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 September 30, 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 October 22, 2015.
Class | Outstanding | |
Common Stock, $0.01 par value | 39,382,715 | |
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) | ||||||||||||
September 30, 2015 | December 31, 2014 | September 30, 2014 | ||||||||||
ASSETS | ||||||||||||
Current assets | ||||||||||||
Cash and cash equivalents ($41,052, $61,276 and $29,518 related to consolidated construction joint ventures (“CCJVs”) | $ | 221,785 | $ | 255,961 | $ | 167,174 | ||||||
Short-term marketable securities | 17,607 | 25,504 | 27,950 | |||||||||
Receivables, net ($36,527, $36,781 and $45,483 related to CCJVs) | 456,688 | 310,934 | 417,628 | |||||||||
Costs and estimated earnings in excess of billings ($365, $129 and $21,105 related to CCJVs) | 56,971 | 36,411 | 62,823 | |||||||||
Inventories | 60,289 | 68,920 | 74,605 | |||||||||
Real estate held for development and sale | 11,609 | 11,609 | 11,773 | |||||||||
Deferred income taxes | 39,272 | 53,231 | 55,874 | |||||||||
Equity in construction joint ventures | 219,652 | 184,575 | 181,259 | |||||||||
Other current assets | 18,863 | 23,033 | 21,743 | |||||||||
Total current assets | 1,102,736 | 970,178 | 1,020,829 | |||||||||
Property and equipment, net ($6,068, $11,969 and $16,172 related to CCJVs) | 385,036 | 409,653 | 424,272 | |||||||||
Long-term marketable securities | 70,646 | 76,563 | 74,140 | |||||||||
Investments in affiliates | 33,077 | 32,361 | 34,177 | |||||||||
Goodwill | 53,799 | 53,799 | 53,799 | |||||||||
Other noncurrent assets | 73,412 | 77,940 | 75,826 | |||||||||
Total assets | $ | 1,718,706 | $ | 1,620,494 | $ | 1,683,043 | ||||||
LIABILITIES AND EQUITY | ||||||||||||
Current liabilities | ||||||||||||
Current maturities of long-term debt | $ | 22 | $ | 21 | $ | 21 | ||||||
Current maturities of non-recourse debt | 5,822 | 1,226 | 1,226 | |||||||||
Accounts payable ($10,438, $18,009 and $22,951 related to CCJVs) | 196,885 | 151,935 | 205,493 | |||||||||
Billings in excess of costs and estimated earnings ($13,794, $32,830 and $23,138 related to CCJVs) | 122,409 | 108,992 | 115,809 | |||||||||
Accrued expenses and other current liabilities ($1,148, $2,714 and $3,110 related to CCJVs) | 224,101 | 200,652 | 221,618 | |||||||||
Total current liabilities | 549,239 | 462,826 | 544,167 | |||||||||
Long-term debt | 270,105 | 270,105 | 270,127 | |||||||||
Long-term non-recourse debt | — | 5,516 | 5,822 | |||||||||
Other long-term liabilities | 41,211 | 44,495 | 45,887 | |||||||||
Deferred income taxes | 21,646 | 20,446 | 9,977 | |||||||||
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 39,380,053 shares as of September 30, 2015, 39,186,386 shares as of December 31, 2014 and 39,152,255 shares as of September 30, 2014 | 394 | 392 | 391 | |||||||||
Additional paid-in capital | 137,974 | 134,177 | 132,396 | |||||||||
Retained earnings | 675,927 | 659,816 | 648,017 | |||||||||
Total Granite Construction Incorporated shareholders’ equity | 814,295 | 794,385 | 780,804 | |||||||||
Non-controlling interests | 22,210 | 22,721 | 26,259 | |||||||||
Total equity | 836,505 | 817,106 | 807,063 | |||||||||
Total liabilities and equity | $ | 1,718,706 | $ | 1,620,494 | $ | 1,683,043 | ||||||
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 September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Revenue | ||||||||||||||||
Construction | $ | 427,018 | $ | 447,097 | $ | 921,143 | $ | 873,357 | ||||||||
Large Project Construction | 217,084 | 179,446 | 590,282 | 611,110 | ||||||||||||
Construction Materials | 107,274 | 93,221 | 229,442 | 201,014 | ||||||||||||
Total revenue | 751,376 | 719,764 | 1,740,867 | 1,685,481 | ||||||||||||
Cost of revenue | ||||||||||||||||
Construction | 362,720 | 398,295 | 795,108 | 790,584 | ||||||||||||
Large Project Construction | 194,512 | 173,767 | 535,166 | 538,846 | ||||||||||||
Construction Materials | 93,246 | 81,010 | 203,818 | 185,536 | ||||||||||||
Total cost of revenue | 650,478 | 653,072 | 1,534,092 | 1,514,966 | ||||||||||||
Gross profit | 100,898 | 66,692 | 206,775 | 170,515 | ||||||||||||
Selling, general and administrative expenses | 50,077 | 47,386 | 151,374 | 147,731 | ||||||||||||
Gain on sales of property and equipment | (804 | ) | (3,004 | ) | (2,090 | ) | (6,891 | ) | ||||||||
Operating income | 51,625 | 22,310 | 57,491 | 29,675 | ||||||||||||
Other (income) expense | ||||||||||||||||
Interest income | (591 | ) | (451 | ) | (1,561 | ) | (1,343 | ) | ||||||||
Interest expense | 3,485 | 2,488 | 10,966 | 10,426 | ||||||||||||
Equity in income of affiliates | (1,155 | ) | (1,109 | ) | (1,762 | ) | (2,310 | ) | ||||||||
Other expense (income), net | 27 | 1,196 | (1,409 | ) | (450 | ) | ||||||||||
