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, 2017 | |
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 25, 2017.
Class | Outstanding | |
Common Stock, $0.01 par value | 39,850,783 | |
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, 2017 | December 31, 2016 | September 30, 2016 | ||||||||||
ASSETS | ||||||||||||
Current assets | ||||||||||||
Cash and cash equivalents ($71,328, $73,115 and $47,803 related to consolidated construction joint ventures (“CCJVs”)) | $ | 185,516 | $ | 189,326 | $ | 150,225 | ||||||
Short-term marketable securities | 47,814 | 64,884 | 54,863 | |||||||||
Receivables, net ($51,079, $52,613 and $77,012 related to CCJVs) | 627,081 | 419,345 | 512,752 | |||||||||
Costs and estimated earnings in excess of billings ($3,035, $5,046 and $2,940 related to CCJVs) | 94,527 | 73,102 | 80,032 | |||||||||
Inventories | 62,059 | 55,245 | 61,015 | |||||||||
Equity in construction joint ventures | 242,358 | 247,182 | 263,180 | |||||||||
Other current assets ($6,033, $7,500 and $8,649 related to CCJVs) | 26,612 | 39,908 | 28,047 | |||||||||
Total current assets | 1,285,967 | 1,088,992 | 1,150,114 | |||||||||
Property and equipment, net ($33,754, $20,500 and $15,302 related to CCJVs) | 412,174 | 406,650 | 407,327 | |||||||||
Long-term marketable securities | 69,991 | 62,895 | 52,908 | |||||||||
Investments in affiliates | 39,946 | 35,668 | 34,356 | |||||||||
Goodwill | 53,799 | 53,799 | 53,799 | |||||||||
Deferred income taxes, net | — | — | 5,223 | |||||||||
Other noncurrent assets | 85,411 | 85,449 | 81,540 | |||||||||
Total assets | $ | 1,947,288 | $ | 1,733,453 | $ | 1,785,267 | ||||||
LIABILITIES AND EQUITY | ||||||||||||
Current liabilities | ||||||||||||
Current maturities of long-term debt | $ | 14,796 | $ | 14,796 | $ | 14,795 | ||||||
Accounts payable ($27,443, $26,419 and $20,654 related to CCJVs) | 286,913 | 199,029 | 223,612 | |||||||||
Billings in excess of costs and estimated earnings ($38,581, $33,704 and $34,994 related to CCJVs) | 168,707 | 97,522 | 116,151 | |||||||||
Accrued expenses and other current liabilities ($1,354, $1,544 and $817 related to CCJVs) | 246,775 | 218,587 | 237,534 | |||||||||
Total current liabilities | 717,191 | 529,934 | 592,092 | |||||||||
Long-term debt | 225,922 | 229,498 | 240,715 | |||||||||
Deferred income taxes, net | 5,932 | 5,441 | — | |||||||||
Other long-term liabilities | 46,435 | 45,989 | 46,270 | |||||||||
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: 39,850,587 shares as of September 30, 2017, 39,621,140 shares as of December 31, 2016 and 39,601,569 shares as of September 30, 2016 | 399 | 396 | 396 | |||||||||
Additional paid-in capital | 157,734 | 150,337 | 147,583 | |||||||||
Accumulated other comprehensive income (loss) | 240 | (371 | ) | (1,524 | ) | |||||||
Retained earnings | 756,183 | 735,626 | 724,691 | |||||||||
Total Granite Construction Incorporated shareholders’ equity | 914,556 | 885,988 | 871,146 | |||||||||
Non-controlling interests | 37,252 | 36,603 | 35,044 | |||||||||
Total equity | 951,808 | 922,591 | 906,190 | |||||||||
Total liabilities and equity | $ | 1,947,288 | $ | 1,733,453 | $ | 1,785,267 | ||||||
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, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue | ||||||||||||||||
Construction | $ | 579,146 | $ | 464,624 | $ | 1,235,264 | $ | 1,005,457 | ||||||||
Large Project Construction | 279,845 | 249,345 | 741,341 | 642,116 | ||||||||||||
Construction Materials | 98,135 | 89,936 | 211,834 | 200,363 | ||||||||||||
Total revenue | 957,126 | 803,905 | 2,188,439 | 1,847,936 | ||||||||||||
Cost of revenue | ||||||||||||||||
Construction | 487,798 | 393,094 | 1,053,463 | 857,938 | ||||||||||||
Large Project Construction | 273,460 | 225,826 | 731,906 | 591,438 | ||||||||||||
Construction Materials | 81,338 | 77,311 | 188,844 | 178,440 | ||||||||||||
Total cost of revenue | 842,596 | 696,231 | 1,974,213 | 1,627,816 | ||||||||||||
Gross profit | 114,530 | 107,674 | 214,226 | 220,120 | ||||||||||||
Selling, general and administrative expenses | 49,501 | 54,194 | 162,726 | 159,032 | ||||||||||||
Gain on sales of property and equipment | (1,753 | ) | (398 | ) | (2,830 | ) | (2,364 | ) | ||||||||
Operating income | 66,782 | 53,878 | 54,330 | 63,452 | ||||||||||||
Other (income) expense | ||||||||||||||||
Interest income | (1,141 | ) | (790 | ) | (3,356 | ) | (2,424 | ) | ||||||||
Interest expense | 2,660 | 3,034 | 8,097 | 9,270 | ||||||||||||
Equity in income of affiliates | (2,732 | ) | (2,424 | ) | (4,907 | ) | (4,583 | ) | ||||||||
Other income, net | (1,309 | ) | (732 | ) | (2,821 | ) | (5,287 | ) | ||||||||
Total other income | (2,522 | ) | (912 | ) | (2,987 | ) | (3,024 | ) | ||||||||
Income before provision for income taxes | 69,304 | 54,790 | 57,317 | 66,476 | ||||||||||||
Provision for income taxes | 21,249 | 16,617 | 16,841 | 19,540 | ||||||||||||
Net income | 48,055 | 38,173 | 40,476 | 46,936 | ||||||||||||
Amount attributable to non-controlling interests | (2,073 | ) | (982 | ) | (4,151 | ) | (5,987 | ) | ||||||||
Net income attributable to Granite Construction Incorporated | $ | 45,982 | $ | 37,191 | $ | 36,325 | $ | 40,949 | ||||||||
Net income per share attributable to common shareholders (see Note 11) | ||||||||||||||||
Basic | $ | 1.15 | $ | 0.94 | $ | 0.91 | $ | 1.04 | ||||||||
Diluted | $ | 1.14 | $ | 0.92 | $ | 0.90 | $ | 1.02 | ||||||||
Weighted average shares of common stock | ||||||||||||||||
Basic | 39,844 | 39,599 | 39,774 | 39,539 | ||||||||||||
Diluted | 40,387 | 40,313 | 40,367 | 40,205 | ||||||||||||
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 COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||
