UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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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
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from ___________ to ___________ | |
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Commission File Number:
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GRANITE CONSTRUCTION INCORPORATED
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State of Incorporation: |
I.R.S. Employer Identification Number: |
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Address of principal executive offices:
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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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. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒
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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Accelerated filer ☐ |
Non-accelerated filer ☐ |
Smaller reporting company
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Emerging growth company
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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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of February 22, 2021.
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Class |
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Outstanding |
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Common stock, $0.01 par value |
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As disclosed in our 2019 Annual Report on Form 10-K, in February 2020, the Audit/Compliance Committee of the Company’s Board of Directors, assisted by independent counsel, initiated an investigation of prior-period reporting for the Heavy Civil operating group, and the extent to which these matters affect the effectiveness of the Company’s internal control over financial reporting (the “Investigation”). The Investigation is now complete. We have restated our consolidated financial statements as of December 31, 2018, and for the years ended December 31, 2018 and 2017 and our unaudited quarterly financial information for the first three quarters in the year ended December 31, 2019 and for each of the quarters in the year ended December 31, 2018 in our Annual Report on Form 10-K for the year ended December 31, 2019 filed on February 22, 2021 to correct misstatements associated with project forecasts in the Heavy Civil operating group (the “Investigation Adjustments”) discovered in connection with the independent Investigation. In addition to the Investigation Adjustments, we corrected additional identified out-of-period and uncorrected misstatements that were not material, individually or in the aggregate, to our consolidated financial statements. We have reflected the impact of the restatement on our unaudited condensed consolidated financial information as of and for the three and nine months ended September 30, 2019 herein. See Note 3 of “Notes to the Condensed Consolidated Financial Statements” for additional information.
| EXPLANATORY NOTE | ||
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Item 1. |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk
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Item 4. | |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 4. |
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Item 6. |
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| EXHIBIT 95 | ||
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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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| EXHIBIT 104 | ||
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Item 1. |
FINANCIAL STATEMENTS |
GRANITE CONSTRUCTION INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - in thousands, except share and per share data)
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As Restated |
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September 30, 2020 |
December 31, 2019 |
September 30, 2019 |
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ASSETS |
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Current assets |
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Cash and cash equivalents ($ , $ and $ related to consolidated construction joint ventures (“CCJVs”)) |
$ |
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$ |
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$ |
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Short-term marketable securities |
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Receivables, net ($ , $ and $ related to CCJVs) |
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Contract assets ($ , $ and $ related to CCJVs) |
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Inventories |
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Equity in construction joint ventures |
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Other current assets ($ , $ and $ related to CCJVs) |
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Total current assets |
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Property and equipment, net ($ , $ and $ related to CCJVs) |
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Long-term marketable securities |
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Investments in affiliates |
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Goodwill |
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Right of use assets |
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Deferred income taxes, net |
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Other noncurrent assets |
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Total assets |
$ |
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$ |
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$ |
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LIABILITIES AND EQUITY |
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Current liabilities |
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Current maturities of long-term debt |
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$ |
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$ |
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Accounts payable ($ , $ and $ related to CCJVs) |
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Contract liabilities ($ , $ and $ related to CCJVs) |
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Accrued expenses and other current liabilities ($ , $ and $ related to CCJVs) |
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Total current liabilities |
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Long-term debt |
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Long-term lease liabilities |
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Deferred income taxes, net |
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Other long-term liabilities |
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Commitments and contingencies (Note 18) |
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Equity |
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Preferred stock, $ par value, authorized shares, outstanding |
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Common stock, $ par value, authorized shares; issued and outstanding: shares as of September 30, 2020, shares as of December 31, 2019 and shares as of September 30, 2019 |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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Retained earnings |
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Total Granite Construction Incorporated shareholders’ equity |
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Non-controlling interests |
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Total equity |
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Total liabilities and equity |
$ |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
GRANITE CONSTRUCTION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - in thousands, except per share data)
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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As Restated |
As Restated |
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2020 |
2019 |
2020 |
2019 |
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Revenue |
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| Transportation | $ |
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$ |
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$ |
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| Water |
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| Specialty |
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| Materials |
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| Total revenue |
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Cost of revenue |
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| Transportation |
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| Materials |
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| Total cost of revenue |
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| Gross profit |
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| Selling, general and administrative expenses |
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| Acquisition and integration expenses |
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| Non-cash impairment charges (See Note 4) |
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| Gain on sales of property and equipment |
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Other (income) expense |
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| Interest expense |
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| Equity in income of affiliates, net |
(
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(
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(
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| Total other expense (income) |
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| (Loss) income before provision for (benefit from) income taxes |
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| Amount attributable to non-controlling interests |
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| Net (loss) income attributable to Granite Construction Incorporated | $ |
(
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$ |
(
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Net (loss) income per share attributable to common shareholders (See Note 16) |
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| Basic | $ |
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| Diluted | $ |
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Weighted average shares of common stock |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
GRANITE CONSTRUCTION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited - in thousands)
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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As Restated |
As Restated |
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2020 |
2019 |
2020 |
2019 |
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Net (loss) income |
$ |
(
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$ |
(
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(
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Other comprehensive income (loss), net of tax: |
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Net unrealized loss on derivatives |
$ |
(
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(
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(
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Less: reclassification for net gains (losses) included in interest expense |
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(
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Net change |
$ |
(
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(
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(
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(
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Foreign currency translation adjustments, net |
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(
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(
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Other comprehensive loss |
$ |
(
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(
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(
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(
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Comprehensive income (loss) |
$ |
(
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$ |
(
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(
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Non-controlling interests in comprehensive income (loss) |
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(
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Comprehensive (loss) income attributable to Granite Construction Incorporated |
$ |
(
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$ |
(
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(
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The accompanying notes are an integral part of these condensed consolidated financial statements.
