 171,714 | |||||||
Construction Materials | 35,449 | 29,750 | |||||||
Real Estate | 22 | 121 | |||||||
Total revenue | 379,847 | 378,704 | |||||||
Cost of revenue | |||||||||
Construction | 147,896 | 163,918 | |||||||
Large Project Construction | 171,543 | 148,993 | |||||||
Construction Materials | 39,000 | 35,724 | |||||||
Real Estate | — | 11 | |||||||
Total cost of revenue | 358,439 | 348,646 | |||||||
Gross profit | 21,408 | 30,058 | |||||||
Selling, general and administrative expenses | 49,247 | 57,161 | |||||||
Gain on sales of property and equipment | 894 | 1,087 | |||||||
Operating loss | (26,945 | ) | (26,016 | ) | |||||
Other income (expense) | |||||||||
Interest income | 479 | 129 | |||||||
Interest expense | (3,599 | ) | (3,646 | ) | |||||
Equity in income (loss) of affiliates | 791 | (423 | ) | ||||||
Other (expense) income, net | (51 | ) | 1,103 | ||||||
Total other expense | (2,380 | ) | (2,837 | ) | |||||
Loss before benefit from income taxes | (29,325 | ) | (28,853 | ) | |||||
Benefit from income taxes | (8,064 | ) | (9,027 | ) | |||||
Net loss | (21,261 | ) | (19,826 | ) | |||||
Amount attributable to non-controlling interests | 708 | (2,156 | ) | ||||||
Net loss attributable to Granite Construction Incorporated | $ | (20,553 | ) | $ | (21,982 | ) | |||
Net loss per share attributable to common shareholders (see Note 11) | |||||||||
Basic | $ | (0.53 | ) | $ | (0.57 | ) | |||
Diluted | $ | (0.53 | ) | $ | (0.57 | ) | |||
Weighted average shares of common stock | |||||||||
Basic | 38,951 | 38,610 | |||||||
Diluted | 38,951 | 38,610 | |||||||
Dividends per common share | $ | 0.13 | $ | 0.13 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
GRANITE CONSTRUCTION INCORPORATED | |||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||
(Unaudited - in thousands) | |||||||||
Three Months Ended March 31, | 2014 | 2013 | |||||||
Operating activities | |||||||||
Net loss | $ | (21,261 | ) | $ | (19,826 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||
Depreciation, depletion and amortization | 15,832 | 15,970 | |||||||
Gain on sales of property and equipment | (894 | ) | (1,087 | ) | |||||
Change in deferred income tax | 1,613 | — | |||||||
Stock-based compensation | 4,095 | 5,386 | |||||||
Equity in net income from unconsolidated joint ventures | (2,562 | ) | (17,018 | ) | |||||
Changes in assets and liabilities: | |||||||||
Receivables | 68,383 | 63,694 | |||||||
Costs and estimated earnings in excess of billings, net | (43,318 | ) | (38,099 | ) | |||||
Inventories | (14,933 | ) | (6,506 | ) | |||||
Contributions to unconsolidated construction joint ventures | — | (16,208 | ) | ||||||
Distributions from unconsolidated construction joint ventures | 6,880 | 1,820 | |||||||
Other assets, net | (10,167 | ) | (6,505 | ) | |||||
Accounts payable | (19,629 | ) | (33,159 | ) | |||||
Accrued expenses and other current liabilities, net | (3,816 | ) | (3,115 | ) | |||||
Net cash used in operating activities | (19,777 | ) | (54,653 | ) | |||||
Investing activities | |||||||||
Purchases of marketable securities | (10,000 | ) | (14,975 | ) | |||||
Maturities of marketable securities | 5,000 | 20,000 | |||||||
Proceeds from sale of marketable securities | 15,000 | 5,000 | |||||||
Purchases of property and equipment | (10,375 | ) | (9,956 | ) | |||||
Proceeds from sales of property and equipment | 1,360 | 3,417 | |||||||
Other investing activities, net | 39 | (57 | ) | ||||||
Net cash provided by investing activities | 1,024 | 3,429 | |||||||
Financing activities | |||||||||
Cash dividends paid | (5,083 | ) | (5,045 | ) | |||||
Purchases of common stock | (4,278 | ) | (4,907 | ) | |||||
Contributions from non-controlling partners, net | 4,278 | — | |||||||
Other financing activities, net | 495 | (41 | ) | ||||||
Net cash used in financing activities | (4,588 | ) | (9,993 | ) | |||||
Decrease in cash and cash equivalents | (23,341 | ) | (61,217 | ) | |||||
Cash and cash equivalents at beginning of period | 229,121 | 321,990 | |||||||
Cash and cash equivalents at end of period | $ | 205,780 | $ | 260,773 | |||||
Supplementary Information | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 624 | $ | 276 | ||||
Income taxes | 1,551 | 1,272 | ||||||
Other non-cash activities: | ||||||||
Performance guarantees | $ | (438 | ) | $ | 23,590 | |||
Non-cash investing and financing activities: | ||||||||
Restricted stock units issued, net of forfeitures | $ | 6,273 | $ | 13,402 | ||||
Accrued cash dividends | 5,083 | 5,045 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | Basis of Presentation |
The condensed consolidated financial statements included herein have been prepared by Granite Construction Incorporated (“we,” “us,” “our,” “Company” or “Granite”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted, although we believe the disclosures which are made are adequate to make the information presented not misleading. Further, the condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to state fairly our financial position at March 31, 2014 and 2013 and the results of our operations and cash flows for the periods presented. The December 31, 2013 condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP.
We prepared the accompanying condensed consolidated financial statements on the same basis as our annual consolidated financial statements. Our operations are typically affected more by weather conditions during the first and fourth quarters of our fiscal year which may alter our construction schedules and can create variability in our revenues and profitability. Therefore, the results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the full year.
