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, 2015 | |
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 30, 2015.
Class | Outstanding | |
Common Stock, $0.01 par value | 39,346,462 | |
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, 2015 | December 31, 2014 | March 31, 2014 | ||||||||||
ASSETS | ||||||||||||
Current assets | ||||||||||||
Cash and cash equivalents ($52,884, $61,276 and $27,612 related to consolidated construction joint ventures (“CCJVs”)) | $ | 239,403 | $ | 255,961 | $ | 205,780 | ||||||
Short-term marketable securities | 19,282 | 25,504 | 41,143 | |||||||||
Receivables, net ($39,711, $36,781 and $39,014 related to CCJVs) | 271,328 | 310,934 | 245,281 | |||||||||
Costs and estimated earnings in excess of billings | 56,907 | 36,411 | 53,311 | |||||||||
Inventories | 64,636 | 68,920 | 77,407 | |||||||||
Real estate held for development and sale | 11,609 | 11,609 | 11,742 | |||||||||
Deferred income taxes | 53,231 | 53,231 | 55,874 | |||||||||
Equity in construction joint ventures | 197,570 | 184,575 | 168,045 | |||||||||
Other current assets | 26,613 | 23,033 | 40,142 | |||||||||
Total current assets | 940,579 | 970,178 | 898,725 | |||||||||
Property and equipment, net ($9,729, $11,969 and $19,801 related to CCJVs) | 399,910 | 409,653 | 432,398 | |||||||||
Long-term marketable securities | 80,522 | 76,563 | 65,969 | |||||||||
Investments in affiliates | 32,031 | 32,361 | 33,336 | |||||||||
Goodwill | 53,799 | 53,799 | 53,799 | |||||||||
Other noncurrent assets | 76,687 | 77,940 | 76,944 | |||||||||
Total assets | $ | 1,583,528 | $ | 1,620,494 | $ | 1,561,171 | ||||||
LIABILITIES AND EQUITY | ||||||||||||
Current liabilities | ||||||||||||
Current maturities of long-term debt | $ | 22 | $ | 21 | $ | 21 | ||||||
Current maturities of non-recourse debt | 6,435 | 1,226 | 1,226 | |||||||||
Accounts payable ($14,960, $18,009 and $22,136 related to CCJVs) | 121,013 | 151,935 | 141,241 | |||||||||
Billings in excess of costs and estimated earnings ($29,963, $32,830 and $43,087 related to CCJVs) | 95,328 | 108,992 | 125,618 | |||||||||
Accrued expenses and other current liabilities | 225,255 | 200,652 | 193,307 | |||||||||
Total current liabilities | 448,053 | 462,826 | 461,413 | |||||||||
Long-term debt | 270,105 | 270,105 | 270,127 | |||||||||
Long-term non-recourse debt | — | 5,516 | 6,435 | |||||||||
Other long-term liabilities | 42,058 | 44,495 | 48,662 | |||||||||
Deferred income taxes | 20,615 | 20,446 | 9,803 | |||||||||
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 39,342,647 shares as of March 31, 2015, 39,186,386 shares as of December 31, 2014 and 39,098,549 shares as of March 31, 2014 | 393 | 392 | 391 | |||||||||
Additional paid-in capital | 133,962 | 134,177 | 126,937 | |||||||||
Retained earnings | 645,931 | 659,816 | 629,443 | |||||||||
Total Granite Construction Incorporated shareholders’ equity | 780,286 | 794,385 | 756,771 | |||||||||
Non-controlling interests | 22,411 | 22,721 | 7,960 | |||||||||
Total equity | 802,697 | 817,106 | 764,731 | |||||||||
Total liabilities and equity | $ | 1,583,528 | $ | 1,620,494 | $ | 1,561,171 | ||||||
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, | 2015 | 2014 | ||||||
Revenue | ||||||||
Construction | $ | 188,520 | $ | 157,040 | ||||
Large Project Construction | 190,305 | 187,336 | ||||||
Construction Materials | 41,424 | 35,471 | ||||||
Total revenue | 420,249 | 379,847 | ||||||
Cost of revenue | ||||||||
Construction | 166,845 | 147,896 | ||||||
Large Project Construction | 172,534 | 171,543 | ||||||
Construction Materials | 40,761 | 39,000 | ||||||
Total cost of revenue | 380,140 | 358,439 | ||||||
Gross profit | 40,109 | 21,408 | ||||||
Selling, general and administrative expenses | 52,203 | 49,247 | ||||||
Gain on sales of property and equipment | (811 | ) | (894 | ) | ||||
Operating loss | (11,283 | ) | (26,945 | ) | ||||
Other (income) expense | ||||||||
Interest income | (442 | ) | (479 | ) | ||||
Interest expense | 3,496 | 3,599 | ||||||
Equity in loss (income) of affiliates | 63 | (791 | ) | |||||
Other (income) expense, net | (1,284 | ) | 51 | |||||
Total other expense | 1,833 | 2,380 | ||||||
Loss before benefit from income taxes | (13,116 | ) | (29,325 | ) | ||||
Benefit from income taxes | (4,506 | ) | (8,064 | ) | ||||
Net loss | (8,610 | ) | (21,261 | ) | ||||
Amount attributable to non-controlling interests | 50 | 708 | ||||||
Net loss attributable to Granite Construction Incorporated | $ | (8,560 | ) | $ | (20,553 | ) | ||
Net loss per share attributable to common shareholders (see Note 12) | ||||||||
Basic | $ | (0.22 | ) | $ | (0.53 | ) | ||
Diluted | $ | (0.22 | ) | $ | (0.53 | ) | ||
Weighted average shares of common stock | ||||||||
Basic | 39,215 | 38,951 | ||||||
Diluted | 39,215 | 38,951 | ||||||
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, | 2015 | 2014 | |||||||
Operating activities | |||||||||
Net loss | $ | (8,610 | ) | $ | (21,261 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||
Depreciation, depletion and amortization | 15,627 | 15,832 | |||||||
Gain on sales of property and equipment | (811 | ) | (894 | ) | |||||
Change in deferred income taxes | (14 | ) | 1,613 | ||||||
Stock-based compensation | 3,163 | 4,095 | |||||||
Equity in net income from unconsolidated joint ventures | (11,271 | ) | (2,562 | ) | |||||
Changes in assets and liabilities: | |||||||||
Receivables | 36,662 | 68,383 | |||||||
Costs and estimated earnings in excess of billings, net | (29,366 | ) | (43,318 | ) | |||||
Inventories | 4,284 | (14,933 | ) | ||||||
Contributions to unconsolidated construction joint ventures | (20,000 | ) | — | ||||||
Distributions from unconsolidated construction joint ventures | 21,170 | 6,880 | |||||||
Other assets, net | (3,305 | ) | (10,167 | ) | |||||
Accounts payable | (28,609 | ) | (19,629 | ) | |||||
Accrued expenses and other current liabilities, net | 14,162 | (3,816 | ) | ||||||
Net cash used in operating activities | (6,918 | ) | (19,777 | ) | |||||
Investing activities | |||||||||
Purchases of marketable securities | (9,988 | ) | (10,000 | ) | |||||
Maturities of marketable securities | 10,000 | 5,000 | |||||||
Proceeds from called marketable securities | 5,000 | 15,000 | |||||||
Purchases of property and equipment | (7,607 | ) | (10,375 | ) | |||||
Proceeds from sales of property and equipment | 1,089 | 1,360 | |||||||
Other investing activities, net | 383 | 39 | |||||||
Net cash (used in) provided by investing activities | (1,123 | ) | 1,024 | ||||||
Financing activities | |||||||||
Cash dividends paid | (5,094 | ) | (5,083 | ) | |||||
Purchases of common stock | (3,191 | ) | (4,278 | ) | |||||
(Distributions to) contributions from non-controlling partners | (270 | ) | 4,278 | ||||||
Other financing activities | 38 | 495 | |||||||
Net cash used in financing activities | (8,517 | ) | (4,588 | ) | |||||