(Unaudited - in thousands) | ||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income | $ | 48,055 | $ | 38,173 | $ | 40,476 | $ | 46,936 | ||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Net unrealized gain (loss) on derivatives | $ | 46 | $ | 382 | $ | (163 | ) | $ | (1,016 | ) | ||||||
Less: reclassification for net losses included in interest expense | 25 | 126 | 141 | 226 | ||||||||||||
Net change | $ | 71 | $ | 508 | $ | (22 | ) | $ | (790 | ) | ||||||
Foreign currency translation adjustments, net | 98 | (221 | ) | 633 | 766 | |||||||||||
Other comprehensive income (loss) | $ | 169 | $ | 287 | $ | 611 | $ | (24 | ) | |||||||
Comprehensive income | $ | 48,224 | $ | 38,460 | $ | 41,087 | $ | 46,912 | ||||||||
Non-controlling interests in comprehensive income | (2,073 | ) | (982 | ) | (4,151 | ) | (5,987 | ) | ||||||||
Comprehensive income attributable to Granite | $ | 46,151 | $ | 37,478 | $ | 36,936 | $ | 40,925 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
GRANITE CONSTRUCTION INCORPORATED | |||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||
(Unaudited - in thousands) | |||||||||
Nine Months Ended September 30, | 2017 | 2016 | |||||||
Operating activities | |||||||||
Net income | $ | 40,476 | $ | 46,936 | |||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||
Depreciation, depletion and amortization | 48,522 | 46,637 | |||||||
Gain on sales of property and equipment, net | (2,830 | ) | (2,364 | ) | |||||
Stock-based compensation | 13,580 | 11,013 | |||||||
Equity in net loss (income) from unconsolidated joint ventures | 15,415 | (15,903 | ) | ||||||
Gain on real estate entity | — | (2,452 | ) | ||||||
Net income from affiliates | (4,907 | ) | (4,583 | ) | |||||
Changes in assets and liabilities: | |||||||||
Receivables | (207,908 | ) | (169,678 | ) | |||||
Costs and estimated earnings in excess of billings, net | 14,726 | 1,793 | |||||||
Inventories | (6,814 | ) | (5,462 | ) | |||||
Contributions to unconsolidated construction joint ventures | (3,937 | ) | (11,545 | ) | |||||
Distributions from unconsolidated construction joint ventures | 33,374 | 5,850 | |||||||
Other assets, net | 10,523 | (2,209 | ) | ||||||
Accounts payable | 90,799 | 62,787 | |||||||
Accrued expenses and other current liabilities, net | 23,595 | 19,782 | |||||||
Net cash provided by (used in) operating activities | 64,614 | (19,398 | ) | ||||||
Investing activities | |||||||||
Purchases of marketable securities | (79,708 | ) | (84,758 | ) | |||||
Maturities of marketable securities | 90,000 | 30,000 | |||||||
Proceeds from called marketable securities | — | 50,000 | |||||||
Purchases of property and equipment ($13,537 and $9,976 related to CCJVs) | (56,808 | ) | (67,889 | ) | |||||
Proceeds from sales of property and equipment | 5,107 | 5,790 | |||||||
Distributions from affiliates | — | 2,233 | |||||||
Other investing activities, net | 2,321 | 3,847 | |||||||
Net cash used in investing activities | (39,088 | ) | (60,777 | ) | |||||
Financing activities | |||||||||
Long-term debt principal repayments | (3,750 | ) | (3,750 | ) | |||||
Cash dividends paid | (15,506 | ) | (15,415 | ) | |||||
Repurchases of common stock | (6,713 | ) | (4,946 | ) | |||||
(Distributions to) contributions from non-controlling partners, net | (3,500 | ) | 1,522 | ||||||
Other financing activities, net | 133 | 153 | |||||||
Net cash used in financing activities | (29,336 | ) | (22,436 | ) | |||||
Decrease in cash and cash equivalents | (3,810 | ) | (102,611 | ) | |||||
Cash and cash equivalents at beginning of period | 189,326 | 252,836 | |||||||
Cash and cash equivalents at end of period | $ | 185,516 | $ | 150,225 | |||||
Supplementary Information | |||||||||
Cash paid during the period for: | |||||||||
Interest | $ | 6,720 | $ | 7,557 | |||||
Income taxes | 2,689 | 6,748 | |||||||
Other non-cash operating activities: | |||||||||
Performance guarantees | $ | 5,761 | $ | 17,596 | |||||
Non-cash investing and financing activities: | |||||||||
Restricted stock units issued, net of forfeitures | $ | 11,184 | $ | 21,057 | |||||
Accrued cash dividends | 5,181 | 5,148 | |||||||
Accrued equipment purchases | 2,440 | (3,453 | ) | ||||||
6
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,” “the Company” or “Granite”) and are unaudited, 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, 2016. 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. 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, 2017 and 2016 and the results of our operations and cash flows for the periods presented. The December 31, 2016 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, 2017 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 for the adoption of Accounting Standards Update (“ASU”) No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, ASU No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships and ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities during the nine months ended September 30, 2017. ASU No. 2016-01 eliminated the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the consolidated balance sheet, which related to our marketable securities and debt (see Note 5). ASU No. 2016-05 had no impact and ASU No. 2017-08 had an immaterial impact on our condensed consolidated financial statements.
2. | Recently Issued Accounting Pronouncements |
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and subsequently issued several related ASUs (“Topic 606”), which provide guidance for recognizing revenue from contracts with customers. The core principle of Topic 606 is that revenue will be recognized when promised goods or services are transferred to customers in an amount that reflects consideration for which entitlement is expected in exchange for those goods or services. Topic 606 will be effective commencing with our quarter ending March 31, 2018.