Certain reclassifications have been made to historical financial data on our condensed consolidated statements of cash flows to conform to our current year presentation. Historically, cash flows used in or provided by unconsolidated construction joint ventures were presented as one line item within operating cash flows. To improve transparency in the related balance sheet accounts, we have now presented separately the significant activity for the periods presented. In addition to the above, we reclassified $23.6 million related to performance guarantees for the three months ended March 31, 2013 out of the equity in construction joint ventures and accrued expenses and other current liabilities, net to the non-cash supplemental table of the condensed consolidated statement of cash flows. These changes did not impact total cash used in or provided by operating, investing or financing activities. The following table summarizes these changes (in thousands):
As Reported | Reclassifications | Adjusted | |||||||||
Three months ended | March 31, 2013 | ||||||||||
Equity in net income from unconsolidated joint ventures | $ | — | $ | (17,018 | ) | $ | (17,018 | ) | |||
Equity in construction joint ventures | (64,874 | ) | 64,874 | — | |||||||
Costs and estimated earnings in excess of billings, net | (29,395 | ) | (8,704 | ) | (38,099 | ) | |||||
Contributions to unconsolidated construction joint ventures | — | (16,208 | ) | (16,208 | ) | ||||||
Distributions from unconsolidated construction joint ventures | — | 1,820 | 1,820 | ||||||||
Accounts payable | (31,985 | ) | (1,174 | ) | (33,159 | ) | |||||
Accrued expenses and other current liabilities, net | 20,475 | (23,590 | ) | (3,115 | ) | ||||||
Total | $ | (105,779 | ) | $ | — | $ | (105,779 | ) | |||
6
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. | Revisions in Estimates |
Our profit recognition related to construction contracts is based on estimates of costs to complete each project. These estimates can vary significantly in the normal course of business as projects progress, circumstances develop and evolve, and uncertainties are resolved. We do not recognize revenue on contract change orders or affirmative claims until we have a signed agreement; however, we do recognize costs as incurred and revisions to estimated total costs as soon as the obligation to perform is determined. Approved change orders and affirmative claims, as well as changes in related estimates of costs to complete, are considered revisions in estimates. We use the cumulative catch-up method applicable to construction contract accounting to account for revisions in estimates. Under this method, revisions in estimates are accounted for in their entirety in the period of change. There can be no assurance that we will not experience further changes in circumstances or otherwise be required to further revise our profitability estimates.
For the majority of our contracts, revenue in an amount equal to cost incurred is recognized prior to contracts reaching at least 25% completion, thus deferring the related profit. Except in the case of construction management, time and material and cost-plus agreements, it is our judgment that until a project reaches at least 25% completion, there may be insufficient information to determine the estimated profit on the project with a reasonable level of certainty. The gross profit impact from projects that reached the profit recognition threshold is not included in the tables below. During the three months ended March 31, 2014 and 2013, the initial gross profit impact from projects exceeding the threshold was $4.0 million and $4.5 million, respectively.
Construction
There were two revisions in estimates that individually had an impact of $1.0 million or more on gross profit for the three months ended March 31, 2014. The impact to gross profit was a $3.5 million decrease due to additional costs and lower productivity than originally anticipated. There were no revisions in estimates, either increases or decreases, that individually had an impact of $1.0 million or more on gross profit during the three months ended March 31, 2013.
7
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Large Project Construction
The net changes in project profitability from revisions in estimates, both increases and decreases, that individually had an impact of $1.0 million or more on gross profit were net increases of $8.2 million and $9.2 million for the three months ended March 31, 2014 and 2013, respectively. Amounts attributable to non-controlling interests were $0.7 million and $1.7 million for the three months ended March 31, 2014 and 2013, respectively. The projects are summarized as follows:
Increases
Three Months Ended March 31, | |||||||||
(dollars in millions) | 2014 | 2013 | |||||||
Number of projects with upward estimate changes | 5 | 3 | |||||||
Range of increase in gross profit from each project, net | $ | 1.3 - 7.9 | $ | 1.9 - 7.8 | |||||
Increase on project profitability | $ | 16.1 | $ | 16.1 | |||||
The increases during the three months ended March 31, 2014 were due to settlement of outstanding issues with contract owners and a vendor, and owner-directed scope changes. The increases during the three months ended March 31, 2013 were due to lower than anticipated construction costs and resolution of project uncertainties.
Decreases
Three Months Ended March 31, | |||||||||
(dollars in millions) | 2014 | 2013 | |||||||
Number of projects with downward estimate changes | 2 | 2 | |||||||
Range of reduction in gross profit from each project, net | $ | 3.4 - 4.5 | $ | 2.4 - 4.5 | |||||
Decrease on project profitability | $ | 7.9 | $ | 6.9 | |||||
The decreases during the three months ended March 31, 2014 were due to additional costs and lower productivity than originally anticipated. The decreases during the three months ended March 31, 2013 were due to higher than anticipated costs.
8
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. | Marketable Securities |
All marketable securities were classified as held-to-maturity for the dates presented and the carrying amounts of held-to-maturity securities were as follows:
(in thousands) | March 31, 2014 | December 31, 2013 | March 31, 2013 | |||||||||
U.S. Government and agency obligations | $ | 6,157 | $ | 10,000 | $ | 6,169 | ||||||
Commercial paper | 34,986 | 39,968 | 29,976 | |||||||||
Municipal bonds | — | — | 8,696 | |||||||||
Total short-term marketable securities | 41,143 | 49,968 | 44,841 | |||||||||
U.S. Government and agency obligations | 65,969 | 67,234 | 57,958 | |||||||||
Total long-term marketable securities | 65,969 | 67,234 | 57,958 | |||||||||
Total marketable securities | $ | 107,112 | $ | 117,202 | $ | 102,799 | ||||||
Scheduled maturities of held-to-maturity investments were as follows (in thousands):
March 31, 2014 | |||
Due within one year | $ | 41,143 | |
Due in one to five years | 65,969 | ||
Total | $ | 107,112 | |
9
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. | Fair Value Measurement |
Fair value accounting standards describe three levels that may be used to measure fair value:
• | Level 1 - Quoted prices in active markets for identical assets or liabilities. |
• | Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
• | Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The following tables summarize assets and liabilities measured at fair value in the condensed consolidated balance sheets on a recurring basis for each of the fair value levels (in thousands):
March 31, 2014 | Fair Value Measurement at Reporting Date Using | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash equivalents | ||||||||||||||||
Money market funds | $ | 49,770 | $ | — | $ | — | $ | 49,770 | ||||||||
Total assets | $ | 49,770 | $ | — | $ | — | $ | 49,770 | ||||||||
December 31, 2013 | Fair Value Measurement at Reporting Date Using | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash equivalents | ||||||||||||||||
Money market funds | $ | 89,336 | $ | — | $ | — | $ | 89,336 | ||||||||
Total assets | $ | 89,336 | $ | — | $ | — | $ | 89,336 | ||||||||
March 31, 2013 | Fair Value Measurement at Reporting Date Using | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash equivalents | ||||||||||||||||
Money market funds | $ | 160,845 | $ | — | $ | — | $ | 160,845 | ||||||||
Held-to-maturity commercial paper | 4,999 | — | — | 4,999 | ||||||||||||
Total assets | $ | 165,844 | $ | — | $ | — | $ | 165,844 | ||||||||
A reconciliation of cash equivalents to consolidated cash and cash equivalents is as follows:
(in thousands) | March 31, 2014 | December 31, 2013 | March 31, 2013 | |||||||||
Cash equivalents | $ | 49,770 | $ | 89,336 | $ | 165,844 | ||||||
Cash | 156,010 | 139,785 | 94,929 | |||||||||
Total cash and cash equivalents | $ | 205,780 | $ | 229,121 | $ | 260,773 | ||||||
10
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The carrying values and estimated fair values of our financial instruments that are not required to be recorded at fair value in the condensed consolidated balance sheets are as follows:
March 31, 2014 | December 31, 2013 | March 31, 2013 | ||||||||||||||||||||||||
(in thousands) | Fair Value Hierarchy | Carrying Value | Fair Value | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||
Assets: | ||||||||||||||||||||||||||
Held-to-maturity marketable securities1 | Level 1 | $ | 107,112 | $ | 106,864 | $ | 117,202 | $ | 116,915 | $ | 102,799 | $ | 102,872 | |||||||||||||
Liabilities (including current maturities): | ||||||||||||||||||||||||||
Senior notes payable2 | Level 3 | $ | 200,000 | $ | 226,503 | $ | 200,000 | $ | 225,865 | $ | 208,333 | $ | 242,071 | |||||||||||||
Credit Agreement loan2 | Level 3 | 70,000 | 69,368 | 70,000 | 69,601 | 70,000 | 70,568 | |||||||||||||||||||
1Held-to-maturity marketable securities are periodically assessed for other-than-temporary impairment.