Total other expense | 1,766 | 2,124 | 6,234 | 6,323 | ||||||||||||
Income before provision for income taxes | 49,859 | 20,186 | 51,257 | 23,352 | ||||||||||||
Provision for income taxes | 17,679 | 6,081 | 18,148 | 8,301 | ||||||||||||
Net income | 32,180 | 14,105 | 33,109 | 15,051 | ||||||||||||
Amount attributable to non-controlling interests | (1,421 | ) | 1,177 | (1,297 | ) | (6,681 | ) | |||||||||
Net income attributable to Granite Construction Incorporated | $ | 30,759 | $ | 15,282 | $ | 31,812 | $ | 8,370 | ||||||||
Net income per share attributable to common shareholders (see Note 12) | ||||||||||||||||
Basic | $ | 0.78 | $ | 0.39 | $ | 0.81 | $ | 0.21 | ||||||||
Diluted | $ | 0.77 | $ | 0.38 | $ | 0.80 | $ | 0.21 | ||||||||
Weighted average shares of common stock | ||||||||||||||||
Basic | 39,378 | 39,150 | 39,317 | 39,073 | ||||||||||||
Diluted | 39,897 | 39,813 | 39,863 | 39,790 | ||||||||||||
Dividends per common share | $ | 0.13 | $ | 0.13 | $ | 0.39 | $ | 0.39 | ||||||||
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) | |||||||||
Nine Months Ended September 30, | 2015 | 2014 | |||||||
Operating activities | |||||||||
Net income | $ | 33,109 | $ | 15,051 | |||||
Adjustments to reconcile net income to net cash used in operating activities: | |||||||||
Depreciation, depletion and amortization | 48,517 | 49,968 | |||||||
Gain on sales of property and equipment | (2,090 | ) | (6,891 | ) | |||||
Change in deferred income taxes | 14,967 | 1,795 | |||||||
Stock-based compensation | 6,962 | 8,933 | |||||||
Equity in net income from unconsolidated joint ventures | (29,465 | ) | (27,001 | ) | |||||
Changes in assets and liabilities: | |||||||||
Receivables | (148,791 | ) | (103,913 | ) | |||||
Costs and estimated earnings in excess of billings, net | 3,621 | (44,126 | ) | ||||||
Inventories | 8,631 | (12,131 | ) | ||||||
Contributions to unconsolidated construction joint ventures | (55,394 | ) | (24,797 | ) | |||||
Distributions from unconsolidated construction joint ventures | 41,558 | 46,991 | |||||||
Other assets, net | 5,719 | 5,455 | |||||||
Accounts payable | 48,034 | 43,710 | |||||||
Accrued expenses and other current liabilities, net | 16,493 | 123 | |||||||
Net cash used in operating activities | (8,129 | ) | (46,833 | ) | |||||
Investing activities | |||||||||
Purchases of marketable securities | (54,961 | ) | (49,975 | ) | |||||
Maturities of marketable securities | 26,700 | 40,000 | |||||||
Proceeds from called marketable securities | 45,000 | 25,000 | |||||||
Purchases of property and equipment | (26,144 | ) | (37,471 | ) | |||||
Proceeds from sales of property and equipment | 3,439 | 12,257 | |||||||
Other investing activities, net | 598 | (1,109 | ) | ||||||
Net cash used in investing activities | (5,368 | ) | (11,298 | ) | |||||
Financing activities | |||||||||
Cash dividends paid | (15,326 | ) | (15,229 | ) | |||||
Purchases of common stock | (3,325 | ) | (4,751 | ) | |||||
(Distributions to) contributions from non-controlling partners, net | (1,740 | ) | 15,156 | ||||||
Other financing activities, net | (288 | ) | 1,008 | ||||||
Net cash used in financing activities | (20,679 | ) | (3,816 | ) | |||||
Decrease in cash and cash equivalents | (34,176 | ) | (61,947 | ) | |||||
Cash and cash equivalents at beginning of period | 255,961 | 229,121 | |||||||
Cash and cash equivalents at end of period | $ | 221,785 | $ | 167,174 | |||||
Supplementary Information | |||||||||
Cash paid during the period for: | |||||||||
Interest | $ | 7,787 | $ | 6,911 | |||||
Income taxes | 450 | 2,293 | |||||||
Other non-cash operating activities: | |||||||||
Performance guarantees | $ | (10,700 | ) | $ | 21,332 | ||||
Non-cash investing and financing activities: | |||||||||
Restricted stock units issued, net of forfeitures | $ | 5,924 | $ | 6,862 | |||||
Accrued cash dividends | 5,119 | 5,090 | |||||||
Accrued equipment purchases | 3,245 | (671 | ) | ||||||
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 September 30, 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 and nine months ended September 30, 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 customers’ contracts are pending or have been submitted on certain projects. The owners or their authorized representatives and/or other third parties may be in partial or full agreement with the modifications or claims, or may have rejected or disagree entirely or partially 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 $35.0 million and $44.7 million for the three and nine months ended September 30, 2015, respectively. During the nine months ended September 30, 2014 customer claim settlements had a gross profit impact of $23.2 million. There were no customer claim settlements during the three months ended September 30, 2014. Recognition of estimated recovery for affirmative claims increases costs and estimated earnings in excess of billings and may remain outstanding for more than twelve months.