GRANITE CONSTRUCTION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited - in thousands, except share data)
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Outstanding Shares |
Common Stock |
Additional Paid-In Capital |
Accumulated Other Comprehensive (Loss) Income |
Retained Earnings |
Total Granite Shareholders’ Equity |
Non-controlling Interests |
Total Equity |
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| Balances at June 30, 2020 |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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Net loss |
— |
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(
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(
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Other comprehensive income |
— |
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(
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(
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Purchases of common stock (1) |
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Restricted stock units (“RSUs”) vested |
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Dividends on common stock ($ per share) |
— |
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| Transactions with non-controlling interests | — |
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Amortized RSUs and other |
(
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| Balances at September 30, 2020 |
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$ |
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(
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| Balances at June 30, 2019 (As Restated) |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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Net income |
— |
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(
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Other comprehensive loss |
— |
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(
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(
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Purchases of common stock (1) |
(
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(
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(
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RSUs vested |
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Dividends on common stock ($ per share) |
— |
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(
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(
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Transactions with non-controlling interests |
— |
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Amortized RSUs and other |
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| Balances at September 30, 2019 (As Restated) |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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Balances at December 31, 2019 |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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Net loss |
— |
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(
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Other comprehensive loss |
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(
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Purchases of common stock (1) |
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RSUs vested |
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Dividends on common stock ($ per share) |
— |
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(
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Effect of adopting Topic 326 (Note 2) |
— |
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Transactions with non-controlling interests |
— |
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(
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(
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Amortized RSUs and other |
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(
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(
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Balances at September 30, 2020 |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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Balances at December 31, 2018 |
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$ |
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$ |
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$ |
(
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$ |
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$ |
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$ |
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Net (loss) income |
— |
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(
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(
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(
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Other comprehensive loss |
— |
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(
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(
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Purchases of common stock (1) |
(
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— |
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RSUs vested |
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Dividends on common stock ($ per share) |
— |
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(
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(
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(
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Effect of adopting Topic 842 |
— |
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(
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(
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(
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Transactions with non-controlling interests |
— |
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(
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(
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Amortized RSUs and other |
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(
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Balances at September 30, 2019 (As Restated) |
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$ |
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$ |
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$ |
(
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) | $ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
GRANITE CONSTRUCTION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
( Unaudited - in thousands )
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As Restated |
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Nine Months Ended September 30, |
2020 |
2019 |
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Operating activities |
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Net loss |
$ |
(
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(
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Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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Depreciation, depletion and amortization |
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Amortization related to the 2.75% Convertible Notes (See Note 14) |
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Gain on sales of property and equipment, net |
(
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(
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Deferred income taxes |
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(
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Stock-based compensation |
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Equity in net loss from unconsolidated joint ventures |
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Net income from affiliates |
(
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(
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Non-cash impairment charges (See Note 4) |
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Other non-cash adjustments |
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Changes in assets and liabilities, net of the effect of an acquisition in 2019: |
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Receivables |
(
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(
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Contract assets, net |
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(
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Inventories |
(
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(
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Contributions to unconsolidated construction joint ventures |
(
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(
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Distributions from unconsolidated construction joint ventures and affiliates |
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Other assets, net |
(
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(
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Accounts payable |
(
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|||||
|
Accrued expenses and other current liabilities, net |
|
|
||||||
|
Net cash provided by (used in) operating activities |
|
(
|
) | |||||
|
Investing activities |
||||||||
|
Purchases of marketable securities |
(
|
) |
|
|||||
|
Maturities of marketable securities |
|
|
||||||
| Proceeds from called marketable securities |
|
|
||||||
|
Purchases of property and equipment |
(
|
) |
(
|
) | ||||
|
Proceeds from sales of property and equipment |
|
|
||||||
|
Cash paid to purchase business |
|
(
|
) | |||||
|
Other investing activities, net |
(
|
) |
(
|
) | ||||
|
Net cash used in investing activities |
(
|
) |
(
|
) | ||||
|
Financing activities |
||||||||
|
Proceeds from debt |
|
|
||||||
|
Debt principal repayments |
(
|
) |
(
|
) | ||||
|
Cash dividends paid |
(
|
) |
(
|
) | ||||
|
Repurchases of common stock |
(
|
) |
(
|
) | ||||
|
Contributions from non-controlling partners |
|
|
||||||
|
Distributions to non-controlling partners |
(
|
) |
(
|
) | ||||
|
Other financing activities, net |
|
|
||||||
|
Net cash provided by (used in) financing activities |
|
(
|
) | |||||
|
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
(
|
) | |||||
|
Cash, cash equivalents and $5,835 and $5,825 in restricted cash at beginning of period |
|
|
||||||
|
Cash, cash equivalents and $1,512 and $5,658 in restricted cash at end of period |
$ |
|
$ |
|
||||
|
Supplementary Information |
||||||||
|
Right of use assets obtained in exchange for lease obligations |
$ |
|
$ |
|
||||
|
Cash paid for operating lease liabilities |
|
|
||||||
|
Cash paid during the period for: |
||||||||
|
Interest |
$ |
|
$ |
|
||||
|
Income taxes |
|
|
||||||
|
Non-cash investing and financing activities: |
||||||||
|
RSUs issued, net of forfeitures |
$ |
|
$ |
|
||||
|
Accrued cash dividends |
|
|
||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), are unaudited and should be read in conjunction with our Annual Report on Form 10 -K for the year ended December 31, 2019 . Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. Further, the condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to state fairly our financial position at September 30, 2020 and 2019 and the results of our operations and cash flows for the periods presented. The December 31, 2019 condensed consolidated balance sheet data included herein was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP.
Our operations are typically affected more by weather conditions during the first and fourth quarters of our fiscal year which may alter our construction schedules and can create variability in our revenues and profitability. Therefore, the results of operations for the three and nine months ended September 30, 2020 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 during the three months ended March 31, 2020 of Accounting Standards Update (“ASU”) No. 2018 - 13, Fair Value Measurement (Topic 820 ): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement and ASU No. 2019 - 12 , Income Taxes (Topic 740 ): Simplifying the Accounting for Income Taxes, neither of which had a material impact on our condensed consolidated financial statements. In addition, effective January 1, 2020, we adopted ASU No. 2016 - 13, Financial Instruments - Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments and ASU No. 2019 - 05, Credit Losses (Topic 326 ): Targeted Transition Relief, the impact of which is described in Note 2 .
Cash, Cash Equivalents and Restricted Cash: The table below presents changes in cash, cash equivalents and restricted cash on the condensed consolidated statements of cash flows and a reconciliation to the amounts reported in the condensed consolidated balance sheets (in thousands):
|
Nine months ended September 30, |
2020 |
2019 |
||||||
|
Cash, cash equivalents and restricted cash, beginning of period |
$ |
|
$ |
|
||||
|
End of the period |
||||||||
|
Cash and cash equivalents |
|
|
||||||
|
Restricted cash |
|
|
||||||
|
Total cash, cash equivalents and restricted cash, end of period |
|
|
||||||
|
Net increase (decrease) in cash, cash equivalents and restricted cash |
$ |
|
$ |
(
|
) | |||
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
2. Recently Issued and Adopted Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020 - 06, Debt—Debt with Conversion and Other Options (Subtopic 470 - 20 ) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815 - 40 ): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments resulting in accounting for convertible debt instruments as a single liability measured at its amortized cost. This change will also reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules. In addition, the ASU requires the application of the if-converted method for calculating diluted earnings per share and eliminates the treasury stock method. The ASU is effective commencing with our quarter ended March 31, 2022, with early adoption permitted. We are currently evaluating the impact of ASU 2020 - 06 on our condensed consolidated financial statements.
In March 2020, the FASB issued ASU 2020 - 04, Reference Rate Reform (Topic 848 ): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides optional guidance to ease the potential burden in accounting for the effects of the transition away from LIBOR and other reference rates. This ASU was effective commencing with our quarter ended March 31, 2020 through December 31, 2022 and we expect to adopt in 2021. We do not expect the adoption of this ASU to have an impact on our condensed consolidated financial statements as our Credit Agreement (as defined in Note 14 below) uses the secured overnight financing rate as an alternative to LIBOR.
In
June 2016,
the FASB issued ASU
No.
2016
-
13,
Financial Instruments - Credit Losses (Topic
326
): Measurement of Credit Losses on Financial Instruments,
and in
May 2019
issued ASU
No.
2019
-
05,
Credit Losses (Topic
326
): Targeted Transition Relief
(collectively referred to as “Topic
326”
). Topic
326
requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. We adopted Topic
326
effective
January 1, 2020,
recognizing a net cumulative decrease to retained earnings of approximately $
In connection with the adoption of Topic 326 , we implemented the following accounting policy as of January 1, 2020:
Allowance for Credit Losses: Financial assets, which potentially subject us to credit losses, consist primarily of short and long-term marketable securities, receivables, contract assets and long-term notes receivables included in other noncurrent assets in our consolidated balance sheets. We measure expected credit losses of financial assets based on historical loss and other information available to management using a loss rate method applied to asset groups with categorically similar risk characteristics. These expected credit losses are recorded to an allowance for credit losses valuation account that is deducted from receivables and contract assets to present the net amount expected to be collected on the financial asset on the consolidated balance sheet.
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
3. Restatement
Restatement Background
As disclosed in our 2019 Annual Report on Form 10 -K, in February 2020, the Audit/Compliance Committee of the Company’s Board of Directors, assisted by independent counsel, initiated an investigation of prior-period reporting for the Heavy Civil operating group, and the extent to which these matters affect the effectiveness of the Company’s internal control over financial reporting (the “Investigation”). The Investigation is now complete. We have restated our consolidated financial statements as of December 31, 2018, and for the years ended December 31, 2018 and 2017 and our unaudited quarterly financial information for the first three quarters in the year ended December 31, 2019 and for each of the quarters in the year ended December 31, 2018 in our Annual Report on Form 10 -K for the year ended December 31, 2019 to correct misstatements associated with project forecasts in the Heavy Civil operating group (the “Investigation Adjustments”) discovered in connection with the independent Investigation. In addition to the Investigation Adjustments, we corrected additional identified out-of-period and uncorrected misstatements that were not material, individually or in the aggregate, to our consolidated financial statements (the “Other Adjustments”). We have reflected the impact of the restatement on our unaudited condensed consolidated financial information as of and for the three and nine months ended September 30, 2019 herein.