2The fair values of the senior notes payable and Credit Agreement (defined in Note 10) loan are based on borrowing rates available to us for long-term loans with similar terms, average maturities, and credit risk.
The carrying values of receivables, other current assets, and accrued expenses and other current liabilities approximate their fair values due to the short-term nature of these instruments. In addition, the fair value of non-recourse debt measured using Level 3 inputs approximates its carrying value due to its relative short-term nature and competitive interest rates. During the three months ended March 31, 2014 and 2013, we did not record any fair value adjustments related to nonfinancial assets and liabilities measured at fair value on a nonrecurring basis.
In March 2014, we entered into an interest rate swap with a notional amount of $100.0 million which matures in June 2018 to convert the interest rate of our 2019 Notes (defined in Note 10) from a fixed rate of 6.11% to a floating rate of 4.15% plus six-month LIBOR. The interest rate swap is reported at fair value using Level 2 inputs, and gains or losses, which were not material for the three months ended March 31, 2014, are recorded in other (expense) income, net in our condensed consolidated statement of operations.
5. | Receivables, net |
(in thousands) | March 31, 2014 | December 31, 2013 | March 31, 2013 | |||||||||
Construction contracts: | ||||||||||||
Completed and in progress | $ | 142,289 | $ | 193,538 | $ | 145,511 | ||||||
Retentions | 69,574 | 73,103 | 87,451 | |||||||||
Total construction contracts | 211,863 | 266,641 | 232,962 | |||||||||
Construction material sales | 23,790 | 36,813 | 20,782 | |||||||||
Other | 12,212 | 12,657 | 9,486 | |||||||||
Total gross receivables | 247,865 | 316,111 | 263,230 | |||||||||
Less: allowance for doubtful accounts | 2,584 | 2,513 | 2,999 | |||||||||
Total net receivables | $ | 245,281 | $ | 313,598 | $ | 260,231 | ||||||
Receivables include amounts billed and billable to clients for services provided and/or according to contract terms as of the end of the applicable period and do not bear interest. Certain contracts include provisions that permit us to submit invoices in advance of providing services and, to the extent not collected, they are included in receivables. Other contracts include provisions that permit us to submit invoices based on the passage of time, achievement of milestones or completion of the project. To the extent the related costs have not been billed, the contract balance is included in costs and estimated earnings in excess of billings on the condensed consolidated balance sheets. Included in other receivables at March 31, 2014, December 31, 2013 and March 31, 2013 were items such as notes receivable, fuel tax refunds and income tax refunds. No such receivables individually exceeded 10% of total net receivables at any of these dates.
Financing receivables consisted of long-term notes receivable and retentions receivable. As of March 31, 2014, December 31, 2013, and March 31, 2013 long-term notes receivable outstanding were $1.2 million, $1.3 million and $1.8 million, respectively. The balance primarily related to loans made to employees and was included in other noncurrent assets in our condensed consolidated balance sheets.
11
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Certain construction contracts include retainage provisions. The balances billed but not paid by customers pursuant to these provisions generally become due upon completion and acceptance of the contract by the owners. No such receivables individually exceeded 10% of total net receivables at any of the presented dates. As of March 31, 2014, the majority of the retentions receivable are expected to be collected within one year.
We segregate our retention receivables into two categories: escrow and non-escrow. The balances in each category were as follows:
(in thousands) | March 31, 2014 | December 31, 2013 | March 31, 2013 | |||||||||
Escrow | $ | 25,603 | $ | 25,124 | $ | 39,290 | ||||||
Non-escrow | 43,971 | 47,979 | 48,161 | |||||||||
Total retention receivables | $ | 69,574 | $ | 73,103 | $ | 87,451 | ||||||
The escrow receivables include amounts due to Granite which have been deposited into an escrow account and bear interest. Typically, escrow retention receivables are held until work on a project is complete and has been accepted by the owner who then releases those funds, along with accrued interest, to us. There is minimal risk of not collecting on these amounts.