Gross profit associated with claims against non-customers, such as vendors, designers or subcontractors, continues to be recognized when the claims are settled. During the three and nine months ended September 30, 2015 and three months ended September 30, 2014, there were no claim settlements with non-customers. During the nine months ended September 30, 2014, gross profit from claim settlements with non-customers was $7.9 million.
6
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 or as a result of settlement.
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. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, which deferred the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date. Therefore, the ASU will be effective commencing with our quarter ending March 31, 2018. 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 to 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 requires 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 the adoption of this ASU to 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 the adoption of this ASU to have a material impact on our consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Topic 330, Inventory, requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The amendments to ASU No. 2015-11 require an entity to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The ASU will be effective commencing with our quarter ending March 31, 2017. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
7
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In August 2015, the FASB issued ASU No. 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements which permits debt issuance costs for line-of-credit arrangements to be deferred and presented as an asset and subsequently amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The ASU will be effective commencing with our quarter ending March 31, 2016. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, rather than retrospectively adjust previously issued financial statements. The ASU will be effective commencing with our quarter ending March 31, 2016. We do not expect the adoption of this ASU to 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 against customers 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 against customers 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 undertake 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 and nine months ended September 30, 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 considered to be a change in estimate for purposes of the tables below and is therefore excluded. During the three and nine months ended September 30, 2015, the gross profit impact from projects that reached initial profit recognition was $8.3 million and $21.6 million, respectively. During the three and nine months ended September 30, 2014, the gross profit impact from projects that reached initial profit recognition was $21.4 million and $50.0 million, respectively.
8
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 increases of $3.7 million and $9.4 million for the three and nine months ended September 30, 2015, respectively. The net changes for the three and nine months ended September 30, 2014 were net decreases of $1.0 million and $9.3 million, respectively. The projects are summarized as follows:
Increases
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(dollars in millions) | 2015 | 2014 | 2015 | 2014 | |||||||||||
Number of projects with upward estimate changes | 1 | — | 7 | 2 | |||||||||||
Range of increase in gross profit from each project, net | $ | 5.1 | $ | — | $ | 1.0 - 5.0 | $ | 1.1 - 1.2 | |||||||
Increase to project profitability | $ | 5.1 | $ | — | $ | 15.3 | $ | 2.3 | |||||||
The increases during the three and nine months ended September 30, 2015 were due to settlements of outstanding issues with contract owners and lower costs than anticipated, as well as estimated cost recovery from claims during the nine months. The increases during the nine months ended September 30, 2014 were due to owner-directed scope changes and lower costs than originally anticipated.
Decreases
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(dollars in millions) | 2015 | 2014 | 2015 | 2014 | |||||||||||
Number of projects with downward estimate changes | 1 | 1 | 3 | 5 | |||||||||||
Range of reduction in gross profit from each project, net | $ | 1.4 | $ | 1.0 | $ | 1.5 - 2.3 | $ | 1.7 - 2.9 | |||||||
Decrease to project profitability | $ | 1.4 | $ | 1.0 | $ | 5.9 | $ | 11.6 | |||||||
The decreases during the three and nine months ended September 30, 2015 and 2014 were due to additional costs and lower productivity than originally anticipated.
