GRANITE CONSTRUCTION INC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2017
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ___________ to ___________
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Commission File Number: 1-12911
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GRANITE CONSTRUCTION INCORPORATED
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State of Incorporation:
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I.R.S. Employer Identification Number:
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Delaware
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77-0239383
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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.
x
Yes
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).
x
Yes
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.
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Large accelerated filer
x
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
o
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Emerging growth company
o
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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
July 28, 2017
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Class
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Outstanding
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Common Stock, $0.01 par value
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39,841,304
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Index
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EXHIBIT 101.INS
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EXHIBIT 101.SCH
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EXHIBIT 101.CAL
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EXHIBIT 101.DEF
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EXHIBIT 101.LAB
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EXHIBIT 101.PRE
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2
PART
I.
FINANCIAL INFORMATION
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Item 1.
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FINANCIAL STATEMENTS
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GRANITE CONSTRUCTION INCORPORATED
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||||||||||||
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||||||||||||
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(Unaudited - in thousands, except share and per share data)
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||||||||||||
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June 30,
2017 |
December 31,
2016 |
June 30,
2016 |
|||||||||
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ASSETS
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Current assets
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Cash and cash equivalents ($80,195, $73,115 and $50,065 related to consolidated construction joint ventures (“CCJVs”))
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$
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178,068
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$
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189,326
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$
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161,218
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Short-term marketable securities
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47,821
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64,884
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34,959
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Receivables, net ($42,099, $52,613 and $59,923 related to CCJVs)
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484,245
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419,345
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431,127
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Costs and estimated earnings in excess of billings ($3,124, $5,046 and $451 related to CCJVs)
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99,883
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73,102
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86,025
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Inventories
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65,495
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55,245
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64,711
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Equity in construction joint ventures
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230,448
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247,182
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245,509
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Other current assets ($7,190, $7,500 and $8,489 related to CCJVs)
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43,597
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39,908
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31,949
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||||||
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Total current assets
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1,149,557
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1,088,992
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1,055,498
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Property and equipment, net ($28,398, $20,500 and $13,420 related to CCJVs)
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414,079
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406,650
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409,860
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Long-term marketable securities
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59,990
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62,895
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42,653
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Investments in affiliates
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37,170
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35,668
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34,517
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Goodwill
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53,799
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53,799
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53,799
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Deferred income taxes, net
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—
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—
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5,407
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Other noncurrent assets
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88,550
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85,449
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84,095
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Total assets
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$
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1,803,145
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$
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1,733,453
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$
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1,685,829
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LIABILITIES AND EQUITY
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Current liabilities
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||||||
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Current maturities of long-term debt
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$
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14,796
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$
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14,796
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$
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14,795
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Accounts payable ($24,976, $26,419 and $25,061 related to CCJVs)
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252,527
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199,029
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210,923
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Billings in excess of costs and estimated earnings ($32,657, $33,704 and $18,687 related to CCJVs)
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114,180
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97,522
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90,484
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Accrued expenses and other current liabilities ($1,156, $1,544 and $1,529 related to CCJVs)
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231,048
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218,587
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212,986
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Total current liabilities
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612,551
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529,934
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529,188
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Long-term debt
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227,114
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229,498
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241,907
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||||||
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Deferred income taxes, net
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5,420
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5,441
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—
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||||||
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Other long-term liabilities
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47,983
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45,989
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45,719
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Commitments and contingencies
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Equity
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||||||||||
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Preferred stock, $0.01 par value, authorized 3,000,000 shares, none outstanding
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—
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—
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—
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Common stock, $0.01 par value, authorized 150,000,000 shares; issued and outstanding: 39,837,295 shares as of June 30, 2017, 39,621,140 shares as of December 31, 2016 and 39,597,469 shares as of June 30, 2016
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398
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396
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396
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Additional paid-in capital
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155,476
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150,337
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145,156
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||||||
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Accumulated other comprehensive income (loss)
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71
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(371
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)
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(1,811
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)
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Retained earnings
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715,451
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735,626
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692,740
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Total Granite Construction Incorporated shareholders’ equity
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871,396
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885,988
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836,481
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Non-controlling interests
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38,681
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36,603
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32,534
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||||||
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Total equity
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910,077
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922,591
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869,015
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||||||
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Total liabilities and equity
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$
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1,803,145
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$
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1,733,453
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$
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1,685,829
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|||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
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GRANITE CONSTRUCTION INCORPORATED
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||||||||||||||||
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||||||||||||||||
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(Unaudited - in thousands, except per share data)
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||||||||||||||||
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Three Months Ended June 30,
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Six Months Ended June 30,
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|||||||||||||||
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2017
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2016
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2017
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2016
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Revenue
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|||||||||||||||
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Construction
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$
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429,269
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$
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331,346
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$
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656,118
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$
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540,833
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||||
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Large Project Construction
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254,463
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197,322
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461,496
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392,771
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Construction Materials
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79,181
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75,911
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113,699
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110,427
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Total revenue
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762,913
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604,579
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1,231,313
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1,044,031
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||||||||
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Cost of revenue
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||||||||||||||
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Construction
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366,765
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282,290
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565,665
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464,844
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||||||||
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Large Project Construction
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253,968
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183,668
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458,446
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365,612
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||||||||
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Construction Materials
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67,610
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65,420
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107,506
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101,129
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||||||||
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Total cost of revenue
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688,343
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531,378
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1,131,617
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931,585
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||||||||
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Gross profit
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74,570
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73,201
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99,696
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112,446
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||||||||
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Selling, general and administrative expenses
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51,388
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48,705
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113,225
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104,838
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||||||||
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Gain on sales of property and equipment
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(807
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)
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(1,366
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)
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(1,077
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)
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(1,966
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)
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||||||||
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Operating income (loss)
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23,989
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25,862
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(12,452
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)
|
9,574
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||||||||
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Other (income) expense
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||||||||||||||
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Interest income
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(1,164
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)
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(798
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)
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(2,215
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)
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(1,634
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)
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||||||||
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Interest expense
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2,694
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3,187
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|
5,437
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6,236
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||||||||
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Equity in income of affiliates
|
(1,259
|
)
|
(717
|
)
|
(2,175
|
)
|
(2,159
|
)
|
||||||||
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Other income, net
|
(642
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)
|
(3,183
|
)
|
(1,512
|
)
|
(4,555
|
)
|
||||||||
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Total other income
|
(371
|
)
|
(1,511
|
)
|
(465
|
)
|
(2,112
|
)
|
||||||||
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Income (loss) before provision for (benefit from) income taxes
|
24,360
|
|
27,373
|
|
(11,987
|
)
|
11,686
|
|
||||||||
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Provision for (benefit from) income taxes
|
8,088
|
|
8,847
|
|
(4,408
|
)
|
2,923
|
|
||||||||
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Net income (loss)
|
16,272
|
|
18,526
|
|
(7,579
|
)
|
8,763
|
|
||||||||
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Amount attributable to non-controlling interests
|
(2,139
|
)
|
(4,327
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)
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(2,078
|
)
|
(5,005
|
)
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||||||||
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Net income (loss) attributable to Granite Construction Incorporated
|
$
|
14,133
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$
|
14,199
|
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$
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(9,657
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)
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$
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3,758
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||||
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Net income (loss) per share attributable to common shareholders
(see Note 11)
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||||||||||||||||
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Basic
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$
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0.35
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$
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0.36
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$
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(0.24
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)
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$
|
0.10
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|
||||
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Diluted
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$
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0.35
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$
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0.35
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$
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(0.24
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)
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$
|
0.09
|
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||||
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Weighted average shares of common stock
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||||||||||||||
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Basic
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39,827
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39,584
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39,738
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39,509
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||||||||
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Diluted
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40,393
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40,302
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39,738
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40,140
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||||||||
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Dividends per common share
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$
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0.13
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$
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0.13
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$
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0.26
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$
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0.26
|
|
||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
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GRANITE CONSTRUCTION INCORPORATED
|
||||||||||||||||
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
||||||||||||||||
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(Unaudited - in thousands)
|
||||||||||||||||
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Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
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2017
|
2016
|
2017
|
2016
|
|||||||||||||
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Net income (loss)
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$
|
16,272
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$
|
18,526
|
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$
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(7,579
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)
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$
|
8,763
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||||
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Other comprehensive income (loss), net of tax:
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Net unrealized loss on derivatives
|
$
|
(261
|
)
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$
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(507
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)
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$
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(209
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)
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$
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(1,398
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)
|
||||
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Less: reclassification for net losses included in interest expense
|
47
|
|
100
|
|
116
|
|
100
|
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||||||||
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Net change
|
$
|
(214
|
)
|
$
|
(407
|
)
|
$
|
(93
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)
|
$
|
(1,298
|
)
|
||||
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Foreign currency translation adjustments, net
|
542
|
|
165
|
|
535
|
|
987
|
|
||||||||
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Other comprehensive income (loss)
|
$
|
328
|
|
$
|
(242
|
)
|
$
|
442
|
|
$
|
(311
|
)
|
||||
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Comprehensive income (loss)
|
$
|
16,600
|
|
$
|
18,284
|
|
$
|
(7,137
|
)
|
$
|
8,452
|
|
||||
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Non-controlling interests in comprehensive loss
|
(2,139
|
)
|
(4,327
|
)
|
(2,078
|
)
|
(5,005
|
)
|
||||||||
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Comprehensive income (loss) attributable to Granite
|
$
|
14,461
|
|
$
|
13,957
|
|
$
|
(9,215
|
)
|
$
|
3,447
|
|
||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
|
GRANITE CONSTRUCTION INCORPORATED
|
|||||||||
|
|
|||||||||
|
(
Unaudited - in thousands
)
|
|||||||||
|
Six Months Ended June 30,
|
2017
|
2016
|
|||||||
|
Operating activities
|
|
|
|||||||
|
Net (loss) income
|
$
|
(7,579
|
)
|
$
|
8,763
|
|
|||
|
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
|
|
|
|||||||
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Depreciation, depletion and amortization
|
31,148
|
|
29,502
|
|
|||||
|
Gain on sales of property and equipment
|
(1,077
|
)
|
(1,966
|
)
|
|||||
|
Stock-based compensation
|
11,224
|
|
8,563
|
|
|||||
|
Equity in net loss (income) from unconsolidated joint ventures
|
8,249
|
|
(5,688
|
)
|
|||||
|
Gain on real estate entity
|
—
|
|
(2,452
|
)
|
|||||
|
Changes in assets and liabilities:
|
|
|
|||||||
|
Receivables
|
(64,864
|
)
|
(87,286
|
)
|
|||||
|
Costs and estimated earnings in excess of billings, net
|
(28,284
|
)
|
(30,645
|
)
|
|||||
|
Inventories
|
(10,250
|
)
|
(9,158
|
)
|
|||||
|
Contributions to unconsolidated construction joint ventures
|
(750
|
)
|
(8,018
|
)
|
|||||
|
Distributions from unconsolidated construction joint ventures
|
32,494
|
|
5,445
|
|
|||||
|
Other assets, net
|
(9,212
|
)
|
(7,544
|
)
|
|||||
|
Accounts payable
|
52,417
|
|
47,529
|
|
|||||
|
Accrued expenses and other current liabilities, net
|
9,170
|
|
(158
|
)
|
|||||
|
Net cash provided by (used in) operating activities
|
22,686
|
|
(53,113
|
)
|
|||||
|
Investing activities
|
|
|
|
|
|||||
|
Purchases of marketable securities
|
(49,816
|
)
|
|
(29,894
|
)
|
||||
|
Maturities of marketable securities
|
70,000
|
|
|
20,000
|
|
||||
|
Proceeds from called marketable securities
|
—
|
|
|
35,000
|
|
||||
|
Purchases of property and equipment ($7,492 and $9,044 related to CCJVs)
|
(37,518
|
)
|
|
(48,837
|
)
|
||||
|
Proceeds from sales of property and equipment
|
2,585
|
|
|
2,510
|
|
||||
|
Other investing activities, net
|
23
|
|
|
(128
|
)
|
||||
|
Net cash used in investing activities
|
(14,726
|
)
|
|
(21,349
|
)
|
||||
|
Financing activities
|
|
|
|
|
|||||
|
Long-term debt principal repayments
|
(2,500
|
)
|
|
(2,500
|
)
|
||||
|
Cash dividends paid
|
(10,327
|
)
|
|
(10,267
|
)
|
||||
|
Repurchases of common stock
|
(6,568
|
)
|
|
(4,845
|
)
|
||||
|
Other financing activities, net
|
177
|
|
|
456
|
|
||||
|
Net cash used in financing activities
|
(19,218
|
)
|
|
(17,156
|
)
|
||||
|
Decrease in cash and cash equivalents
|
(11,258
|
)
|
|
(91,618
|
)
|
||||
|
Cash and cash equivalents at beginning of period
|
189,326
|
|
|
252,836
|
|
||||
|
Cash and cash equivalents at end of period
|
$
|
178,068
|
|
|
$
|
161,218
|
|
||
|
Supplementary Information
|
|
|
|||||||
|
Cash paid during the period for:
|
|
|
|||||||
|
Interest
|
$
|
5,957
|
|
$
|
6,911
|
|
|||
|
Income taxes
|
2,554
|
|
6,438
|
|
|||||
|
Other non-cash operating activities:
|
|||||||||
|
Performance guarantees
|
$
|
5,761
|
|
$
|
11,247
|
|
|||
|
Non-cash investing and financing activities:
|
|
|
|
|
|||||
|
Restricted stock units issued, net of forfeitures
|
$
|
11,254
|
|
$
|
21,013
|
|
|||
|
Accrued cash dividends
|
5,179
|
|
5,148
|
|
|||||
|
Accrued equipment purchases
|
(1,271
|
)
|
(5,823
|
)
|
|||||
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
June 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 six
months ended
June 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 six months ended
June 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 currently anticipate adopting Topic 606 using the modified retrospective transition approach that may result in a cumulative adjustment to beginning retained earnings as of January 1, 2018, which we will elect to only apply to contracts with customers that are not substantially complete as of January 1, 2018.