Non-escrow retention receivables are amounts that the project owner has contractually withheld that are to be paid upon owner acceptance of contract completion. We evaluate our non-escrow retention receivables for collectibility using certain customer information that includes the following:
• | Federal - includes federal agencies such as the Bureau of Reclamation, the Army Corp of Engineers, and the Bureau of Indian Affairs. The obligations of these agencies are backed by the federal government. Consequently, there is minimal risk of not collecting the amounts we are entitled to receive. |
• | State - primarily state departments of transportation. The risk of not collecting on these accounts is small; however, we have experienced occasional delays in payment as states have struggled with budget issues. |
• | Local - these customers include local agencies such as cities, counties and other local municipal agencies. The risk of not collecting on these accounts is small; however, we have experienced occasional delays in payment as some local agencies have struggled with budget issues. |
• | Private - includes individuals, developers and corporations. The majority of our collection risk is associated with these customers. We perform ongoing credit evaluations of our customers and generally do not require collateral, although the law provides us certain remedies, including, but not limited to, the ability to file mechanics’ liens on real property improved for private customers in the event of non-payment by such customers. |
The following table summarizes the amount of our non-escrow retention receivables within each category:
(in thousands) | March 31, 2014 | December 31, 2013 | March 31, 2013 | |||||||||
Federal | $ | 2,108 | $ | 2,878 | $ | 2,926 | ||||||
State | 4,275 | 5,579 | 2,440 | |||||||||
Local | 28,587 | 31,122 | 30,991 | |||||||||
Private | 9,001 | 8,400 | 11,804 | |||||||||
Total | $ | 43,971 | $ | 47,979 | $ | 48,161 | ||||||
12
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We regularly review our accounts receivable, including past due amounts, to determine their probability of collection. If it is probable that an amount is uncollectible, it is charged to bad debt expense and a corresponding reserve is established in allowance for doubtful accounts. If it is deemed certain that an amount is uncollectible, the amount is written off. Based on contract terms, non-escrow retention receivables are typically due within 60 days of owner acceptance of contract completion. We consider retention amounts beyond 60 days of owner acceptance of contract completion to be past due. The following tables present the aging of our non-escrow retention receivables (in thousands):
March 31, 2014 | Current | 1 - 90 Days Past Due | Over 90 Days Past Due | Total | ||||||||||||
Federal | $ | 2,054 | $ | 36 | $ | 18 | $ | 2,108 | ||||||||
State | 3,234 | 438 | 603 | 4,275 | ||||||||||||
Local | 22,744 | 836 | 5,007 | 28,587 | ||||||||||||
Private | 7,309 | 1,177 | 515 | 9,001 | ||||||||||||
Total | $ | 35,341 | $ | 2,487 | $ | 6,143 | $ | 43,971 | ||||||||
December 31, 2013 | Current | 1 - 90 Days Past Due | Over 90 Days Past Due | Total | ||||||||||||
Federal | $ | 2,843 | $ | 13 | $ | 22 | $ | 2,878 | ||||||||
State | 4,919 | 326 | 334 | 5,579 | ||||||||||||
Local | 24,705 | 1,024 | 5,393 | 31,122 | ||||||||||||
Private | 6,817 | 287 | 1,296 | 8,400 | ||||||||||||
Total | $ | 39,284 | $ | 1,650 | $ | 7,045 | $ | 47,979 | ||||||||
March 31, 2013 | Current | 1 - 90 Days Past Due | Over 90 Days Past Due | Total | ||||||||||||
Federal | $ | 2,660 | $ | 156 | $ | 110 | $ | 2,926 | ||||||||
State | 1,388 | 397 | 655 | 2,440 | ||||||||||||
Local | 23,003 | 2,541 | 5,447 | 30,991 | ||||||||||||
Private | 9,744 | 1,609 | 451 | 11,804 | ||||||||||||
Total | $ | 36,795 | $ | 4,703 | $ | 6,663 | $ | 48,161 | ||||||||
Federal, state and local agencies generally require several approvals to release payments, and these approvals often take over 90 days past contractual due dates to obtain. Amounts past due from government agencies primarily result from delays caused by paperwork processing and/or obtaining proper agency approvals rather than lack of funds, which was the case with the majority of local agencies with past due balances as of March 31, 2014. We generally receive payment within one year of owner acceptance. As of March 31, 2014, December 31, 2013 and March 31, 2013, our allowance for doubtful accounts contained no material provision related to non-escrow retention receivables as we determined there were no significant collectibility issues.
13
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. | Construction and Line Item Joint Ventures |
We participate in various construction joint venture partnerships and a limited liability company of which we are a limited partner or member (“joint ventures”). 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.
At March 31, 2014, there was approximately $4.2 billion of construction revenue to be recognized on unconsolidated and line item construction joint venture contracts of which $1.2 billion represented our share and the remaining $3.0 billion represented our partners’ share. We are not able to estimate amounts that may be required beyond the remaining cost of the work to be performed. These costs could be offset by billings to the customer or by proceeds from our partners’ corporate and/or other guarantees.
Construction Joint Ventures
Generally, each construction joint venture is formed to complete a specific contract and is jointly controlled by the venture partners. The associated agreements typically provide that our interests in any profits and assets, and our respective share in any losses and liabilities resulting from the performance of the contracts, are limited to our stated percentage interest in the project. We have no significant commitments beyond completion of the contracts. Under our contractual arrangements, we provide capital to these joint ventures in return for an ownership interest. In addition, partners dedicate resources to the ventures necessary to complete the contracts and are reimbursed for their cost. The operational risks of each construction joint venture are passed along to the joint venture partners. As we absorb our share of these risks, our investment in each venture is exposed to potential losses.
We have determined that certain of these joint ventures are consolidated because they are variable interest entities (“VIEs”) and we are the primary beneficiary, or because they are not VIEs and we hold the majority voting interest.
We continually evaluate whether there are changes in the status of the VIEs or changes to the primary beneficiary designation of the VIE. Based on our assessments during the three months ended March 31, 2014, we determined no change was required for existing construction joint ventures.
14
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidated Construction Joint Ventures
The carrying amounts and classification of assets and liabilities of construction joint ventures we are required to consolidate are included in our condensed consolidated balance sheets as follows:
(in thousands) | March 31, 2014 | December 31, 2013 | March 31, 2013 | |||||||||
Cash and cash equivalents1 | $ | 27,612 | $ | 38,800 | $ | 98,738 | ||||||
Receivables, net | 39,014 | 38,372 | 47,040 | |||||||||
Other current assets | 4,624 | 4,778 | 3,867 | |||||||||
Total current assets | 71,250 | 81,950 | 149,645 | |||||||||
Property and equipment, net | 19,801 | 22,216 | 39,486 | |||||||||
Total assets2 | $ | 91,051 | $ | 104,166 | $ | 189,131 | ||||||
Accounts payable | $ | 22,136 | $ | 16,937 | $ | 26,354 | ||||||
Billings in excess of costs and estimated earnings1 | 43,087 | 60,185 | 71,821 | |||||||||
Accrued expenses and other current liabilities | 7,074 | 11,299 | 8,983 | |||||||||
Total liabilities2 | $ | 72,297 | $ | 88,421 | $ | 107,158 | ||||||
1The volume and stage of completion of contracts from our consolidated construction joint ventures may cause fluctuations in cash and cash equivalents as well as billings in excess of costs and estimated earnings between periods.
2The assets and liabilities of each joint venture relate solely to that joint venture. The decision to distribute joint venture cash and cash equivalents and assets must generally be made jointly by all of the partners and, accordingly, these cash and cash equivalents and assets generally are not available for the working capital needs of Granite until distributed.