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 $5.1 million and $1.8 million for the three and nine months ended September 30, 2015, respectively. The net changes for the three and nine months ended September 30, 2014 were a net decrease of $8.5 million and a net increase of $25.9 million, respectively. Amounts attributable to non-controlling interests were $1.4 million and $0.3 million of the net increases for the three and nine months ended September 30, 2015, respectively, and were $1.8 million of the net decrease and $5.8 million of the net increase for the three and nine months ended September 30, 2014, respectively. The projects are summarized as follows:
Increases
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(dollars in millions) | 2015 | 2014 | 2015 | 2014 | |||||||||||
Number of projects with upward estimate changes | 4 | 2 | 7 | 9 | |||||||||||
Range of increase in gross profit from each project, net | $ | 1.0 - 3.9 | $ | 1.3 - 3.8 | $ | 1.5 - 5.1 | $ | 1.1 - 11.8 | |||||||
Increase to project profitability | $ | 9.4 | $ | 5.1 | $ | 19.9 | $ | 43.0 | |||||||
The increases during the three and nine months ended September 30, 2015 were due to settlements of outstanding issues with contract owners and owner-directed scope changes, as well as estimated cost recovery from claims during the nine months. The increases during the three and nine months ended September 30, 2014 were due to higher productivity than originally anticipated, owner-directed scope changes and settlements of outstanding issues with contract owners.
9
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Decreases
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(dollars in millions) | 2015 | 2014 | 2015 | 2014 | |||||||||||
Number of projects with downward estimate changes | 2 | 3 | 5 | 3 | |||||||||||
Range of reduction in gross profit from each project, net | $ | 1.8 - 2.6 | $ | 2.0 - 7.0 | $ | 2.6 - 4.6 | $ | 1.3 - 13.9 | |||||||
Decrease to project profitability | $ | 4.3 | $ | 13.6 | $ | 18.1 | $ | 17.1 | |||||||
The decreases during the three and nine months ended September 30, 2015 and 2014 were due to additional costs and lower productivity than originally anticipated.
4. | Marketable Securities |
All marketable securities were classified as held-to-maturity as of the dates presented and the carrying amounts of held-to-maturity securities were as follows:
(in thousands) | September 30, 2015 | December 31, 2014 | September 30, 2014 | |||||||||
U.S. Government and agency obligations | $ | 7,625 | $ | 10,511 | $ | 12,967 | ||||||
Commercial paper | 9,982 | 14,993 | 14,983 | |||||||||
Total short-term marketable securities | 17,607 | 25,504 | 27,950 | |||||||||
U.S. Government and agency obligations | 70,646 | 76,563 | 74,140 | |||||||||
Total long-term marketable securities | 70,646 | 76,563 | 74,140 | |||||||||
Total marketable securities | $ | 88,253 | $ | 102,067 | $ | 102,090 | ||||||
Scheduled maturities of held-to-maturity investments were as follows:
(in thousands) | September 30, 2015 | ||
Due within one year | $ | 17,607 | |
Due in one to five years | 70,646 | ||
Total | $ | 88,253 | |
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. |
10
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 | ||||||||||||||||
September 30, 2015 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Cash equivalents | ||||||||||||||||
Money market funds | $ | 50,006 | $ | — | $ | — | $ | 50,006 | ||||||||
Total assets | $ | 50,006 | $ | — | $ | — | $ | 50,006 | ||||||||
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 | ||||||||||||||||
September 30, 2014 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Cash equivalents | ||||||||||||||||
Money market funds | $ | 50,148 | $ | — | $ | — | $ | 50,148 | ||||||||
Total assets | $ | 50,148 | $ | — | $ | — | $ | 50,148 | ||||||||
A reconciliation of cash equivalents to consolidated cash and cash equivalents is as follows:
(in thousands) | September 30, 2015 | December 31, 2014 | September 30, 2014 | |||||||||
Cash equivalents | $ | 50,006 | $ | 60,618 | $ | 50,148 | ||||||
Cash | 171,779 | 195,343 | 117,026 | |||||||||
Total cash and cash equivalents | $ | 221,785 | $ | 255,961 | $ | 167,174 | ||||||
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, including net periodic settlement amounts, are recorded in other (income) expense, net in our condensed consolidated statements of operations. During the three and nine months ended September 30, 2015, we recorded net gains of $1.2 million and $2.5 million, respectively, and during the three and nine months ended September 30, 2014, we recorded net losses of $0.6 million and a net gain of $0.3 million, respectively. The fair value of the interest rate swap is recorded in other current assets on the condensed consolidated balance sheets and was $2.1 million, $0.3 million and less than $0.1 million as of September 30, 2015, December 31, 2014 and September 30, 2014, respectively.