Description of Restatement Tables
We have presented below a reconciliation from the previously reported to the restated values as of and for the three and nine months ended September 30, 2019. The previously reported values were derived from our Quarterly Report on Form 10 -Q for the quarter ended September 30, 2019 filed on October 25, 2019 and are labeled as “As Previously Reported” in the following tables. The account balances labeled as “Investigation Adjustments” represent effects of adjustments resulting from the Investigation. The account balances labeled as “Other Adjustments” represent the effects of other adjustments, which related to revisions in estimates in projects primarily impacting revenue and cost of revenue in the Transportation segment as a result of out-of-period or uncorrected misstatements in previously filed financial statements that were not material, individually or in the aggregate, to those previously filed financial statements, balance sheet reclassifications and other immaterial adjustments.
The impacts to the condensed consolidated statements of shareholders’ equity and comprehensive income (loss) as a result of the restatement were due to the changes in net income (loss) for the three and nine months ended September 30, 2019. In addition, there was no impact to net cash used in investing and financing activities for the nine months ended September 30, 2019 as a result of the restatement.
The effects of the prior-period misstatements on our consolidated financial statements are as follows (in thousands, except per share data):
Consolidated Balance Sheet
|
September 30, 2019 |
As Previously Reported |
Investigation Adjustments |
Other Adjustments |
As Restated |
||||||||||||
|
ASSETS |
||||||||||||||||
|
Current assets |
||||||||||||||||
|
Cash and cash equivalents |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Short-term marketable securities |
|
|
|
|
||||||||||||
|
Receivables, net |
|
|
|
|
||||||||||||
|
Contract assets |
|
(
|
) |
(
|
) |
|
||||||||||
|
Inventories |
|
|
|
|
||||||||||||
|
Equity in construction joint ventures |
|
(
|
) |
|
|
|||||||||||
|
Other current assets |
|
|
|
|
||||||||||||
|
Total current assets |
|
(
|
) |
(
|
) |
|
||||||||||
|
Property and equipment, net |
|
|
|
|
||||||||||||
|
Long-term marketable securities |
|
|
|
|
||||||||||||
|
Investments in affiliates |
|
|
|
|
||||||||||||
|
Goodwill |
|
|
|
|
||||||||||||
|
Right of use assets |
|
|
|
|
||||||||||||
|
Deferred income taxes, net |
|
(
|
) |
|
|
|||||||||||
|
Other noncurrent assets |
|
|
(
|
) |
|
|||||||||||
|
Total assets |
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
||||||
|
LIABILITIES AND EQUITY |
||||||||||||||||
|
Current liabilities |
||||||||||||||||
|
Current maturities of long-term debt |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Accounts payable |
|
|
|
|
||||||||||||
|
Contract liabilities |
|
|
(
|
) |
|
|||||||||||
|
Accrued expenses and other current liabilities |
|
|
|
|
||||||||||||
|
Total current liabilities |
|
|
(
|
) |
|
|||||||||||
|
Long-term debt |
|
|
|
|
||||||||||||
|
Long-term lease liabilities |
|
|
|
|
||||||||||||
|
Deferred income taxes, net |
|
|
|
|
||||||||||||
|
Other long-term liabilities |
|
|
|
|
||||||||||||
| Commitments and contingencies | ||||||||||||||||
|
Equity |
||||||||||||||||
|
Preferred stock, $ par value, authorized shares, outstanding |
|
|
|
|
||||||||||||
|
Common stock, $ par value, authorized shares; issued and outstanding: shares as of September 30, 2019 |
|
|
|
|
||||||||||||
|
Additional paid-in capital |
|
|
|
|
||||||||||||
|
Accumulated other comprehensive loss |
(
|
) |
|
|
(
|
) | ||||||||||
|
Retained earnings |
|
(
|
) |
(
|
) |
|
||||||||||
|
Total Granite Construction Incorporated shareholders’ equity |
|
(
|
) |
(
|
) |
|
||||||||||
|
Non-controlling interests |
|
(
|
) |
(
|
) |
|
||||||||||
|
Total equity |
|
(
|
) |
(
|
) |
|
||||||||||
|
Total liabilities and equity |
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
||||||
Consolidated Statement of Operations
|
Three Months Ended September 30, 2019 |
Nine Months Ended September 30, 2019 |
|||||||||||||||||||||||||||||||
|
As Previously Reported |
Investigation Adjustments |
Other Adjustments |
As Restated |
As Reported |
Investigation Adjustments |
Other Adjustments |
As Restated |
|||||||||||||||||||||||||
|
Revenue |
||||||||||||||||||||||||||||||||
|
Transportation |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||||||||||
|
Water |
|
(
|
) |
|
|
|
(
|
) |
|
|
||||||||||||||||||||||
|
Specialty |
|
|
|
|
|
|
(
|
) |
|
|||||||||||||||||||||||
|
Materials |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Total revenue |
|
|
|
|
|
|
(
|
) |
|
|||||||||||||||||||||||
|
Cost of revenue |
||||||||||||||||||||||||||||||||
|
Transportation |
|
(
|
) |
|
|
|
(
|
) |
(
|
) |
|
|||||||||||||||||||||
|
Water |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Specialty |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Materials |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Total cost of revenue |
|
(
|
) |
|
|
|
(
|
) |
(
|
) |
|
|||||||||||||||||||||
|
Gross profit (loss) |
|
|
|
|
|
|
(
|
) |
|
|||||||||||||||||||||||
|
Selling, general and administrative expenses |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Acquisition and integration expenses |
|
|
|
|
|
|
(
|
) |
|
|||||||||||||||||||||||
|
Gain on sales of property and equipment |
(
|
) |
|
|
(
|
) |
(
|
) |
|
|
(
|
) | ||||||||||||||||||||
|
Operating income (loss) |
|
|
|
|
(
|
) |
|
(
|
) |
(
|
) | |||||||||||||||||||||
|
Other (income) expense |
||||||||||||||||||||||||||||||||
|
Interest income |
(
|
) |
|
|
(
|
) |
(
|
) |
|
|
(
|
) | ||||||||||||||||||||
|
Interest expense |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Equity in income of affiliates, net |
(
|
) |
|
|
(
|
) |
(
|
) |
|
|
(
|
) | ||||||||||||||||||||
|
Other income, net |
|
|
|
|
(
|
) |
|
|
(
|
) | ||||||||||||||||||||||
|
Total other income |
(
|
) |
|
|
(
|
) |
(
|
) |
|
|
(
|
) | ||||||||||||||||||||
|
Income (loss) before provision for (benefit from) income taxes |
|
|
|
|
(
|
) |
|
(
|
) |
(
|
) | |||||||||||||||||||||
|
Provision for (benefit from) income taxes |
|
|
|
|
(
|
) |
|
(
|
) |
(
|
) | |||||||||||||||||||||
|
Net income (loss) |
|
|
|
|
(
|
) |
|
(
|
) |
(
|
) | |||||||||||||||||||||
|
Amount attributable to non-controlling interests |
(
|
) |
|
(
|
) |
|
(
|
) |
|
|
(
|
) | ||||||||||||||||||||
|
Net income (loss) attributable to Granite Construction Incorporated |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | |||||||||||||
|
Net income (loss) income per share attributable to common shareholders |
||||||||||||||||||||||||||||||||
|
Basic |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | |||||||||||||
|
Diluted |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | |||||||||||||
|
Weighted average shares of common stock |
||||||||||||||||||||||||||||||||
|
Basic |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Diluted |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
Consolidated Statement of Cash Flows
|
Nine Months Ended September 30, 2019 |
As Previously Reported |
Investigation Adjustments |
Other Adjustments |
As Restated |
||||||||||||
|
Operating activities |
||||||||||||||||
|
Net (loss) income |
$ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | |||||
|
Adjustments to reconcile net (loss) income to net cash used in operating activities: |
||||||||||||||||
|
Depreciation, depletion and amortization |
|
|
|
|
||||||||||||
|
Gain on sales of property and equipment |
(
|
) |
|
|
(
|
) | ||||||||||
|
Deferred income taxes |
(
|
) |
|
|
(
|
) | ||||||||||
|
Stock-based compensation |
|
|
|
|
||||||||||||
|
Equity in net loss (income) from unconsolidated joint ventures |
|
(
|
) |
(
|
) |
|
||||||||||
|
Net income from affiliates |
(
|
) |
|
|
(
|
) | ||||||||||
|
Other non-cash adjustments |
|
|
|
|
||||||||||||
|
Changes in assets and liabilities, net of the effects of an acquisition: |
||||||||||||||||
|
Receivables |
(
|
) |
|
(
|
) |
(
|
) | |||||||||
|
Contract assets, net |
(
|
) |
(
|
) |
|
(
|
) | |||||||||
|
Inventories |
(
|
) |
|
|
(
|
) | ||||||||||
|
Contributions to unconsolidated construction joint ventures |
(
|
) |
|
|
(
|
) | ||||||||||
|
Distributions from unconsolidated construction joint ventures and affiliates |
|
|
|
|
||||||||||||
|
Other assets, net |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
|
Accounts payable |
|
|
(
|
) |
|
|||||||||||
|
Accrued expenses and other current liabilities, net |
(
|
) |
|
|
|
|||||||||||
|
Net cash used in operating activities |
$ |
(
|
) | $ |
|
$ |
|
$ |
(
|
) | ||||||
4. Impairment Charges
Goodwill
We performed an interim goodwill impairment test on the
March
31,
2020
balances of our Water and Mineral Services Group Materials and Specialty reporting units due to an adverse change in the business climate for these reporting units, including a modified relationship with a business partner, increased competition and market consolidation during the
three
months ended
March 31, 2020,
exasperated by economic disruption and market conditions associated with the COVID-
19
pandemic. These factors led to reductions in the revenue and margin growth rates used in our quantitative goodwill tests. The goodwill impairment test resulted in a $
We performed a
second
interim goodwill impairment test on the
September
30,
2020
balances of our Midwest Group Specialty, Water and Mineral Services Group Water and Water and Mineral Services Group Materials reporting units due to the continued impact from an adverse change in the business climate, including reduced market share due to loss of strategic personnel during the
three
months ended
September 30, 2020.