Although we are in the process of assessing the financial impact of Topic 606 on our consolidated financial statements and related footnotes, we do not expect Topic 606 to have a material impact on our Construction Materials segment’s revenue. While we continue to assess the impact to both our Large Project Construction and Construction segments, our Large Project Construction segment is more likely to be impacted than our Construction segment 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 and the recognition of provisions for loss could be impacted. Based on our assessment to-date on 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.
|
|
•
|
Mobilization costs - Mobilization costs generally consist of costs to mobilize equipment and labor to a job site. Mobilization costs are currently recorded as job costs as they are incurred. Topic 606 requires mobilization costs to be capitalized as an asset on the consolidated balance sheets and amortized to contract cost over the expected duration of the contract.
|
|
•
|
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 on currently active construction contracts with customers, we have identified a few Large Project Construction segment contracts and Construction segment contracts that will consist of multiple individual contracts as defined by Topic 606.
|
7
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
|
•
|
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.
|
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, receivables not contractually billable, 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 disaggregated revenue. 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,
which eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. 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.
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
June 30, 2017
and for the three and six months ended
June 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 six months ended
June 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 six months ended
June 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 six months ended
June 30, 2017
included increases in revenue of
$12.2 million
and
$14.0 million
, respectively, related to the estimated cost recovery of customer affirmative claims, which included increases of
$11.4 million
and
$14.1 million
, respectively, which were also affected by an increase in estimated contract costs in excess of the estimated recovery during the three and six months ended
June 30, 2017
, respectively. The remaining
$0.8 million
and offsetting decrease of
$0.1 million
, respectively, had estimated contract costs in excess of estimated cost recovery that were recorded in prior periods.
Revisions in estimates for the three
and six
months ended
June 30, 2016
included increases in revenue of
$17.4 million
and
$20.2 million
, respectively, related to the estimated cost recovery of customer affirmative claims, which included increases of
$15.3 million
that were also affected by an increase in estimated contract costs in excess of the estimated recovery during both the three and six months ended
June 30, 2016
. The remaining
$2.1 million
and
$4.9 million
, respectively, had estimated contract costs in excess of estimated cost recovery that were recorded in prior periods.
Back Charges
Revisions in estimates for the three and six months ended
June 30, 2017
included a reduction of cost of revenue of
$2.7 million
and
$3.0 million
, respectively, related to the estimated recovery of back charges of which
$1.4 million
was also affected by an increase in estimated contract costs that were in excess of the estimated recovery during both the three and six months ended
June 30, 2017
. The remaining
$1.3 million
and
$1.6 million
, respectively, had estimated contract costs in excess of estimated cost recovery that were recorded in prior periods.
Revisions in estimates for both the three and six months ended
June 30, 2016
included a reduction of cost of revenue of
$7.6 million
related to the estimated recovery of back charges of which
$2.2 million
was also affected by an increase in estimated contract costs that were in excess of the estimated recovery during both the three and six months ended
June 30, 2016
. The remaining
$5.4 million
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 which individually had an impact of $1.0 million or more on gross profit were decreases of
$1.1 million
and
$1.8 million
for the three
and six
months ended
June 30, 2017
, respectively. The changes for the three and six months ended
June 30, 2016
were decreases of
$1.0 million
and
$2.5 million
, respectively. There were no increases in project profitability from revisions in estimates, which individually had an impact of $1.0 million or more on gross profit during the three and six months ended
June 30, 2017
and 2016. The projects are summarized as follows:
Decreases
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||
|
(dollars in millions)
|
2017
|
2016
|
2017
|
2016
|
|||||||||||
|
Number of projects with downward estimate changes
|
1
|
|
1
|
|
1
|
|
2
|
|
|||||||
|
Range of reduction in gross profit from each project, net
|
$
|
1.1
|
|
$
|
1.0
|
|
$
|
1.8
|
|
$
|
1.2 - 1.3
|
|
|||
|
Decrease on project profitability
|
$
|
1.1
|
|
$
|
1.0
|
|
$
|
1.8
|
|
$
|
2.5
|
|
|||
The decreases during the three
and six
months ended
June 30, 2017
and June 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
$23.8 million
and
$37.8 million
for the three
and six
months ended
June 30, 2017
, respectively. The net changes for the three and six months ended
June 30, 2016
were net decreases of
$4.8 million
and
$7.8 million
, respectively. Amounts attributable to non-controlling interests were
$0.4 million
and
$2.0 million
of the decrease for the three and six months ended
June 30, 2017
, respectively, and were
$3.6 million
of the net decreases for both the three and six months ended
June 30, 2016
. The projects are summarized as follows:
Increases
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||
|
(dollars in millions)
|
2017
|
2016
|
2017
|
2016
|
|||||||||||
|
Number of projects with upward estimate changes
|
—
|
|
2
|
|
—
|
|
4
|
|
|||||||
|
Range of increase in gross profit from each project, net
|
$
|
—
|
|
$
|
2.9 - 6.9
|
|
$
|
—
|
|
$
|
1.2 - 6.9
|
|
|||
|
Increase on project profitability
|
$
|
—
|
|
$
|
9.8
|
|
$
|
—
|
|
$
|
12.3
|
|
|||
The increases during the three
and six
months ended
June 30, 2016
were due to estimated recovery from back charge claims and higher productivity than originally anticipated as well as owner-directed scope changes during the six month period.
Decreases
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||
|
(dollars in millions)
|
2017
|
2016
|
2017
|
2016
|
|||||||||||
|
Number of projects with downward estimate changes
|
5
|
|
4
|
|
7
|
|
4
|
|
|||||||
|
Range of reduction in gross profit from each project, net
|
$
|
1.1 - 8.1
|
|
$
|
2.2 - 5.9
|
|
$
|
1.0 - 10.8
|
|
$
|
3.4 - 6.4
|
|
|||
|
Decrease on project profitability
|
$
|
23.8
|
|
$
|
14.6
|
|
$
|
37.8
|
|
$
|
20.1
|
|
|||
The decreases during the three
and six
months ended
June 30, 2017
were due to higher costs than originally anticipated as well as additional design, weather and owner-related costs, net of estimated and actual recovery from customer affirmative claims and back charges. The decreases during the three
and six
months ended
June 30, 2016
were due to additional design, weather and owner-related costs and lower productivity than originally anticipated. As of
June 30, 2017
, there were projects for which additional costs, including liquidated damages, were reasonably possible but the range of costs was not estimable. The range will be determined as the projects proceed, and the outcomes could have a material effect on our financial position, results of operations and /or cash flows in the future.