At March 31, 2014, we were engaged in four active consolidated construction joint venture projects with total contract values ranging from $0.4 million to $337.4 million. Our share of revenue remaining to be recognized on these consolidated joint ventures ranged from $0.1 million to $59.6 million. Our proportionate share of the equity in these joint ventures was between 51.0% and 65.0%. During the three months ended March 31, 2014 and 2013, total revenue from consolidated construction joint ventures was $32.1 million and $18.3 million, respectively. Total cash used in consolidated construction joint venture operations was $22.5 million and $6.6 million during the three months ended March 31, 2014 and 2013, respectively.
Unconsolidated Construction Joint Ventures
We account for our share of construction joint ventures that we are not required to consolidate on a pro rata basis in the condensed consolidated statements of operations and as a single line item on the condensed consolidated balance sheets. As of March 31, 2014, these unconsolidated joint ventures were engaged in eleven active construction projects with total contract values ranging from $40.0 million to $3.1 billion. Our proportionate share of the equity in these unconsolidated joint ventures ranged from 20.0% to 50.0%. As of March 31, 2014, our share of the revenue remaining to be recognized on these unconsolidated joint ventures ranged from $0.3 million to $591.1 million.
As of March 31, 2014, one of our unconsolidated construction joint ventures was located in Canada and, therefore, the associated disclosures throughout this footnote include amounts that were translated from Canadian dollars to U.S. dollars using the spot rate in effect as of the reporting date for balance sheet items, and the average rate in effect during the reporting period for the results of operations. The associated foreign currency translation adjustments did not have a material impact on the condensed consolidated financial statements for any of the dates or periods presented.
15
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Following is summary financial information related to unconsolidated construction joint ventures:
(in thousands) | March 31, 2014 | December 31, 2013 | March 31, 2013 | |||||||||
Assets: | ||||||||||||
Cash and cash equivalents1 | $ | 240,486 | $ | 385,094 | $ | 401,746 | ||||||
Other assets | 581,842 | 523,827 | 333,554 | |||||||||
Less partners’ interest | 542,114 | 612,530 | 466,690 | |||||||||
Granite’s interest | 280,214 | 296,391 | 268,610 | |||||||||
Liabilities: | ||||||||||||
Accounts payable | 131,441 | 155,985 | 103,050 | |||||||||
Billings in excess of costs and estimated earnings1 | 189,979 | 245,341 | 226,269 | |||||||||
Other liabilities | 69,745 | 104,152 | 6,961 | |||||||||
Less partners’ interest | 278,996 | 371,760 | 238,935 | |||||||||
Granite’s interest | 112,169 | 133,718 | 97,345 | |||||||||
Equity in construction joint ventures | $ | 168,045 | $ | 162,673 | $ | 171,265 | ||||||
1The volume and stage of completion of contracts from our unconsolidated construction joint ventures may cause fluctuations in cash and cash equivalents as well as billings in excess of costs and estimated earnings between periods. The decision to distribute joint venture cash and cash equivalents and assets must generally be made jointly by all of the partners and, accordingly, these cash and cash equivalents and assets generally are not available for the working capital needs of Granite until distributed.
Three Months Ended March 31, | ||||||||
(in thousands) | 2014 | 2013 | ||||||
Revenue: | ||||||||
Total | $ | 349,167 | $ | 225,304 | ||||
Less partners’ interest1 | 259,857 | 153,704 | ||||||
Granite’s interest | 89,310 | 71,600 | ||||||
Cost of revenue: | ||||||||
Total | 297,461 | 158,695 | ||||||
Less partners’ interest1 | 210,906 | 104,333 | ||||||
Granite’s interest | 86,555 | 54,362 | ||||||
Granite’s interest in gross profit | $ | 2,755 | $ | 17,238 | ||||
1Partners’ interest represents amounts to reconcile total revenue and total cost of revenue as reported by our partners to Granite’s interest adjusted to reflect our accounting policies.
During the three months ended March 31, 2014 and 2013, the net income of unconsolidated construction joint ventures was $51.0 million and $66.0 million, respectively, of which our share was $2.6 million and $17.0 million, respectively.
Line Item Joint Ventures
The revenue for each line item joint venture partner’s discrete items of work is defined in the contract with the project owner and each venture partner bears the profitability risk associated with its own work. 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 include only our portion of these contracts in our condensed consolidated financial statements. As of March 31, 2014, we had four active line item joint venture construction projects with total contract values ranging from $42.4 million to $74.7 million of which our portion ranged from $23.6 million to $62.1 million. As of March 31, 2014, our share of revenue remaining to be recognized on these line item joint ventures ranged from $0.4 million to $16.5 million.
16
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. | Real Estate Entities and Investments in Affiliates |
The operations of our Real Estate segment are conducted through our wholly-owned subsidiary, Granite Land Company (“GLC”). Generally, GLC participates with third-party partners in entities that are formed to accomplish specific real estate development projects.
We have determined that certain of these joint ventures are consolidated because they are VIEs and we are the primary beneficiary. We continually evaluate whether there are changes in the status of the VIEs or changes to the primary beneficiary designation of the VIE. Based on our assessments during the three months ended March 31, 2014 and 2013, we determined no change was required for existing real estate ventures.
Our real estate affiliates include limited partnerships or limited liability companies of which we are a limited partner or member. The agreements with GLC’s partners in these real estate entities define each partner’s management role and financial responsibility in the project. The amount of GLC’s exposure is limited to GLC’s equity investment in the real estate joint venture. However, if one of GLC’s partners is unable to fulfill its management role or make its required financial contribution, GLC may assume, at its option, full management and/or financial responsibility for the project.
Substantially all the assets of these real estate entities in which we are a participant through our GLC subsidiary are classified as real estate held for development and sale and are pledged as collateral for the associated debt. All outstanding debt of these entities is non-recourse to Granite. However, there is recourse to our real estate affiliates that incurred the debt (i.e., the limited partnership or limited liability company of which we are a limited partner or member).
GLC receives authorization to provide additional financial support for certain of its real estate entities in increments to address changes in business plans. During the three months ended March 31, 2014, GLC did not increase its authorized financial support, and during the three months ended March 31, 2013 was authorized to increase its financial support to one consolidated real estate entity by $5.9 million to meet existing debt obligations. As of March 31, 2014, $2.2 million of the total authorized investment had yet to be contributed to the consolidated entity.
To determine if impairment charges should be recognized, the carrying amount of each real estate development project is reviewed on a quarterly basis. Based on our quarterly evaluations of each project’s business plan, we recorded no material impairment charges to our real estate development projects or investments during the three months ended March 31, 2014 and 2013.