We will adopt Topic 606 using the modified retrospective transition approach, which we will elect to apply to contracts with customers that are not substantially complete, i.e. less than 90% complete, as of January 1, 2018. We do not expect Topic 606 to have a material impact on our Construction and Construction Materials segments’ revenue. The most significant impact of Topic 606 relates to our Large Project Construction segment specifically in the following areas:
• | Multiple performance obligations - In accordance with Topic 606, construction contracts with customers, including those related to contract modifications, will be reviewed to determine if there are multiple performance obligations. If separate performance obligations are identified, the timing of revenue recognition could be impacted. Based on our assessment to-date of currently active construction contracts with customers, we have identified one unconsolidated joint venture contract in our Large Project Construction segment that will have multiple performance obligations. |
7
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
• | Multiple contracts - Contracts containing task orders may be determined to consist of multiple individual contracts as defined by Topic 606. Based on our assessment to-date of currently active construction contracts with customers, we have identified one Large Project Construction segment contract and one Construction segment contract that will consist of multiple individual contracts as defined by Topic 606. |
• | Provision for losses - Provisions for losses will be recognized in the consolidated statements of operations for the full amount of estimated losses at the uncompleted performance obligation level whenever evidence indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue. Currently provisions for losses are recorded at the contract level. Based on our assessment to-date of currently active construction contracts with customers, we have identified one unconsolidated joint venture contract in our Large Project Construction segment that will have actual and provisions for losses related to completed and uncompleted performance obligations, respectively. |
Based on our estimated costs to complete and our assessment of the impact from the adoption of Topic 606 as of September 30, 2017, we estimate a net cumulative decrease to retained earnings between $11.0 million and $19.0 million as of January 1, 2018. This estimate may change upon adoption for various reasons including, but not limited to, revisions to the estimated costs to complete or a difference in actual progress versus expected progress related to current or new performance obligations.
In addition to the above, we expect to separately present contract assets and liabilities on the consolidated balance sheets. Contract assets will include amounts due under contractual retainage provisions, unbilled receivables, costs and estimated earnings in excess of billings and capitalized mobilization costs. Contract liabilities will include provisions for losses and billings in excess of costs and estimated earnings.
There will also be new disclosures related to revenue including information about unearned revenue and revenue disaggregated by operating group. Unearned revenue will be similar to our existing contract backlog but will only include project amounts when the related contract, contract options and task orders, as applicable, are executed rather than when awarded and funding is probable.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The ASU will be effective commencing with our quarter ending March 31, 2019. While we continue to evaluate the effect of this ASU, we expect the adoption of this ASU to have a material impact on our assets and liabilities due to the recognition of right-of-use assets and lease liabilities on our consolidated balance sheets.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which is intended to help companies evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses by providing a more robust framework to use in determining when a set of assets and activities is a business. This ASU will be effective commencing with our quarter ending March 31, 2018. We do not expect the adoption of this ASU to have an impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test, which measures goodwill impairment by comparing the implied fair value of a reporting unit’s goodwill with its carrying amount. This ASU will be effective commencing with our quarter ending March 31, 2020. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting, which clarifies that changes to the value, vesting conditions, or award classification of share-based payment awards must be accounted for as modifications. This ASU will be effective commencing with our quarter ending March 31, 2018. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which refines and expands hedge accounting for both financial (e.g., interest rate) and commodity risks. This ASU will be effective commencing with our quarter ending March 31, 2019. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
8
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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. 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 revisions in estimates for the current 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 further changes in circumstances or otherwise be required to revise our cost estimates in the future.
In our review of these changes for the three months ended September 30, 2017 and for the three and nine months ended September 30, 2016, we did not identify any material amounts that should have been recorded in a prior period. In our review of these changes for the nine months ended September 30, 2017, we identified and corrected amounts that should have been recorded during the three months ended September 30, 2016. This correction resulted in a $4.9 million decrease to Large Project Construction revenue and gross profit and a $1.6 million increase in net loss attributable to Granite Construction Incorporated. We have assessed the impact of this correction to the financial statements of prior periods’ and to the financial statements for the nine months ended September 30, 2017, and have concluded that the amounts were not material and are not expected to be material to the financial statements for the year ending December 31, 2017.
In the normal course of business, we have revisions in estimated costs some of which are associated with unresolved affirmative claims and back charges. The estimated or actual recovery related to these estimated costs associated with unresolved affirmative claims and back charges may be recorded in future periods, which can cause fluctuations in the gross profit impact from revisions in estimates.
Affirmative Claims
Revisions in estimates for the three and nine months ended September 30, 2017 included increases in revenue of $11.5 million and $25.5 million, respectively, related to the estimated cost recovery of customer affirmative claims, which included increases of $11.0 million and $25.1 million, respectively, which were also affected by an increase in estimated contract costs in excess of the estimated recovery during the three and nine months ended September 30, 2017, respectively. The remaining $0.5 million and $0.4 million, respectively, had estimated contract costs in excess of the estimated cost recovery that were recorded in prior periods.
Revisions in estimates for the three and nine months ended September 30, 2016 included increases in revenue of $1.2 million and $21.4 million related to the estimated cost recovery of customer affirmative claims, which included increases of $0.2 million and $15.5 million that were also affected by an increase in estimated contract costs in excess of the estimated recovery during the three and nine months ended September 30, 2016, respectively. The remaining $1.0 million and $5.9 million, respectively, had estimated contract costs in excess of the estimated cost recovery that were recorded in prior periods.
Back Charges
Revisions in estimates for the three and nine months ended September 30, 2017 included a reduction of cost of revenue of $0.6 million and $3.6 million, respectively, related to the estimated recovery of back charges of which $0.6 million and $2.0 million was also affected by an increase in estimated contract costs that were in excess of the estimated recovery during the three and nine months ended September 30, 2017. The remaining $1.6 million during the nine months ended September 30, 2017 had estimated contract costs in excess of estimated cost recovery that were recorded in prior periods.