Decrease in cash and cash equivalents | (16,558 | ) | (23,341 | ) | |||||
Cash and cash equivalents at beginning of period | 255,961 | 229,121 | |||||||
Cash and cash equivalents at end of period | $ | 239,403 | $ | 205,780 | |||||
Supplementary Information | |||||||||
Cash paid during the period for: | |||||||||
Interest | $ | 612 | $ | 624 | |||||
Income taxes | 202 | 1,551 | |||||||
Other non-cash activities: | |||||||||
Performance guarantees | $ | 4,736 | $ | (438 | ) | ||||
Non-cash investing and financing activities: | |||||||||
Restricted stock units issued, net of forfeitures | $ | 5,281 | $ | 6,273 | |||||
Accrued cash dividends | 5,115 | 5,083 | |||||||
Accrued equipment purchases | 2,313 | — | |||||||
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, 2014. 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, 2015 and 2014 and the results of our operations and cash flows for the periods presented. The December 31, 2014 condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP.
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, 2015 are not necessarily indicative of the results to be expected for the full year.
We prepared the accompanying condensed consolidated financial statements on the same basis as our annual consolidated financial statements, except as follows:
Change in Accounting Policy for Affirmative Claims
Unresolved contract modifications and claims to recover additional costs to which the Company believes it is entitled under the terms of the projects’ contracts are pending or have been submitted on certain projects. The projects’ owners or their authorized representatives and/or other third parties may be in partial or full agreement with the request or proposed modification, or may have rejected or disagree entirely as to such entitlement.
Effective January 1, 2015, we changed our accounting policy for recognizing revenue associated with affirmative claims with customers. Revenue is now recognized to the extent of costs incurred when it is probable that a claim settlement with a customer will result in additional revenue and the amount can be reasonably estimated. Prior to this change in accounting policy, we recognized revenue from affirmative claims with customers when the claims were settled, generally when a legally binding agreement was signed. We believe this change in accounting policy is preferable as it more accurately reflects the timing and amount of revenue earned on our projects, as well as providing better comparability to our industry peers.
Recognizing claim recoveries requires significant judgments and estimates. During the first quarter of 2015, we implemented new and refined internal controls and processes to enable the reasonable estimation of claims.
Given that these internal controls and processes were not fully implemented until the first quarter of 2015, and we do not believe that it is possible to objectively distinguish information about claims estimates in prior periods from information that subsequently became available, it is impractical to independently and objectively substantiate judgments and estimates that would have been made with respect to claims in prior periods. Therefore, it is not possible to reasonably determine the estimated amounts of and prior reporting periods in which past claims would have met the criteria for recognition under our new accounting policy. Accordingly, we have adopted this accounting policy change prospectively beginning on January 1, 2015.
The effect of adopting the new accounting policy for customer claims was an increase in revenue and gross profit of $9.7 million for the three months ended March 31, 2015 and there were no customer claims settled during the three months ended March 31, 2014.
Gross profit associated with claims against non-customers, such as vendors, designers or subcontractors, continues to be recognized when settled. During the three months ended March 31, 2015, there were no claim settlements with non-customers. During the three months ended March 31, 2014, gross profit from claim settlements with non-customers was $7.9 million.
The potential increase or decrease to gross profit from recoveries for contract modifications and claims may be material in future periods when claims, or a portion of such claims, against customers become probable and estimable, estimates are revised or when claims against other third parties are settled. In addition, the Company may incur additional costs when pursuing such potential recoveries.
6
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. | Recently Issued Accounting Pronouncements |
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard 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.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which provides guidance for consolidation of certain legal entities. The guidance changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The ASU will be effective commencing with our quarter ending March 31, 2016. We do not expect the adoption of this ASU will have a material impact on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The ASU will be effective commencing with our quarter ending March 31, 2016. We do not expect that the adoption of this ASU will have a material impact on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance on accounting for fees paid by a customer in a cloud computing arrangement. A cloud computing arrangement that contains a software license will be accounted for consistently with the acquisition of other software licenses. If no software license is present in the contract, the entity should account for the arrangement as a service contract. The ASU will be effective commencing with our quarter ending March 31, 2016. We do not expect that the adoption of this ASU will have a material impact 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 associated with unapproved change orders and, effective in the first quarter of 2015, affirmative claims to the extent the related costs have been incurred, the amount can be reliably estimated and recovery is probable. Prior to 2015, we recognized revenue on affirmative claims when we had a signed agreement. See Note 1 for further discussion.
We recognize revisions to estimated total costs as soon as the obligation to perform is determined. When we experience significant changes in our estimates of costs to complete, we undergo a process that includes reviewing the nature of the changes to ensure that there are no material amounts that should have been recorded in a prior period rather than as a revision in estimates for the current period. In our review of these changes for the three months ended March 31, 2015 and 2014, we did not identify any amounts that should have been recorded in a prior period. 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 future changes in circumstances or otherwise be required to revise our profitability estimates.