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, including net periodic settlement amounts, are recorded in other (income) expense, net in our condensed consolidated statements of operations. During the three and nine months ended September 30, 2015, we recorded losses of $0.4 million, and during the three and nine months ended September 30, 2014, we recorded losses of $0.6 million and $0.7 million, respectively. The fair values of the commodity swaps are recorded in accrued expenses and other current liabilities on the condensed consolidated balance sheets and were $0.7 million, $1.7 million and $0.5 million as of September 30, 2015, December 31, 2014 and September 30, 2014, respectively.
11
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:
September 30, 2015 | December 31, 2014 | September 30, 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 | $ | 88,253 | $ | 88,313 | $ | 102,067 | $ | 101,808 | $ | 102,090 | $ | 101,711 | |||||||||||||
Liabilities (including current maturities): | ||||||||||||||||||||||||||
Senior notes payable1 | Level 3 | $ | 200,000 | $ | 212,919 | $ | 200,000 | $ | 220,226 | $ | 200,000 | $ | 225,186 | |||||||||||||
Credit Agreement loan1 | Level 3 | 70,000 | 69,753 | 70,000 | 70,153 | 70,000 | 70,258 | |||||||||||||||||||
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 and nine months ended September 30, 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.
6. | Receivables, net |
Receivables, net at September 30, 2015, December 31, 2014 and September 30, 2014 are as follows:
(in thousands) | September 30, 2015 | December 31, 2014 | September 30, 2014 | |||||||||
Construction contracts: | ||||||||||||
Completed and in progress | $ | 300,188 | $ | 191,094 | $ | 274,203 | ||||||
Retentions | 82,344 | 84,760 | 79,475 | |||||||||
Total construction contracts | 382,532 | 275,854 | 353,678 | |||||||||
Construction Material sales | 68,449 | 28,549 | 54,718 | |||||||||
Other | 5,979 | 6,822 | 9,740 | |||||||||
Total gross receivables | 456,960 | 311,225 | 418,136 | |||||||||
Less: allowance for doubtful accounts | 272 | 291 | 508 | |||||||||
Total net receivables | $ | 456,688 | $ | 310,934 | $ | 417,628 | ||||||
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 not contractually billable, such as claim recovery estimates, 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 September 30, 2015, December 31, 2014 and September 30, 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 September 30, 2015, December 31, 2014 and September 30, 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 September 30, 2015, the majority of the retentions receivable are expected to be collected within one year.
12
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We segregate our retention receivables into two categories: escrow and non-escrow. The balances in each category were as follows:
(in thousands) | September 30, 2015 | December 31, 2014 | September 30, 2014 | |||||||||
Escrow | $ | 21,590 | $ | 28,692 | $ | 26,128 | ||||||
Non-escrow | 60,754 | 56,068 | 53,347 | |||||||||
Total retention receivables | $ | 82,344 | $ | 84,760 | $ | 79,475 | ||||||
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 September 30, 2015, the non-escrow retention receivables aged over 90 days decreased to $0.1 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.
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 September 30, 2015, there was approximately $5.6 billion of construction revenue to be recognized on unconsolidated and line item construction joint venture contracts of which $1.7 billion represented our share and the remaining $3.9 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.
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 September 30, 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) | September 30, 2015 | December 31, 2014 | September 30, 2014 | |||||||||
Cash and cash equivalents1 | $ | 41,052 | $ | 61,276 | $ | 29,518 | ||||||
Receivables, net | 36,527 | 36,781 | 45,483 | |||||||||
Costs and estimated earnings in excess of billings1 | 365 | 129 | 21,105 | |||||||||
Other current assets | 2,020 | 1,617 | 1,910 | |||||||||
Total current assets | 79,964 | 99,803 | 98,016 | |||||||||
Property and equipment, net | 6,068 | 11,969 | 16,172 | |||||||||
Total assets2 | $ | 86,032 | $ | 111,772 | $ | 114,188 | ||||||
Accounts payable | $ | 10,438 | $ | 18,009 | $ | 22,951 | ||||||
Billings in excess of costs and estimated earnings1 | 13,794 | 32,830 | 23,138 | |||||||||
Accrued expenses and other current liabilities | 1,148 | 2,714 | 3,110 | |||||||||
Total liabilities2 | $ | 25,380 | $ | 53,553 | $ | 49,199 | ||||||
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 September 30, 2015, we were engaged in three active consolidated construction joint venture projects with total contract values ranging from $0.6 million to $293.8 million. Our share of revenue remaining to be recognized on these consolidated joint ventures ranged from $0.2 million to $119.7 million. Our proportionate share of the equity in these joint ventures was between 50.0% and 65.0%. During the three and nine months ended September 30, 2015, total revenue from consolidated construction joint ventures was $14.0 million and $39.0 million, respectively. During the three and nine months ended September 30, 2014, total revenue from consolidated construction joint ventures was $23.8 million and $122.0 million, respectively. Total operating cash flows used in consolidated construction joint ventures were $16.8 million and $44.7 million during the nine months ended September 30, 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 September 30, 2015, these unconsolidated joint ventures were engaged in eleven active projects with total contract values ranging from $73.6 million to $3.4 billion. Our proportionate share of the equity in these unconsolidated joint ventures ranged from 20.0% to 50.0%. As of September 30, 2015, our share of the revenue remaining to be recognized on these unconsolidated joint ventures ranged from $3.2 million to $632.2 million.