Revisions in estimates for the three and nine months ended September 30, 2016 included a reduction of cost of revenue of $3.3 million and $10.9 million, respectively, related to the estimated recovery of back charges of which $1.2 million and $3.4 million were also affected by an increase in estimated contract costs that were in excess of the estimated recovery during the three and nine months ended September 30, 2016, respectively. The remaining $2.1 million and $7.5 million, respectively, had estimated contract costs in excess of estimated cost recovery that were recorded in prior periods.
The tables below include the impact to gross profit from significant revisions in estimates related to estimated and actual recovery of customer affirmative claims and back charges as well as the associated estimated contract costs.
9
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Construction
The changes in project profitability from revisions in estimates, both increases and decreases, which individually had an impact of $1.0 million or more on gross profit were net decreases of $0.3 million and $1.3 million for the three and nine months ended September 30, 2017, respectively. The changes for the three and nine months ended September 30, 2016 were net increases of $0.7 million and net decreases of $3.1 million, respectively. The projects are summarized as follows:
Increases
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(dollars in millions) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Number of projects with upward estimate changes | 2 | 1 | 5 | 2 | |||||||||||
Range of increase in gross profit from each project, net | $ | 1.0 - 1.2 | $ | 2.6 | $ | 1.0 - 1.6 | $ | 1.8 - 2.7 | |||||||
Increase on project profitability | $ | 2.2 | $ | 2.6 | $ | 6.0 | $ | 4.5 | |||||||
The increases during the three and nine months ended September 30, 2017 and 2016 were due to lower costs and higher productivity than originally anticipated as well as settlements of outstanding issues with contract owners during the nine months ended September 30, 2016.
Decreases
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(dollars in millions) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Number of projects with downward estimate changes | 1 | 1 | 3 | 5 | |||||||||||
Range of reduction in gross profit from each project, net | $ | 2.5 | $ | 1.9 | $ | 1.1 - 3.5 | $ | 1.1 - 2.6 | |||||||
Decrease on project profitability | $ | 2.5 | $ | 1.9 | $ | 7.3 | $ | 7.6 | |||||||
The decreases during the three and nine months ended September 30, 2017 and 2016 were due to additional costs and lower productivity than originally anticipated.
Large Project Construction
The changes in project profitability from revisions in estimates, both increases and decreases, which individually had an impact of $1.0 million or more on gross profit were decreases of $19.3 million and $58.1 million for the three and nine months ended September 30, 2017, respectively. The changes for the three and nine months ended September 30, 2016 were net increases of $0.4 million and net decreases of $6.0 million, respectively.
There were no amounts attributable to non-controlling interests for the three months ended September 30, 2017 and 2016, respectively. Amounts attributable to non-controlling interests were $2.1 million of the decrease and $3.5 million of the net decrease for the nine months ended September 30, 2017 and 2016, respectively. The projects are summarized as follows:
Increases
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(dollars in millions) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Number of projects with upward estimate changes | — | 3 | — | 7 | |||||||||||
Range of increase in gross profit from each project, net | $ | — | $ | 1.4 - 3.0 | $ | — | $ | 1.2 - 6.5 | |||||||
Increase on project profitability | $ | — | $ | 6.1 | $ | — | $ | 19.8 | |||||||
The increases during the three and nine months ended September 30, 2016, were due to owner-directed scope changes, settlement of an outstanding back charge claim and higher productivity than originally anticipated as well as estimated recovery from back charge claims during the nine month period.
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GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Decreases
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(dollars in millions) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Number of projects with downward estimate changes | 3 | 3 | 7 | 4 | |||||||||||
Range of reduction in gross profit from each project, net | $ | 2.4 - 12.7 | $ | 1.1 - 3.5 | $ | 1.3 - 14.5 | $ | 3.4 - 7.9 | |||||||
Decrease on project profitability | $ | 19.3 | $ | 5.7 | $ | 58.1 | $ | 25.8 | |||||||
The decreases during the three and nine months ended September 30, 2017 and 2016, were due to additional design, weather and owner-related costs and lower productivity than originally anticipated, net of estimated and actual recovery from customer affirmative claims and back charges. As of September 30, 2017, there were projects for which additional costs, including liquidated damages, were reasonably possible but the range of costs was not estimable. As the related projects proceed, future estimates may change and could have a material effect on our financial position, results of operations and/or cash flows in the future.
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, 2017 | December 31, 2016 | September 30, 2016 | |||||||||
U.S. Government and agency obligations | $ | 12,909 | $ | 10,002 | $ | 14,999 | ||||||
Commercial paper | 34,905 | 54,882 | 39,864 | |||||||||
Total short-term marketable securities | 47,814 | 64,884 | 54,863 | |||||||||
U.S. Government and agency obligations | 69,991 | 62,895 | 52,908 | |||||||||
Total long-term marketable securities | 69,991 | 62,895 | 52,908 | |||||||||
Total marketable securities | $ | 117,805 | $ | 127,779 | $ | 107,771 | ||||||
Scheduled maturities of held-to-maturity investments were as follows:
(in thousands) | September 30, 2017 | ||
Due within one year | $ | 47,814 | |
Due in one to five years | 69,991 | ||
Total | $ | 117,805 | |
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GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
5. | Fair Value Measurement |
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, 2017 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Cash equivalents | ||||||||||||||||
Money market funds | $ | 22,896 | $ | — | $ | — | $ | 22,896 | ||||||||
Total assets | $ | 22,896 | $ | — | $ | — | $ | 22,896 | ||||||||
December 31, 2016 | ||||||||||||||||
Cash equivalents | ||||||||||||||||
Money market funds | $ | 10,057 | $ | — | $ | — | $ | 10,057 | ||||||||
Total assets | $ | 10,057 | $ | — | $ | — | $ | 10,057 | ||||||||
September 30, 2016 | ||||||||||||||||
Cash equivalents | ||||||||||||||||
Money market funds | $ | 12,041 | $ | — | $ | — | $ | 12,041 | ||||||||
Total assets | $ | 12,041 | $ | — | $ | — | $ | 12,041 | ||||||||
A reconciliation of cash equivalents to consolidated cash and cash equivalents is as follows
(in thousands) | September 30, 2017 | December 31, 2016 | September 30, 2016 | |||||||||
Cash equivalents | $ | 22,896 | $ | 10,057 | $ | 12,041 | ||||||
Cash | 162,620 | 179,269 | 138,184 | |||||||||
Total cash and cash equivalents | $ | 185,516 | $ | 189,326 | $ | 150,225 | ||||||
Interest Rate Swaps
As of both September 30, 2017 and December 31, 2016, the fair value of the cash flow hedge that we entered into in January 2016 was $0.8 million and was included in other current assets in the condensed consolidated balance sheets. As of September 30, 2016, the fair value of the cash flow hedge was $1.3 million and was included in accrued expenses and other current liabilities in the condensed consolidated balance sheets.