Revenue in an amount equal to cost incurred is recognized if there is not sufficient information to determine the estimated profit on the project with a reasonable level of certainty. The gross profit impact from projects that reached initial profit recognition is not included in the tables below. During the three months ended March 31, 2015 and 2014, the gross profit impact from projects that reached initial profit recognition was $7.6 million and $4.0 million, respectively.
Construction
There were three and 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, 2015 and 2014, respectively. The impact to gross profit during the three months ended March 31, 2015 was a $4.8 million increase, ranging from $1.0 million to $2.2 million, due to estimated cost recovery from claims. The impact to gross profit during the three months ended March 31, 2014 was a $3.5 million decrease, ranging from $1.3 million to $2.2 million, due to additional costs and lower productivity than originally anticipated.
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 a net decrease of $0.8 million and a net increase of $8.2 million for the three months ended March 31, 2015 and 2014, respectively. Amounts attributable to non-controlling interests were $0.5 million of the net decrease and $0.7 million of the net increase for the three months ended March 31, 2015 and 2014, respectively. The projects are summarized as follows:
Increases
Three Months Ended March 31, | |||||||
(dollars in millions) | 2015 | 2014 | |||||
Number of projects with upward estimate changes | 2 | 5 | |||||
Range of increase in gross profit from each project, net | $ | 1.1 - 1.9 | $ | 1.3 - 7.9 | |||
Increase in project profitability | $ | 3.0 | $ | 16.1 | |||
The increase during the three months ended March 31, 2015 was due to estimated cost recovery from claims. The increases during the three months ended March 31, 2014 were due to a claim settlement with a vendor and owner-directed scope changes.
Decreases
Three Months Ended March 31, | |||||||
(dollars in millions) | 2015 | 2014 | |||||
Number of projects with downward estimate changes | 3 | 2 | |||||
Range of reduction in gross profit from each project, net | $ | 1.1 - 1.3 | $ | 3.4 - 4.5 | |||
Decrease in project profitability | $ | 3.8 | $ | 7.9 | |||
The decreases during the three months ended March 31, 2015 and 2014 were due to additional costs and lower productivity than originally anticipated.
8
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) | March 31, 2015 | December 31, 2014 | March 31, 2014 | |||||||||
U.S. Government and agency obligations | $ | 9,290 | $ | 10,511 | $ | 6,157 | ||||||
Commercial paper | 9,992 | 14,993 | 34,986 | |||||||||
Total short-term marketable securities | 19,282 | 25,504 | 41,143 | |||||||||
U.S. Government and agency obligations | 80,522 | 76,563 | 65,969 | |||||||||
Total long-term marketable securities | 80,522 | 76,563 | 65,969 | |||||||||
Total marketable securities | $ | 99,804 | $ | 102,067 | $ | 107,112 | ||||||
Scheduled maturities of held-to-maturity investments were as follows:
(in thousands) | March 31, 2015 | ||
Due within one year | $ | 19,282 | |
Due in one to five years | 80,522 | ||
Total | $ | 99,804 | |
9
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 | ||||||||||||||||
March 31, 2015 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Cash equivalents | ||||||||||||||||
Money market funds | $ | 54,709 | $ | — | $ | — | $ | 54,709 | ||||||||
Total assets | $ | 54,709 | $ | — | $ | — | $ | 54,709 | ||||||||
Fair Value Measurement at Reporting Date Using | ||||||||||||||||
December 31, 2014 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Cash equivalents | ||||||||||||||||
Money market funds | $ | 60,618 | $ | — | $ | — | $ | 60,618 | ||||||||
Total assets | $ | 60,618 | $ | — | $ | — | $ | 60,618 | ||||||||
Fair Value Measurement at Reporting Date Using | ||||||||||||||||
March 31, 2014 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Cash equivalents | ||||||||||||||||
Money market funds | $ | 49,770 | $ | — | $ | — | $ | 49,770 | ||||||||
Total assets | $ | 49,770 | $ | — | $ | — | $ | 49,770 | ||||||||
A reconciliation of cash equivalents to consolidated cash and cash equivalents is as follows:
(in thousands) | March 31, 2015 | December 31, 2014 | March 31, 2014 | |||||||||
Cash equivalents | $ | 54,709 | $ | 60,618 | $ | 49,770 | ||||||
Cash | 184,694 | 195,343 | 156,010 | |||||||||
Total cash and cash equivalents | $ | 239,403 | $ | 255,961 | $ | 205,780 | ||||||
10
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 NPA (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 statements of operations, and was a gain of $1.3 million during the three months ended March 31, 2015. The fair value of the interest rate swap is recorded in other current assets on the condensed consolidated balance sheets and was $1.7 million as of March 31, 2015.
In March 2014, we entered into two diesel commodity swaps covering the periods from May 2014 to October 2014 and from May 2015 to October 2015 which represented roughly 25% of our forecasted purchases for diesel during these periods. In May 2014, we entered into two natural gas commodity swaps covering the periods from June 2014 to October 2014 and from May 2015 to October 2015 representing roughly 25% of our forecasted purchases of natural gas during these periods. The commodity swaps are reported at fair value using Level 2 inputs, and gains or losses are recorded in other (income) expense, net in our condensed consolidated statements of operations, and was a net loss of $0.2 million during the three months ended March 31, 2015. The fair values of the commodity swaps are recorded in accrued expenses and other current liabilities on the condensed consolidated balance sheets and were $1.9 million as of March 31, 2015.
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, 2015 | December 31, 2014 | March 31, 2014 | ||||||||||||||||||||||||
(in thousands) | Fair Value Hierarchy | Carrying Value | Fair Value | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||
Assets: | ||||||||||||||||||||||||||
Held-to-maturity marketable securities | Level 1 | $ | 99,804 | $ | 99,811 | $ | 102,067 | $ | 101,808 | $ | 107,112 | $ | 106,864 | |||||||||||||
Liabilities (including current maturities): | ||||||||||||||||||||||||||
Senior notes payable1 | Level 3 | $ | 200,000 | $ | 222,973 | $ | 200,000 | $ | 220,226 | $ | 200,000 | $ | 226,503 | |||||||||||||
Credit Agreement loan1 | Level 3 | 70,000 | 70,391 | 70,000 | 70,153 | 70,000 | 69,368 | |||||||||||||||||||
1The 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 months ended March 31, 2015 and 2014, we did not record any fair value adjustments related to nonfinancial assets and liabilities measured at fair value on a nonrecurring basis.
