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 June 30, 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 July 24, 2014.
Class | Outstanding | |
Common Stock, $0.01 par value | 39,150,090 | |
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) | ||||||||||||
June 30, 2014 | December 31, 2013 | June 30, 2013 As Revised | ||||||||||
ASSETS | ||||||||||||
Current assets | ||||||||||||
Cash and cash equivalents ($29,109, $38,800 and $63,806 related to consolidated construction joint ventures (“CCJVs”)) | $ | 146,458 | $ | 229,121 | $ | 247,833 | ||||||
Short-term marketable securities | 27,898 | 49,968 | 21,271 | |||||||||
Receivables, net ($45,825, $38,372, and $59,807 related to CCJVs) | 363,614 | 313,598 | 336,418 | |||||||||
Costs and estimated earnings in excess of billings | 76,228 | 33,306 | 62,426 | |||||||||
Inventories | 79,501 | 62,474 | 68,905 | |||||||||
Real estate held for development and sale | 11,761 | 12,478 | 50,696 | |||||||||
Deferred income taxes | 55,874 | 55,874 | 36,687 | |||||||||
Equity in construction joint ventures | 185,859 | 162,673 | 148,727 | |||||||||
Other current assets | 30,727 | 30,711 | 36,203 | |||||||||
Total current assets | 977,920 | 950,203 | 1,009,166 | |||||||||
Property and equipment, net ($16,957, $22,216, and $34,891 related to CCJVs) | 426,700 | 436,859 | 470,893 | |||||||||
Long-term marketable securities | 84,234 | 67,234 | 55,225 | |||||||||
Investments in affiliates | 33,936 | 32,480 | 31,421 | |||||||||
Goodwill | 53,799 | 53,799 | 53,598 | |||||||||
Other noncurrent assets | 76,797 | 76,580 | 80,365 | |||||||||
Total assets | $ | 1,653,386 | $ | 1,617,155 | $ | 1,700,668 | ||||||
LIABILITIES AND EQUITY | ||||||||||||
Current liabilities | ||||||||||||
Current maturities of long-term debt | $ | 21 | $ | 21 | $ | 20 | ||||||
Current maturities of non-recourse debt | 1,226 | 1,226 | 2,147 | |||||||||
Accounts payable ($26,246, $16,937, and $18,297 related to CCJVs) | 210,777 | 160,706 | 188,124 | |||||||||
Billings in excess of costs and estimated earnings ($27,876, $60,185, $72,094 related to CCJVs) | 125,957 | 138,375 | 144,462 | |||||||||
Accrued expenses and other current liabilities ($3,805, $11,299, and $9,153 related to CCJVs) | 187,348 | 197,242 | 200,758 | |||||||||
Total current liabilities | 525,329 | 497,570 | 535,511 | |||||||||
Long-term debt | 270,127 | 270,127 | 270,148 | |||||||||
Long-term non-recourse debt | 6,129 | 6,741 | 7,354 | |||||||||
Other long-term liabilities | 48,455 | 48,580 | 46,817 | |||||||||
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 39,131,647 shares as of June 30, 2014, 38,917,728 shares as of December 31, 2013 and 38,852,463 shares as of June 30, 2013 | 391 | 389 | 389 | |||||||||
Additional paid-in capital | 130,181 | 126,449 | 121,368 | |||||||||
Retained earnings | 637,905 | 655,102 | 681,311 | |||||||||
Total Granite Construction Incorporated shareholders’ equity | 768,477 | 781,940 | 803,068 | |||||||||
Non-controlling interests | 25,066 | 4,404 | 29,715 | |||||||||
Total equity | 793,543 | 786,344 | 832,783 | |||||||||
Total liabilities and equity | $ | 1,653,386 | $ | 1,617,155 | $ | 1,700,668 | ||||||
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 June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 As Revised | 2014 | 2013 As Revised | |||||||||||||
Revenue | ||||||||||||||||
Construction | $ | 269,220 | $ | 308,602 | $ | 426,261 | $ | 485,720 | ||||||||
Large Project Construction | 244,328 | 181,557 | 431,663 | 353,271 | ||||||||||||
Construction Materials | 72,322 | 60,185 | 107,771 | 89,936 | ||||||||||||
Real Estate | — | 4 | 22 | 125 | ||||||||||||
Total revenue | 585,870 | 550,348 | 965,717 | 929,052 | ||||||||||||
Cost of revenue | ||||||||||||||||
Construction | 244,393 | 284,532 | 392,289 | 448,451 | ||||||||||||
Large Project Construction | 193,536 | 159,986 | 365,080 | 308,979 | ||||||||||||
Construction Materials | 65,524 | 56,231 | 104,526 | 91,957 | ||||||||||||
Real Estate | 2 | 3 | — | 13 | ||||||||||||
Total cost of revenue | 503,455 | 500,752 | 861,895 | 849,400 | ||||||||||||
Gross profit | 82,415 | 49,596 | 103,822 | 79,652 | ||||||||||||