10
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
|
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)
|
June 30,
2017 |
December 31,
2016 |
June 30,
2016 |
|||||||||
|
U.S. Government and agency obligations
|
$
|
12,909
|
|
$
|
10,002
|
|
$
|
20,010
|
|
|||
|
Commercial paper
|
34,912
|
|
54,882
|
|
14,949
|
|
||||||
|
Total short-term marketable securities
|
47,821
|
|
64,884
|
|
34,959
|
|
||||||
|
U.S. Government and agency obligations
|
59,990
|
|
62,895
|
|
42,653
|
|
||||||
|
Total long-term marketable securities
|
59,990
|
|
62,895
|
|
42,653
|
|
||||||
|
Total marketable securities
|
$
|
107,811
|
|
$
|
127,779
|
|
$
|
77,612
|
|
|||
Scheduled maturities of held-to-maturity investments were as follows:
|
(in thousands)
|
June 30,
2017 |
||
|
Due within one year
|
$
|
47,821
|
|
|
Due in one to five years
|
59,990
|
|
|
|
Total
|
$
|
107,811
|
|
|
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
|
||||||||||||||||
|
June 30, 2017
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||
|
Cash equivalents
|
|
|
|
|
|
|
|
|
||||||||
|
Money market funds
|
$
|
38,006
|
|
$
|
—
|
|
$
|
—
|
|
$
|
38,006
|
|
||||
|
Total assets
|
$
|
38,006
|
|
$
|
—
|
|
$
|
—
|
|
$
|
38,006
|
|
||||
|
December 31, 2016
|
||||||||||||||||
|
Cash equivalents
|
|
|
|
|
|
|
|
|
||||||||
|
Money market funds
|
$
|
10,057
|
|
$
|
—
|
|
$
|
—
|
|
$
|
10,057
|
|
||||
|
Total assets
|
$
|
10,057
|
|
$
|
—
|
|
$
|
—
|
|
$
|
10,057
|
|
||||
|
June 30, 2016
|
||||||||||||||||
|
Cash equivalents
|
|
|
|
|
|
|
|
|
||||||||
|
Money market funds
|
$
|
30,082
|
|
$
|
—
|
|
$
|
—
|
|
$
|
30,082
|
|
||||
|
Commercial paper
|
4,994
|
|
—
|
|
—
|
|
4,994
|
|
||||||||
|
Total assets
|
$
|
35,076
|
|
$
|
—
|
|
$
|
—
|
|
$
|
35,076
|
|
||||
A reconciliation of cash equivalents to consolidated cash and cash equivalents is as follows
|
(in thousands)
|
June 30,
2017 |
December 31,
2016 |
|
June 30,
2016 |
||||||||
|
Cash equivalents
|
$
|
38,006
|
|
$
|
10,057
|
|
|
$
|
35,076
|
|
||
|
Cash
|
|
140,062
|
|
|
179,269
|
|
|
126,142
|
|
|||
|
Total cash and cash equivalents
|
$
|
178,068
|
|
$
|
189,326
|
|
|
$
|
161,218
|
|
||
11
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Interest Rate Swaps
As of
June 30, 2017
and
December 31, 2016
, the fair value of the cash flow hedge that we entered into in January 2016 was
$0.7 million
and
$0.8 million
, respectively, and was included in other current assets in the condensed consolidated balance sheets. As of
June 30, 2016
, the fair value of the cash flow hedge was
$2.1 million
and was included in accrued expenses and other current liabilities in the condensed consolidated balance sheets.
The unrealized losses, net of taxes, on the effective portion were reported as a component of accumulated other comprehensive income (loss) and were losses of
$0.3 million
and
$0.2 million
during the three and six months ended
June 30, 2017
, respectively, and
$0.5 million
and
$1.4 million
during the three and six months ended
June 30, 2016
, respectively. During the three and six months ended
June 30, 2017
and
2016
, there was no ineffective portion. The interest expense reclassified from accumulated other comprehensive income (loss) during both the three and six months ended
June 30, 2017
and 2016 was immaterial. We estimate less than
$0.1 million
to be reclassified from accumulated other comprehensive income (loss) into pre-tax earnings within the next twelve months.
As of
June 30, 2016
, the fair value of the interest rate swap that was terminated in December 2016 was
$1.7 million
and was included in other current assets on the condensed consolidated balance sheets. During the three and
six
months ended
June 30, 2016
, we recorded net gains of
$0.3 million
and
$1.6 million
, respectively, that were included in other income, net on our condensed consolidated statements of operations.
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:
|
June 30, 2017
|
December 31, 2016
|
June 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
|
$
|
107,811
|
|
$
|
107,381
|
|
$
|
127,779
|
|
$
|
127,365
|
|
$
|
77,612
|
|
$
|
77,678
|
|
|||||||
|
Liabilities (including current maturities):
|
||||||||||||||||||||||||||
|
2019 Notes
1
|
Level 3
|
$
|
120,000
|
|
$
|
123,371
|
|
$
|
120,000
|
|
$
|
124,654
|
|
$
|
160,000
|
|
$
|
167,210
|
|
|||||||
|
Credit Agreement term loan
1
|
Level 3
|
92,500
|
|
92,046
|
|
95,000
|
|
93,991
|
|
97,500
|
|
97,409
|
|
|||||||||||||
|
Credit Agreement - revolving credit facility
1
|
Level 3
|
30,000
|
|
29,672
|
|
30,000
|
|
29,452
|
|
—
|
|
—
|
|
|||||||||||||
1
See Note 10 for definitions of 2019 Notes and Credit Agreement.
During the three and six months ended
June 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.
12
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
|
6.
|
Receivables, net
|
|
(in thousands)
|
June 30,
2017 |
December 31,
2016 |
June 30,
2016 |
|||||||||
|
Construction contracts:
|
|
|
|
|||||||||
|
Completed and in progress
|
$
|
343,707
|
|
$
|
288,160
|
|
$
|
266,685
|
|
|||
|
Retentions
|
75,891
|
|
84,878
|
|
95,415
|
|
||||||
|
Total construction contracts
|
419,598
|
|
373,038
|
|
362,100
|
|
||||||
|
Construction material sales
|
54,165
|
|
29,357
|
|
54,277
|
|
||||||
|
Other
|
10,892
|
|
17,523
|
|
15,227
|
|
||||||
|
Total gross receivables
|
484,655
|
|
419,918
|
|
431,604
|
|
||||||
|
Less: allowance for doubtful accounts
|
410
|
|
573
|
|
477
|
|
||||||
|
Total net receivables
|
$
|
484,245
|
|
$
|
419,345
|
|
$
|
431,127
|
|
|||
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, such as claim recovery estimates, the associated revenue is included in costs and estimated earnings in excess of billings or billings
i
n excess of costs and estimated earnings in the condensed consolidated balance sheets. As of
June 30, 2017
,
December 31, 2016
and
June 30, 2016
, the aggregate claim recovery estimates included in these balances were approximately
$10.8 million
,
$12.3 million
and
$8.1 million
, respectively. Included in other receivables at
June 30, 2017
,
December 31, 2016
and
June 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 both
June 30, 2017
and
December 31, 2016
the estimated recovery from back charge claims included in Other receivables was
$0.3 million
and was
$10.5 million
as of June 30, 2016.
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
June 30, 2017
,
December 31, 2016
and
June 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.
13
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
June 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
June 30, 2017
, there was approximately
$5.5 billion
of construction revenue to be recognized on unconsolidated and line item construction joint venture contracts of which
$1.8 billion
represented our share and the remaining
$3.7 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
June 30, 2017
, we were engaged in
four
active CCJV projects with total contract values ranging from
$49.1 million
to
$267.4 million
. Our share of revenue remaining to be recognized on these CCJVs ranged from
$11.6 million
to
$147.3 million
. Our proportionate share of the equity in these joint ventures was between
50.0%
and
65.0%
. During the three and
six
months ended
June 30, 2017
, total revenue from CCJVs was
$49.5 million
and
$85.0 million
, respectively. During the three and
six
months ended
June 30, 2016
, total revenue from CCJVs was
$33.0 million
and
$55.1 million
, respectively. During the
six
months ended
June 30, 2017
and 2016, CCJVs provided
$19.2 million
and
$12.8 million
of operating cash flows, respectively.
Unconsolidated Construction Joint Ventures
As of
June 30, 2017
, we were engaged in
eleven
active unconsolidated joint venture projects with total contract values ranging from
$79.4 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
June 30, 2017
, our share of the revenue remaining to be recognized on these unconsolidated construction joint ventures ranged from
$1.3 million
to
$436.6 million
.
As of
June 30, 2017
,
December 31, 2016
and
June 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.
14
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)
|
June 30,
2017 |
December 31,
2016 |
June 30,
2016 |
|||||||||
|
Assets:
|
|
|
|
|||||||||
|
Cash, cash equivalents and marketable securities
|
$
|
388,542
|
|
$
|
537,991
|
|
$
|
435,098
|
|
|||
|
Other current assets
1
|
632,166
|
|
644,809
|
|
679,920
|
|
||||||
|
Noncurrent assets
|
230,633
|
|
207,240
|
|
216,722
|
|
||||||
|
Less partners’ interest
|
828,237
|
|
935,615
|
|
894,017
|
|
||||||
|
Granite’s interest
1,2
|
423,104
|
|
454,425
|
|
437,723
|
|
||||||
|
Liabilities:
|
|
|
|
|||||||||
|
Current liabilities
|
668,630
|
|
696,215
|
|
634,796
|
|
||||||
|
Less partners’ interest and adjustments
3
|
460,052
|
|
472,324
|
|
434,371
|
|
||||||
|
Granite’s interest
|
208,578
|
|
223,891
|
|
200,425
|
|
||||||
|
Equity in construction joint ventures
4
|
$
|
214,526
|
|
$
|
230,534
|
|
$
|
237,298
|
|
|||
1
Included in this balance and in accrued and other current liabilities on our condensed consolidated balance sheets as of
June 30, 2017
, December 31, 2016 and
June 30, 2016
was
$88.9 million
,
$83.1 million
and
$76.8 million
, respectively, related to performance guarantees.
2
Included in this balance as of
June 30, 2017
,
December 31, 2016 and
June 30, 2016
was
$81.7 million
,
$65.4 million
and
$57.8 million
, respectively, related to Granite’s share of estimated cost recovery of customer affirmative claims. In addition, this balance included
$9.8 million
,
$5.6 million
and
$4.3 million
related to Granite’s share of estimated recovery of back charge claims as of
June 30, 2017
, December 31, 2016 and
June 30, 2016
, respectively.
3
Partners’ interest and adjustments includes amounts to reconcile total liabilities as reported by our partners to Granite’s interest adjusted to reflect our accounting policies.
4
As of
June 30, 2017
, December 31, 2016 and
June 30, 2016
this balance included
$15.9 million
,
$16.6 million
and
$8.2 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 June 30,
|
Six Months Ended June 30,
|
|||||||||||||
|
(in thousands)
|
2017
|
2016
|
2017
|
2016
|
|||||||||||
|
Revenue:
|
|
|
|||||||||||||
|
Total
1
|
$
|
515,983
|
|
$
|
475,879
|
|
$
|
967,304
|
|
$
|
970,046
|
|
|||
|
Less partners’ interest and adjustments
1,2
|
376,332
|
|
346,863
|
|
700,162
|
|
694,771
|
|
|||||||
|
Granite’s interest
|
139,651
|
|
129,016
|
|
267,142
|
|
275,275
|
|
|||||||
|
Cost of revenue:
|
|
|
|||||||||||||
|
Total
|
498,932
|
|
479,113
|
|
941,922
|
|
940,610
|
|
|||||||
|
Less partners’ interest and adjustments
1,2
|
349,557
|
|
347,661
|
|
666,552
|
|
671,702
|
|
|||||||
|
Granite’s interest
|
149,375
|
|
131,452
|
|
275,370
|
|
268,908
|
|
|||||||
|
Granite’s interest in gross (loss)
profit
|
$
|
(9,724
|
)
|
$
|
(2,436
|
)
|
$
|
(8,228
|
)
|
$
|
6,367
|
|
|||
1
While Granite’s interest in revenue, cost of revenue and gross profit were correctly stated, Total revenue and revenue for partners’ interest and adjustments for the three months ended June 30, 2016 were misstated in our Quarterly Report for the quarter ended June 30, 2016. Total revenue and revenue for partner’s interest and adjustments as reported was (in thousands):
$682,002
and
$552,986
, respectively, for the three months ended June 30, 2016. Total revenue and revenue for partner’s interest and adjustments should have been (in thousands):
$475,879
and
$346,863
, respectively, for the three months ended June 30, 2016 and are reflected in the table. The misstatements did not have any impact on the consolidated financial statements in any period. We assessed the materiality of the errors in accordance with the SEC’s Staff Accounting Bulletin 99 and concluded that the errors were not material to either of these previously issued financial statements. Accordingly, we will revise our previously issued financial statements prospectively to correct these errors.