During 2013, we concluded the majority of our 2010 Enterprise Improvement Plan (“EIP”) which included the impairment and the planned orderly divestiture of our real estate investment business consistent with our strategy to focus on our core business. Consequently, during 2013 we recorded impairment charges on certain real estate assets in accordance with our EIP. When real estate assets which we continue to have a financial interest are sold, we may recognize additional restructuring charges or gains; however, we do not expect these charges or gains to be material to our consolidated financial statements. No restructuring charges were recorded during the three months ended March 31, 2014 and 2013, and an immaterial restructuring gain was recorded during the three months ended March 31, 2013.
17
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidated Real Estate Entities
As of March 31, 2014, December 31, 2013 and March 31, 2013, real estate held for development and sale associated with consolidated real estate entities included in our condensed consolidated balance sheets was $11.7 million, $12.5 million and $50.3 million, respectively. Non-recourse debt, including current maturities, associated with these entities was $7.7 million, $8.0 million and $11.8 million as of March 31, 2014, December 31, 2013 and March 31, 2013, respectively. All other amounts associated with these entities were insignificant as of the dates presented. Residential real estate held for development and sale in Washington State was $11.6 million as of both March 31, 2014 and December 31, 2013, and was $40.4 million as of March 31, 2013. The remaining balances were in various commercial projects in California and Texas.
Investments in Affiliates
Our investments in affiliates balance consists of the following:
(in thousands) | March 31, 2014 | December 31, 2013 | March 31, 2013 | |||||||||
Equity method investments in real estate affiliates | $ | 22,353 | $ | 21,392 | $ | 19,979 | ||||||
Equity method investments in other affiliates | 10,983 | 11,088 | 10,763 | |||||||||
Total investments in affiliates | $ | 33,336 | $ | 32,480 | $ | 30,742 | ||||||
We have determined that certain real estate joint ventures are not consolidated because they are VIEs and we are not the primary beneficiary. We have determined that certain non-real estate joint ventures are not consolidated because they are not VIEs and we do not hold the majority voting interest. As such, these entities are accounted for using the equity method. We account for our share of the operating results of these equity method investments in other income in the condensed consolidated statements of operations and as a single line item on our condensed consolidated balance sheets as investments in affiliates.
The following table provides summarized balance sheet information for our affiliates accounted for under the equity method on a combined basis:
(in thousands) | March 31, 2014 | December 31, 2013 | March 31, 2013 | |||||||||
Total assets | $ | 172,763 | $ | 173,988 | $ | 160,133 | ||||||
Net assets | 95,561 | 99,444 | 90,605 | |||||||||
Granite’s share of net assets | 33,336 | 32,480 | 30,742 | |||||||||
The equity method investments in real estate included $15.9 million, $14.9 million and $14.2 million in residential real estate in Texas as of March 31, 2014, December 31, 2013 and March 31, 2013, respectively. The remaining balances were in commercial real estate in Texas. Of the $172.8 million in total assets as of March 31, 2014, real estate entities had total assets ranging from $2.7 million to $54.0 million and non-real estate entities had total assets ranging from $0.3 million to $24.8 million. As of each of the periods presented, the most significant non-real estate equity method investment was a 50% interest in a limited liability company which owns and operates an asphalt terminal and operates an emulsion plant in Nevada.
18
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. | Property and Equipment, net |
Balances of major classes of assets and allowances for depreciation and depletion are included in property and equipment, net on our condensed consolidated balance sheets as follows:
(in thousands) | March 31, 2014 | December 31, 2013 | March 31, 2013 | |||||||||
Equipment and vehicles | $ | 770,266 | $ | 765,971 | $ | 760,717 | ||||||
Quarry property | 170,442 | 170,442 | 180,506 | |||||||||
Land and land improvements | 120,092 | 119,917 | 125,301 | |||||||||
Buildings and leasehold improvements | 83,994 | 83,494 | 83,733 | |||||||||
Office furniture and equipment | 70,826 | 70,156 | 68,232 | |||||||||
Property and equipment | 1,215,620 | 1,209,980 | 1,218,489 | |||||||||
Less: accumulated depreciation and depletion | 783,222 | 773,121 | 740,823 | |||||||||
Property and equipment, net | $ | 432,398 | $ | 436,859 | $ | 477,666 | ||||||
9. | Intangible Assets |
Indefinite-lived Intangible Assets:
Indefinite-lived intangible assets primarily consist of goodwill and use rights. Use rights of $0.4 million are included in other noncurrent assets on our condensed consolidated balance sheets as of March 31, 2014, December 31, 2013 and March 31, 2013.
The following table presents the goodwill balance by reporting segment:
(in thousands) | March 31, 2014 | December 31, 2013 | March 31, 2013 | |||||||||
Construction | $ | 29,260 | $ | 29,260 | $ | 28,297 | ||||||
Large Project Construction | 22,593 | 22,593 | 23,182 | |||||||||
Construction Materials | 1,946 | 1,946 | 2,114 | |||||||||
Total goodwill | $ | 53,799 | $ | 53,799 | $ | 53,593 | ||||||
19
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Amortized Intangible Assets:
Following is the breakdown of our amortized intangible assets that are included in other noncurrent assets on our condensed consolidated balance sheets:
March 31, 2014 | Accumulated | |||||||||||
(in thousands) | Gross Value | Amortization | Net Book Value | |||||||||
Permits | $ | 29,713 | $ | (12,273 | ) | $ | 17,440 | |||||
Trade name | 4,100 | (539 | ) | 3,561 | ||||||||
Customer lists | 4,398 | (2,564 | ) | 1,834 | ||||||||
Acquired backlog | 7,900 | (6,962 | ) | 938 | ||||||||
Covenants not to compete and other | 2,459 | (2,424 | ) | 35 | ||||||||
Total amortized intangible assets | $ | 48,570 | $ | (24,762 | ) | $ | 23,808 | |||||
December 31, 2013 | Accumulated | |||||||||||
(in thousands) | Gross Value | Amortization | Net Book Value | |||||||||
Permits | $ | 29,713 | $ | (11,992 | ) | $ | 17,721 | |||||
Trade name | 4,100 | (432 | ) | 3,668 | ||||||||
Customer lists | 4,398 | (2,491 | ) | 1,907 | ||||||||
Acquired backlog | 7,900 | (6,835 | ) | 1,065 | ||||||||
Covenants not to compete and other | 2,459 | (2,408 | ) | 51 | ||||||||
Total amortized intangible assets | $ | 48,570 | $ | (24,158 | ) | $ | 24,412 | |||||
March 31, 2013 | Accumulated | |||||||||||
(in thousands) | Gross Value | Amortization | Net Book Value | |||||||||
Permits | $ | 29,713 | $ | (11,149 | ) | $ | 18,564 | |||||
Acquired backlog | 7,900 | (1,707 | ) | 6,193 | ||||||||
Trade name | 4,100 | (108 | ) | 3,992 | ||||||||
Customer lists | 4,398 | (2,271 | ) | 2,127 | ||||||||
Covenants not to compete and other | 2,459 | (2,316 | ) | 143 | ||||||||
Total amortized intangible assets | $ | 48,570 | $ | (17,551 | ) | $ | 31,019 | |||||
Amortization expense related to amortized assets for the three months ended March 31, 2014 and 2013 was $0.6 million and $2.2 million, respectively. Based on the amortized assets balance at March 31, 2014, amortization expense expected to be recorded in the future is as follows: $2.1 million for the remainder of 2014; $2.1 million in 2015; $1.8 million in 2016; $1.7 million in 2017; $1.7 million in 2018; and $14.4 million thereafter.