Selling, general and administrative expenses | 51,098 | 46,789 | 100,346 | 103,950 | ||||||||||||
Gain on sales of property and equipment | 2,993 | 3,306 | 3,886 | 4,394 | ||||||||||||
Operating income (loss) | 34,310 | 6,113 | 7,362 | (19,904 | ) | |||||||||||
Other income (expense) | ||||||||||||||||
Interest income | 413 | 380 | 893 | 508 | ||||||||||||
Interest expense | (4,339 | ) | (3,700 | ) | (7,937 | ) | (7,345 | ) | ||||||||
Equity in income of affiliates | 410 | 698 | 1,202 | 275 | ||||||||||||
Other income (expense), net | 1,697 | (495 | ) | 1,645 | 608 | |||||||||||
Total other expense | (1,819 | ) | (3,117 | ) | (4,197 | ) | (5,954 | ) | ||||||||
Income (loss) before provision for (benefit from) income taxes | 32,491 | 2,996 | 3,165 | (25,858 | ) | |||||||||||
Provision for (benefit from) income taxes | 10,284 | 1,214 | 2,220 | (7,813 | ) | |||||||||||
Net income (loss) | 22,207 | 1,782 | 945 | (18,045 | ) | |||||||||||
Amount attributable to non-controlling interests | (8,566 | ) | (363 | ) | (7,858 | ) | (2,518 | ) | ||||||||
Net income (loss) attributable to Granite Construction Incorporated | $ | 13,641 | $ | 1,419 | $ | (6,913 | ) | $ | (20,563 | ) | ||||||
Net income (loss) per share attributable to common shareholders (see Note 12) | ||||||||||||||||
Basic | $ | 0.35 | $ | 0.04 | $ | (0.18 | ) | $ | (0.53 | ) | ||||||
Diluted | $ | 0.34 | $ | 0.04 | $ | (0.18 | ) | $ | (0.53 | ) | ||||||
Weighted average shares of common stock | ||||||||||||||||
Basic | 39,115 | 38,829 | 39,033 | 38,720 | ||||||||||||
Diluted | 39,807 | 39,769 | 39,033 | 38,720 | ||||||||||||
Dividends per common share | $ | 0.13 | $ | 0.13 | $ | 0.26 | $ | 0.26 | ||||||||
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) | |||||||||
Six Months Ended June 30, | 2014 | 2013 As Revised | |||||||
Operating activities | |||||||||
Net income (loss) | $ | 945 | $ | (18,045 | ) | ||||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | |||||||||
Gain on restructuring, net | — | (497 | ) | ||||||
Depreciation, depletion and amortization | 31,878 | 34,362 | |||||||
Gain on sales of property and equipment | (3,886 | ) | (4,394 | ) | |||||
Change in deferred income taxes | 1,613 | — | |||||||
Stock-based compensation | 6,585 | 8,101 | |||||||
Equity in net income from unconsolidated joint ventures | (25,724 | ) | (31,201 | ) | |||||
Changes in assets and liabilities: | |||||||||
Receivables | (44,160 | ) | (9,176 | ) | |||||
Costs and estimated earnings in excess of billings, net | (56,150 | ) | (35,243 | ) | |||||
Inventories | (17,027 | ) | (9,120 | ) | |||||
Contributions to unconsolidated construction joint ventures | (13,797 | ) | (16,209 | ) | |||||
Distributions from unconsolidated construction joint ventures | 16,528 | 42,486 | |||||||
Other assets, net | (1,579 | ) | (6,519 | ) | |||||
Accounts payable | 42,235 | (11,724 | ) | ||||||
Accrued expenses and other current liabilities, net | (9,849 | ) | 5,531 | ||||||
Net cash used in operating activities | (72,388 | ) | (51,648 | ) | |||||
Investing activities | |||||||||
Purchases of marketable securities | (34,991 | ) | (14,975 | ) | |||||
Maturities of marketable securities | 25,000 | 43,000 | |||||||
Proceeds from sale of marketable securities | 15,000 | 5,000 | |||||||
Purchases of property and equipment | (20,091 | ) | (19,422 | ) | |||||
Proceeds from sales of property and equipment | 5,838 | 8,481 | |||||||
Payment of Kenny post-closing adjustments | — | (4,621 | ) | ||||||
Other investing activities, net | 47 | 163 | |||||||
Net cash (used in) provided by investing activities | (9,197 | ) | 17,626 | ||||||
Financing activities | |||||||||
Long-term debt principal repayments | (613 | ) | (10,594 | ) | |||||
Cash dividends paid | (10,142 | ) | (10,078 | ) | |||||
Purchases of common stock | (4,369 | ) | (5,022 | ) | |||||
Contributions from non-controlling partners | 13,442 | 6,001 | |||||||
Distributions to non-controlling partners | (686 | ) | (21,142 | ) | |||||
Other financing activities | 1,290 | 700 | |||||||
Net cash used in financing activities | (1,078 | ) | (40,135 | ) | |||||
Decrease in cash and cash equivalents | (82,663 | ) | (74,157 | ) | |||||