These factors led to reductions in the revenue and margin growth rates, and delays in the timing of future cash flows used in our quantitative goodwill tests. The goodwill impairment test resulted in a non-cash impairment charge of an additional $
Consistent with our annual impairment test, we calculated the estimated fair values of the Water and Mineral Services Group Materials and Water and Mineral Services Group Specialty reporting units using the discounted cash flows and market multiple methods. Judgments inherent in these methods included the determination of appropriate discount rates, the amount and timing of expected future cash flows, revenue and margin growth rates, and appropriate benchmark companies. The cash flows used in our discounted cash flow model were based on five -year financial forecasts developed internally by management adjusted for market participant-based assumptions. Our discount rate assumptions were based on an assessment of the equity cost of capital and appropriate capital structure for our reporting units.
Future developments that we are unable to anticipate may require us to further revise the estimated future cash flows, which could adversely affect the fair value of our reporting units in future periods and result in additional impairment charges. The assumptions used in the goodwill impairment tests are classified as Level 3 inputs.
Investment in Affiliates
During the
nine
months ended
September
30,
2020,
operating costs increased in certain of our foreign entity investments in affiliates which resulted in price increases and therefore a decrease in demand. The effect of this change in business climate on certain investments’ expected future operating cash flows resulted in other than temporary decline in fair value below the carrying value. Therefore, we recorded a non-cash impairment charge of $
5. Revisions in Estimates
Our profit recognition related to construction contracts is based on estimates of transaction price and 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. Changes in estimates of transaction price and costs to complete may result in the reversal of previously recognized revenue if the current estimate adversely differs from the previous estimate. When we experience significant changes in our estimates, 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. For revisions in estimates, generally we use the cumulative catch-up method for changes to the transaction price that are part of a single performance obligation. 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 estimates in the future. Other than those identified in the 2019 Annual Report on Form 10 -K, we did not identify any material amounts that should have been recorded in a prior period for the three and nine months ended September 30, 2019. In our review of these changes for the three and nine months ended September 30, 2020, we did not identify any material amounts that should have been recorded in a prior period.
In the normal course of business, we have revisions in estimates, including estimated costs some of which are associated with unresolved affirmative claims and back charges. The estimated or actual recovery related to these estimated costs may be recorded in future periods or may be at values below the associated cost, which can cause fluctuations in the gross profit impact from revisions in estimates.
There were
no
increases from revisions in estimates, which individually had an impact of $
The projects with decreases from revisions in estimates, which individually had an impact of million or more on gross profit, are summarized as follows (dollars in millions except per share data):
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
As Restated |
As Restated |
|||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
|||||||||||||
|
Number of projects with downward estimate changes |
|
|
|
|
||||||||||||
|
Range of reduction in gross profit from each project, net |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Decrease to project profitability |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Increase to net loss |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Increase to net loss per diluted share |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
Other than one project in our Specialty segment during the three and nine months ended September 30, 2020 , all decreases during the three and nine months ended September 30, 2020 were in our Transportation segment and were due to additional costs from differing site conditions, lower productivity than originally anticipated and unfavorable weather. The decreases during the three and nine months ended September 30, 2019 were due to increased project completion costs, schedule delays, lower productivity than originally anticipated and performance of a significant amount of disputed work partially offset by an increase in estimated recovery from customer affirmative claims.
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
6. Disaggregation of Revenue
The following tables present our disaggregated revenue (in thousands):
Three months ended September 30,
|
2020 |
Transportation |
Water |
Specialty |
Materials |
Total |
|||||||||||||||
|
California |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
|
Federal |
|
|
|
|
|
|||||||||||||||
|
Heavy Civil |
|
|
|
|
|
|||||||||||||||
|
Midwest |
|
|
|
|
|
|||||||||||||||
|
Northwest |
|
|
|
|
|
|||||||||||||||
|
Water and Mineral Services |
|
|
|
|
|
|||||||||||||||
|
Total |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
|
2019 (As Restated) |
Transportation |
Water |
Specialty |
Materials |
Total |
|||||||||||||||
|
California |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
|
Federal |
|
|
|
|
|
|||||||||||||||
|
Heavy Civil |
|
|
|
|
|
|||||||||||||||
|
Midwest |
|
|
|
|
|
|||||||||||||||
|
Northwest |
|
|
|
|
|
|||||||||||||||
|
Water and Mineral Services |
|
|
|
|
|
|||||||||||||||
|
Total |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
Nine months ended September 30,
|
2020 |
Transportation |
Water |
Specialty |
Materials |
Total |
|||||||||||||||
|
California |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
|
Federal |
|
|
|
|
|
|||||||||||||||
|
Heavy Civil |
|
|
|
|
|
|||||||||||||||
|
Midwest |
|
|
|
|
|
|||||||||||||||
|
Northwest |
|
|
|
|
|
|||||||||||||||
|
Water and Mineral Services |
|
|
|
|
|
|||||||||||||||
|
Total |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
|
2019 (As Restated) |
Transportation |
Water |
Specialty |
Materials |
Total |
|||||||||||||||
|
California |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
|
Federal |
|
|
|
|
|
|||||||||||||||
|
Heavy Civil |
|
|
|
|
|
|||||||||||||||
|
Midwest |
|
|
|
|
|
|||||||||||||||
|
Northwest |
|
|
|
|
|
|||||||||||||||
|
Water and Mineral Services |
|
|
|
|
|
|||||||||||||||
|
Total |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
7. Unearned Revenue
The following tables present our unearned revenue as of the respective periods (in thousands):
|
September 30, 2020 |
Transportation |
Water |
Specialty |
Total |
||||||||||||
|
California |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Federal |
|
|
|
|
||||||||||||
|
Heavy Civil |
|
|
|
|
||||||||||||
|
Midwest |
|
|
|
|
||||||||||||
|
Northwest |
|
|
|
|
||||||||||||
|
Water and Mineral Services |
|
|
|
|
||||||||||||
|
Total |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
June 30, 2020 |
Transportation |
Water |
Specialty |
Total |
||||||||||||
|
California |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Federal |
|
|
|
|
||||||||||||
|
Heavy Civil |
|
|
|
|
||||||||||||
|
Midwest |
|
|
|
|
||||||||||||
|
Northwest |
|
|
|
|
||||||||||||
|
Water and Mineral Services |
|
|
|
|
||||||||||||
|
Total |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
September 30, 2019 (As Restated) |
Transportation |
Water |
Specialty |
Total |
||||||||||||
|
California |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Federal |
|
|
|
|
||||||||||||
|
Heavy Civil |
|
|
|
|
||||||||||||
|
Midwest |
|
|
|
|
||||||||||||
|
Northwest |
|
|
|
|
||||||||||||
|
Water and Mineral Services |
|
|
|
|
||||||||||||
|
Total |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
8. Contract Assets and Liabilities
During the
three
and
nine
months ended
September 30, 2020
, we recognized revenue of $
As a result of changes in contract transaction price related to performance obligations that were satisfied or partially satisfied prior to the end of the periods, we recognized revenue of $
As of
September 30, 2020
,
December 31, 2019
and
September 30, 2019
, the aggregate claim recovery estimates included in contract asset and liability balances were $
The components of the contract asset balances as of the respective dates were as follows (in thousands):
| As Restated | ||||||||||||
|
September 30, 2020 |
December 31, 2019 |
September 30, 2019 |
||||||||||
|
Costs in excess of billings and estimated earnings |
$ |
|
$ |
|
$ |
|
||||||
|
Contract retention |
|
|
|
|||||||||
|
Total contract assets |
$ |
|
$ |
|
$ |
|
||||||
As of September 30, 2020 , December 31, 2019 and September 30, 2019 , no contract retention individually exceeded 10% of total net receivables at any of the presented dates. The majority of the contract retention balance is expected to be collected within one year.