11
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. | Receivables, net |
Receivables, net at March 31, 2015, December 31, 2014 and March 31, 2014 are as follows:
(in thousands) | March 31, 2015 | December 31, 2014 | March 31, 2014 | |||||||||
Construction contracts: | ||||||||||||
Completed and in progress | $ | 163,671 | $ | 191,094 | $ | 142,289 | ||||||
Retentions | 74,718 | 84,760 | 69,574 | |||||||||
Total construction contracts | 238,389 | 275,854 | 211,863 | |||||||||
Construction Material sales | 26,776 | 28,549 | 23,790 | |||||||||
Other | 6,504 | 6,822 | 12,212 | |||||||||
Total gross receivables | 271,669 | 311,225 | 247,865 | |||||||||
Less: allowance for doubtful accounts | 341 | 291 | 2,584 | |||||||||
Total net receivables | $ | 271,328 | $ | 310,934 | $ | 245,281 | ||||||
Receivables include amounts billed and billable to clients for services provided as of the end of the applicable period and do not bear interest. To the extent costs have not been billed or are billable, 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, 2015, December 31, 2014 and March 31, 2014 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 retentions receivable and were included in receivables, net on the condensed consolidated balance sheets as of March 31, 2015, December 31, 2014 and March 31, 2014. 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 project work or products by the owners. No retention receivable individually exceeded 10% of total net receivables at any of the presented dates. As of March 31, 2015, 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, 2015 | December 31, 2014 | March 31, 2014 | |||||||||
Escrow | $ | 22,421 | $ | 28,692 | $ | 25,603 | ||||||
Non-escrow | 52,297 | 56,068 | 43,971 | |||||||||
Total retention receivables | $ | 74,718 | $ | 84,760 | $ | 69,574 | ||||||
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.
As of March 31, 2015, the non-escrow retention receivables aged over 90 days decreased to $6.7 million from $8.6 million at December 31, 2014. As of both dates, our allowance for doubtful accounts contained no material provision related to non-escrow retention receivables as we determined there were no significant collectability issues.
12
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. | Construction and Line Item Joint Ventures |
We participate in various construction joint ventures, partnerships and a limited liability company of which we are a limited member (“joint ventures”). We also participate in various “line item” joint venture agreements under which each member is responsible for performing certain discrete items of the total scope of contracted work.
Due to the joint and several nature of the performance obligations under the related owner contracts, if any of the members fail to perform, we and the other members would be responsible for performance of the outstanding work. At March 31, 2015, there was approximately $6.1 billion of construction revenue to be recognized on unconsolidated and line item construction joint venture contracts of which $1.9 billion represented our share and the remaining $4.2 billion represented the other members’ 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 the other members and/or other guarantors.
Construction Joint Ventures
Generally, each construction joint venture is formed to complete a specific contract and is jointly controlled by the venture members. 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 venture. Under our contractual arrangements, we provide capital to these joint ventures in return for an ownership interest. In addition, members 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 members. As we absorb our share of these risks, our investment in each venture is exposed to potential gains and 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, 2015, we determined no change was required for existing construction joint ventures.
13
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 on the condensed consolidated balance sheets as follows:
(in thousands) | March 31, 2015 | December 31, 2014 | March 31, 2014 | |||||||||
Cash and cash equivalents1 | $ | 52,884 | $ | 61,276 | $ | 27,612 | ||||||
Receivables, net | 39,711 | 36,781 | 39,014 | |||||||||
Other current assets | 2,510 | 1,746 | 4,624 | |||||||||
Total current assets | 95,105 | 99,803 | 71,250 | |||||||||
Property and equipment, net | 9,729 | 11,969 | 19,801 | |||||||||
Total assets2 | $ | 104,834 | $ | 111,772 | $ | 91,051 | ||||||
Accounts payable | $ | 14,960 | $ | 18,009 | $ | 22,136 | ||||||
Billings in excess of costs and estimated earnings1 | 29,963 | 32,830 | 43,087 | |||||||||
Accrued expenses and other current liabilities | 1,530 | 2,714 | 7,074 | |||||||||
Total liabilities2 | $ | 46,453 | $ | 53,553 | $ | 72,297 | ||||||
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 and costs in excess of billings and estimated earnings between periods.
2The assets and liabilities of each consolidated 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 a majority of the members 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, 2015, we were engaged in two active consolidated construction joint venture projects with total contract values of $32.7 million and $284.7 million. Our share of revenue remaining to be recognized on these consolidated joint ventures was $0.1 million and $38.0 million. Our proportionate share of the equity in these joint ventures was 55.0% and 65.0%. During the three months ended March 31, 2015 and 2014, total revenue from consolidated construction joint ventures was $15.0 million and $32.1 million, respectively. Total operating cash flows used in consolidated construction joint ventures were $7.9 million and $22.5 million during the three months ended March 31, 2015 and 2014, 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, 2015, these unconsolidated joint ventures were engaged in eleven active projects with total contract values ranging from $73.0 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, 2015, our share of the revenue remaining to be recognized on these unconsolidated joint ventures ranged from $4.6 million to $663.4 million.
As of March 31, 2015, 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.
14
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, 2015 | December 31, 2014 | March 31, 2014 | |||||||||
Assets: | ||||||||||||
Cash and cash equivalents1 | $ | 240,123 | $ | 264,263 | $ | 240,486 | ||||||
Other assets | 721,618 | 573,898 | 581,842 | |||||||||
Less partners’ interest | 637,512 | 546,907 | 542,114 | |||||||||
Granite’s interest | 324,229 | 291,254 | 280,214 | |||||||||
Liabilities: | ||||||||||||
Accounts payable | 191,312 | 146,198 | 131,441 | |||||||||
Billings in excess of costs and estimated earnings1 | 171,187 | 156,604 | 189,979 | |||||||||
Other liabilities | 72,026 | 55,289 | 69,745 | |||||||||
Less partners’ interest | 304,422 | 251,412 | 278,996 | |||||||||
Granite’s interest | 130,103 | 106,679 | 112,169 | |||||||||
Equity in construction joint ventures2 | $ | 194,126 | $ | 184,575 | $ | 168,045 | ||||||
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 costs in excess of billings 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.