Cash and cash equivalents at beginning of period | 229,121 | 321,990 | |||||||
Cash and cash equivalents at end of period | $ | 146,458 | $ | 247,833 | |||||
Supplementary Information | |||||||||
Cash paid during the period for: | |||||||||
Interest | $ | 7,337 | $ | 7,339 | |||||
Income taxes | 2,144 | 2,006 | |||||||
Other non-cash activities: | |||||||||
Performance guarantees | $ | (617 | ) | $ | 21,813 | ||||
Non-cash investing and financing activities: | |||||||||
Restricted stock units issued, net of forfeitures | $ | 6,969 | $ | 14,862 | |||||
Accrued cash dividends | 5,087 | 5,051 | |||||||
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 June 30, 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 and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year.
Certain revisions and reclassifications have been made to historical financial data in our condensed consolidated financial statements as follows:
• | We have revised our condensed consolidated balance sheet as of June 30, 2013 and our condensed consolidated statements of operations and cash flows for the three and six months ended June 30, 2013 to correct errors identified during the preparation of our 2013 Annual Report on Form 10-K. The errors primarily related to equipment-related costs of $1.7 million. The Company assessed the materiality of the errors individually and in the aggregate on the prior interim periods’ financial statements in accordance with the SEC’s Staff Accounting Bulletin No. 99 and, based on an analysis of quantitative and qualitative factors, determined that the errors were not material to the Company’s condensed consolidated financial statements for the second quarter of 2013; therefore, these previously issued condensed consolidated financial statements can continue to be relied upon and an amendment of the previously filed Quarterly Report on Form 10-Q is not required. However, for comparability, the Company has revised its condensed consolidated balance sheet as of June 30, 2013 and its condensed consolidated statements of operations and cash flows for the three and six months ended June 30, 2013 as presented herein to correct these errors. |
• | 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 balances sheet accounts, we have now presented separately the significant activity. In addition, we reclassified $21.8 million related to performance guarantees for the six months ended June 30, 2013 out of 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. |
6
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables set forth the impact of the accounting errors and reclassification adjustments on the previously reported condensed consolidated balance sheet as of June 30, 2013 and the condensed statements of operations and cash flows for the three and six months ended June 30, 2013 (in thousands):
Condensed Consolidated Balance Sheet
June 30, 2013 | ||||||||||||
As Reported | Revisions | Revised | ||||||||||
Total current assets | $ | 1,009,530 | $ | (364 | ) | $ | 1,009,166 | |||||
Noncurrent assets | 691,874 | (372 | ) | $ | 691,502 | |||||||
Total assets | $ | 1,701,404 | $ | (736 | ) | $ | 1,700,668 | |||||
Total current liabilities | $ | 534,856 | $ | 655 | $ | 535,511 | ||||||
Noncurrent liabilities | 332,374 | — | 332,374 | |||||||||
Total Granite Construction Incorporated shareholders’ equity | 804,367 | (1,299 | ) | 803,068 | ||||||||
Non-controlling interests | 29,807 | (92 | ) | 29,715 | ||||||||
Total liabilities and equity | $ | 1,701,404 | $ | (736 | ) | $ | 1,700,668 | |||||
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 2013 | ||||||||||||
As Reported | Revisions | Revised | ||||||||||
Total revenue | $ | 550,162 | $ | 186 | $ | 550,348 | ||||||
Total cost of revenue | 498,965 | 1,787 | 500,752 | |||||||||
Gross profit (loss) | 51,197 | (1,601 | ) | 49,596 | ||||||||
Selling, general and administrative expenses | 46,454 | 335 | 46,789 | |||||||||
Operating income (loss) | 8,049 | (1,936 | ) | 6,113 | ||||||||
Income (loss) before provision for income taxes | 4,932 | (1,936 | ) | 2,996 | ||||||||
Provision for (benefit from) income taxes | 1,766 | (552 | ) | 1,214 | ||||||||