The unrealized gains and losses, net of taxes, on the effective portion reported as a component of accumulated other comprehensive income (loss) and the interest expense reclassified from accumulated other comprehensive income (loss) were both immaterial during the three and nine months ended September 30, 2017 and 2016. During the three and nine months ended September 30, 2017 and 2016, there was no ineffective portion. We estimate an immaterial amount to be reclassified from accumulated other comprehensive income (loss) into pre-tax earnings within the next twelve months.
As of September 30, 2016, the fair value of the interest rate swap that was terminated in December 2016 was $1.1 million and was included in other current assets on the condensed consolidated balance sheets. During the three and nine months ended September 30, 2016, we recorded net losses of $0.6 million and net gains of $1.0 million, respectively, that were included in other income, net on our condensed consolidated statements of operations.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Other Assets and Liabilities
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 were as follows:
September 30, 2017 | December 31, 2016 | September 30, 2016 | ||||||||||||||||||||||||
(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 | $ | 117,805 | $ | 117,349 | $ | 127,779 | $ | 127,365 | $ | 107,771 | $ | 107,770 | |||||||||||||
Liabilities (including current maturities): | ||||||||||||||||||||||||||
2019 Notes1 | Level 3 | $ | 120,000 | $ | 124,792 | $ | 120,000 | $ | 124,654 | $ | 160,000 | $ | 169,094 | |||||||||||||
Credit Agreement - term loan1 | Level 3 | 91,250 | 91,078 | 95,000 | 93,991 | 96,250 | 96,151 | |||||||||||||||||||
Credit Agreement - revolving credit facility1 | Level 3 | 30,000 | 30,018 | 30,000 | 29,452 | — | — | |||||||||||||||||||
1See Note 10 for definitions of 2019 Notes and Credit Agreement.
During the three and nine months ended September 30, 2017 and 2016, 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 |
(in thousands) | September 30, 2017 | December 31, 2016 | September 30, 2016 | |||||||||
Construction contracts: | ||||||||||||
Completed and in progress | $ | 469,416 | $ | 288,160 | $ | 347,320 | ||||||
Retentions | 88,650 | 84,878 | 97,385 | |||||||||
Total construction contracts | 558,066 | 373,038 | 444,705 | |||||||||
Construction material sales | 58,920 | 29,357 | 50,768 | |||||||||
Other | 10,412 | 17,523 | 17,760 | |||||||||
Total gross receivables | 627,398 | 419,918 | 513,233 | |||||||||
Less: allowance for doubtful accounts | 317 | 573 | 481 | |||||||||
Total net receivables | $ | 627,081 | $ | 419,345 | $ | 512,752 | ||||||
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 are not contractually billable or have not been earned, including claim recovery estimates, the associated revenue is included in costs and estimated earnings in excess of billings or billings in excess of costs and estimated earnings in the condensed consolidated balance sheets. As of September 30, 2017, December 31, 2016 and September 30, 2016, the aggregate claim recovery estimates included in these balances were approximately $21.6 million, $12.3 million and $7.8 million, respectively. Included in other receivables at September 30, 2017, December 31, 2016 and September 30, 2016 were items such as estimated recovery from back charge claims, notes receivable, fuel tax refunds, receivables from vendors and income tax refunds. No such receivables individually exceeded 10% of total net receivables at any of these dates. As of September 30, 2017, December 31, 2016 and September 30, 2016, the estimated recovery from back charge claims included in Other receivables was $0.3 million, $0.3 million and $9.3 million, respectively.
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. As of September 30, 2017, December 31, 2016 and September 30, 2016, no retention receivable individually exceeded 10% of total net receivables at any of the presented dates. The majority of the retentions receivable are expected to be collected within one year and there were no retentions receivables determined to be uncollectible.
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GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
7. | Construction Joint Ventures |
We participate in various construction joint ventures. 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, 2017, we determined no change to the primary beneficiary was required for existing construction joint ventures.
Due to the joint and several nature of the performance obligations under the related owner contracts, if any of the partners fail to perform, we and the remaining partners, if any, would be responsible for performance of the outstanding work (i.e., we provide a performance guarantee). At September 30, 2017, there was approximately $5.1 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 $3.4 billion represented our partners’ share. We are not able to estimate amounts that may be required beyond the remaining cost of the work to be performed. These costs could be offset by billings to the customer or by proceeds from our partners’ and/or other guarantees.
Consolidated Construction Joint Ventures (“CCJVs”)
At September 30, 2017, we were engaged in six active CCJV projects with total contract values ranging from $49.2 million to $409.6 million. Our share of revenue remaining to be recognized on these CCJVs ranged from $8.1 million to $204.8 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, 2017, total revenue from CCJVs was $44.5 million and $129.5 million, respectively. During the three and nine months ended September 30, 2016, total revenue from CCJVs was $24.8 million and $79.9 million, respectively. During the nine months ended September 30, 2017 and 2016, CCJVs provided $26.4 million and $7.8 million of operating cash flows, respectively.
Unconsolidated Construction Joint Ventures
As of September 30, 2017, we were engaged in eleven active unconsolidated joint venture projects with total contract values ranging from $77.3 million to $3.7 billion, for which there were three with contract values greater than $1.0 billion. Our proportionate share of the equity in these unconsolidated construction joint ventures ranged from 20.0% to 50.0%. As of September 30, 2017, our share of the revenue remaining to be recognized on these unconsolidated construction joint ventures ranged from $0.5 million to $408.1 million.
As of September 30, 2017, December 31, 2016 and September 30, 2016, 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.