2
Partners’ 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.
15
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
During the three and six months ended
June 30, 2017
unconsolidated construction joint venture net income was
$17.6 million
and
$26.2 million
, respectively, of which our share was net loss of
$9.7 million
and
$8.2 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 our partners’. During the three months ended
June 30, 2016
, unconsolidated construction joint venture net loss was
$4.4 million
of which our share was
$2.9 million
and during the six months ended
June 30, 2016
, unconsolidated construction joint venture net income was
$29.3 million
of which our share was
$5.6 million
. 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.
Line Item Joint Ventures
As of
June 30, 2017
, we had
two
active line item joint venture construction projects with total contract values of
$66.2 million
and
$74.7 million
of which our portion was
$44.7 million
and
$30.7 million
, respectively. As of
June 30, 2017
, our share of revenue remaining to be recognized on these line item joint ventures was
$7.3 million
and
$0.8 million
, respectively. During the three and
six
months ended
June 30, 2017
our portion of revenue from line item joint ventures was
$6.8 million
and
$14.7 million
, respectively. During the three and
six
months ended June 30, 2016, our portion of revenue from line item joint ventures was
$9.6 million
and
$14.0 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)
|
June 30,
2017 |
December 31,
2016 |
June 30,
2016 |
|||||||||
|
Equity method investments in real estate affiliates
|
$
|
27,329
|
|
$
|
25,911
|
|
$
|
25,018
|
|
|||
|
Equity method investment in other affiliate
|
9,841
|
|
9,757
|
|
9,499
|
|
||||||
|
Total investments in affiliates
|
$
|
37,170
|
|
$
|
35,668
|
|
$
|
34,517
|
|
|||
The following table provides summarized balance sheet information for our affiliates accounted for under the equity method on a combined basis:
|
(in thousands)
|
June 30,
2017 |
December 31,
2016 |
June 30,
2016 |
|||||||||
|
Total assets
|
$
|
156,969
|
|
$
|
155,506
|
|
$
|
176,275
|
|
|||
|
Net assets
|
96,638
|
|
99,804
|
|
102,650
|
|
||||||
|
Granite’s share of net assets
|
37,170
|
|
35,668
|
|
34,517
|
|
||||||
The equity method investments in real estate affiliates included
$22.2 million
,
$20.8 million
and
$19.4 million
in residential real estate in Texas as of
June 30, 2017
,
December 31, 2016
and
June 30, 2016
, respectively. The remaining balances were in commercial real estate in Texas. Of the
$157.0 million
in total assets as of
June 30, 2017
, real estate entities had total assets ranging from
$1.6 million
to
$70.7 million
and the non-real estate entity had total assets of
$21.6 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)
|
June 30,
2017 |
December 31,
2016 |
June 30,
2016 |
|||||||||
|
Equipment and vehicles
|
$
|
774,903
|
|
$
|
756,602
|
|
$
|
769,307
|
|
|||
|
Quarry property
|
176,041
|
|
174,839
|
|
179,773
|
|
||||||
|
Land and land improvements
|
111,766
|
|
110,999
|
|
111,425
|
|
||||||
|
Buildings and leasehold improvements
|
84,113
|
|
82,762
|
|
82,733
|
|
||||||
|
Office furniture and equipment
|
58,377
|
|
56,381
|
|
63,721
|
|
||||||
|
Property and equipment
|
1,205,200
|
|
1,181,583
|
|
1,206,959
|
|
||||||
|
Less: accumulated depreciation and depletion
|
791,121
|
|
774,933
|
|
797,099
|
|
||||||
|
Property and equipment, net
|
$
|
414,079
|
|
$
|
406,650
|
|
$
|
409,860
|
|
|||
|
10.
|
|
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
June 30, 2017
, we had a
$292.5 million
credit facility, of which
$200.0 million
was a revolving credit facility and
$92.5 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
June 30, 2017
, December 31, 2016 and June 30, 2016,
$5.0 million
of the term loan balance was included in current maturities of long-term debt and the remaining
$87.5 million
,
$90.0 million
and
$92.5 million
, respectively, was included in long-term debt on the condensed consolidated balance sheets.
As of
June 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
June 30, 2017
and December 31, 2016 and in the amount of
$160.0 million
as of June 30, 2016 were due to a group of institutional holders and had an interest rate of
6.11%
per annum (“2019 Notes”). As of
June 30, 2017
, three equal annual installments from 2017 through 2019 are remaining. Of the outstanding balances,
$110.0 million
as of both
June 30, 2017
and December 31, 2016 and
$150.0 million
as of June 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 June 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
June 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 June 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 June 30, 2016.
As of
June 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.
16
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
|
11.
|
Weighted Average Shares Outstanding and Net Income (Loss) Per Share
|
The following table presents a reconciliation of the weighted average shares outstanding used in calculating basic and diluted net income (loss) per share as well as the calculation of basic and diluted net income (loss) per share:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
(in thousands, except per share amounts)
|
2017
|
2016
|
2017
|
2016
|
||||||||||||
|
Numerator (basic and diluted):
|
|
|
|
|||||||||||||
|
Net income (loss) allocated to common shareholders for basic calculation
|
$
|
14,133
|
|
$
|
14,199
|
|
$
|
(9,657
|
)
|
$
|
3,758
|
|
||||
|
Denominator:
|
|
|
|
|||||||||||||
|
Weighted average common shares outstanding, basic
|
39,827
|
|
39,584
|
|
39,738
|
|
39,509
|
|
||||||||
|
Dilutive effect of common stock options and restricted stock units
1
|
566
|
|
718
|
|
—
|
|
631
|
|
||||||||
|
Weighted average common shares outstanding, diluted
|
40,393
|
|
40,302
|
|
39,738
|
|
40,140
|
|
||||||||
|
Net income (loss) per share, basic
|
$
|
0.35
|
|
$
|
0.36
|
|
$
|
(0.24
|
)
|
$
|
0.10
|
|
||||
|
Net income (loss) per share, diluted
|
$
|
0.35
|
|
$
|
0.35
|
|
$
|
(0.24
|
)
|
$
|
0.09
|
|
||||
1
Due to the net loss for the six months ended June 30, 2017, restricted stock units of approximately
618,000
have been excluded from the number of shares used in calculating diluted net loss per share, as their inclusion would be antidilutive.
|
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 stock
1
|
(6,568
|
)
|
—
|
|
(6,568
|
)
|
||||||
|
Other transactions with shareholders and employees
2
|
11,987
|
|
—
|
|
11,987
|
|
||||||
|
Net (loss) income
|
(9,657
|
)
|
2,078
|
|
(7,579
|
)
|
||||||
|
Dividends on common stock
|
(10,354
|
)
|
—
|
|
(10,354
|
)
|
||||||
|
Balance at June 30, 2017
|
$
|
871,396
|
|
$
|
38,681
|
|
$
|
910,077
|
|
|||
|
|
|
|
||||||||||
|
Balance at December 31, 2015
|
$
|
839,237
|
|
$
|
30,884
|
|
$
|
870,121
|
|
|||
|
Purchases of common stock
3
|
(4,845
|
)
|
—
|
|
(4,845
|
)
|
||||||
|
Other transactions with shareholders and employees
2
|
8,623
|
|
—
|
|
8,623
|
|
||||||
|
Transactions with non-controlling interests, net
|
—
|
|
(3,355
|
)
|
(3,355
|
)
|
||||||
|
Net income
|
3,758
|
|
5,005
|
|
8,763
|
|
||||||
|
Dividends on common stock
|
(10,292
|
)
|
—
|
|
(10,292
|
)
|
||||||
|
Balance at June 30, 2016
|
$
|
836,481
|
|
$
|
32,534
|
|
$
|
869,015
|
|
|||
1
Represents
133,000
shares purchased in connection with employee tax withholding for restricted stock units vested under our 2012 Equity Incentive Plan.
2
Amounts are comprised primarily of amortized restricted stock units.
3
Represents
109,000
shares purchased in connection with employee tax withholding for restricted stock units vested under our 2012 Equity Incentive Plan.
17
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
June 30, 2017
,
December 31, 2016
and
June 30, 2016
related to these matters were approximately
$1.0 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.
.
18
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 June 30,
|
|||||||||||||||
|
Construction
|
Large Project Construction
|
Construction Materials
|
Total
|
|||||||||||||
|
2017
|
|
|
|
|
|
|
||||||||||
|
Total revenue from reportable segments
|
$
|
429,269
|
|
$
|
254,463
|
|
$
|
123,242
|
|
$
|
806,974
|
|
||||
|
Elimination of intersegment revenue
|
—
|
|
—
|
|
(44,061
|
)
|
(44,061
|
)
|
||||||||
|
Revenue from external customers
|
429,269
|
|
254,463
|
|
79,181
|
|
762,913
|
|
||||||||
|
Gross profit
|
62,504
|
|
495
|
|
11,571
|
|
74,570
|
|
||||||||
|
Depreciation, depletion and amortization
|
5,441
|
|
3,081
|
|
5,417
|
|
13,939
|
|
||||||||
|
2016
|
|
|
|
|
|
|
|
|
||||||||
|
Total revenue from reportable segments
|
$
|
331,346
|
|
$
|
197,322
|
|
$
|
115,342
|
|
$
|
644,010
|
|
||||
|
Elimination of intersegment revenue
|
—
|
|
—
|
|
(39,431
|
)
|
(39,431
|
)
|
||||||||
|
Revenue from external customers
|
331,346
|
|
197,322
|
|
75,911
|
|
604,579
|
|
||||||||
|
Gross profit
|
49,056
|
|
13,654
|
|
10,491
|
|
73,201
|
|
||||||||
|
Depreciation, depletion and amortization
|
5,345
|
|
1,519
|
|
5,859
|
|
12,723
|
|
||||||||
|
|
Six Months Ended June 30,
|
|||||||||||||||
|
Construction
|
Large Project Construction
|
Construction Materials
|
Total
|
|||||||||||||
|
2017
|
|
|
|
|
|
|
||||||||||
|
Total revenue from reportable segments
|
$
|
656,118
|
|
$
|
461,496
|
|
$
|
171,864
|
|
$
|
1,289,478
|
|
||||
|
Elimination of intersegment revenue
|
—
|
|
—
|
|
(58,165
|
)
|
(58,165
|
)
|
||||||||
|
Revenue from external customers
|
656,118
|
|
461,496
|
|
113,699
|
|
1,231,313
|
|
||||||||
|
Gross profit
|
90,453
|
|
3,050
|
|
6,193
|
|
99,696
|
|
||||||||
|
Depreciation, depletion and amortization
|
10,435
|
|
4,967
|
|
10,615
|
|
26,017
|
|
||||||||
|
Segment assets
|
142,456
|
|
312,891
|
|
295,068
|
|
750,415
|
|
||||||||
|
2016
|
|
|
|
|
|
|
|
|
||||||||
|
Total revenue from reportable segments
|
$
|
540,833
|
|
$
|
392,771
|
|
$
|
164,273
|
|
$
|
1,097,877
|
|
||||
|
Elimination of intersegment revenue
|
—
|
|
—
|
|
(53,846
|
)
|
(53,846
|
)
|
||||||||
|
Revenue from external customers
|
540,833
|
|
392,771
|
|
110,427
|
|
1,044,031
|
|
||||||||
|
Gross profit
|
75,989
|
|
27,159
|
|
9,298
|
|
112,446
|
|
||||||||
|
Depreciation, depletion and amortization
|
9,870
|
|
2,988
|
|
11,196
|
|
24,054
|
|
||||||||
|
Segment assets
|
151,877
|
|
306,440
|
|
297,910
|
|
756,227
|
|
||||||||
A reconciliation of segment gross profit to consolidated income (loss) before provision for (benefit from) income taxes is as follows:
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
(in thousands)
|
2017
|
2016
|
2017
|
2016
|
|||||||||||
|
Total gross profit from reportable segments
|
$
|
74,570
|
|
$
|
73,201
|
|
$
|
99,696
|
|
$
|
112,446
|
|
|||
|
Selling, general and administrative expenses
|
51,388
|
|
48,705
|
|
113,225
|
|
104,838
|
|
|||||||
|
Gain on sales of property and equipment
|
(807
|
)
|
(1,366
|
)
|
(1,077
|
)
|
(1,966
|
)
|
|||||||
|
Total other income
|
(371
|
)
|
(1,511
|
)
|
(465
|
)
|
(2,112
|
)
|
|||||||
|
Income (loss) before provision for (benefit from) income taxes
|
$
|
24,360
|
|
$
|
27,373
|
|
|
$
|
(11,987
|
)
|
|
$
|
11,686
|
|
|
19
|
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.