Net Income (loss) | 3,166 | (1,384 | ) | 1,782 | ||||||||
Amount attributable to non-controlling interests | (448 | ) | 85 | (363 | ) | |||||||
Net income (loss) attributable to Granite Construction Incorporated | $ | 2,718 | $ | (1,299 | ) | $ | 1,419 | |||||
Net income (loss) per share attributable to common shareholders (see Note 12) | ||||||||||||
Basic | $ | 0.07 | $ | (0.03 | ) | $ | 0.04 | |||||
Diluted | $ | 0.07 | $ | (0.03 | ) | $ | 0.04 | |||||
7
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 2013 | ||||||||||||
As Reported | Revisions | Revised | ||||||||||
Total revenue | $ | 928,866 | $ | 186 | $ | 929,052 | ||||||
Total cost of revenue | 847,613 | 1,787 | 849,400 | |||||||||
Gross profit (loss) | 81,253 | (1,601 | ) | 79,652 | ||||||||
Selling, general and administrative expenses | 103,615 | 335 | 103,950 | |||||||||
Operating loss | (17,968 | ) | (1,936 | ) | (19,904 | ) | ||||||
Loss before benefit from income taxes | (23,922 | ) | (1,936 | ) | (25,858 | ) | ||||||
Benefit from income taxes | (7,261 | ) | (552 | ) | (7,813 | ) | ||||||
Net loss | (16,661 | ) | (1,384 | ) | (18,045 | ) | ||||||
Amount attributable to non-controlling interests | (2,603 | ) | 85 | (2,518 | ) | |||||||
Net loss attributable to Granite Construction Incorporated | $ | (19,264 | ) | $ | (1,299 | ) | $ | (20,563 | ) | |||
Net loss per share attributable to common shareholders (see Note 12) | ||||||||||||
Basic | $ | (0.50 | ) | $ | (0.03 | ) | $ | (0.53 | ) | |||
Diluted | $ | (0.50 | ) | $ | (0.03 | ) | $ | (0.53 | ) | |||
Condensed Consolidated Statement of Cash Flows
Six months ended June 30, 2013 | ||||||||||||||||
As Reported | Revisions | Reclassifications | Revised | |||||||||||||
Net Loss | $ | (16,661 | ) | $ | (1,384 | ) | $ | — | $ | (18,045 | ) | |||||
Depreciation, depletion and amortization | 33,988 | 374 | — | 34,362 | ||||||||||||
Equity in net income from unconsolidated joint ventures | — | — | (31,201 | ) | (31,201 | ) | ||||||||||
Costs and estimated earnings in excess of billings, net | (24,873 | ) | 1,335 | (11,705 | ) | (35,243 | ) | |||||||||
Equity in construction joint ventures | (42,336 | ) | — | 42,336 | — | |||||||||||
Contributions to unconsolidated construction joint ventures | — | — | (16,209 | ) | (16,209 | ) | ||||||||||
Distributions from unconsolidated construction joint ventures | — | — | 42,486 | 42,486 | ||||||||||||
Other assets, net | (5,957 | ) | (562 | ) | — | (6,519 | ) | |||||||||
Accounts payable | (10,548 | ) | — | (1,176 | ) | (11,724 | ) | |||||||||
Accrued expenses and other current liabilities, net | 29,825 | 237 | (24,531 | ) | 5,531 | |||||||||||
Total | $ | (36,562 | ) | $ | — | $ | — | $ | (36,562 | ) | ||||||
8
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. | Recently Issued Accounting Pronouncement |
In May 2014 the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. This ASU’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects consideration to which the company expects to be entitled in exchange for those goods or services. The ASU will be effective commencing with our quarter ending March 31, 2017. We are currently assessing the potential impact of this ASU on our consolidated financial statements.
3. | 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 recognize revenue on affirmative claims when we have a signed agreement and recognize revenue associated with unapproved change orders to the extent the related costs have been incurred, the amount can be reliably estimated and recovery is probable. We recognize costs associate with affirmative claims and unapproved change orders 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 until there is sufficient information to determine the estimated profit on the project with a reasonable level of certainty. The gross profit impact from projects that reached profit recognition is not included in the tables below. During the three and six months ended June 30, 2014, the initial gross profit impact from projects that reached profit recognition was $24.5 million and $28.6 million, respectively, and was $8.7 million and $15.2 million for the three and six months ended June 30, 2013, respectively.