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GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following is summary financial information related to unconsolidated construction joint ventures:
(in thousands) | September 30, 2017 | December 31, 2016 | September 30, 2016 | |||||||||
Assets: | ||||||||||||
Cash, cash equivalents and marketable securities | $ | 333,751 | $ | 537,991 | $ | 509,644 | ||||||
Other current assets1 | 721,014 | 644,809 | 683,854 | |||||||||
Noncurrent assets | 223,449 | 207,240 | 212,620 | |||||||||
Less partners’ interest | 846,832 | 935,615 | 942,183 | |||||||||
Granite’s interest1,2 | 431,382 | 454,425 | 463,935 | |||||||||
Liabilities: | ||||||||||||
Current liabilities | 650,065 | 696,215 | 656,621 | |||||||||
Less partners’ interest and adjustments3 | 445,068 | 472,324 | 449,044 | |||||||||
Granite’s interest | 204,997 | 223,891 | 207,577 | |||||||||
Equity in construction joint ventures4 | $ | 226,385 | $ | 230,534 | $ | 256,358 | ||||||
1Included in this balance and in accrued and other current liabilities on our condensed consolidated balance sheets as of September 30, 2017, December 31, 2016 and September 30, 2016 was $88.9 million, $83.1 million and $83.1 million, respectively, related to performance guarantees.
2Included in this balance as of September 30, 2017, December 31, 2016 and September 30, 2016 was $77.6 million, $65.4 million and $62.5 million, respectively, related to Granite’s share of estimated cost recovery of customer affirmative claims. In addition, this balance included $11.1 million, $5.6 million and $5.9 million related to Granite’s share of estimated recovery of back charge claims as of September 30, 2017, December 31, 2016 and September 30, 2016, respectively.
3Partners’ interest and adjustments includes amounts to reconcile total liabilities as reported by our partners to Granite’s interest adjusted to reflect our accounting policies.
4As of September 30, 2017, December 31, 2016 and September 30, 2016, this balance included $16.0 million, $16.6 million and $6.8 million, respectively, of deficit in construction joint ventures that is included in accrued expenses and other current liabilities on the condensed consolidated balance sheets.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Revenue: | |||||||||||||||
Total | $ | 550,115 | $ | 550,296 | $ | 1,517,419 | $ | 1,520,342 | |||||||
Less partners’ interest and adjustments1 | 396,672 | 390,775 | 1,096,834 | 1,085,546 | |||||||||||
Granite’s interest | 153,443 | 159,521 | 420,585 | 434,796 | |||||||||||
Cost of revenue: | |||||||||||||||
Total | 520,205 | 510,579 | 1,462,127 | 1,451,189 | |||||||||||
Less partners’ interest and adjustments1 | 359,825 | 360,965 | 1,026,377 | 1,032,667 | |||||||||||
Granite’s interest | 160,380 | 149,614 | 435,750 | 418,522 | |||||||||||
Granite’s interest in gross (loss) profit | $ | (6,937 | ) | $ | 9,907 | $ | (15,165 | ) | $ | 16,274 | |||||
1Partners’ interest and adjustments 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, 2017, unconsolidated construction joint venture net income was $31.0 million and $57.2 million, respectively, of which our share was net loss of $7.1 million and $15.3 million, respectively. The differences between our share of the joint venture net losses when compared to the joint venture net income primarily resulted from differences between our estimated total revenue and cost of revenue when compared to that of our partners’ on four projects. During the three and nine months ended September 30, 2016, unconsolidated construction joint venture net income was $38.7 million and $68.0 million, respectively, of which our share was $10.3 million and $15.9 million, respectively. These joint venture net income amounts exclude our corporate overhead required to manage the joint ventures and include taxes only to the extent the applicable states have joint venture level taxes.
15
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Line Item Joint Ventures
As of September 30, 2017, we had one active line item joint venture construction project with a total contract value of $66.2 million of which our portion was $48.7 million. As of September 30, 2017, our share of revenue remaining to be recognized on this line item joint venture was $3.8 million. During the three and nine months ended September 30, 2017, our portion of revenue from line item joint ventures was $5.4 million and $20.1 million, respectively. During the three and nine months ended September 30, 2016, our portion of revenue from line item joint ventures was $9.5 million and $23.5 million, respectively.
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 investments in affiliates balance consists of the following:
(in thousands) | September 30, 2017 | December 31, 2016 | September 30, 2016 | |||||||||
Equity method investments in real estate affiliates | $ | 28,634 | $ | 25,911 | $ | 24,638 | ||||||
Equity method investment in other affiliate | 11,312 | 9,757 | 9,718 | |||||||||
Total investments in affiliates | $ | 39,946 | $ | 35,668 | $ | 34,356 | ||||||
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, 2017 | December 31, 2016 | September 30, 2016 | |||||||||
Total assets | $ | 163,714 | $ | 155,506 | $ | 167,859 | ||||||
Net assets | 98,490 | 99,804 | 95,128 | |||||||||
Granite’s share of net assets | 39,946 | 35,668 | 34,356 | |||||||||
The equity method investments in real estate affiliates included $23.6 million, $20.8 million and $19.7 million in residential real estate in Texas as of September 30, 2017, December 31, 2016 and September 30, 2016, respectively. The remaining balances were in commercial real estate in Texas. Of the $163.7 million in total assets as of September 30, 2017, real estate entities had total assets ranging from $1.6 million to $73.1 million and the non-real estate entity had total assets of $26.5 million.
9. | Property and Equipment, net |
Balances of major classes of assets and allowances for depreciation and depletion are included in property and equipment, net in the condensed consolidated balance sheets and were as follows:
(in thousands) | September 30, 2017 | December 31, 2016 | September 30, 2016 | |||||||||
Equipment and vehicles | $ | 778,010 | $ | 756,602 | $ | 770,882 | ||||||
Quarry property | 177,427 | 174,839 | 179,735 | |||||||||
Land and land improvements | 113,384 | 110,999 | 111,714 | |||||||||
Buildings and leasehold improvements | 83,914 | 82,762 | 82,733 | |||||||||
Office furniture and equipment | 59,791 | 56,381 | 61,007 | |||||||||
Property and equipment | 1,212,526 | 1,181,583 | 1,206,071 | |||||||||
Less: accumulated depreciation and depletion | 800,352 | 774,933 | 798,744 | |||||||||
Property and equipment, net | $ | 412,174 | $ | 406,650 | $ | 407,327 | ||||||
16
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
10. | Debt Covenants and Events of Default |
Our debt and credit agreements require us to comply with various affirmative, restrictive and financial covenants, including the financial covenants described below. 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, 2017, we had a $291.3 million credit facility, of which $200.0 million was a revolving credit facility and $91.3 million was a term loan that matures on October 28, 2020 (the “Maturity Date”) and has a sublimit for letters of credit of $100.0 million (the “Credit Agreement”).