As of September 30, 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)
The following is summary financial information related to unconsolidated construction joint ventures:
(in thousands) | September 30, 2015 | December 31, 2014 | September 30, 2014 | |||||||||
Assets: | ||||||||||||
Cash and cash equivalents1 | $ | 460,668 | $ | 264,263 | $ | 286,040 | ||||||
Other assets | 818,609 | 573,898 | 538,012 | |||||||||
Less partners’ interest | 875,629 | 546,907 | 530,585 | |||||||||
Granite’s interest | 403,648 | 291,254 | 293,467 | |||||||||
Liabilities: | ||||||||||||
Accounts payable | 228,695 | 146,198 | 141,630 | |||||||||
Billings in excess of costs and estimated earnings1 | 321,103 | 156,604 | 178,781 | |||||||||
Other liabilities | 88,905 | 55,289 | 61,061 | |||||||||
Less partners’ interest | 441,627 | 251,412 | 269,264 | |||||||||
Granite’s interest | 197,076 | 106,679 | 112,208 | |||||||||
Equity in construction joint ventures2 | $ | 206,572 | $ | 184,575 | $ | 181,259 | ||||||
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 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 September 30, 2015, this balance included $13.1 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 September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Revenue: | ||||||||||||||||
Total | $ | 530,215 | $ | 313,945 | $ | 1,439,766 | $ | 1,055,276 | ||||||||
Less partners’ interest and adjustments1 | 382,465 | 213,068 | 1,018,565 | 741,451 | ||||||||||||
Granite’s interest | 147,750 | 100,877 | 421,201 | 313,825 | ||||||||||||
Cost of revenue: | ||||||||||||||||
Total | 424,492 | 338,848 | 1,270,793 | 982,014 | ||||||||||||
Less partners’ interest and adjustments1 | 287,784 | 239,661 | 879,653 | 696,633 | ||||||||||||
Granite’s interest | 136,708 | 99,187 | 391,140 | 285,381 | ||||||||||||
Granite’s interest in gross profit | $ | 11,042 | $ | 1,690 | $ | 30,061 | $ | 28,444 | ||||||||
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 nine months ended September 30, 2015, unconsolidated construction joint venture net income was $19.5 million and $86.9 million, respectively, of which our share was $11.1 million and $29.7 million, respectively. During the three and nine months ended September 30, 2014, unconsolidated construction joint venture net loss was $25.2 million and net income was $75.2 million, respectively, of which our share was net income of $1.8 million and $28.1 million, respectively. These joint venture 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 September 30, 2015, we had five active line item joint venture construction projects with total contract values ranging from $42.4 million to $87.1 million of which our portion ranged from $28.5 million to $64.6 million. As of September 30, 2015, our share of revenue remaining to be recognized on these line item joint ventures ranged from $1.3 million to $39.8 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 expense (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) | September 30, 2015 | December 31, 2014 | September 30, 2014 | |||||||||
Equity method investments in real estate affiliates | $ | 24,093 | $ | 22,623 | $ | 24,040 | ||||||
Equity method investment in other affiliate | 8,984 | 9,738 | 10,137 | |||||||||
Total investments in affiliates | $ | 33,077 | $ | 32,361 | $ | 34,177 | ||||||
The following table provides summarized balance sheet information for our affiliates accounted for under the equity method on a combined basis:
(in thousands) | September 30, 2015 | December 31, 2014 | September 30, 2014 | |||||||||
Total assets | $ | 179,949 | $ | 170,174 | $ | 172,220 | ||||||
Net assets | 106,239 | 97,639 | 103,651 | |||||||||
Granite’s share of net assets | 33,077 | 32,361 | 34,177 | |||||||||
The equity method investments in real estate included $18.4 million, $16.5 million and $17.8 million in residential real estate in Texas as of September 30, 2015, December 31, 2014 and September 30, 2014, respectively. The remaining balances were in commercial real estate in Texas. Of the $179.9 million in total assets as of September 30, 2015, real estate entities had total assets ranging from $1.7 million to $69.6 million and the non-real estate entity had total assets of $19.2 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) | September 30, 2015 | December 31, 2014 | September 30, 2014 | |||||||||
Equipment and vehicles | $ | 762,121 | $ | 767,313 | $ | 771,934 | ||||||
Quarry property | 171,924 | 172,081 | 169,982 | |||||||||
Land and land improvements | 111,058 | 110,235 | 118,985 | |||||||||
Buildings and leasehold improvements | 82,651 | 82,655 | 83,813 | |||||||||
Office furniture and equipment | 71,259 | 70,820 | 70,837 | |||||||||
Property and equipment | 1,199,013 | 1,203,104 | 1,215,551 | |||||||||
Less: accumulated depreciation and depletion | 813,977 | 793,451 | 791,279 | |||||||||
Property and equipment, net | $ | 385,036 | $ | 409,653 | $ | 424,272 | ||||||
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 September 30, 2015, December 31, 2014 and September 30, 2014.