9
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 decreases of $1.4 million and $8.3 million for the three and six months ended June 30, 2014 respectively. The net changes for the three and six months ended June 30, 2013 were net decreases of $0.5 million and $0.3 million, respectively. The projects are summarized as follows:
Increases
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(dollars in millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Number of projects with upward estimate changes | — | 1 | — | 2 | ||||||||||||
Range of increase in gross profit from each project, net | $ | — | $ | 1.6 | $ | — | $ | 1.4 - 1.7 | ||||||||
Increase on project profitability | $ | — | $ | 1.6 | $ | — | $ | 3.1 | ||||||||
The increases during the three and six months ended June 30, 2013 were due to owner-directed scope changes.
Decreases
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(dollars in millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Number of projects with downward estimate changes | 1 | 1 | 5 | 2 | ||||||||||||
Reduction in gross profit from each project, net | $ | 1.4 | $ | 2.1 | $ | 1.1 - 2.2 | $ | 1.0 - 2.4 | ||||||||
Decrease on project profitability | $ | 1.4 | $ | 2.1 | $ | 8.3 | $ | 3.4 | ||||||||
The decreases during the three and six months ended June 30, 2014 and 2013 were due to additional costs and lower productivity than originally anticipated.
10
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 $25.7 million and $34.5 million for the three and six months ended June 30, 2014, respectively. The net changes for the three and six months ended June 30, 2013 were net increases of $8.7 million and $17.9 million, respectively. Amounts attributable to non-controlling interests were $8.2 million and $7.5 million of the net increases for the three and six months ended June 30, 2014, respectively, and were $0.4 million and $1.4 million for the three and six months ended June 30, 2013, respectively. The projects are summarized as follows:
Increases
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(dollars in millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Number of projects with upward estimate changes | 6 | 5 | 9 | 5 | ||||||||||||
Range of increase in gross profit from each project, net | $ | 1.1 - 19.7 | $ | 1.3 - 8.3 | $ | 1.1 - 16.3 | $ | 1.5 - 16.1 | ||||||||
Increase on project profitability | $ | 28.0 | $ | 15.8 | $ | 41.3 | $ | 31.9 | ||||||||
The increases during the three and six months ended June 30, 2014 were due to higher productively than originally anticipated, owner-directed scope changes and settlement of outstanding issues with contract owners. The increases during the three and six months ended June 30, 2013 were due to production at a higher rate than anticipated, resolution of project uncertainties and owner-directed scope changes.
Decreases
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(dollars in millions) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Number of projects with downward estimate changes | 1 | 2 | 1 | 2 | ||||||||||||
Range of reduction in gross profit from each project, net | $ | 2.3 | $ | 2.8 - 4.3 | $ | 6.8 | $ | 5.2 - 8.8 | ||||||||
Decrease on project profitability | $ | 2.3 | $ | 7.1 | $ | 6.8 | $ | 14.0 | ||||||||
The decreases during the three and six months ended June 30, 2014 were due to additional costs and lower productivity than originally anticipated. The decreases during the three and six months ended June 30, 2013 were due to lower productivity than anticipated.