20
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. | Covenants and Events of Default |
Our debt and credit agreements require us to comply with various affirmative, restrictive and financial covenants. Our failure to comply with any of these covenants, or to pay principal, interest or other amounts when due thereunder, would constitute an event of default under the applicable agreements. Under certain circumstances, the occurrence of an event of default under one of our debt or credit agreements (or the acceleration of the maturity of the indebtedness under one of our agreements) may constitute an event of default under one or more of our other debt or credit agreements. Default under our debt and credit agreements could result in (1) us no longer being entitled to borrow under the agreements, (2) termination of the agreements, (3) the requirement that any letters of credit under the agreements be cash collateralized, (4) acceleration of the maturity of outstanding indebtedness under the agreements and/or (5) foreclosure on any collateral securing the obligations under the agreements.
As of March 31, 2014, we were in compliance with the covenants contained in our note purchase agreements governing our senior notes payable (“2019 NPA”) and our $215.0 million committed revolving credit facility, with a sublimit for letters of credit of $100.0 million (“Credit Agreement”), as well as the debt agreements related to our consolidated real estate entities. We are not aware of any non-compliance by any of our unconsolidated real estate entities with the covenants contained in their debt agreements.
11. | Weighted Average Shares Outstanding and Earnings Per Share |
A reconciliation of the weighted average shares outstanding used in calculating basic and diluted net loss per share in the accompanying condensed consolidated statements of operations is as follows:
Three Months Ended March 31, | ||||||
(in thousands) | 2014 | 2013 | ||||
Weighted average shares outstanding: | ||||||
Weighted average common stock outstanding | 38,951 | 38,734 | ||||
Less: weighted average unvested restricted stock outstanding | — | 124 | ||||
Total basic weighted average shares outstanding | 38,951 | 38,610 | ||||
Diluted weighted average shares outstanding: | ||||||
Weighted average common stock outstanding, basic | 38,951 | 38,610 | ||||
Effect of dilutive securities: | ||||||
Common stock options and restricted stock units1 | — | — | ||||
Total weighted average shares outstanding assuming dilution | 38,951 | 38,610 | ||||
1Due to the net loss for the three months ended March 31, 2014 and 2013, restricted stock units and common stock options representing approximately 799,000 and 768,000 shares, respectively, have been excluded from the number of shares used in calculating diluted net loss per share for the respective periods, as their inclusion would be antidilutive.
Earnings Per Share
We calculate earnings per share (“EPS”) under the two-class method by allocating earnings to both common shares and unvested restricted stock which are considered participating securities. However, net losses are not allocated to participating securities for purposes of computing EPS under the two-class method.
21
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. | Equity |
The following tables summarize our equity activity for the periods presented:
(in thousands) | Granite Construction Incorporated | Non-controlling Interests | Total Equity | |||||||||
Balance at December 31, 2013 | $ | 781,940 | $ | 4,404 | $ | 786,344 | ||||||
Purchase of common stock1 | (4,278 | ) | — | (4,278 | ) | |||||||
Other transactions with shareholders3 | 4,745 | — | 4,745 | |||||||||
Transactions with non-controlling interests, net | — | 4,264 | 4,264 | |||||||||
Net loss | (20,553 | ) | (708 | ) | (21,261 | ) | ||||||
Dividends on common stock | (5,083 | ) | — | (5,083 | ) | |||||||
Balance at March 31, 2014 | $ | 756,771 | $ | 7,960 | $ | 764,731 | ||||||
(in thousands) | ||||||||||||
Balance at December 31, 2012 | $ | 829,953 | $ | 41,905 | $ | 871,858 | ||||||
Purchase of common stock2 | (4,907 | ) | — | (4,907 | ) | |||||||
Other transactions with shareholders3 | 5,657 | — | 5,657 | |||||||||
Transactions with non-controlling interests, net | — | 192 | 192 | |||||||||
Net (loss) income | (21,982 | ) | 2,156 | (19,826 | ) | |||||||
Dividends on common stock | (5,045 | ) | — | (5,045 | ) | |||||||
Balance at March 31, 2013 | $ | 803,676 | $ | 44,253 | $ | 847,929 | ||||||
1Represents 110,000 shares purchased in connection with employee tax withholding for shares/units granted under our Amended and Restated 1999 Equity Incentive Plan.
2Represents 165,000 shares purchased in connection with employee tax withholding for shares/units granted under our Amended and Restated 1999 Equity Incentive Plan.
3Amounts are comprised primarily of amortized restricted stock and units.
22
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. | Legal Proceedings |
In the ordinary course of business, we and our affiliates are involved in various legal proceedings that are pending against us and our affiliates alleging, among other things, public liability issues or breach of contract or tortious conduct in connection with the performance of services and/or materials provided, the various outcomes of which cannot be predicted with certainty. We and our affiliates are also subject to government inquiries in the ordinary course of business seeking information concerning our compliance with government construction contracting requirements and related laws and regulations.
We record liabilities in our condensed consolidated balance sheets representing our estimated liabilities relating to legal proceedings and government inquiries to the extent that we have concluded such liabilities are probable and the amounts of such liabilities are reasonably estimable. The aggregate liabilities recorded as of March 31, 2014, December 31, 2013 and March 31, 2013 related to these matters were approximately $11.1 million, $16.3 million and $9.9 million, respectively, and were primarily included in accrued expenses and other current liabilities on our condensed consolidated balance sheets. Some of the matters in which we or our affiliates are involved may involve compensatory, punitive, or other claims or sanctions that, if granted, could require us to pay damages or make other expenditures in amounts that are not probable to be incurred or cannot currently be reasonably estimated. In addition, in some circumstances our government contracts could be terminated, we could be suspended or debarred, or payment of our costs could be disallowed. While any of our pending legal proceedings may be subject to early resolution as a result of our ongoing efforts to settle, whether or when any legal proceeding will be resolved through settlement is neither predictable nor guaranteed. Accordingly, it is possible that future developments in such proceedings and inquiries could require us to (i) adjust existing accruals, or (ii) record new accruals that we did not originally believe to be probable or that could not be reasonably estimated. Such changes could be material to our financial condition, results of operations and/or cash flows in any particular reporting period. In addition to matters that are considered probable for which the loss can be reasonably estimated, we also disclose certain matters where the loss is considered reasonably possible and is reasonably estimable. Except as noted below, we believe the aggregate range of possible loss related to matters considered reasonably possible was not material as of March 31, 2014. Our view as to such matters could change in future periods.