2As of March 31, 2015, this balance included $3.4 million of deficit in construction joint ventures that is included in accrued expenses and other current liabilities on the condensed consolidated balance sheet.
Three Months Ended March 31, | ||||||||
(in thousands) | 2015 | 2014 | ||||||
Revenue: | ||||||||
Total | $ | 443,407 | $ | 349,167 | ||||
Less partners’ interest and adjustments1 | 308,120 | 259,857 | ||||||
Granite’s interest | 135,287 | 89,310 | ||||||
Cost of revenue: | ||||||||
Total | 410,071 | 297,461 | ||||||
Less partners’ interest and adjustments1 | 286,047 | 210,906 | ||||||
Granite’s interest | 124,024 | 86,555 | ||||||
Granite’s interest in gross profit | $ | 11,263 | $ | 2,755 | ||||
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, 2015 and 2014, unconsolidated construction joint venture net income was $33.4 million and $51.0 million, respectively, of which our share was $11.3 million and $2.6 million, respectively. These net income amounts exclude our corporate overhead required to manage the joint ventures.
15
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Line Item Joint Ventures
The revenue for each line item joint venture member’s discrete items of work is defined in the contract with the project owner and each venture member 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 member 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, 2015, we had three active line item joint venture construction projects with total contract values ranging from $42.7 million to $86.6 million of which our portion ranged from $29.1 million to $64.1 million. As of March 31, 2015, our share of revenue remaining to be recognized on these line item joint ventures ranged from $2.2 million to $22.4 million.
8. | Investments in Affiliates |
Our investments in affiliates balance is related to our investments in unconsolidated non-construction entities that we account for using the equity method of accounting, including investments in real estate entities and a non-real estate entity. Our share of the operating results of the equity method investments is included in other income in the condensed consolidated statements of operations and as a single line item on the condensed consolidated balance sheets as investments in affiliates.
Our investments in affiliates balance consists of the following (in thousands):
(in thousands) | March 31, 2015 | December 31, 2014 | March 31, 2014 | |||||||||
Equity method investments in real estate affiliates | $ | 22,639 | $ | 22,623 | $ | 22,353 | ||||||
Equity method investment in other affiliate | 9,392 | 9,738 | 10,983 | |||||||||
Total investments in affiliates | $ | 32,031 | $ | 32,361 | $ | 33,336 | ||||||
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, 2015 | December 31, 2014 | March 31, 2014 | |||||||||
Total assets | $ | 178,723 | $ | 170,174 | $ | 172,763 | ||||||
Net assets | 101,212 | 97,639 | 95,561 | |||||||||
Granite’s share of net assets | 32,031 | 32,361 | 33,336 | |||||||||
The equity method investments in real estate included $16.8 million, $16.5 million and $15.9 million in residential real estate in Texas as of March 31, 2015, December 31, 2014 and March 31, 2014, respectively. The remaining balances were in commercial real estate in Texas. Of the $178.7 million in total assets as of March 31, 2015, real estate entities had total assets ranging from $1.9 million to $61.8 million and the non-real estate entity had total assets of $23.9 million.
16
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) | March 31, 2015 | December 31, 2014 | March 31, 2014 | |||||||||
Equipment and vehicles | $ | 766,066 | $ | 767,313 | $ | 770,266 | ||||||
Quarry property | 172,046 | 172,081 | 170,442 | |||||||||
Land and land improvements | 110,302 | 110,235 | 120,092 | |||||||||
Buildings and leasehold improvements | 82,628 | 82,655 | 83,994 | |||||||||
Office furniture and equipment | 70,820 | 70,820 | 70,826 | |||||||||
Property and equipment | 1,201,862 | 1,203,104 | 1,215,620 | |||||||||
Less: accumulated depreciation and depletion | 801,952 | 793,451 | 783,222 | |||||||||
Property and equipment, net | $ | 399,910 | $ | 409,653 | $ | 432,398 | ||||||
10. | 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, 2015, December 31, 2014 and March 31, 2014.
The following table presents the goodwill balance by reportable segment:
(in thousands) | March 31, 2015 | December 31, 2014 | March 31, 2014 | |||||||||
Construction | $ | 29,260 | $ | 29,260 | $ | 29,260 | ||||||
Large Project Construction | 22,593 | 22,593 | 22,593 | |||||||||
Construction Materials | 1,946 | 1,946 | 1,946 | |||||||||
Total goodwill | $ | 53,799 | $ | 53,799 | $ | 53,799 | ||||||
17
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Amortized Intangible Assets
The following is the breakdown of our amortized intangible assets that are included in other noncurrent assets on our condensed consolidated balance sheets (in thousands):
Accumulated | ||||||||||||
March 31, 2015 | Gross Value | Amortization | Net Book Value | |||||||||
Permits | $ | 29,713 | $ | (13,396 | ) | $ | 16,317 | |||||
Acquired backlog | 7,900 | (7,378 | ) | 522 | ||||||||
Customer lists | 4,398 | (2,858 | ) | 1,540 | ||||||||
Trade name | 4,100 | (971 | ) | 3,129 | ||||||||
Covenants not to compete and other | 2,459 | (2,428 | ) | 31 | ||||||||
Total amortized intangible assets | $ | 48,570 | $ | (27,031 | ) | $ | 21,539 | |||||
Accumulated | ||||||||||||
December 31, 2014 | Gross Value | Amortization | Net Book Value | |||||||||
Permits | $ | 29,713 | $ | (13,115 | ) | $ | 16,598 | |||||
Acquired backlog | 7,900 | (7,263 | ) | 637 | ||||||||
Customer lists | 4,398 | (2,785 | ) | 1,613 | ||||||||
Trade name | 4,100 | (863 | ) | 3,237 | ||||||||
Covenants not to compete and other | 2,459 | (2,428 | ) | 31 | ||||||||
Total amortized intangible assets | $ | 48,570 | $ | (26,454 | ) | $ | 22,116 | |||||
Accumulated | ||||||||||||
March 31, 2014 | Gross Value | Amortization | Net Book Value | |||||||||
Permits | $ | 29,713 | $ | (12,273 | ) | $ | 17,440 | |||||
Acquired backlog | 7,900 | (6,962 | ) | 938 | ||||||||
Customer lists | 4,398 | (2,564 | ) | 1,834 | ||||||||
Trade name | 4,100 | (539 | ) | 3,561 | ||||||||
Covenants not to compete and other | 2,459 | (2,424 | ) | 35 | ||||||||
Total amortized intangible assets | $ | 48,570 | $ | (24,762 | ) | $ | 23,808 | |||||
Amortization expense related to amortized intangible assets for each of the three months ended March 31, 2015 and 2014 was $0.6 million. Based on the amortized intangible assets balance at March 31, 2015, amortization expense expected to be recorded in the future is as follows: $2.4 million for the remainder of 2015; $1.7 million in 2016; $1.7 million in 2017; $1.7 million in 2018; $1.7 million in 2019; and $12.3 million thereafter.