11
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. | 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) | June 30, 2014 | December 31, 2013 | June 30, 2013 | |||||||||
U.S. Government and agency obligations | $ | 7,906 | $ | 10,000 | $ | 613 | ||||||
Commercial paper | 19,992 | 39,968 | 14,992 | |||||||||
Municipal bonds | — | — | 5,666 | |||||||||
Total short-term marketable securities | 27,898 | 49,968 | 21,271 | |||||||||
U.S. Government and agency obligations | 84,234 | 67,234 | 55,225 | |||||||||
Total long-term marketable securities | 84,234 | 67,234 | 55,225 | |||||||||
Total marketable securities | $ | 112,132 | $ | 117,202 | $ | 76,496 | ||||||
Scheduled maturities of held-to-maturity investments were as follows:
(in thousands) | June 30, 2014 | ||
Due within one year | $ | 27,898 | |
Due in one to five years | 84,234 | ||
Total | $ | 112,132 | |
12
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. | 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 significant 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):
Fair Value Measurement at Reporting Date Using | ||||||||||||||||
June 30, 2014 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Cash equivalents | ||||||||||||||||
Money market funds | $ | 31,583 | $ | — | $ | — | $ | 31,583 | ||||||||
Total assets | $ | 31,583 | $ | — | $ | — | $ | 31,583 | ||||||||
Fair Value Measurement at Reporting Date Using | ||||||||||||||||
December 31, 2013 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Cash equivalents | ||||||||||||||||
Money market funds | $ | 89,336 | $ | — | $ | — | $ | 89,336 | ||||||||
Total assets | $ | 89,336 | $ | — | $ | — | $ | 89,336 | ||||||||
Fair Value Measurement at Reporting Date Using | ||||||||||||||||
June 30, 2013 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Cash equivalents | ||||||||||||||||
Money market funds | $ | 144,605 | $ | — | $ | — | $ | 144,605 | ||||||||
Total assets | $ | 144,605 | $ | — | $ | — | $ | 144,605 | ||||||||
A reconciliation of cash equivalents to consolidated cash and cash equivalents is as follows:
(in thousands) | June 30, 2014 | December 31, 2013 | June 30, 2013 As Revised | |||||||||
Cash equivalents | $ | 31,583 | $ | 89,336 | $ | 144,605 | ||||||
Cash | 114,875 | 139,785 | 103,228 | |||||||||
Total cash and cash equivalents | $ | 146,458 | $ | 229,121 | $ | 247,833 | ||||||
13
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:
June 30, 2014 | December 31, 2013 | June 30, 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 | $ | 112,132 | $ | 111,999 | $ | 117,202 | $ | 116,915 | $ | 76,496 | $ | 76,100 | |||||||||||||
Liabilities (including current maturities): | ||||||||||||||||||||||||||
Senior notes payable2 | Level 3 | $ | 200,000 | $ | 222,920 | $ | 200,000 | $ | 225,865 | $ | 200,000 | $ | 227,902 | |||||||||||||
Credit Agreement loan2 | Level 3 | 70,000 | 69,781 | 70,000 | 69,601 | 70,000 | 69,321 | |||||||||||||||||||
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 11) 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 and six months ended June 30, 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 11) 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 are recorded in other income (expense), net in our condensed consolidated statement of operations and were $1.0 million and $0.6 million during the three and six months ended June 30, 2014.
6. | Receivables, net |
Receivables, net at June 30, 2014, December 31, 2013 and June 30, 2013 are as follows:
(in thousands) | June 30, 2014 | December 31, 2013 | June 30, 2013 | |||||||||
Construction contracts: | ||||||||||||
Completed and in progress | $ | 237,870 | $ | 193,538 | $ | 207,488 | ||||||
Retentions | 69,678 | 73,103 | 76,288 | |||||||||
Total construction contracts | 307,548 | 266,641 | 283,776 | |||||||||
Construction material sales | 48,932 | 36,813 | 43,535 | |||||||||
Other | 7,677 | 12,657 | 11,700 | |||||||||
Total gross receivables | 364,157 | 316,111 | 339,011 | |||||||||
Less: allowance for doubtful accounts | 543 | 2,513 | 2,593 | |||||||||
Total net receivables | $ | 363,614 | $ | 313,598 | $ | 336,418 | ||||||
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, based on the passage of time, achievement of milestones or upon completion of the project and, to the extent not collected, are included in receivables. 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 June 30, 2014, December 31, 2013 and June 30, 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.
14
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financing receivables consisted of long-term notes receivable and retentions receivable. As of June 30, 2014, December 31, 2013, and June 30, 2013 long-term notes receivable outstanding were $1.1 million, $1.3 million and $1.6 million, respectively. The balance primarily related to loans made to employees and was included in other noncurrent assets in our condensed consolidated balance sheets.