Investigation Related to Grand Avenue Project Disadvantaged Business Enterprise (“DBE”) Issues: On March 6, 2009, the U.S. Department of Transportation, Office of Inspector General served upon our wholly-owned subsidiary, Granite Construction Northeast, Inc. (“Granite Northeast”), a United States District Court, Eastern District of New York Grand Jury subpoena to produce documents. The subpoena sought all documents pertaining to the use of a DBE firm (the “Subcontractor”), and the Subcontractor’s use of a non-DBE subcontractor/consultant, on the Grand Avenue Bus Depot and Central Maintenance Facility for the Borough of Queens Project (the “Grand Avenue Project”), a Granite Northeast project, that began in 2004 and was substantially complete in 2008. The subpoena also sought any documents regarding the use of the Subcontractor as a DBE on any other projects and any other documents related to the Subcontractor or to the subcontractor/consultant. Granite Northeast produced the requested documents, together with other requested information. Subsequently, Granite Northeast was informed by the Department of Justice (“DOJ”) that it is a subject of an investigation, along with others, and that the DOJ believes that Granite Northeast’s claim of DBE credit for the Subcontractor was improper. In addition to the documents produced in response to the Grand Jury subpoena, Granite Northeast has provided requested information to the DOJ, along with other federal and state agencies (the “Agencies”) concerning other DBE entities for which Granite Northeast has historically claimed DBE credit. The Agencies have informed Granite Northeast that they believe that the claimed DBE credit taken for some of those other DBE entities was improper. Granite Northeast has met several times since January 2013 with Assistant United States Attorneys and the Agencies’ representatives to discuss the status of the government’s criminal investigation of the Grand Avenue Project participants, including Granite Northeast, and for Granite Northeast and the Agencies to discuss their respective positions on, and potential resolution of, the issues raised in the investigation. As a result of this investigation, Granite Northeast is subject to potential civil, criminal, and/or administrative penalties or sanctions, as well as certain costs related to future DBE compliance activities. Granite believes that the incurrence of some form of penalty or sanction is probable, and has therefore recorded what it believes to be the most likely amount of liability it may incur in its condensed consolidated balance sheet as of March 31, 2014. Granite believes that it is reasonably possible that it may incur liability in relation to this matter that is in excess of such accrual; however, it is not possible to reasonably estimate the amount or range of any such excess. The resolution of the matters under investigation could have direct or indirect consequences that could have a material adverse effect on our financial position, results of operations and/or liquidity.
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GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. | Business Segment Information |
Our reportable segments are: Construction, Large Project Construction, Construction Materials and Real Estate.
The Construction segment performs various construction projects with a large portion of the work focused on new construction and improvement of streets, roads, highways, bridges, site work, underground, power related facilities, utilities and other infrastructure projects. These projects are typically bid-build projects completed within two years with a contract value of less than $75 million.
The Large Project Construction segment focuses on large, complex infrastructure projects which typically have a longer duration than our Construction segment work. These projects include major highways, mass transit facilities, bridges, tunnels, waterway locks and dams, pipelines, canals, power related facilities, utilities and airport infrastructure. This segment primarily includes bid-build, design-build, construction management/general contractor contracts, and various contract methods relating to public, private partnerships, generally with contract values in excess of $75 million.
The Construction Materials segment mines and processes aggregates and operates plants that produce construction materials for internal use and for sale to third parties.
The Real Estate segment develops, operates, and sells real estate related projects and provides real estate services for the Company’s operations. The Real Estate segment’s current portfolio consists of residential, retail and office site development projects for sale to home and commercial property developers in Washington and California. During 2013, we concluded the majority of our 2010 EIP which included the impairment and the planned orderly divestiture of our real estate investment business consistent with our strategy to focus on our core business. Consequently, during 2013 we recorded impairment charges on certain real estate assets in accordance with our EIP. When real estate assets which we continue to have a financial interest are sold, we may recognize additional restructuring charges or gains; however, we do not expect these charges or gains to be material to our consolidated financial statements. No restructuring charges were recorded during the three months ended March 31, 2014 and 2013 and an immaterial gain was recorded during the three months ended March 31, 2013.
The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies contained in our 2013 Annual Report on Form 10-K. We evaluate segment performance based on gross profit or loss, and do not include selling, general and administrative expenses nor non-operating income or expense. Segment assets include property and equipment, intangibles, goodwill, inventory, equity in construction joint ventures and real estate held for development and sale.
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GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Summarized segment information is as follows:
Three Months Ended March 31, | ||||||||||||||||||||
(in thousands) | Construction | Large Project Construction | Construction Materials | Real Estate | Total | |||||||||||||||
2014 | ||||||||||||||||||||
Total revenue from reportable segments | $ | 157,040 | $ | 187,336 | $ | 42,087 | $ | 22 | $ | 386,485 | ||||||||||
Elimination of intersegment revenue | — | — | (6,638 | ) | — | (6,638 | ) | |||||||||||||
Revenue from external customers | 157,040 | 187,336 | 35,449 | 22 | 379,847 | |||||||||||||||
Gross profit (loss) | 9,144 | 15,793 | (3,551 | ) | 22 | 21,408 | ||||||||||||||
Depreciation, depletion and amortization | 4,015 | 3,204 | 5,098 | — | 12,317 | |||||||||||||||
Segment assets | 147,232 | 238,519 | 318,203 | 11,742 | 715,696 | |||||||||||||||
2013 | ||||||||||||||||||||
Total revenue from reportable segments | $ | 177,119 | $ | 171,714 | $ | 38,389 | $ | 121 | $ | 387,343 | ||||||||||
Elimination of intersegment revenue | — | — | (8,639 | ) | — | (8,639 | ) | |||||||||||||
Revenue from external customers | 177,119 | 171,714 | 29,750 | 121 | 378,704 | |||||||||||||||
Gross profit (loss) | 13,201 | 22,721 | (5,974 | ) | 110 | 30,058 | ||||||||||||||
Depreciation, depletion and amortization | 5,659 | 1,976 | 5,565 | — | 13,200 | |||||||||||||||
Segment assets | ||||||||||||||||||||