20
Current Economic Environment and Outlook
Both public and private markets remain highly competitive, with record backlog of
$4.1 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 chronic 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.
Notably in early April, the California legislature approved the passage of SB1, The Road Repair and Accountability Act of 2017. The 10-year, $52.4 billion bill provides long overdue incremental funding for state and local transportation infrastructure beginning in the second half of 2017.
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 six
months ended
June 30, 2017
and
2016
:
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
(in thousands)
|
2017
|
2016
|
2017
|
2016
|
|||||||||||
|
Total revenue
|
$
|
762,913
|
|
$
|
604,579
|
|
$
|
1,231,313
|
|
$
|
1,044,031
|
|
|||
|
Gross profit
|
74,570
|
|
73,201
|
|
99,696
|
|
112,446
|
|
|||||||
|
Operating income (loss)
|
23,989
|
|
25,862
|
|
(12,452
|
)
|
9,574
|
|
|||||||
|
Total other income
|
(371
|
)
|
(1,511
|
)
|
(465
|
)
|
(2,112
|
)
|
|||||||
|
Net income (loss) attributable to Granite Construction Incorporated
|
14,133
|
|
14,199
|
|
(9,657
|
)
|
3,758
|
|
|||||||
Revenue
Total Revenue by Segment
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||||||||||||||
|
(dollars in thousands)
|
2017
|
2016
|
2017
|
2016
|
||||||||||||||||||||||||
|
Construction
|
$
|
429,269
|
|
56.2
|
%
|
$
|
331,346
|
|
54.8
|
%
|
$
|
656,118
|
|
53.3
|
%
|
$
|
540,833
|
|
51.8
|
%
|
||||||||
|
Large Project Construction
|
254,463
|
|
33.4
|
|
197,322
|
|
32.6
|
|
461,496
|
|
37.5
|
|
392,771
|
|
37.6
|
|
||||||||||||
|
Construction Materials
|
79,181
|
|
10.4
|
|
75,911
|
|
12.6
|
|
113,699
|
|
9.2
|
|
110,427
|
|
10.6
|
|
||||||||||||
|
Total
|
$
|
762,913
|
|
100.0
|
%
|
$
|
604,579
|
|
100.0
|
%
|
$
|
1,231,313
|
|
100.0
|
%
|
$
|
1,044,031
|
|
100.0
|
%
|
||||||||
21
Construction Revenue
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||||||||||||||
|
(dollars in thousands)
|
2017
|
2016
|
2017
|
2016
|
||||||||||||||||||||||||
|
California:
|
|
|
|
|
||||||||||||||||||||||||
|
Public sector
|
$
|
97,106
|
|
22.6
|
%
|
$
|
82,711
|
|
24.9
|
%
|
$
|
155,808
|
|
23.7
|
%
|
$
|
153,346
|
|
28.4
|
%
|
||||||||
|
Private sector
|
50,499
|
|
11.8
|
|
41,126
|
|
12.4
|
|
74,561
|
|
11.4
|
|
75,458
|
|
14.0
|
|
||||||||||||
|
Northwest:
|
|
|
|
|
|
|||||||||||||||||||||||
|
Public sector
|
160,421
|
|
37.4
|
|
117,379
|
|
35.4
|
|
229,034
|
|
34.9
|
|
168,846
|
|
31.2
|
|
||||||||||||
|
Private sector
|
22,153
|
|
5.2
|
|
28,049
|
|
8.5
|
|
34,206
|
|
5.2
|
|
38,392
|
|
7.1
|
|
||||||||||||
|
Heavy Civil
|
||||||||||||||||||||||||||||
|
Public sector
|
22,585
|
|
5.3
|
|
3,879
|
|
1.2
|
|
30,686
|
|
4.7
|
|
9,795
|
|
1.8
|
|
||||||||||||
|
Private sector
|
1,513
|
|
0.4
|
|
—
|
|
—
|
|
2,632
|
|
0.4
|
|
—
|
|
—
|
|
||||||||||||
|
Kenny:
|
||||||||||||||||||||||||||||
|
Public sector
|
41,613
|
|
9.7
|
|
46,029
|
|
13.9
|
|
76,631
|
|
11.7
|
|
67,157
|
|
12.4
|
|
||||||||||||
|
Private sector
|
33,379
|
|
7.8
|
|
12,173
|
|
3.7
|
|
52,560
|
|
8.0
|
|
27,839
|
|
5.1
|
|
||||||||||||
|
Total
|
$
|
429,269
|
|
100.0
|
%
|
$
|
331,346
|
|
100.0
|
%
|
$
|
656,118
|
|
100.0
|
%
|
$
|
540,833
|
|
100.0
|
%
|
||||||||
Construction revenue for the three and six months ended
June 30, 2017
increased by
$97.9 million
, or
29.6%
, and
$115.3 million
, or
21.3%
, respectively, compared to the same periods in
2016
. The increases were primarily due to an increase in beginning contract backlog across most operating groups as well as new work in the public sector of the Northwest and California operating groups and the private sector of the Kenny operating group.
Large Project Construction Revenue
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||||||||||||||
|
(dollars in thousands)
|
2017
|
2016
|
2017
|
2016
|
||||||||||||||||||||||||
|
Heavy Civil
1
|
$
|
188,481
|
|
74.1
|
%
|
$
|
149,732
|
|
75.8
|
%
|
$
|
350,227
|
|
75.9
|
%
|
$
|
307,032
|
|
78.3
|
%
|
||||||||
|
Northwest
1
|
11,295
|
|
4.4
|
|
7,024
|
|
3.6
|
|
14,962
|
|
3.2
|
|
13,137
|
|
3.3
|
|
||||||||||||
|
California
1
|
12,048
|
|
4.7
|
|
7,642
|
|
3.9
|
|
22,169
|
|
4.8
|
|
14,956
|
|
3.8
|
|
||||||||||||
|
Kenny
|
|
|
||||||||||||||||||||||||||
|
Public sector
|
33,800
|
|
13.3
|
|
27,756
|
|
14.1
|
|
59,014
|
|
12.8
|
|
47,307
|
|
12.0
|
|
||||||||||||
|
Private sector
|
8,839
|
|
3.5
|
|
5,168
|
|
2.6
|
|
15,124
|
|
3.3
|
|
10,339
|
|
2.6
|
|
||||||||||||
|
Total
|
$
|
254,463
|
|
100.0
|
%
|
$
|
197,322
|
|
100.0
|
%
|
$
|
461,496
|
|
100.0
|
%
|
$
|
392,771
|
|
100.0
|
%
|
||||||||
1
For the periods presented, this Large Project Construction revenue was earned only from the public sector.
Large Project Construction revenue for the three and six months ended
June 30, 2017
increased by
$57.1 million
, or
29.0%
, and
$68.7 million
, or
17.5%
, respectively, compared to the same periods in
2016
. The increases were primarily due to progress on projects partially offset by a net negative impact from revisions in estimates (see Note 3 of “Notes to the Consolidated Financial Statements” for more information).
Construction Materials Revenue
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||||||||||||||
|
(dollars in thousands)
|
2017
|
2016
|
2017
|
2016
|
||||||||||||||||||||||||
|
California
|
$
|
48,463
|
|
61.2
|
%
|
$
|
42,368
|
|
55.8
|
%
|
$
|
72,879
|
|
64.1
|
%
|
$
|
66,390
|
|
60.1
|
%
|
||||||||
|
Northwest
|
30,718
|
|
38.8
|
|
33,543
|
|
44.2
|
|
40,820
|
|
35.9
|
|
44,037
|
|
39.9
|
|
||||||||||||
|
Total
|
$
|
79,181
|
|
100.0
|
%
|
$
|
75,911
|
|
100.0
|
%
|
$
|
113,699
|
|
100.0
|
%
|
$
|
110,427
|
|
100.0
|
%
|
||||||||
Construction Materials revenue for the three and
six
months ended
June 30, 2017
increased by
$3.3 million
, or
4.3%
, and
$3.3 million
, or
3.0%
, compared to the same periods in
2016
. The increases were primarily due to a net increase in sales volume.
22
Contract Backlog
Our contract backlog consists of the unearned revenue on awarded contracts, including 100% of our consolidated joint venture contracts and our proportionate share of unconsolidated joint venture contracts. We generally include a project in our contract backlog at the time it is awarded and to the extent we believe funding is probable. Certain government contracts where funding is appropriated on a periodic basis are included in contract backlog at the time of the award when it is probable the contract value will be funded and executed. Awarded contracts that include unexercised contract options and unissued task orders are included in contract backlog to the extent options are exercised or task order issuance is probable. Substantially all of the contracts in our contract backlog may be canceled or modified at the election of the customer; however, we have not been materially adversely affected by contract cancellations or modifications in the past.