As of September 30, 2017, December 31, 2016 and September 30, 2016, $5.0 million of the term loan balance was included in current maturities of long-term debt and the remaining $86.3 million, $90.0 million and $91.3 million, respectively, was included in long-term debt on the condensed consolidated balance sheets.
As of September 30, 2017 and December 31, 2016, $30.0 million had been drawn from the Credit Agreement to service the 2016 installment of the 2019 Notes (defined below).
Senior notes payable in the amount of $120.0 million as of both September 30, 2017 and December 31, 2016 and in the amount of $160.0 million as of September 30, 2016 were due to a group of institutional holders and had an interest rate of 6.11% per annum (“2019 Notes”). As of September 30, 2017, three equal annual installments from 2017 through 2019 are remaining. Of the outstanding balances, $110.0 million as of both September 30, 2017 and December 31, 2016 and $150.0 million as of September 30, 2016 were included in long-term debt on the condensed consolidated balance sheets.
Of the $40.0 million due for the 2017 installment of the 2019 Notes, $30.0 million is included in long-term debt on the condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016 as we have the ability and intent to pay these installments using borrowings under the Credit Agreement or by obtaining other sources of financing. The remaining $10.0 million of the 2017 installment was included in current maturities of long-term debt as of September 30, 2017 and December 31, 2016.
Of the $40.0 million due for the 2016 installment of the 2019 Notes, $30.0 million was included in long-term debt on the condensed consolidated balance sheets as of September 30, 2016 as we had the ability and intent to pay these installments using borrowings under the Credit Agreement. The remaining $10.0 million of the 2016 installment was included in current maturities of long-term debt as of September 30, 2016.
As of September 30, 2017, we were in compliance with all covenants contained in the Credit Agreement and related to the note purchase agreement governing our 2019 Notes. We are not aware of any non-compliance by any of our unconsolidated real estate entities with the covenants contained in their debt agreements.
17
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
11. | Weighted Average Shares Outstanding and Net Income Per Share |
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) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Numerator (basic and diluted): | ||||||||||||||||
Net income allocated to common shareholders for basic calculation | $ | 45,982 | $ | 37,191 | $ | 36,325 | $ | 40,949 | ||||||||
Denominator: | ||||||||||||||||
Weighted average common shares outstanding, basic | 39,844 | 39,599 | 39,774 | 39,539 | ||||||||||||
Dilutive effect of common stock options and restricted stock units | 543 | 714 | 593 | 666 | ||||||||||||
Weighted average common shares outstanding, diluted | 40,387 | 40,313 | 40,367 | 40,205 | ||||||||||||
Net income per share, basic | $ | 1.15 | $ | 0.94 | $ | 0.91 | $ | 1.04 | ||||||||
Net income per share, diluted | $ | 1.14 | $ | 0.92 | $ | 0.90 | $ | 1.02 | ||||||||
12. | Equity |
The following tables summarize our equity activity for the periods presented (in thousands):
Granite Construction Incorporated | Non-controlling Interests | Total Equity | ||||||||||
Balance at December 31, 2016 | $ | 885,988 | $ | 36,603 | $ | 922,591 | ||||||
Purchases of common stock1 | (6,713 | ) | — | (6,713 | ) | |||||||
Other transactions with shareholders and employees2 | 14,488 | — | 14,488 | |||||||||
Transactions with non-controlling interests, net | — | (3,502 | ) | (3,502 | ) | |||||||
Net income | 36,325 | 4,151 | 40,476 | |||||||||
Dividends on common stock | (15,532 | ) | — | (15,532 | ) | |||||||
Balance at September 30, 2017 | $ | 914,556 | $ | 37,252 | $ | 951,808 | ||||||
Balance at December 31, 2015 | $ | 839,237 | $ | 30,884 | $ | 870,121 | ||||||
Purchases of common stock3 | (4,946 | ) | — | (4,946 | ) | |||||||
Other transactions with shareholders and employees2 | 11,345 | — | 11,345 | |||||||||
Transactions with non-controlling interests, net | — | (1,827 | ) | (1,827 | ) | |||||||
Net income | 40,949 | 5,987 | 46,936 | |||||||||
Dividends on common stock | (15,439 | ) | — | (15,439 | ) | |||||||
Balance at September 30, 2016 | $ | 871,146 | $ | 35,044 | $ | 906,190 | ||||||
1Represents 136,000 shares purchased in connection with employee tax withholding for restricted stock units vested under our 2012 Equity Incentive Plan.
2Amounts are comprised primarily of amortized restricted stock units.
3Represents 111,000 shares purchased in connection with employee tax withholding for restricted stock units vested under our 2012 Equity Incentive Plan.
18
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
13. | Legal Proceedings |
In the ordinary course of business, we or our joint ventures and affiliates are involved in various legal proceedings alleging, among other things, public liability issues, breach of contract or tortious conduct in connection with the performance of services and/or materials provided. We are also subject to government inquiries and reporting requirements seeking information concerning our compliance with government construction contracting requirements and various laws and regulations. The outcomes of such proceedings and government inquiries cannot be predicted with certainty.
Some of the matters in which we or our joint ventures and affiliates are involved may include 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 or suspended, we could be 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, 2017, December 31, 2016 and September 30, 2016 related to these matters were approximately $1.7 million, $4.3 million and $0.7 million, respectively, and were primarily included in accrued expenses and other current liabilities. The aggregate range of reasonably possible loss amounts in excess of accrued losses recorded for probable loss contingencies, including those related to liquidated damages, could have a material impact on our consolidated financial statements if they become probable and the reasonably estimable amount is determined.