The components of the contract liability balances as of the respective dates were as follows (in thousands):
| As Restated | ||||||||||||
|
September 30, 2020 |
December 31, 2019 |
September 30, 2019 |
||||||||||
|
Billings in excess of costs and estimated earnings, net of retention |
$ |
|
$ |
|
$ |
|
||||||
|
Provisions for losses |
|
|
|
|||||||||
|
Total contract liabilities |
$ |
|
$ |
|
$ |
|
||||||
9. Receivables, net
Receivables include billed and unbilled amounts for services provided to clients for which we have an unconditional right to payment as of the end of the applicable period and do not bear interest. The following table presents major categories of receivables (in thousands):
|
As Restated |
||||||||||||
| September 30, 2020 | December 31, 2019 | September 30, 2019 | ||||||||||
|
Contracts completed and in progress: |
||||||||||||
|
Billed |
$ |
|
$ |
|
$ |
|
||||||
|
Unbilled |
|
|
|
|||||||||
|
Total contracts completed and in progress |
|
|
|
|||||||||
|
Material sales |
|
|
|
|||||||||
|
Other |
|
|
|
|||||||||
|
Total gross receivables |
|
|
|
|||||||||
|
Less: allowance for credit losses |
|
|
|
|||||||||
|
Total net receivables |
$ |
|
$ |
|
$ |
|
||||||
Included in other receivables at September 30, 2020 , December 31, 2019 and September 30, 2019 , were items such as estimated recovery from back charge claims, notes receivable, fuel tax refunds and income tax refunds. No such receivables individually exceeded 10% of total net receivables at any of these dates.
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
10. Fair Value Measurement
The following tables summarize significant assets and liabilities measured at fair value in the condensed consolidated balance sheets on a recurring basis for each of the fair value levels (in thousands):
|
Fair Value Measurement at Reporting Date Using |
||||||||||||||||
|
September 30, 2020 |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
|
Cash equivalents |
||||||||||||||||
|
Money market funds |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Other current assets |
||||||||||||||||
|
Commodity swap |
|
|
|
|
||||||||||||
|
Other noncurrent assets |
||||||||||||||||
|
Restricted cash |
|
|
|
|
||||||||||||
|
Total assets |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Accrued and other current liabilities |
||||||||||||||||
|
Interest rate swap |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Total liabilities |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
December 31, 2019 |
||||||||||||||||
|
Cash equivalents |
||||||||||||||||
|
Money market funds |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Other noncurrent assets |
||||||||||||||||
|
Restricted cash |
|
|
|
|
||||||||||||
|
Total assets |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Accrued and other current liabilities |
||||||||||||||||
|
Interest rate swap |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Total liabilities |
$ |
|
$ |
|
$ |
|
$ |
|
|
September 30, 2019 |
||||||||||||||||
|
Cash equivalents |
||||||||||||||||
|
Money market funds |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Other noncurrent assets |
||||||||||||||||
|
Restricted cash |
|
|
|
|
||||||||||||
|
Total assets |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Accrued and other current liabilities |
||||||||||||||||
|
Interest rate swap |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Total liabilities |
$ |
|
$ |
|
$ |
|
$ |
|
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Interest Rate Swaps
In connection with the Third Amended and Restated Credit Agreement (as discussed further in Note
14
) we entered into
two
interest rate swaps designated as cash flow hedges with an effective date of
May 2018.
The
two
cash flow hedges had a combined initial notional amount of $
Other Assets and Liabilities
The carrying values and estimated fair values of financial instruments that are not required to be recorded at fair value in the condensed consolidated balance sheets were as follows:
|
September 30, 2020 |
December 31, 2019 |
September 30, 2019 |
|||||||||||||||||||||||
|
(in thousands) |
Fair Value Hierarchy |
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
||||||||||||||||||
|
Assets: |
|||||||||||||||||||||||||
|
Held-to-maturity marketable securities (1) |
Level 1 |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
|
Liabilities (including current maturities): |
|||||||||||||||||||||||||
|
2.75% Convertible Notes (2),(3) |
Level 2 |
$ |
|
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||
|
Credit Agreement - term loan (2) |
Level 3 |
|
|
|
|
|
|
||||||||||||||||||
|
Credit Agreement - revolving credit facility (2) |
Level 3 |
|
|
|
|
|
|
||||||||||||||||||
( 1 ) All marketable securities were classified as held-to-maturity and consisted of U.S. Government and agency obligations as of September 30, 2020, December 31, 2019 and September 30, 2019.
(
2
) The fair value of the
(
3
) Excluded from carrying value is $
As disclosed in Note 4, we recorded fair value adjustments related to nonfinancial assets measured at fair value on a nonrecurring basis during the three and nine months ended September 30, 2020. During the three and nine months ended September 30, 2020, we did not record any fair value adjustments related to nonfinancial liabilities measured at fair value on a nonrecurring basis. During the three and nine months ended September 30, 2019, we did not record any fair value adjustments related to nonfinancial assets and liabilities measured at fair value on a nonrecurring basis.
11. 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 and nine months ended September 30, 2020 , we determined no change was required for existing joint ventures.
Due to the joint and several nature of the performance obligations under the related owner contracts, if any of the partners fail to perform, we and the remaining partners, if any, would be responsible for performance of the outstanding work (i.e., we provide a performance guarantee). At
September 30, 2020
, there was approximately $
Consolidated Construction Joint Ventures (“CCJVs”)
At
September 30, 2020
, we were engaged in
active CCJV projects with total contract values ranging from $
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Unconsolidated Construction Joint Ventures
As of
September 30, 2020
, we were engaged in
active unconsolidated joint venture projects with total contract values ranging from $
The following is summary financial information related to unconsolidated construction joint ventures:
|
As Restated |
||||||||||||
|
(in thousands) |
September 30, 2020 |
December 31, 2019 |
September 30, 2019 |
|||||||||
|
Assets |
||||||||||||
|
Cash, cash equivalents and marketable securities |
$ |
|
$ |
|
$ |
|
||||||
|
Other current assets (1) |
|
|
|
|||||||||
|
Noncurrent assets |
|
|
|
|||||||||
|
Less partners’ interest |
|
|
|
|||||||||
|
Granite’s interest (1),(2) |
|
|
|
|||||||||
|
Liabilities |
||||||||||||
|
Current liabilities |
|
|
$ |
|
||||||||
|
Less partners’ interest and adjustments (3) |
|
|
|
|||||||||
|
Granite’s interest |
|
|
|
|||||||||
|
Equity in construction joint ventures (4) |
$ |
|
$ |
|
$ |
|
||||||
(
1
) Included in this balance and in accrued expenses and other current liabilities on the condensed consolidated balance sheets was $
(
2
) Included in this balance as of
September 30, 2020
,
December 31, 2019
and
September 30, 2019
, was $
( 3 ) Partners’ interest and adjustments includes amounts to reconcile total net assets as reported by our partners to Granite’s interest adjusted to reflect our accounting policies and estimates primarily related to contract forecast differences.