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 June 30, 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) | June 30, 2014 | December 31, 2013 | June 30, 2013 | |||||||||
Escrow | $ | 25,093 | $ | 25,124 | $ | 31,892 | ||||||
Non-escrow | 44,585 | 47,979 | 44,396 | |||||||||
Total retention receivables | $ | 69,678 | $ | 73,103 | $ | 76,288 | ||||||
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 collectability 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) | June 30, 2014 | December 31, 2013 | June 30, 2013 | |||||||||
Federal | $ | 1,543 | $ | 2,878 | $ | 3,325 | ||||||
State | 5,078 | 5,579 | 2,757 | |||||||||
Local | 30,213 | 31,122 | 32,500 | |||||||||
Private | 7,751 | 8,400 | 5,814 | |||||||||
Total | $ | 44,585 | $ | 47,979 | $ | 44,396 | ||||||
15
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):
June 30, 2014 | Current | 1 - 90 Days Past Due | Over 90 Days Past Due | Total | ||||||||||||
Federal | $ | 1,532 | $ | — | $ | 11 | $ | 1,543 | ||||||||
State | 4,837 | 168 | 73 | 5,078 | ||||||||||||
Local | 25,210 | 654 | 4,349 | 30,213 | ||||||||||||
Private | 6,591 | 107 | 1,053 | 7,751 | ||||||||||||
Total | $ | 38,170 | $ | 929 | $ | 5,486 | $ | 44,585 | ||||||||
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 | ||||||||
June 30, 2013 | Current | 1 - 90 Days Past Due | Over 90 Days Past Due | Total | ||||||||||||
Federal | $ | 2,551 | $ | 236 | $ | 538 | $ | 3,325 | ||||||||
State | 1,327 | 619 | 811 | 2,757 | ||||||||||||
Local | 25,362 | 1,496 | 5,642 | 32,500 | ||||||||||||
Private | 4,571 | 634 | 609 | 5,814 | ||||||||||||
Total | $ | 33,811 | $ | 2,985 | $ | 7,600 | $ | 44,396 | ||||||||
Federal, state and local agencies generally require several approvals to release payments, and these approvals often take more than 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 June 30, 2014. We generally receive payment within one year of owner acceptance. As of June 30, 2014, December 31, 2013 and June 30, 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.
16
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. | 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 June 30, 2014, there was approximately $3.9 billion of construction revenue to be recognized on unconsolidated and line item construction joint venture contracts of which $1.1 billion represented our share and the remaining $2.8 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 six months ended June 30, 2014, we determined no change was required for existing construction joint ventures.
17
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) | June 30, 2014 | December 31, 2013 | June 30, 2013 | |||||||||
Cash and cash equivalents1 | $ | 29,109 | $ | 38,800 | $ | 63,806 | ||||||
Receivables, net | 45,825 | 38,372 | 59,807 | |||||||||
Costs and estimated earnings in excess of billings1 | 25,217 | 178 | 477 | |||||||||
Other current assets | 4,276 | 4,600 | 3,115 | |||||||||
Total current assets | 104,427 | 81,950 | 127,205 | |||||||||
Property and equipment, net | 16,957 | 22,216 | 34,891 | |||||||||
Other noncurrent assets | — | — | 1,253 | |||||||||
Total assets2 | $ | 121,384 | $ | 104,166 | $ | 163,349 | ||||||
Accounts payable | $ | 26,246 | $ | 16,937 | $ | 18,297 | ||||||
Billings in excess of costs and estimated earnings1 | 27,876 | 60,185 | 72,094 | |||||||||
Accrued expenses and other current liabilities | 3,805 | 11,299 | 9,153 | |||||||||
Total liabilities2 | $ | 57,927 | $ | 88,421 | $ | 99,544 | ||||||
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 June 30, 2014, we were engaged in four active consolidated construction joint venture projects with total contract values ranging from $0.4 million to $364.4 million. Our share of revenue remaining to be recognized on these consolidated joint ventures ranged from less than $0.1 million to $51.9 million. Our proportionate share of the equity in these joint ventures was between 51.0% and 65.0%. During the three and six months ended June 30, 2014, total revenue from consolidated construction joint ventures was $66.0 million and $98.2 million, respectively. During the three and six months ended June 30, 2013, total revenue from consolidated construction joint ventures was $45.5 million and $88.7 million, respectively. Total cash used in consolidated construction joint venture operations was $41.9 million and $16.3 million during the six months ended June 30, 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 June 30, 2014, these unconsolidated joint ventures were engaged in nine active unconsolidated construction projects with total contract values ranging from $96.6 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 June 30, 2014, our share of the revenue remaining to be recognized on these unconsolidated joint ventures ranged from $0.1 million to $548.2 million.
As of June 30, 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.