18
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. | 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, 2015, we were in compliance with the covenants contained in our note purchase agreement governing our senior notes payable (“2019 NPA”) and the credit agreement governing the $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.
12. | Weighted Average Shares Outstanding and 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.
A reconciliation of the weighted average shares outstanding used in calculating basic and diluted net income (loss) per share in the accompanying condensed consolidated statements of operations is as follows:
Three Months Ended March 31, | ||||||
(in thousands) | 2015 | 2014 | ||||
Weighted average shares outstanding: | ||||||
Weighted average common stock outstanding | 39,215 | 38,951 | ||||
Total basic weighted average shares outstanding | 39,215 | 38,951 | ||||
Diluted weighted average shares outstanding: | ||||||
Weighted average common stock outstanding, basic | 39,215 | 38,951 | ||||
Effect of dilutive securities: | ||||||
Common stock options and restricted stock units1 | — | — | ||||
Total weighted average shares outstanding assuming dilution | 39,215 | 38,951 | ||||
1Due to the net loss for the three months ended March 31, 2015 and 2014, restricted stock units and common stock options representing approximately 598,000 and 799,000 shares, respectively, have been excluded from the number of shares used in calculating diluted net loss per share, as their inclusion would be antidilutive.
19
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. | 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, 2014 | $ | 794,385 | $ | 22,721 | $ | 817,106 | ||||||
Purchase of common stock1 | (3,191 | ) | — | (3,191 | ) | |||||||
Other transactions with shareholders and employees3 | 2,767 | — | 2,767 | |||||||||
Transactions with non-controlling interests, net | — | (260 | ) | (260 | ) | |||||||
Net loss | (8,560 | ) | (50 | ) | (8,610 | ) | ||||||
Dividends on common stock | (5,115 | ) | — | (5,115 | ) | |||||||
Balance at March 31, 2015 | $ | 780,286 | $ | 22,411 | $ | 802,697 | ||||||
Balance at December 31, 2013 | $ | 781,940 | $ | 4,404 | $ | 786,344 | ||||||
Purchase of common stock2 | (4,278 | ) | — | (4,278 | ) | |||||||
Other transactions with shareholders and employees3 | 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 | ||||||
1Represents 98,000 shares purchased in connection with employee tax withholding for shares/units vested under our Amended and Restated 1999 Equity Incentive Plan.
2Represents 110,000 shares purchased in connection with employee tax withholding for shares/units vested under our Amended and Restated 1999 Equity Incentive Plan.
3Amounts are comprised primarily of amortized restricted stock and units.
20
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. | Legal Proceedings |
In the ordinary course of business, we and our affiliates are involved in various legal proceedings 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 various laws and regulations, the outcomes of which cannot be predicted with certainty.
Some of the matters in which we or our joint ventures and 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, debarred or incur other administrative penalties or sanctions, 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.
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, are recorded in our condensed consolidated balance sheets. The aggregate liabilities recorded as of March 31, 2015, December 31, 2014 and March 31, 2014 related to these matters were approximately $9.4 million, $9.7 million and $11.1 million, respectively, and were primarily included in accrued expenses and other current liabilities. The aggregate range of possible loss related to matters considered reasonably possible was zero to approximately $4.5 million as of March 31, 2015. 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 (collectively 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 the DOJ and the Agencies’ representatives to discuss the government’s criminal investigation of the Grand Avenue Project participants, including Granite Northeast, and to discuss their respective positions on, and potential resolution of, the issues raised in the investigation. In connection with this investigation, Granite Northeast is subject to potential civil, criminal, and/or administrative penalties or sanctions, as well as additional future DBE compliance activities and the costs associated therewith. 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, 2015. Granite believes that it is reasonably possible that it may incur liability in relation to this matter that is in excess of such accrual. 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.
21
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. | Business Segment Information |
Our reportable segments are: Construction, Large Project Construction and Construction Materials.
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, together with 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. In addition, the Construction Materials segment includes real estate investment activity that was not material for any of the periods presented.
The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies contained in our 2014 Annual Report on Form 10-K, except as disclosed in Note 1. We evaluate segment performance based on gross profit or loss, and do not include selling, general and administrative expenses and non-operating income or expense. Segment assets include property and equipment, intangibles, goodwill, inventory and equity in construction joint ventures.