(
4
) Included in this balance and in accrued expenses and other current liabilities on our condensed consolidated balance sheets was $
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
As Restated |
As Restated |
|||||||||||||||
|
(in thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||
|
Revenue |
||||||||||||||||
|
Total |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Less partners’ interest and adjustments (1) |
|
|
|
|
||||||||||||
|
Granite’s interest |
|
|
|
|
||||||||||||
|
Cost of revenue |
||||||||||||||||
|
Total |
|
|
|
|
||||||||||||
|
Less partners’ interest and adjustments (1) |
|
|
|
|
||||||||||||
|
Granite’s interest |
|
|
|
|
||||||||||||
|
Granite’s interest in gross loss |
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
( 1 ) Partners’ interest and adjustments includes 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 and estimates primarily related to contract forecast differences.
During the
three
and
nine
months ended
September 30, 2020
, unconsolidated construction joint venture net loss was $(
Line Item Joint Ventures
As of
September
30,
2020,
we had
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
12. Investments in Affiliates
Our investments in affiliates balance consists of equity method investments in the following types of entities:
|
(in thousands) |
September 30, 2020 |
December 31, 2019 |
September 30, 2019 |
|||||||||
|
Foreign |
$ |
|
$ |
|
$ |
|
||||||
|
Real estate |
|
|
|
|||||||||
|
Asphalt terminal |
|
|
|
|||||||||
|
Total investments in affiliates |
$ |
|
$ |
|
$ |
|
||||||
The following table provides summarized balance sheet information for our affiliates accounted for under the equity method on a combined basis:
|
(in thousands) |
September 30, 2020 |
December 31, 2019 |
September 30, 2019 |
|||||||||
|
Current assets |
$ |
|
$ |
|
$ |
|
||||||
|
Noncurrent assets |
|
|
|
|||||||||
|
Total assets |
|
|
|
|||||||||
|
Current liabilities |
|
|
|
|||||||||
|
Long-term liabilities (1) |
|
|
|
|||||||||
|
Total liabilities |
|
|
|
|||||||||
|
Net assets |
|
|
|
|||||||||
|
Granite’s share of net assets |
$ |
|
$ |
|
$ |
|
||||||
( 1 ) The balance primarily related to local bank debt for equipment purchases and working capital in our foreign affiliates and debt associated with our real estate investments.
Of the $
13. Property and Equipment, net
Balances of major classes of assets and total accumulated depreciation and depletion are included in property and equipment, net in the condensed consolidated balance sheets and were as follows:
|
(in thousands) |
September 30, 2020 |
December 31, 2019 |
September 30, 2019 |
|||||||||
|
Equipment and vehicles |
$ |
|
$ |
|
$ |
|
||||||
|
Quarry property |
|
|
|
|||||||||
|
Land and land improvements |
|
|
|
|||||||||
|
Buildings and leasehold improvements |
|
|
|
|||||||||
|
Office furniture and equipment |
|
|
|
|||||||||
|
Property and equipment |
|
|
|
|||||||||
|
Less: accumulated depreciation and depletion |
|
|
|
|||||||||
|
Property and equipment, net |
$ |
|
$ |
|
$ |
|
||||||
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
14. Long-Term Debt and Credit Arrangements
|
(in thousands) |
September 30, 2020 |
December 31, 2019 |
September 30, 2019 |
|||||||||
|
2.75% Convertible Notes |
$ |
|
$ |
|
$ |
|
||||||
|
Credit Agreement - term loan |
|
|
|
|||||||||
|
Credit Agreement - revolving credit facility |
|
|
|
|||||||||
|
Debt issuance costs and other |
|
|
|
|||||||||
|
Total debt |
|
|
|
|||||||||
|
Less current maturities |
|
|
|
|||||||||
|
Total long-term debt |
$ |
|
$ |
|
$ |
|
||||||
The aggregate minimum principal maturities of long-term debt related to balances at
September 30, 2020
excluding debt issuance costs, including current maturities and the $
Credit Agreement
On
March 26, 2020,
we entered into Amendment
No.
3
to the Third Amended and Restated Credit Agreement, which among other things, (i) reduced the revolving credit facility from $
On June 19, 2020 and November 12, 2020, we entered into Amendments No. 4 and No. 5, respectively, to the Third Amended and Restated Credit Agreement, which, among other things, provided additional timing for the Company to deliver annual and quarterly financial statements.
On February 19, 2021, we entered into the Limited Waiver and Amendment No. 6 to the Third Amended and Restated Credit Agreement which waives any defaults or events of defaults that may have arisen in connection with the Company’s restatement during the periods covered by the restatement, the failure to comply with a financial covenant and any right of the lenders to collect interest at the default rate with respect to the waived defaults and events of default.
We refer to Third Amended and Restated Credit Agreement dated May 31, 2018 and all subsequent amendments listed above as “Credit Agreement.”
The Credit Agreement consists of a term loan and a revolving credit facility.
The term loan requires that Granite repay
As of
September 30, 2020
, the total unused availability under the Credit Agreement was $
Borrowings under the Credit Agreement bear interest at LIBOR, subject to a
2.75% Convertible Notes
In
November 2019,
we issued an aggregate principal amount of $
As of
September 30, 2020
and
December 31, 2019,
the carrying amount of the liability component was $
On
October
29,
2019,
in connection with the offering of our
2.75%
Convertible Notes, we entered into a purchased equity derivative instrument (“Hedge Option”) and sold warrants to reduce the cost of the Hedge Option. The Hedge Option and warrants were included in additional paid-in capital on the condensed consolidated balance sheets and were $
On
May 4, 2020,
the Company notified the Trustee for the
2.75%
Convertible Notes that beginning
May 5, 2020
until the date on which the Company regained compliance with its filing requirements under section
4.06
(d) of the indenture, the Company would pay
2019 Notes
As of
September 30, 2019,
senior notes payable in the amount of $
Covenants and Events of Default
Our Credit Agreement requires us to comply with various affirmative, restrictive and financial covenants, including the financial covenants described below. Our failure to comply with these covenants would constitute an event of default under the Credit Agreement. Additionally, our failure to pay principal, interest or other amounts when due or within the relevant grace period on our 2.75% Convertible Notes or our Credit Agreement would constitute an event of default under the indenture governing our 2.75% Convertible Notes or the Credit Agreement. A default under our Credit Agreement could result in (i) us no longer being entitled to borrow under such facility; (ii) termination of such facility; (iii) the requirement that any letters of credit under such facility be cash collateralized; (iv) acceleration of amounts owed under the Credit Agreement; and/or (v) foreclosure on any lien securing the obligations under such facility. A default under the indenture governing our 2.75% Convertible Notes could result in acceleration of the maturity of the notes.
The most significant financial covenants under the terms of our Credit Agreement require the maintenance of a minimum Consolidated Interest Coverage Ratio and a maximum Consolidated Leverage Ratio. As of
September 30, 2020
, the Consolidated Leverage Ratio was
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
15. Leases
We have leases for office and shop space, as well as for equipment primarily utilized in our construction projects. As of
September 30, 2020
, our lease contracts were classified as operating leases and had terms ranging from month-to-month to
As of September 30, 2020 , December 31, 2019 and September 30, 2019 , we had no lease contracts that had not yet commenced but created significant rights and obligations.