Total Contract Backlog by Segment
|
(dollars in thousands)
|
June 30, 2017
|
March 31, 2017
|
June 30, 2016
|
||||||||||||||||||
|
Construction
|
$
|
1,266,504
|
|
31.2
|
%
|
$
|
1,175,474
|
|
34.2
|
%
|
$
|
1,144,965
|
|
30.5
|
%
|
||||||
|
Large Project Construction
|
2,797,894
|
|
68.8
|
|
2,259,721
|
|
65.8
|
|
2,606,019
|
|
69.5
|
|
|||||||||
|
Total
|
$
|
4,064,398
|
|
100.0
|
%
|
$
|
3,435,195
|
|
100.0
|
%
|
$
|
3,750,984
|
|
100.0
|
%
|
||||||
Construction Contract Backlog
|
(dollars in thousands)
|
June 30, 2017
|
March 31, 2017
|
June 30, 2016
|
||||||||||||||||||
|
California:
|
|
|
|
|
|
|
|||||||||||||||
|
Public sector
|
$
|
355,872
|
|
28.2
|
%
|
$
|
291,919
|
|
24.8
|
%
|
$
|
291,704
|
|
25.5
|
%
|
||||||
|
Private sector
|
123,104
|
|
9.7
|
|
118,288
|
|
10.1
|
|
54,761
|
|
4.8
|
|
|||||||||
|
Northwest:
|
|
|
|
|
|
|
|||||||||||||||
|
Public sector
|
422,700
|
|
33.4
|
|
367,652
|
|
31.3
|
|
340,673
|
|
29.8
|
|
|||||||||
|
Private sector
|
47,117
|
|
3.7
|
|
27,783
|
|
2.4
|
|
31,476
|
|
2.7
|
|
|||||||||
|
Heavy Civil
|
|||||||||||||||||||||
|
Public sector
|
64,844
|
|
5.1
|
|
86,003
|
|
7.3
|
|
97,390
|
|
8.5
|
|
|||||||||
|
Private sector
|
1,611
|
|
0.1
|
|
3,084
|
|
0.3
|
|
—
|
|
—
|
|
|||||||||
|
Kenny:
|
|||||||||||||||||||||
|
Public sector
|
175,017
|
|
13.8
|
|
204,864
|
|
17.3
|
|
300,076
|
|
26.2
|
|
|||||||||
|
Private sector
|
76,239
|
|
6.0
|
|
75,881
|
|
6.5
|
|
28,885
|
|
2.5
|
|
|||||||||
|
Total
|
$
|
1,266,504
|
|
100.0
|
%
|
$
|
1,175,474
|
|
100.0
|
%
|
$
|
1,144,965
|
|
100.0
|
%
|
||||||
Construction contract backlog of
$1.3 billion
at
June 30, 2017
was
$91.0 million
, or
7.7%
, higher than at
March 31, 2017
due to an improved success rate of bidding activity in the California and Northwest operating groups. These increases were partially offset by decreases from the progress and completion of existing projects in the Heavy Civil and Kenny operating groups. Significant new awards during the three months ended
June 30, 2017
totaled $110.0 million and included a highway rehabilitation project in Alaska, an agriculture inspection station project in California and a dam project in California.
23
Large Project Construction Contract Backlog
|
(dollars in thousands)
|
June 30, 2017
|
March 31, 2017
|
June 30, 2016
|
||||||||||||||||||
|
Heavy Civil
1
|
$
|
2,200,119
|
|
78.7
|
%
|
$
|
1,596,619
|
|
70.7
|
%
|
$
|
1,783,863
|
|
68.5
|
%
|
||||||
|
Northwest
1
|
77,193
|
|
2.8
|
|
88,400
|
|
3.9
|
|
110,556
|
|
4.2
|
|
|||||||||
|
California
1
|
65,679
|
|
2.3
|
|
77,122
|
|
3.4
|
|
136,316
|
|
5.2
|
|
|||||||||
|
Kenny:
|
|
|
|
|
|
|
|||||||||||||||
|
Public sector
2
|
369,780
|
|
13.2
|
|
403,618
|
|
17.8
|
|
487,344
|
|
18.7
|
|
|||||||||
|
Private sector
|
85,123
|
|
3.0
|
|
93,962
|
|
4.2
|
|
87,940
|
|
3.4
|
|
|||||||||
|
Total
|
$
|
2,797,894
|
|
100.0
|
%
|
$
|
2,259,721
|
|
100.0
|
%
|
$
|
2,606,019
|
|
100.0
|
%
|
||||||
1
For the periods presented, all Large Project Construction contract backlog was related to contracts with public agencies.
2
As of
June 30, 2017
,
March 31, 2017
and
June 30, 2016
,
$1.3 million
,
$1.5 million
and
$3.5 million
, respectively, of the Kenny public sector contract backlog was translated from Canadian dollars to U.S. dollars at the spot rate in effect at the reporting date.
Large Project Construction contract backlog of
$2.8 billion
as of
June 30, 2017
was
$538.2 million
, or
23.8%
, higher than at
March 31, 2017
due to an improved success rate of bidding activity in the Heavy Civil operating group partially offset by progress on existing projects in all other operating groups. Significant new awards during the three months ended
June 30, 2017
totaled $764.9 million and included our share of a highway construction project in Houston, our share of a bridge replacement project in Washington D.C. and a bridge replacement project in New York.
Non-controlling partners’ share of Large Project Construction contract backlog as of
June 30, 2017
,
March 31, 2017
, and
June 30, 2016
was
$135.0 million
,
$134.2 million
and
$158.6 million
, respectively.
Gross Profit
The following table presents gross profit by business segment for the respective periods:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
(dollars in thousands)
|
2017
|
2016
|
2017
|
2016
|
||||||||||||
|
Construction
|
$
|
62,504
|
|
$
|
49,056
|
|
$
|
90,453
|
|
$
|
75,989
|
|
||||
|
Percent of segment revenue
|
14.6
|
%
|
14.8
|
%
|
13.8
|
%
|
14.1
|
%
|
||||||||
|
Large Project Construction
|
495
|
|
13,654
|
|
3,050
|
|
27,159
|
|
||||||||
|
Percent of segment revenue
|
0.2
|
|
6.9
|
|
0.7
|
|
6.9
|
|
||||||||
|
Construction Materials
|
11,571
|
|
10,491
|
|
6,193
|
|
9,298
|
|
||||||||
|
Percent of segment revenue
|
14.6
|
|
13.8
|
|
5.4
|
|
8.4
|
|
||||||||
|
Total gross profit
|
$
|
74,570
|
|
$
|
73,201
|
|
$
|
99,696
|
|
$
|
112,446
|
|
||||
|
Percent of total revenue
|
9.8
|
%
|
12.1
|
%
|
8.1
|
%
|
10.8
|
%
|
||||||||
Construction gross profit for the three and
six
months ended
June 30, 2017
increased by
$13.4 million
, or
27.4%
, and
$14.5 million
, or
19.0%
, respectively, compared to the same periods in
2016
. The increased gross profit was primarily due to
increased revenue volume during the three and six months ended
June 30, 2017
.
Large Project Construction gross profit for the three and
six
months ended
June 30, 2017
decreased by
$13.2 million
, or
96.4%
, and
$24.1 million
, or
88.8%
, respectively, when compared to the same periods in
2016
. Large Project Construction gross profit as a percentage of segment revenue for the three
and six
months ended
June 30, 2017
decreased to
0.2%
from
6.9%
and to
0.7%
from
6.9%
, respectively, when compared to the same periods in 2016. The decreases were primarily due to net changes from revisions in estimates from five projects (see Note 3 of “Notes to the Condensed Consolidated Financial Statements”). Progress on four projects that began in late 2016 and early 2017 partially offset the net decreases from revisions in estimates.
Construction Materials gross profit for the three and
six
months ended
June 30, 2017
increased by
$1.1 million
, or
10.3%
, and decreased by
$3.1 million
, or
33.4%
, respectively, when compared to same periods in
2016
. The decrease during the six months ended
June 30, 2017
was primarily due to a decrease in both aggregate and asphalt production from exceptionally wet weather in the first quarter of 2017 resulting in less fixed-cost absorption partially offset by an increase in volume during the three months ended
June 30, 2017
.
24
Selling, General and Administrative Expenses
The following table presents the components of selling, general and administrative expenses for the respective periods:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
(dollars in thousands)
|
2017
|
2016
|
2017
|
2016
|
||||||||||||
|
Selling
|
|
|
|
|
||||||||||||
|
Salaries and related expenses
|
$
|
11,886
|
|
$
|
11,419
|
|
$
|
25,372
|
|
$
|
24,366
|
|
||||
|
Restricted stock unit amortization
|
923
|
|
430
|
|
1,679
|
|
1,144
|
|
||||||||
|
Other selling expenses
|
2,228
|
|
2,438
|
|
5,584
|
|
4,094
|
|
||||||||
|
Total selling
|
15,037
|
|
14,287
|
|
32,635
|
|
29,604
|
|
||||||||
|
General and administrative
|
|
|
|
|
||||||||||||
|
Salaries and related expenses
|
20,506
|
|
16,914
|
|
41,104
|
|
36,743
|
|
||||||||
|
Restricted stock unit amortization
|
724
|
|
1,226
|
|
9,145
|
|
7,069
|
|
||||||||
|
Other general and administrative expenses
|
15,121
|
|
16,278
|
|
30,341
|
|
31,422
|
|
||||||||
|
Total general and administrative
|
36,351
|
|
34,418
|
|
80,590
|
|
75,234
|
|
||||||||
|
Total selling, general and administrative
|
$
|
51,388
|
|
$
|
48,705
|
|
$
|
113,225
|
|
|
$
|
104,838
|
|
|||
|
Percent of revenue
|
6.7
|
%
|
8.1
|
%
|
9.2
|
%
|
10.0
|
%
|
||||||||
Selling, general and administrative expenses for the three and
six
months ended
June 30, 2017
increased
$2.7 million
, or
5.5%
, and
$8.4 million
, or
8.0%
, respectively, compared to the same periods in
2016
. Selling, general and administrative expenses as the percent of revenue for the three and
six
months ended
June 30, 2017
decreased to
6.7%
from
8.1%
, and to
9.2%
from
10.0%
, respectively.
Selling Expenses
Selling expenses include the costs for estimating and bidding, business development and materials facility permits. Selling expenses can vary depending on the volume of projects in process and the number of employees assigned to estimating and bidding activities. As projects are completed or the volume of work slows down, we temporarily redeploy project employees to bid on new projects, moving their salaries and related costs from cost of revenue to selling expenses. Selling expenses during the three months ended
June 30, 2017
remained relatively unchanged compared to the same period in
2016
. Selling expenses during the
six
months ended
June 30, 2017
increased
$3.0 million
, or
10.2%
, respectively, compared to the same period in
2016
primarily due to increases in restricted stock unit amortization and other selling expenses. The increase in restricted stock unit amortization is due to an increase in awards issued during the first quarter of 2017 and the increase in other selling expenses is due to timing and volume of bidding activity.