22
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 | Total | ||||||||||||
2015 | ||||||||||||||||
Total revenue from reportable segments | $ | 188,520 | $ | 190,305 | $ | 53,700 | $ | 432,525 | ||||||||
Elimination of intersegment revenue | — | — | (12,276 | ) | (12,276 | ) | ||||||||||
Revenue from external customers | 188,520 | 190,305 | 41,424 | 420,249 | ||||||||||||
Gross profit | 21,675 | 17,771 | 663 | 40,109 | ||||||||||||
Depreciation, depletion and amortization | 4,692 | 2,644 | 5,432 | 12,768 | ||||||||||||
Segment assets | 144,878 | 253,070 | 307,140 | 705,088 | ||||||||||||
2014 | ||||||||||||||||
Total revenue from reportable segments | $ | 157,040 | $ | 187,336 | $ | 42,109 | $ | 386,485 | ||||||||
Elimination of intersegment revenue | — | — | (6,638 | ) | (6,638 | ) | ||||||||||
Revenue from external customers | 157,040 | 187,336 | 35,471 | 379,847 | ||||||||||||
Gross profit (loss) | 9,144 | 15,793 | (3,529 | ) | 21,408 | |||||||||||
Depreciation, depletion and amortization | 4,015 | 3,204 | 5,098 | 12,317 | ||||||||||||
Segment assets | 147,232 | 238,519 | 329,945 | 715,696 | ||||||||||||
A reconciliation of segment gross profit to consolidated loss before benefit from income taxes is as follows:
Three Months Ended March 31, | ||||||||
(in thousands) | 2015 | 2014 | ||||||
Total gross profit from reportable segments | $ | 40,109 | $ | 21,408 | ||||
Selling, general and administrative expenses | 52,203 | 49,247 | ||||||
Gain on sales of property and equipment | (811 | ) | (894 | ) | ||||
Other expense | 1,833 | 2,380 | ||||||
Loss before benefit from income taxes | $ | (13,116 | ) | $ | (29,325 | ) | ||
23
Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Disclosure
From time to time, Granite makes certain comments and disclosures in reports and statements, including in this Quarterly Report on Form 10-Q, or statements made by its officers or directors, that are not based on historical facts, including statements regarding future events, occurrences, circumstances, activities, performance, outcomes and results, that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by words such as “future,” “outlook,” “assumes,” “believes,” “expects,” “estimates,” “anticipates,” “intends,” “plans,” “appears,” “may,” “will,” “should,” “could,” “would,” “continue,” and the negatives thereof or other comparable terminology or by the context in which they are made. In addition, other written or oral statements which constitute forward-looking statements have been made and may in the future be made by or on behalf of Granite. These forward-looking statements are estimates reflecting the best judgment of senior management and reflect our current expectations regarding future events, occurrences, circumstances, activities, performance, outcomes and results. These expectations may or may not be realized. Some of these expectations may be based on beliefs, assumptions or estimates that may prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our expectations not being realized or otherwise materially affect our business, financial condition, results of operations, cash flows and liquidity. Such risks and uncertainties include, but are not limited to, those more specifically described in our Annual Report on Form 10-K under “Item 1A. Risk Factors.” Due to the inherent risks and uncertainties associated with our forward-looking statements, the reader is cautioned not to place undue reliance on them. The reader is also cautioned that the forward-looking statements contained herein speak only as of the date of this Quarterly Report on Form 10-Q and, except as required by law, we undertake no obligation to revise or update any forward-looking statements for any reason.
24
Overview
We are one of the largest diversified heavy civil contractors and construction materials producers in the United States, engaged in the construction and improvement of streets, roads, highways, mass transit facilities, airport infrastructure, bridges, trenchless and underground utilities, power-related facilities, utilities, tunnels, dams and other infrastructure-related projects. We own aggregate reserves and plant facilities to produce construction materials for use in our construction business and for sale to third parties. We also operate a real estate investment business that we have been divesting over the past five years as part of our 2010 Enterprise Improvement Plan (“EIP”). Our permanent offices are located in Alaska, Arizona, California, Colorado, Florida, Illinois, Nevada, New York, Texas, Utah and Washington. We have three reportable business segments: Construction, Large Project Construction and Construction Materials (see Note 15 of “Notes to the Condensed Consolidated Financial Statements”).
In addition to business segments, we review our business by operating groups and by public and private market sectors. Our operating groups are defined as follows: (1) California; (2) Northwest, which primarily includes offices in Alaska, Arizona, Nevada, Utah and Washington; (3) Heavy Civil, which primarily includes offices in California, Florida, New York and Texas; and (4) Kenny, which primarily includes offices in Colorado and Illinois. Each of these operating groups may include financial results from our Construction and Large Project Construction segments. A project’s results are reported in the operating group that is responsible for the project, not necessarily the geographic area where the work is located. In some cases, the operations of an operating group include the results of work performed outside of that geographic region. Our California and Northwest operating groups include financial results from our Construction Materials segment.
Our construction contracts are obtained through competitive bidding in response to solicitations by both public agencies and private parties and on a negotiated basis as a result of solicitations from private parties. Project owners use a variety of methods to make contractors aware of new projects, including posting bidding opportunities on agency websites, disclosing long-term infrastructure plans, advertising and other general solicitations. Our bidding activity is affected by such factors as the nature and volume of advertising and other solicitations, contract backlog, available personnel, current utilization of equipment and other resources, our ability to obtain necessary surety bonds and competitive considerations. Our contract review process includes identifying risks and opportunities during the bidding process and managing these risks through mitigation efforts such as insurance and pricing. Contracts fitting certain criteria of size and complexity are reviewed by various levels of management and, in some cases, by the Executive Committee of our Board of Directors. Bidding activity, contract backlog and revenue resulting from the award of new contracts may vary significantly from period to period.
Our typical construction project begins with the preparation and submission of a bid to a customer. If selected as the successful bidder, we generally enter into a contract with the customer that provides for payment upon completion of specified work or units of work as identified in the contract.
The four primary economic drivers of our business are (1) the overall health of the economy; (2) federal, state and local public funding levels; (3) population growth resulting in public and private development; and (4) the need to replace or repair aging infrastructure. A stagnant or declining economy will generally result in reduced demand for construction and construction materials in the private sector. This reduced demand increases competition for private sector projects and will ultimately also increase competition in the public sector as companies migrate from bidding on scarce private sector work to projects in the public sector. Greater competition can reduce our revenues and/or have a downward impact on our gross profit margins. In addition, a stagnant or declining economy tends to produce less tax revenue for public agencies, thereby decreasing a source of funds available for spending on public infrastructure improvements. Some funding sources that have been specifically earmarked for infrastructure spending, such as diesel and gasoline taxes, are not as directly affected by a stagnant or declining economy, unless actual consumption is reduced. However, even these can be temporarily at risk as federal, state and local governments take actions to balance their budgets. Additionally, high fuel prices and more fuel efficient vehicles can have a dampening effect on consumption, resulting in overall lower tax revenue. Conversely, increased levels of public funding as well as an expanding or robust economy will generally increase demand for our services and provide opportunities for revenue growth and margin improvement.
25
Current Economic Environment and Outlook
At more than $2.9 billion at March 31, 2015, total company backlog continues to provide Granite with opportunities to grow. Financing from the Transportation Infrastructure Financing and Innovation Act has been a key driver for large projects across the country. However, dedicated federal funding remains a concern. The two-year federal highway bill, Moving Ahead for Progress in the 21st Century, expired in September 2014 and the current short-term extension runs out in May 2015. Congress must act swiftly to ensure long-term funding and continued federal financing are achieved in the next highway bill. A clear commitment to federal infrastructure investment is overdue and is necessary to give state and local leaders the confidence to plan beyond the end of the next short-term patchwork funding cycle.