Lease expense was $
The following table summarizes our undiscounted lease liabilities outstanding as of September 30, 2020 (in thousands):
|
Remainder of 2020 |
$ |
|
||
|
2021 |
|
|||
|
2022 |
|
|||
|
2023 |
|
|||
|
2024 |
|
|||
|
2025 through 2036 |
|
|||
|
Total future minimum lease payments |
$ |
|
||
|
Less: imputed interest |
(
|
) | ||
|
Total |
$ |
|
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
16. 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 September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
As Restated |
As Restated |
|||||||||||||||
|
(in thousands, except per share amounts) |
2020 |
2019 |
2020 |
2019 |
||||||||||||
|
Numerator (basic and diluted) |
||||||||||||||||
| Net income (loss) allocated to common shareholders for basic calculation | $ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | |||||
|
Denominator |
||||||||||||||||
|
Weighted average common shares outstanding, basic |
|
|
|
|
||||||||||||
|
Dilutive effect of RSUs and 2.75% Convertible Notes (1),(2) |
|
|
|
|
||||||||||||
|
Weighted average common shares outstanding, diluted |
|
|
|
|
||||||||||||
| Net income (loss) per share, basic | $ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | |||||
| Net income (loss) per share, diluted | $ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | |||||
(
1
) Due to the net losses, RSUs representing approximately
(
2
) As the average price of our common stock was below $
17. Income Taxes
The following table presents the provision for (benefit from) income taxes for the respective periods:
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
As Restated |
As Restated |
|||||||||||||||
|
(dollars in thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||
|
Provision for (benefit from) income taxes |
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | ||||||
| Effective tax rate |
(
|
)% |
|
% |
|
% |
|
% | ||||||||
Our effective tax rate for the
three
and
nine
months ended
September 30, 2020
decreased to (
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
18. Contingencies - Legal Proceedings
In the ordinary course of business, we and our affiliates are involved in various legal proceedings alleging, among other things, liability issues or breach of contract or tortious conduct in connection with the performance of services and/or materials provided, the various outcomes of which cannot be predicted with certainty. We and our affiliates are also subject to government inquiries in the ordinary course of business seeking information concerning our compliance with government construction contracting requirements and various laws and regulations, the outcomes which cannot be predicted with certainty.
Some of the matters in which we or our joint ventures and affiliates are involved may involve compensatory, punitive, or other claims or sanctions that, if granted, could require us to pay damages or make other expenditures in amounts that are not probable to be incurred or cannot currently be reasonably estimated. In addition, in some circumstances our government contracts could be terminated, we could be suspended, debarred or incur other administrative penalties or sanctions, or payment of our costs could be disallowed. While any of our pending legal proceedings may be subject to early resolution as a result of our ongoing efforts to resolve the proceedings, whether or when any legal proceeding will be resolved 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, disclosure is also provided when it is reasonably possible and estimable that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the amount recorded.
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 the consolidated balance sheets. The aggregate liabilities recorded as of September 30, 2020 and 2019 related to these matters were immaterial. The aggregate range of possible loss related to (i) matters considered reasonably possible, and (ii) reasonably possible amounts in excess of accrued losses recorded for probable loss contingencies, 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.
On August 13, 2019, a securities class action was filed in the United States District Court for the Northern District of California against the Company, James H. Roberts, our former President and Chief Executive Officer, and Jigisha Desai, our former Senior Vice President and Chief Financial Officer and current Executive Vice President and Chief Strategy Officer. An Amended Complaint was filed on February 20, 2020 that, among other things, added Laurel Krzeminski, our former Chief Financial Officer, as a defendant. The amended complaint is brought on behalf of an alleged class of persons or entities that acquired our common stock between April 30, 2018 and October 24, 2019, and alleges claims arising under Sections 10 (b) and 20 (a) of the Securities Exchange Act of 1934 and Rule 10b - 5 thereunder. The Amended Complaint seeks damages based on allegations that in the Company’s SEC filings the defendants made false and/or misleading statements and failed to disclose material adverse facts about the Company’s business, operations and prospects. On May 20, 2020, the Court denied, in part, the Defendants’ Motion to Dismiss the Amended Complaint. On January 21, 2021, the Court granted Plaintiff’s motion for class certification. We are in the pretrial stages of the litigation, and we cannot predict the outcome or consequences of this case, which we intend to defend vigorously.
On October 23, 2019, a putative class action lawsuit was filed in the Superior Court of California, County of Santa Cruz against the Company, James H. Roberts, our former President and Chief Executive Officer; Laurel Krzeminski, our former Chief Financial Officer, and the then-serving Board of Directors on behalf of persons who acquired shares of Company common stock in the Company’s June 2018 merger with Layne. The complaint asserts causes of action under the Securities Act of 1933 and alleges that the registration statement and prospectus were negligently prepared and included materially false and misleading statements and failed to disclose facts required to be disclosed. On August 10, 2020, the Court sustained our demurrer dismissing the complaint with leave to amend. On September 16, 2020, the plaintiff filed an amended complaint. We have filed a demurrer seeking to dismiss the amended complaint. We are in the preliminary stages of the litigation and, as a result, we cannot predict the outcome or consequences of the case, which we intend to defend vigorously.
On May 6, 2020, a stockholder derivative lawsuit was filed in the United States District Court for the Northern District of California against James H. Roberts, our former President and Chief Executive Officer, Jigisha Desai, our former Senior Vice President and Chief Financial Officer and current Executive Vice President and Chief Strategy Officer, Laurel Krzeminski, our former Chief Financial Officer, and our then-current Board of Directors (collectively, the “Individual Defendants”), and the Company, as a nominal defendant, asserting claims for breach of fiduciary duty, unjust enrichment, and violations of the Securities Exchange Act of 1934 that occurred between April 30, 2018 and October 24, 2019. The lawsuit alleges that the Individual Defendants knowingly inflated the Company’s revenue, income, and margins in violation of U.S. GAAP, which caused the results during the relevant periods to be materially false and misleading. The Complaint seeks monetary damages and corporate governance reforms. The Court has ordered that the lawsuit in the derivative action be stayed until further order of the Court or until entry of a final judgment in the putative securities class action lawsuit filed in the United States District Court for the Northern District of California. We are in the preliminary stages of the litigation and, as a result, we cannot predict the outcome or consequences of this case, which we intend to defend vigorously.
As of September 30, 2020, no liability related to above matters was recorded because we have concluded such liabilities are not probable and the amounts of such liabilities are not reasonably estimable.
In connection with our disclosure of the Audit Committee’s independent Investigation, we voluntarily contacted the San Francisco office of the SEC Division of Enforcement regarding the Investigation. The SEC has issued us subpoenas for documents in connection with the independent Investigation. We have produced documents to the SEC regarding the accounting issues identified during the independent Investigation and will continue to cooperate with the SEC in its investigation.