18
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Following is summary financial information related to unconsolidated construction joint ventures:
(in thousands) | June 30, 2014 | December 31, 2013 | June 30, 2013 | |||||||||
Assets: | ||||||||||||
Cash and cash equivalents1 | $ | 226,217 | $ | 385,094 | $ | 342,534 | ||||||
Other assets | 637,896 | 523,827 | 439,812 | |||||||||
Less partners’ interest | 572,753 | 612,530 | 512,775 | |||||||||
Granite’s interest | 291,360 | 296,391 | 269,571 | |||||||||
Liabilities: | ||||||||||||
Accounts payable | 133,914 | 155,985 | 115,606 | |||||||||
Billings in excess of costs and estimated earnings1 | 162,951 | 245,341 | 262,259 | |||||||||
Other liabilities | 63,501 | 104,152 | 25,500 | |||||||||
Less partners’ interest | 254,865 | 371,760 | 282,521 | |||||||||
Granite’s interest | 105,501 | 133,718 | 120,844 | |||||||||
Equity in construction joint ventures | $ | 185,859 | $ | 162,673 | $ | 148,727 | ||||||
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 June 30, | Six Months Ended June 30, | |||||||||||||||
(in thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenue: | ||||||||||||||||
Total | $ | 392,165 | $ | 259,255 | $ | 741,331 | $ | 484,558 | ||||||||
Less partners’ interest1 | 268,526 | 172,656 | 528,383 | 326,361 | ||||||||||||
Granite’s interest | 123,639 | 86,599 | 212,948 | 158,197 | ||||||||||||
Cost of revenue: | ||||||||||||||||
Total | 345,704 | 212,779 | 643,166 | 371,475 | ||||||||||||
Less partners’ interest1 | 246,065 | 141,659 | 456,972 | 248,980 | ||||||||||||
Granite’s interest | 99,639 | 71,120 | 186,194 | 122,495 | ||||||||||||
Granite’s interest in gross profit | $ | 24,000 | $ | 15,479 | $ | 26,754 | $ | 35,702 | ||||||||
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 and six months ended June 30, 2014, the net income of unconsolidated construction joint ventures was $49.4 million and $100.4 million, respectively, of which our share was $23.2 million and $25.7 million, respectively. During the three and six months ended June 30, 2013, the net income of unconsolidated construction joint ventures was $45.6 million and $111.6 million, respectively, of which our share was $14.2 million and $31.2 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 June 30, 2014, we had four active line item joint venture construction projects with total contract values ranging from $42.4 million to $84.9 million of which our portion ranged from $28.5 million to $62.6 million. As of June 30, 2014, our share of revenue remaining to be recognized on these line item joint ventures ranged from less than $0.1 million to $29.5 million.
19
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. | 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 six months ended June 30, 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.
All of 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 six months ended June 30, 2014, GLC did not increase its authorized financial support, and during the six months ended June 30, 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 June 30, 2014, $1.9 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 and six months ended June 30, 2014 and 2013.
During 2013, we concluded the majority of our 2010 Enterprise Improvement Plan (“EIP”) which included the impairment and 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 and six months ended June 30, 2014 and an immaterial restructuring gain was recorded during the three and six months ended June 30, 2013.
20
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidated Real Estate Entities
As of June 30, 2014, December 31, 2013 and June 30, 2013, real estate held for development and sale associated with consolidated real estate entities included in our condensed consolidated balance sheets was $11.8 million, $12.5 million and $50.7 million, respectively. Non-recourse debt, including current maturities, associated with these entities was $7.4 million, $8.0 million and $9.5 million as of June 30, 2014, December 31, 2013 and June 30, 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 June 30, 2014 and December 31, 2013, and was $40.7 million as of June 30, 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) | June 30, 2014 | December 31, 2013 | June 30, 2013 | |||||||||
Equity method investments in real estate affiliates | $ | 23,082 | $ | 21,392 | $ | 20,378 | ||||||
Equity method investments in other affiliates | 10,854 | 11,088 | 11,043 | |||||||||
Total investments in affiliates | $ | 33,936 | $ | 32,480 | $ | 31,421 | ||||||
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) | June 30, 2014 | December 31, 2013 | June 30, 2013 | |||||||||
Total assets | $ | 171,991 | $ | 173,988 | $ | 160,422 | ||||||
Net assets | 98,342 | 99,444 | 93,771 | |||||||||
Granite’s share of net assets | 33,936 | 32,480 | 31,421 | |||||||||
The equity method investments in real estate included $16.7 million, $14.9 million and $14.1 million in residential real estate in Texas as of June 30, 2014, December 31, 2013 and June 30, 2013, respectively. The remaining balances were in commercial real estate in Texas. Of the $172.0 million in total assets as of June 30, 2014, real estate entities had total assets ranging from $2.7 million to $55.6 million and non-real estate entities had total assets ranging from $0.3 million to $22.2 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.
21
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. | 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) | June 30, 2014 | December 31, 2013 | June 30, 2013 As Revised | |||||||||
Equipment and vehicles | $ | 769,271 | $ | 765,971 | $ | 760,271 | ||||||
Quarry property | 170,279 | 170,442 | 180,325 | |||||||||
Land and land improvements | 120,982 | 119,917 | ||||||||||