The following table presents the goodwill balance by reportable segment:
(in thousands) | September 30, 2015 | December 31, 2014 | September 30, 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 | ||||||
The results of operations and cash flows of our business are susceptible to fluctuations due to a variety of factors, including the size, frequency and profitability of contract awards. The Kenny Group Large Project Construction reporting unit is particularly susceptible to these fluctuations given its historically narrow end-market focus. A substantial decline in the actual and projected award rate may impact projected cash flows of any of our reporting units which could cause book value to exceed calculated fair value, resulting in the impairment of all or some portion of goodwill.
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):
September 30, 2015 | Gross Value | Accumulated Amortization | Net Book Value | |||||||||
Permits | $ | 29,713 | $ | (13,958 | ) | $ | 15,755 | |||||
Acquired backlog | 7,900 | (7,513 | ) | 387 | ||||||||
Customer lists | 4,398 | (3,004 | ) | 1,394 | ||||||||
Trade name | 4,100 | (1,187 | ) | 2,913 | ||||||||
Covenants not to compete and other | 2,459 | (2,429 | ) | 30 | ||||||||
Total amortized intangible assets | $ | 48,570 | $ | (28,091 | ) | $ | 20,479 | |||||
December 31, 2014 | Gross Value | Accumulated 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 | |||||
September 30, 2014 | Gross Value | Accumulated Amortization | Net Book Value | |||||||||
Permits | $ | 29,713 | $ | (12,835 | ) | $ | 16,878 | |||||
Acquired backlog | 7,900 | (7,226 | ) | 674 | ||||||||
Customer lists | 4,398 | (2,711 | ) | 1,687 | ||||||||
Trade name | 4,100 | (755 | ) | 3,345 | ||||||||
Covenants not to compete and other | 2,459 | (2,426 | ) | 33 | ||||||||
Total amortized intangible assets | $ | 48,570 | $ | (25,953 | ) | $ | 22,617 | |||||
Amortization expense related to amortized intangible assets for the three and nine months ended September 30, 2015 was $0.5 million and $1.6 million, respectively. Amortization expense related to amortized intangible assets for the three and nine months ended September 30, 2014 was $0.6 million and $1.8 million, respectively. Based on the amortized intangible assets balance at September 30, 2015, amortization expense expected to be recorded in the future is as follows: $0.5 million for the remainder of 2015; $2.0 million in 2016; $1.8 million in 2017; $1.7 million in 2018; $1.7 million in 2019; and $12.7 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 (i) us no longer being entitled to borrow under the agreements; (ii) termination of the agreements; (iii) the requirement that any letters of credit under the agreements be cash collateralized; (iv) acceleration of the maturity of outstanding indebtedness under the agreements; and/or (v) foreclosure on any collateral securing the obligations under the agreements.
As of September 30, 2015, senior notes payable in the amount of $200.0 million were due to a group of institutional holders in five equal annual installments beginning in 2015 and bear interest at 6.11% per annum (“2019 Notes”). As of September 30, 2015, we were in compliance with the covenants contained in our note purchase agreement governing our 2019 Notes and the credit agreement governing the $215.0 million committed revolving credit facility, with a sublimit for letters of credit of $100.0 million, as well as the debt agreements related to our consolidated real estate entity. Granite entered into the Second Amended and Restated Credit Agreement dated October 28, 2015 (see Note 16). We have the ability and intent to draw on this amended and restated credit facility to pay the $40.0 million principal amount due on the 2019 Notes in the fourth quarter of 2015. 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 Net Income Per Share |
Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares include stock options and restricted stock units. The following table presents a reconciliation of the weighted average shares outstanding used in calculating basic and diluted net income per share as well as the calculation of basic and diluted net income per share:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands, except per share amounts) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Numerator (basic and diluted): | ||||||||||||||||
Net income allocated to common shareholders for basic calculation | $ | 30,759 | $ | 15,282 | $ | 31,812 | $ | 8,370 | ||||||||
Denominator: | ||||||||||||||||
Weighted average common shares outstanding, basic | 39,378 | 39,150 | 39,317 | 39,073 | ||||||||||||
Dilutive effect of stock options and restricted stock units | 519 | 663 | 546 | 717 | ||||||||||||