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GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
14. | Business Segment Information |
Summarized segment information is as follows (in thousands):
Three Months Ended September 30, | ||||||||||||||||
Construction | Large Project Construction | Construction Materials | Total | |||||||||||||
2017 | ||||||||||||||||
Total revenue from reportable segments | $ | 579,146 | $ | 279,845 | $ | 180,265 | $ | 1,039,256 | ||||||||
Elimination of intersegment revenue | — | — | (82,130 | ) | (82,130 | ) | ||||||||||
Revenue from external customers | 579,146 | 279,845 | 98,135 | 957,126 | ||||||||||||
Gross profit | 91,348 | 6,385 | 16,797 | 114,530 | ||||||||||||
Depreciation, depletion and amortization | 5,770 | 3,226 | 5,824 | 14,820 | ||||||||||||
2016 | ||||||||||||||||
Total revenue from reportable segments | $ | 464,624 | $ | 249,345 | $ | 162,835 | $ | 876,804 | ||||||||
Elimination of intersegment revenue | — | — | (72,899 | ) | (72,899 | ) | ||||||||||
Revenue from external customers | 464,624 | 249,345 | 89,936 | 803,905 | ||||||||||||
Gross profit | 71,530 | 23,519 | 12,625 | 107,674 | ||||||||||||
Depreciation, depletion and amortization | 6,162 | 1,821 | 6,168 | 14,151 | ||||||||||||
Nine Months Ended September 30, | ||||||||||||||||
Construction | Large Project Construction | Construction Materials | Total | |||||||||||||
2017 | ||||||||||||||||
Total revenue from reportable segments | $ | 1,235,264 | $ | 741,341 | $ | 352,129 | $ | 2,328,734 | ||||||||
Elimination of intersegment revenue | — | — | (140,295 | ) | (140,295 | ) | ||||||||||
Revenue from external customers | 1,235,264 | 741,341 | 211,834 | 2,188,439 | ||||||||||||
Gross profit | 181,801 | 9,435 | 22,990 | 214,226 | ||||||||||||
Depreciation, depletion and amortization | 16,205 | 8,193 | 16,439 | 40,837 | ||||||||||||
Segment assets | 141,210 | 326,314 | 287,821 | 755,345 | ||||||||||||
2016 | ||||||||||||||||
Total revenue from reportable segments | $ | 1,005,457 | $ | 642,116 | $ | 327,108 | $ | 1,974,681 | ||||||||
Elimination of intersegment revenue | — | — | (126,745 | ) | (126,745 | ) | ||||||||||
Revenue from external customers | 1,005,457 | 642,116 | 200,363 | 1,847,936 | ||||||||||||
Gross profit | 147,519 | 50,678 | 21,923 | 220,120 | ||||||||||||
Depreciation, depletion and amortization | 16,032 | 4,809 | 17,364 | 38,205 | ||||||||||||
Segment assets | 156,458 | 322,800 | 290,898 | 770,156 | ||||||||||||
A reconciliation of segment gross profit to consolidated income before provision for income taxes is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Total gross profit from reportable segments | $ | 114,530 | $ | 107,674 | $ | 214,226 | $ | 220,120 | |||||||
Selling, general and administrative expenses | 49,501 | 54,194 | 162,726 | 159,032 | |||||||||||
Gain on sales of property and equipment | (1,753 | ) | (398 | ) | (2,830 | ) | (2,364 | ) | |||||||
Total other income | (2,522 | ) | (912 | ) | (2,987 | ) | (3,024 | ) | |||||||
Income before provision for income taxes | $ | 69,304 | $ | 54,790 | $ | 57,317 | $ | 66,476 | |||||||
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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 that 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.
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, water-related facilities, utilities, tunnels, dams and other infrastructure-related projects. We have three reportable business segments: Construction, Large Project Construction and Construction Materials (see Note 14 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: (i) California; (ii) Northwest, which primarily includes offices in Alaska, Arizona, Nevada, Utah and Washington; (iii) Heavy Civil, which primarily includes offices in California, Florida, New York and Texas; and (iv) Kenny, which primarily includes an office in Illinois.
The four primary economic drivers of our business are (i) the overall health of the U.S. economy; (ii) federal, state and local public funding levels; (iii) population growth resulting in public and private development; and (iv) the need to replace or repair aging infrastructure. Changes in these drivers can either reduce our revenues and/or gross profit margins or provide opportunities for revenue growth and gross profit margin improvement.
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Current Economic Environment and Outlook
Both public and private markets remain highly competitive, with record backlog of $4.2 billion reflecting a backdrop of consistent, modest economic growth. Private market activity, across geographies and end markets, remains a key growth and diversification opportunity. Following decades of under-investment, state, regional, and local public infrastructure investment is poised to grow. We continue to anticipate positive, multi-year demand from improved public-spending trends to have the most impact on our Construction and Construction Materials segments.
The five-year Fixing America’s Surface Transportation (“FAST”) Act, passed in December 2015, remains a stabilizing force for state departments of transportation. While not a growth catalyst, the five-year, $305 billion FAST Act broadened and stabilized state and local visibility through 2020. With a half dozen states joining a larger group in 2017, more than half of U.S. states have taken action over the past five years to stabilize maintenance and to reinvest in transportation infrastructure. California’s 10-year, $52.4 billion investment from Senate Bill 1, The Road Repair and Accountability Act of 2017, passed in the third quarter of 2017 and is expected to accelerate meaningfully in 2018 and beyond.
Managing risks and being compensated appropriately for the complex skills required to build tomorrow's great public infrastructure projects guides our Large Project Construction strategy, as we prioritize and pursue billions of dollars’ worth of future North American projects. The market for these projects remains robust, and we are acutely focused on projects with appropriate returns relative to risks.
Results of Operations
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 of a given quarter are not indicative of the results to be expected for the full year.
The following table presents a financial summary for the three and nine months ended September 30, 2017 and 2016:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Total revenue | $ | 957,126 | $ | 803,905 | $ | 2,188,439 | $ | 1,847,936 | |||||||
Gross profit | 114,530 | 107,674 | 214,226 | 220,120 | |||||||||||
Operating income | 66,782 | 53,878 | 54,330 | 63,452 | |||||||||||
Total other income | (2,522 | ) | (912 | ) | (2,987 | ) | (3,024 | ) | |||||||
Net income attributable to Granite Construction Incorporated | 45,982 | 37,191 | 36,325 | 40,949 | |||||||||||
Revenue
Total Revenue by Segment
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||
(dollars in thousands) | 2017 | |||||||||||||||||||||||||||