Despite increased tax revenues, without long-term federal funding commitments, capital budgets for many of our traditional Western markets have remained flat or gone negative over the past few years. Though generally stable, the volume of available work and the bidding environment in these traditional markets remains highly competitive. We remain encouraged by continued signs of recovery in the private sector, and we continue to expect growing revenue and profit synergies from our diversified markets, including power, tunnel and underground.
The markets for projects within our Large Project Construction segment remain strong. Granite is a highly desired partner for all types of work, including Public Private Partnerships. We continue to pursue significant bidding opportunities for our Large Project Construction segment, which include teaming arrangements with partners to bid on nearly $18 billion over the next two years.
Results of Operations
Our business is seasonal and can be affected by weather conditions in certain geographies. In addition, annual maintenance on our equipment and plants is typically performed during the first quarter, causing down time in operations. These factors can create variability in revenue and profit. Therefore, the results of operations for the three months of a given quarter are not necessarily indicative of the results to be expected for the full year.
The following table presents a financial summary on a comparative basis for the three months ended March 31, 2015 and 2014.
Three Months Ended March 31, | |||||||
(in thousands) | 2015 | 2014 | |||||
Total revenue | $ | 420,249 | $ | 379,847 | |||
Gross profit | 40,109 | 21,408 | |||||
Operating loss | (11,283 | ) | (26,945 | ) | |||
Total other expense | 1,833 | 2,380 | |||||
Net loss attributable to Granite Construction Inc. | (8,560 | ) | (20,553 | ) | |||
26
Revenue
Total Revenue by Segment
Three Months Ended March 31, | ||||||||||||||
(dollars in thousands) | 2015 | 2014 | ||||||||||||
Construction | $ | 188,520 | 44.8 | % | $ | 157,040 | 41.3 | % | ||||||
Large Project Construction | 190,305 | 45.3 | 187,336 | 49.4 | ||||||||||
Construction Materials | 41,424 | 9.9 | 35,471 | 9.3 | ||||||||||
Total | $ | 420,249 | 100.0 | % | $ | 379,847 | 100.0 | % | ||||||
Construction Revenue
Three Months Ended March 31, | ||||||||||||||
(dollars in thousands) | 2015 | 2014 | ||||||||||||
California: | ||||||||||||||
Public sector | $ | 64,949 | 34.4 | % | $ | 66,520 | 42.5 | % | ||||||
Private sector | 26,235 | 13.9 | 17,658 | 11.2 | ||||||||||
Northwest: | ||||||||||||||
Public sector | 37,854 | 20.1 | 22,423 | 14.3 | ||||||||||
Private sector | 28,459 | 15.1 | 19,222 | 12.2 | ||||||||||
Heavy Civil: | ||||||||||||||
Public sector | 6,958 | 3.7 | 2,851 | 1.8 | ||||||||||
Kenny: | ||||||||||||||
Public sector | 8,432 | 4.5 | 15,569 | 9.9 | ||||||||||
Private sector | 15,633 | 8.3 | 12,797 | 8.1 | ||||||||||
Total | $ | 188,520 | 100.0 | % | $ | 157,040 | 100.0 | % | ||||||
Construction revenue for the three months ended March 31, 2015 increased by $31.5 million, or 20.0%, compared to the same period in 2014. The increase was primarily due to early season work in the Northwest operating group, new work in the Heavy Civil operating group and estimated cost recoveries on claims in the California and Northwest operating groups, partially offset by decreases due to timing of new awards in Kenny.
27
Large Project Construction Revenue
Three Months Ended March 31, | ||||||||||||||
(dollars in thousands) | 2015 | 2014 | ||||||||||||
Heavy Civil1 | $ | 140,519 | 73.8 | % | $ | 141,983 | 75.8 | % | ||||||
Northwest1 | 9,711 | 5.1 | 2,902 | 1.5 | ||||||||||
California1 | 5,125 | 2.7 | 17,239 | 9.3 | ||||||||||
Kenny | ||||||||||||||
Public sector | 22,811 | 12.0 | $ | 18,188 | 9.7 | |||||||||
Private sector | 12,139 | 6.4 | $ | 7,024 | 3.7 | |||||||||
Total | $ | 190,305 | 100.0 | % | $ | 187,336 | 100.0 | % | ||||||
1For the periods presented, Large Project Construction revenue was primarily earned from the public sector.
Large Project Construction revenue for the three months ended March 31, 2015 increased by $3.0 million, or 1.6%, compared to the same period in 2014 due to progress on existing projects, entering the year with greater backlog than in 2014 in the Northwest operating group and estimated cost recoveries on claims. These increases were partially offset by ongoing projects nearing completion and delayed starts on new work in the California, Northwest and Heavy Civil operating groups.
Construction Materials Revenue
Three Months Ended March 31, | ||||||||||||||
(dollars in thousands) | 2015 | 2014 | ||||||||||||
California | $ | 29,122 | 70.3 | % | $ | 24,468 | 69.0 | % | ||||||
Northwest | 12,302 | 29.7 | 11,003 | 31.0 | ||||||||||
Total | $ | 41,424 | 100.0 | % | $ | 35,471 | 100.0 | % | ||||||
Construction Materials revenue for the three months ended March 31, 2015 increased by $6.0 million, or 16.8%, compared to the same period in 2014 primarily due to increased volume from early season work in most Western states.
Contract Backlog
Our contract backlog consists of the unearned revenue on awarded contracts, including 100% of our consolidated joint venture contracts and our proportionate share of unconsolidated joint venture contracts. We generally include a project in our contract backlog at the time it is awarded and to the extent we believe funding is probable. Certain federal government contracts where funding is appropriated on a periodic basis are included in contract backlog at the time of the award. Existing contracts that include unexercised contract options and unissued task orders are included in contract backlog as task orders are issued or options are exercised. Substantially all of the contracts in our contract backlog may be canceled or modified at the election of the customer; however, we have not been materially adversely affected by contract cancellations or modifications in the past.
28
Total Contract Backlog by Segment
(dollars in thousands) | March 31, 2015 | December 31, 2014 | March 31, 2014 | ||||||||||||||||||
Construction | $ | 749,261 | 25.5 | % | $ | 712,967 | 26.2 | % | $ | 786,458 | 30.6 | % | |||||||||
Large Project Construction | 2,187,888 | ||||||||||||||||||||