General and Administrative Expenses
General and administrative expenses include costs related to our operational offices that are not allocated to direct contract costs and expenses related to our corporate functions. Other general and administrative expenses include travel and entertainment, outside services, information technology, depreciation, occupancy, training, office supplies, changes in the fair market value of our Non-Qualified Deferred Compensation plan liability and other miscellaneous expenses, none of which individually exceeded 10% of total general and administrative expenses. Total general and administrative expenses for the three and
six
months ended
June 30, 2017
increased
$1.9 million
, or
5.6%
, and
$5.4 million
, or
7.1%
, respectively, compared to the same periods in
2016
primarily due to increases in salaries and related expenses primarily from an increase in employee benefits and compensation. The increase during the six months ended
June 30, 2017
also included an increase in restricted stock unit amortization from an increase in awards issued during the
six
months ended
June 30, 2017
that immediately vested.
25
Other Income
The following table presents the components of other income for the respective periods:
|
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||
|
(in thousands)
|
|
2017
|
|
2016
|
2017
|
2016
|
||||||||||
|
Interest income
|
|
$
|
(1,164
|
)
|
|
$
|
(798
|
)
|
$
|
(2,215
|
)
|
$
|
(1,634
|
)
|
||
|
Interest expense
|
|
2,694
|
|
|
3,187
|
|
5,437
|
|
6,236
|
|
||||||
|
Equity in income of affiliates
|
|
(1,259
|
)
|
|
(717
|
)
|
(2,175
|
)
|
(2,159
|
)
|
||||||
|
Other income, net
|
|
(642
|
)
|
|
(3,183
|
)
|
(1,512
|
)
|
(4,555
|
)
|
||||||
|
Total other income
|
|
$
|
(371
|
)
|
|
$
|
(1,511
|
)
|
$
|
(465
|
)
|
$
|
(2,112
|
)
|
||
Interest expense
for the three and
six
months ended
June 30, 2017
decreased
$0.5 million
and
$0.8 million
, respectively, when compared to the same periods in 2016 primarily due to a reduction of the principal balance of our
2019 Notes (as defined in the Senior Notes Payable section below)
from payments made in the fourth quarter of 2016. Other income, net
for the three and
six
months ended
June 30, 2017
decreased
$2.5 million
and
$3.0 million
, respectively, when compared to the same periods in
2016
primarily due to
the termination of an interest rate swap in the fourth quarter of 201
6 and a gain associated with a consolidated real estate entity during the six months ended June 30, 2016.
Income Taxes
The following table presents the provision for (benefit from) income taxes for the respective periods:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
(dollars in thousands)
|
2017
|
2016
|
2017
|
2016
|
||||||||||||
|
Provision for (benefit from) income taxes
|
$
|
8,088
|
|
$
|
8,847
|
|
$
|
(4,408
|
)
|
$
|
2,923
|
|
||||
|
Effective tax rate
|
33.2
|
%
|
32.3
|
%
|
36.8
|
%
|
25.0
|
%
|
||||||||
We calculate our income tax provision at the end of each interim period by estimating our annual effective tax rate and applying that rate to our year-to-date ordinary earnings. The effect of changes in enacted tax laws, tax rates or tax status is recognized in the interim period in which the change occurs.
Our effective tax rate for the
six
months ended
June 30, 2017
increased to
36.8%
from
25.0%
, when compared to the same period in
2016
. This change was primarily due to the impact of an income tax benefit of share-based compensation on the benefit from income taxes in 2017 compared to a provision for income taxes in 2016. Our effective tax rate remained relatively unchanged for the three months ended June 30, 2017 compared to the same period in 2016.
Certain Legal Proceedings
As discussed in Note 13 of “Notes to the Condensed Consolidated Financial Statements,” under certain circumstances the resolution of certain legal proceedings to which we are subject could have direct or indirect consequences that could have a material adverse effect on our financial position, results of operations, cash flows and/or liquidity.
Liquidity and Capital Resources
The timing differences between our cash inflows and outflows require us to maintain adequate levels of working capital. We believe our cash and cash equivalents, short-term investments, available borrowing capacity and cash expected to be generated from operations will be sufficient to meet our expected working capital needs, capital expenditures, financial commitments, cash dividend payments, and other liquidity requirements associated with our existing operations for the next twelve months. We maintain a collateralized credit facility of
$292.5 million
, of which
$161.2 million
was available at
June 30, 2017
, to provide capital needs to fund growth opportunities, either internal or generated through acquisitions (see Credit Agreement discussion below) or to pay installments on our 2019 Notes (see Senior Notes Payable discussion below). If we experience a prolonged change in our business operating results or make a significant acquisition, we may need additional sources of financing, which, if available, may be limited by the terms of our existing debt covenants, or may require the amendment of our existing debt agreements. There can be no assurance that sufficient capital will continue to be available in the future or that it will be available on terms acceptable to us.
Our revenue, gross profit and the resulting cash flows can differ significantly from period to period due to a variety of factors, including our projects’ progressions toward completion, outstanding contract change orders and claims and the payment terms of our contracts. We typically invoice our customers on a monthly basis. Our contracts frequently call for retention that is a specified percentage withheld from each payment until the contract is completed and the work accepted by the customer.
26
The following table presents our cash, cash equivalents and marketable securities, including amounts from our consolidated construction joint ventures (
“
CCJVs
”
), as of the respective dates:
|
(in thousands)
|
|
June 30,
2017 |
|
December 31,
2016 |
|
June 30,
2016 |
||||||
|
Cash and cash equivalents excluding CCJVs
|
|
$
|
97,873
|
|
|
$
|
116,211
|
|
|
$
|
111,153
|
|
|
CCJV cash and cash equivalents
1
|
|
80,195
|
|
|
73,115
|
|
|
50,065
|
|
|||
|
Total consolidated cash and cash equivalents
|
|
178,068
|
|
|
189,326
|
|
|
161,218
|
|
|||
|
Short-term and long-term marketable securities
2
|
|
107,811
|
|
|
127,779
|
|
|
77,612
|
|
|||
|
Total cash, cash equivalents and marketable securities
|
|
$
|
285,879
|
|
|
$
|
317,105
|
|
|
$
|
238,830
|
|
1
The volume and stage of completion of contracts from our CCJVs may cause fluctuations in joint venture cash and cash equivalents between periods. These funds generally are not available for the working capital or other liquidity needs of Granite until distributed.
2
See Note 4 of “Notes to the Condensed Consolidated Financial Statements” for the composition of our marketable securities.
Our primary sources of liquidity are cash and cash equivalents, marketable securities and cash generated from operations. We may also from time to time access our Credit Agreement (defined below), issue and sell equity, debt or hybrid securities or engage in other capital markets transactions.
Our cash and cash equivalents consisted of deposits and money market funds held with established national financial institutions. Marketable securities consist of U.S. Government and agency obligations and commercial paper.
Total consolidated cash, cash equivalents and marketable securities decreased
$31.2 million
during 2017 due to an
$18.3 million
decrease in cash and cash equivalents excluding CCJVs partially offset by an increase of
$7.1 million
in CCJV cash and cash equivalents - see Cash Flows discussion below. Granite’s portion of CCJV cash and cash equivalents was
$48.8 million
,
$44.7 million
and
$30.4 million
as of
June 30, 2017
,
December 31, 2016
and
June 30, 2016
, respectively. Excluded from the table above is Granite’s portion of unconsolidated construction joint venture cash and cash equivalents was
$106.6 million
,
$151.3 million
and
$127.4 million
as of
June 30, 2017
,
December 31, 2016
and
June 30, 2016
, respectively. The assets of each consolidated and unconsolidated construction joint venture relate solely to that joint venture. The decision to distribute joint venture assets must generally be made jointly by a majority of the members and, accordingly, these assets, including those associated with estimated cost recovery of customer affirmative claims and back charge claims, are generally not available for the working capital needs of Granite until distributed.
Our principal uses of liquidity are paying the costs and expenses associated with our operations, servicing outstanding indebtedness, making capital expenditures and paying dividends on our capital stock. We may also from time to time prepay or repurchase outstanding indebtedness and acquire assets or businesses that are complementary to our operations.
Cash Flows
|
Six Months Ended June 30,
|
||||||||
|
(in thousands)
|
2017
|
2016
|
||||||
|
Net cash (used in) provided by:
|
|
|
||||||
|
Operating activities
|
$
|
22,686
|
|
$
|
(53,113
|
)
|
||
|
Investing activities
|
(14,726
|
)
|
(21,349
|
)
|
||||
|
Financing activities
|
(19,218
|
)
|
(17,156
|
)
|
||||
As a large construction and heavy civil contractor and construction materials producer, our operating cash flows are subject to seasonal cycles, as well as the cycles associated with winning, performing and closing projects. Additionally, operating cash flows are impacted by the timing related to funding construction joint ventures and the resolution of uncertainties inherent in the complex nature of the work that we perform, including claims settlements. Our working capital assets result from both public and private sector projects. Customers in the private sector can be slower paying than those in the public sector; however, private sector projects generally have higher gross profit as a percentage of revenue.
We manage our combined accounts receivable, net, costs and estimated earnings in excess of billings and billings in excess of costs and estimated earnings balances, our primary working capital assets, using day’s sales outstanding (“DSO”). We calculate DSO by dividing the end of the period accounts receivable, net, removing retention and other receivables, plus costs and estimated earnings in excess of billings less billings in excess of costs and estimated earnings by total revenue, less Granite’s interest in revenue related to unconsolidated construction joint ventures, for the current quarter multiplied by 90 days. DSO decreased 5 days to 55 days as of June 30, 2017 from 60 days at June 30, 2016 due to timing of CCJVs in the Large Project Construction segment as well as increased focus on collection efforts resulting in decreased DSO in the Construction Materials segment.
27
We manage our accounts payable and accrued expenses and other current liabilities balances, our primary working capital liabilities, using day’s payables outstanding (“DPO”). We calculate DPO by dividing the end of the period accounts payable plus accrued expenses and other current liabilities (excluding performance guarantees of $88.9 million and $76.8 million as of
June 30, 2017
and 2016, respectively) by total cost of revenue less Granite’s interest in cost of revenue related to unconsolidated construction joint ventures for the current quarter multiplied by 90 days. DPO decreased 12 days to 66 days as of June 30, 2017 from 78 days at June 30, 2016 due to timing of cash disbursements and accrual cut off.
Cash provided by operating activities of
$22.7 million
for the
six
months ended
June 30, 2017
represents a
$75.8 million
increase in cash provided by operating activities during the same period in
2016
. The change was primarily due to a
$34.3 million
increase in net distributions from unconsolidated joint ventures, a
$36.2 million
increase in cash provided by working capital and a
$5.2 million
increase in cash provided by net income after adjusting for non-cash items. The increase in cash provided by working capital was due to a
$22.0 million
increase in cash provided by working capital assets and a
$14.2 million
increase in cash provided by working capital liabilities. The increase in cash provided by working capital assets was primarily due to a decrease in DSO partially offset by an increase in revenue volume. The increase in cash provided by working capital liabilities was primarily due to an increase in volume partially offset by a decrease in DPO.
Cash used in investing activities of
$14.7 million
for the
six
months ended
June 30, 2017
represents a
$6.6 million
decrease in the cash used in investing activities during the same period in
2016
. The change was primarily due to a decrease in purchases, net of sales proceeds, of property and equipment (see Capital Expenditures discussion below) partially offset by a decrease in maturities, net of purchases and proceeds, of marketable securities.