Weighted average common shares outstanding, diluted | 39,897 | 39,813 | 39,863 | 39,790 | ||||||||||||
Net income per share, basic | $ | 0.78 | $ | 0.39 | $ | 0.81 | $ | 0.21 | ||||||||
Net income per share, diluted | $ | 0.77 | $ | 0.38 | $ | 0.80 | $ | 0.21 | ||||||||
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 | ||||||
Purchases of common stock1 | (3,366 | ) | — | (3,366 | ) | |||||||
Other transactions with shareholders and employees2 | 6,816 | — | 6,816 | |||||||||
Transactions with non-controlling interests, net | — | (1,808 | ) | (1,808 | ) | |||||||
Net income | 31,812 | 1,297 | 33,109 | |||||||||
Dividends on common stock | (15,352 | ) | — | (15,352 | ) | |||||||
Balance at September 30, 2015 | $ | 814,295 | $ | 22,210 | $ | 836,505 | ||||||
Balance at December 31, 2013 | $ | 781,940 | $ | 4,404 | $ | 786,344 | ||||||
Purchases of common stock3 | (4,751 | ) | — | (4,751 | ) | |||||||
Other transactions with shareholders and employees2 | 10,505 | — | 10,505 | |||||||||
Transactions with non-controlling interests, net | — | 15,174 | 15,174 | |||||||||
Net income | 8,370 | 6,681 | 15,051 | |||||||||
Dividends on common stock | (15,260 | ) | — | (15,260 | ) | |||||||
Balance at September 30, 2014 | $ | 780,804 | $ | 26,259 | $ | 807,063 | ||||||
1Represents 103,000 shares purchased in connection with employee tax withholding for restricted stock units vested under our Amended and Restated 1999 Equity Incentive Plan.
2Amounts are comprised primarily of amortized restricted stock units.
3Represents 123,000 shares purchased in connection with employee tax withholding for restricted stock units vested under our Amended and Restated 1999 Equity Incentive Plan.
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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 September 30, 2015, December 31, 2014 and September 30, 2014 related to these matters were approximately $9.2 million, $9.7 million and $9.9 million, respectively, and were primarily included in accrued expenses and other current liabilities. The aggregate range of possible loss related to (i) matters considered reasonably possible, and (ii) reasonably possible amounts in excess of accrued losses recorded for probable loss contingencies, was zero to $0.3 million as of September 30, 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 September 30, 2015. Granite and Granite Northeast expect to resolve issues that have been raised in the investigation by the DOJ and Agencies as soon as practicable. Such resolution of the matters under investigation could have additional consequences that could have a material adverse effect on our financial position, results of operations and/or liquidity.
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GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, and 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.
Summarized segment information is as follows (in thousands):
Three Months Ended September 30, | ||||||||||||||||
Construction | Large Project Construction | Construction Materials | Total | |||||||||||||
2015 | ||||||||||||||||
Total revenue from reportable segments | $ | 427,018 | $ | 217,084 | $ | 165,771 | $ | 809,873 | ||||||||
Elimination of intersegment revenue | — | — | (58,497 | ) | (58,497 | ) | ||||||||||
Revenue from external customers | 427,018 | 217,084 | 107,274 | 751,376 | ||||||||||||
Gross profit | 64,298 | 22,572 | 14,028 | 100,898 | ||||||||||||
Depreciation, depletion and amortization | 5,194 | 3,308 | 5,799 | 14,301 | ||||||||||||
2014 | ||||||||||||||||
Total revenue from reportable segments | $ | 447,097 | $ | 179,446 | $ | 146,789 | $ | 773,332 | ||||||||
Elimination of intersegment revenue | — | — | (53,568 | ) | (53,568 | ) | ||||||||||
Revenue from external customers | 447,097 | 179,446 | 93,221 | 719,764 | ||||||||||||
Gross profit | 48,802 | 5,679 | 12,211 | 66,692 | ||||||||||||
Depreciation, depletion and amortization | 4,621 | 4,777 | 5,408 | 14,806 | ||||||||||||
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GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30, | ||||||||||||||||
Construction | Large Project Construction | Construction Materials | Total | |||||||||||||
2015 | ||||||||||||||||
Total revenue from reportable segments | $ | 921,143 | $ | 590,282 | $ | 332,920 | $ | 1,844,345 | ||||||||
Elimination of intersegment revenue | — | — | (103,478 | ) | (103,478 | ) | ||||||||||
Revenue from external customers | 921,143 | 590,282 | 229,442 | 1,740,867 | ||||||||||||
Gross profit | 126,035 | 55,116 | 25,624 | 206,775 | ||||||||||||
Depreciation, depletion and amortization | 14,752 | 8,311 | 16,806 | 39,869 | ||||||||||||
Segment assets | 140,493 | 271,878 | 300,739 | |||||||||||||