Cash used in financing activities of
$19.2 million
for the
six
months ended
June 30, 2017
represents a
$2.1 million
increase in the cash used in financing activities during the same period in
2016
. The change was primarily due to a
$1.7 million
increase in repurchases of common stock related to shares surrendered to pay taxes for vested restricted stock.
Capital Expenditures
During the
six
months ended
June 30, 2017
, we had capital expenditures of
$37.5 million
compared to
$48.8 million
during the same period in
2016
. Major capital expenditures are typically for aggregate and asphalt production facilities, aggregate reserves, construction equipment, buildings and leasehold improvements and investments in our information technology systems. The timing and amount of such expenditures can vary based on the progress of planned capital projects, the type and size of construction projects, changes in business outlook and other factors. We currently anticipate 2017 capital expenditures to be consistent with 2016 capital expenditures of $91.0 million.
Derivatives
We recognize derivative instruments as either assets or liabilities in the condensed consolidated balance sheets at fair value using Level 2 inputs.
In January 2016, we entered into an interest rate swap designed to convert the interest rate on our term loan from a variable to fixed interest rate (see Credit Agreement section below).
In March 2014, we entered into an interest rate swap designed to convert the interest rate on our 2019 Notes (as defined below) from a fixed to variable interest rate, which we terminated in December 2016 (see Senior Notes Payable section below).
Credit Agreement
As of
June 30, 2017
, we had a
$292.5 million
credit facility (the “Credit Agreement”), of which
$200.0 million
was a revolving credit facility and
$92.5 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
. As of
June 30, 2017
, December 31, 2016 and June 30, 2016,
$5.0 million
of the term loan balance was included in current maturities of long-term debt and the remaining
$87.5 million
,
$90.0 million
and
$92.5 million
, respectively, was included in long-term debt on the condensed consolidated balance sheets.
As of
June 30, 2017
and December 31, 2016,
$30.0 million
had been drawn from the Credit Agreement for the 2016 installment of the 2019 Notes (defined below). As of
June 30, 2017
, the total stated amount of all issued and outstanding letters of credit under the Credit Agreement was
$8.8 million
. The total unused availability under the Credit Agreement was
$161.2 million
. The letters of credit will expire between August 2017 and October 2017.
Borrowings under the Credit Agreement bear interest at LIBOR or a base rate (at our option), plus an applicable margin based on certain financial ratios calculated quarterly. LIBOR varies based on the applicable loan term, market conditions and other external factors. The applicable margin was
1.75%
for loans bearing interest based on LIBOR and
0.75%
for loans bearing interest at the base rate at
June 30, 2017
. Accordingly, the effective interest rate using three-month LIBOR and base rate was between
2.90%
and
5.00%
, respectively, at
June 30, 2017
and we elected to use LIBOR.
28
As of
June 30, 2017
and
December 31, 2016
, the fair value of the cash flow hedge that we entered into in January 2016 was
$0.7 million
and
$0.8 million
, respectively, and was included in other current assets in the condensed consolidated balance sheets. As of
June 30, 2016
, the fair value of the cash flow hedge was
$2.1 million
and was included in accrued expenses and other current liabilities in the condensed consolidated balance sheets.
The unrealized losses, net of taxes, on the effective portion were reported as a component of accumulated other comprehensive income (loss) and were losses of
$0.3 million
and
$0.2 million
during the three and six months ended
June 30, 2017
, respectively, and
$0.5 million
and
$1.4 million
during the three and six months ended
June 30, 2016
, respectively. During the three months ended
June 30, 2017
and 2016, there was no ineffective portion. The interest expense reclassified from accumulated other comprehensive income (loss) during both the three and six months ended
June 30, 2017
and 2016 was immaterial.
The Credit Agreement provides for the release of the liens securing the obligations, at our option and expense, so long as certain conditions as defined by the terms in the Credit Agreement are satisfied (“Collateral Release Period”). However, if subsequent to exercising the option, our Consolidated Fixed Charge Coverage Ratio is less than 1.25 or our Consolidated Leverage Ratio is greater than 2.50, then we would be required to promptly re-pledge substantially all of the assets of the Company and our subsidiaries that are guarantors or borrowers under the Credit Agreement. As of
June 30, 2017
, the conditions for the exercise of our right under the Credit Agreement to have liens released were not satisfied.
Senior Notes Payable
Senior notes payable in the amount of
$120.0 million
as of both
June 30, 2017
and December 31, 2016 and in the amount of
$160.0 million
as of June 30, 2016 were due to a group of institutional holders and had an interest rate of
6.11%
per annum (“2019 Notes”). As of
June 30, 2017
, three equal annual installments from 2017 through 2019 were remaining. Of the outstanding balances,
$110.0 million
as of both
June 30, 2017
and December 31, 2016 and
$150.0 million
as of June 30, 2016 were included in long-term debt on the condensed consolidated balance sheets.
Of the $40.0 million due for the 2017 installment, $30.0 million is included in long-term debt on the condensed consolidated balance sheets as of
June 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
June 30, 2017
and December 31, 2016.
Of the $40.0 million due for the 2016 installment, $30.0 million was included in long-term debt on the condensed consolidated balance sheets as of
June 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
June 30, 2016
.
As of
June 30, 2016
, the fair value of the interest rate swap that was terminated in December 2016 was
$1.7 million
and was included in other current assets on the condensed consolidated balance sheets. During the three and six months ended
June 30, 2016
, we recorded net gains of
$0.3 million
and
$1.6 million
, respectively, that were included in other income, net on our condensed consolidated statements of operations.
Surety Bonds and Real Estate Mortgages
We are generally required to provide various types of surety bonds that provide an additional measure of security under certain public and private sector contracts. At
June 30, 2017
, approximately
$3.7 billion
of our contract backlog was bonded. Performance bonds do not have stated expiration dates; rather, we are generally released from the bonds after the owner accepts the work performed under contract. The ability to maintain bonding capacity to support our current and future level of contracting requires that we maintain cash and working capital balances satisfactory to our sureties.
Our unconsolidated real estate held for development and sale is subject to mortgage indebtedness. This indebtedness is non-recourse to Granite but is recourse to the real estate entities. The terms of this indebtedness are typically renegotiated to reflect the evolving nature of the real estate projects as they progress through acquisition, entitlement and development. Modification of these terms may include changes in loan-to-value ratios requiring the real estate entity to repay portions of the debt.
29
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.
The most significant financial covenants under the terms of our Credit Agreement and the note purchase agreement governing the 2019 Notes require the maintenance of a minimum Consolidated Tangible Net Worth, a minimum Consolidated Interest Coverage Ratio and a maximum Consolidated Leverage Ratio.
As of
June 30, 2017
and pursuant to the definitions in the agreements, our Consolidated Tangible Net Worth was
$870.0 million
, which exceeded the minimum of
$710.6 million
and our Consolidated Leverage Ratio was
1.70
, which did not exceed the maximum of
3.00
. Our Consolidated Interest Coverage Ratio was
11.53
, which exceeded the minimum of
4.00
.
As of
June 30, 2017
, we were in compliance with all covenants contained in the Credit Agreement and related to the 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.
Share Purchase Program
On April 7, 2016, the Board of Directors authorized us to purchase up to $200.0 million of our common stock at management’s discretion, which replaced the former authorization including the amount available. We did not purchase shares under the share purchase program in any of the periods presented. The specific timing and amount of any future purchases will vary based on market conditions, securities law limitations and other factors.
Website Access
Our website address is www.graniteconstruction.com. On our website we make available, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). The information on our website is not incorporated into, and is not part of, this report. These reports, and any amendments to them, are also available at the website of the SEC, www.sec.gov.
|
Item 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
There has been no significant change in our exposure to market risks since
December 31, 2016
.
|
Item 4.
|
CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls and Procedures
Our management carried out, as of
June 30, 2017
, with the participation of our Chief Executive Officer and our Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of
June 30, 2017
, our disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by us in reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls Over Financial Reporting
During the quarter ended
June 30, 2017
, there were no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
30
|
Item 1.
|
LEGAL PROCEEDINGS
|
The description of the matters set forth in Part I, Item 1 of this Report under Note 13 of “Notes to the Condensed Consolidated Financial Statements” is incorporated herein by reference.
There have been no material changes in the risk factors previously disclosed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2016
.
The following table sets forth information regarding the repurchase of shares of our common stock during the three months ended
June 30, 2017
:
|
Period
|
|
Total number of shares purchased
1
|
|
Average price paid per share
|
|
Total number of shares purchased as part of publicly announced plans or programs
|
|
Approximate dollar value of shares that may yet be purchased under the plans or programs
2
|
|
||||||
|
April 1, 2017 through April 30, 2017
|
|
1,453
|
|
|
$
|
51.22
|
|
|
—
|
|
|
$
|
200,000,000
|
|
|
|
May 1, 2017 through May 31, 2017
|
|
558
|
|
|
$
|
51.55
|
|
|
—
|
|
|
$
|
200,000,000
|
|
|
|
June 1, 2017 through June 30, 2017
|
|
334
|
|
|
$
|
49.48
|
|
|
—
|
|
|
$
|
200,000,000
|
|
|
|
|
|
2,345
|
|
|
$
|
51.05
|
|
|
—
|
|
|
|
|
||
1
The number of shares purchased is in connection with employee tax withholding for units vested under our 2012 Equity Incentive Plan.
2
On April 7, 2016, the Board of Directors authorized us to purchase up to $200.0 million of our common stock at management’s discretion, which replaced the former authorization including the amount available. We did not purchase shares under the share purchase plan in any of the periods presented. The specific timing and amount of any future purchases will vary based on market conditions, securities law limitations and other factors.
|
Item 4.
|
MINE SAFETY DISCLOSURES
|
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17CFR 229.104) is included in Exhibit 95 to this Quarterly Report on Form 10-Q.
31
|
†
|
||
|
†
|
||
|
††
|
||
|
†
|
||
|
101.INS
|
†
|
XBRL Instance Document
|
|
101.SCH
|
†
|
XBRL Taxonomy Extension Schema
|
|
101.CAL
|
†
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
101.DEF
|
†
|
XBRL Taxonomy Extension Definition Linkbase
|
|
101.LAB
|
†
|
XBRL Taxonomy Extension Label Linkbase
|
|
101.PRE
|
†
|
XBRL Taxonomy Extension Presentation Linkbase
|
|
|
|
|
|
|
†
|
Filed herewith
|
|
|
††
|
Furnished herewith
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
GRANITE CONSTRUCTION INCORPORATED
|
|
|
|
|
|
|
|
Date:
|
August 1, 2017
|
|
By:
|
/s/ Laurel J. Krzeminski
|
|
|
|
|
|
Laurel J. Krzeminski
|
|
|
|
|
|
Executive Vice President and Chief Financial Officer
|
|
(Principal Financial and Accounting Officer)
|
||||
32
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 4. Mine Safety DisclosuresItem 6. Exhibits