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
19. Business Segment Information
Summarized segment information is as follows (in thousands):
Three months ended September 30,
|
Transportation |
Water |
Specialty |
Materials |
Total |
||||||||||||||||
|
2020 |
||||||||||||||||||||
|
Total revenue from reportable segments |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
|
Elimination of intersegment revenue |
|
|
|
(
|
) |
(
|
) | |||||||||||||
|
Revenue from external customers |
|
|
|
|
|
|||||||||||||||
|
Gross profit |
|
|
|
|
|
|||||||||||||||
|
Depreciation, depletion and amortization |
|
|
|
|
|
|||||||||||||||
|
2019 (As Restated) |
||||||||||||||||||||
|
Total revenue from reportable segments |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
|
Elimination of intersegment revenue |
|
|
|
(
|
) |
(
|
) | |||||||||||||
|
Revenue from external customers |
|
|
|
|
|
|||||||||||||||
|
Gross profit |
|
|
|
|
|
|||||||||||||||
|
Depreciation, depletion and amortization |
|
|
|
|
|
Nine months ended September 30,
|
Transportation |
Water |
Specialty |
Materials |
Total |
||||||||||||||||
|
2020 |
||||||||||||||||||||
|
Total revenue from reportable segments |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
|
Elimination of intersegment revenue |
|
|
|
(
|
) |
(
|
) | |||||||||||||
|
Revenue from external customers |
|
|
|
|
|
|||||||||||||||
|
Gross profit |
|
|
|
|
|
|||||||||||||||
|
Depreciation, depletion and amortization |
|
|
|
|
|
|||||||||||||||
|
Segment assets |
|
|
|
|
|
|||||||||||||||
|
2019 (As Restated) |
||||||||||||||||||||
|
Total revenue from reportable segments |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
|
Elimination of intersegment revenue |
|
|
|
(
|
) |
(
|
) | |||||||||||||
|
Revenue from external customers |
|
|
|
|
|
|||||||||||||||
|
Gross (loss) profit |
|
|
|
|
|
|||||||||||||||
|
Depreciation, depletion and amortization |
|
|
|
|
|
|||||||||||||||
|
Segment assets |
|
|
|
|
|
A reconciliation of segment gross profit to consolidated income (loss) before provision for (benefit from) income taxes is as follows:
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
As Restated |
As Restated |
|||||||||||||||
|
(in thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||
|
Total gross profit from reportable segments |
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Selling, general and administrative expenses |
|
|
|
|
||||||||||||
|
Acquisition and integration expenses |
|
|
|
|
||||||||||||
|
Non-cash impairment charges (See Note 4) |
|
— |
|
— | ||||||||||||
|
Gain on sales of property and equipment |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
|
Total other expense (income) |
|
(
|
) |
|
(
|
) | ||||||||||
|
Income (loss) before provision for (benefit from) income taxes |
$ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | |||||
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, strategy, activities, performance, outlook, outcomes, guidance, capital expenditures, backlog, 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, strategy, activities, performance, outlook, outcomes, guidance, capital expenditures, backlog, 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 infrastructure companies in the United States, engaged in infrastructure projects including the construction of streets, roads, highways, mass transit facilities, airport infrastructure, bridges, trenchless and underground utilities, power-related facilities, water-related facilities, well drilling, utilities, tunnels, dams and other infrastructure-related projects, site preparation, mining services, and infrastructure services for residential development, energy development, commercial and industrial sites, and other facilities, as well as construction management professional services. We have four reportable business segments: Transportation, Water, Specialty and Materials (see Note 19 of “Notes to the Condensed Consolidated Financial Statements”). In addition to business segments, we review our business by operating groups. Our operating groups are California, Federal, Heavy Civil, Northwest, Midwest and Water and Mineral Services.
The five 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; (iv) the need to build, replace or repair aging infrastructure; and (v) the pricing of certain commodity related products. 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.
Current Economic Environment and Outlook
Impact of COVID-19 on Our Business
The COVID-19 pandemic has resulted, and is likely to continue to result, in substantial economic disruption for the foreseeable future. While there is optimism that the pandemic will come to an end with the prevalence of vaccines, significant uncertainty continues to exist with the resurgence of cases and the economic restrictions in many states.
With regard to the COVID-19 pandemic, our first priority is to continue to do everything we can to ensure the safety, health and hygiene of our employees, customers, suppliers and others with whom we partner in our business activities. Subject to that and with appropriate risk mitigation and safety practices, we are doing everything we can to carry on our operations in this unprecedented business environment in which we find ourselves.
Work on most of our projects continues as the Company performs services that are categorized under one or more of the “Essential Critical Infrastructure Sectors,” as defined by federal and state law. However, our operations in Mexico and Canada have been impacted with local COVID-19 work restrictions and travel bans, and we have experienced temporary suspensions or reduced project activities as a result of COVID-19 contributing in some cases to employee and subcontractor absences. This disruption has been most impactful to our Water and Mineral Services Group and certain operations located in Washington and Arizona.
In the face of rapidly changing market conditions, we are continually monitoring the status of our balance sheet and access to liquidity. Despite the ongoing pandemic, our balance sheet has strengthened in response to the efforts of our teams across the country. Given the uncertain market environment including the uncertain impact of reduced state and local tax receipts due to the pandemic, Granite continues to be focused on our liquidity through maximizing the return on capital investments and minimizing travel and related expenditures.
Granite’s backlog continues to be strong. This year we are seeing increased interest in best-value or alternative delivery procurement work by the state Department of Transportations, such as California and Utah, along with other state agencies. This shift will create a delay in certain project bookings in the short term, but we believe will give us the opportunity for larger future work with historically higher margins.
Funding for our public work projects, which is around 75% of our portfolio, is dependent on federal, state, regional and local revenues. At the federal level, Congress on September 30, 2020 approved the one-year extension of the Fixing America’s Surface Transportation (“FAST”) Act with flat funding levels as well as a $13.6 billion infusion to the Highway Trust Fund from the general fund, providing state and local governments the visibility needed to plan for 2021 construction programs. In late December 2020, Congress approved a $10 billion relief spending bill for state departments of transportation as part of the Coronavirus Response and Relief Act to help offset pandemic-induced revenue declines. Based on estimates provided by The Federal Highway Administration, over $1.5 billion of the relief fund is apportioned to Granite Construction’s vertically-integrated states. While a permanent revenue solution for the Highway Trust Fund is not yet in place, it continues to remain a stabilizing force for transportation markets. We are optimistic that Congress and the Administration will jointly move forward in 2021 to pass a bipartisan Federal Infrastructure Bill, which we believe will meaningfully improve the programming visibility for state and local governments, starting with the 2022 construction season.
At state, regional and local levels, voter-approved state and local transportation measures continue to support infrastructure spending. In the November 2020 elections, voters in 18 states approved 94% of state and local ballot initiatives that will provide an additional $14 billion in one-time and recurring revenue for transportation improvements. In California, our top revenue-generating state, a significant part of the state infrastructure spend is funded through Senate Bill 1 (SB-1), the Road Repair and Accountability Act of 2017, which is a 10-year, $54.2 billion program. Revenue collected through SB-1 is on track to increase over the next 5 years. While we are encouraged by these funding supports, some of our core states are nevertheless experiencing financial headwinds from the pandemic, which may negatively impact transportation infrastructure spending during the first nine months of 2021. We closely monitor these funding trends and manage our pursuit pipeline accordingly.
While funding uncertainties caused by the COVID-19 pandemic disrupted the normal cadence of project bids in our water-related construction, water resources and wastewater rehabilitation businesses, market demand and local funding opportunities remain resilient. Across the Water segment’s end markets, states and municipal water authorities are weighing options for overdue water and wastewater infrastructure investment. For our wastewater rehabilitation business, this includes potential awards for infrastructure improvements mandated through consent decrees. At the federal level, Congress approved the Water Resources Development Act of 2020 and authorized spending $9.9 billion for 46 new flood control, harbor, ecosystem and lock and dam projects on waterways across the nation. This legislation unlocked the roughly $10 billion balance in the Harbor Maintenance Trust Fund including allowing access to $500 million in appropriations to the Army Corps.
For a further discussion of the uncertainties and business risks associated with the COVID-19 pandemic, see the section entitled “Risk Factors” in the 2019 Annual Report on Form 10-K.
Heavy Civil Strategic Review
Through this challenging time, the Company has not lost sight of its strategic review initiatives related to the Heavy Civil operating group to reduce enterprise exposure to large, complex projects where risks are difficult to mitigate. The Company concluded that historical industry pricing and associated risk for this type of work does not align with the Company’s stakeholder expectations. Under a new management team, we have narrowed the footprint of our Heavy Civil operating group, including the closure of our New York office in January 2021. Our focus is to pursue opportunities in markets where Granite’s presence, capabilities and resources provide strategic advantages, with strong margin expectations.
Impact of Independent Audit/Compliance Committee Investigation
As a result of our delay in filing our 2019 Annual Report on Form 10-K, there are jurisdictions across the country where we were unable to bid on public projects due to various financial statement filing requirements. This has mainly impacted certain public agency bidding opportunities. Granite teams across the country have continued to work with the various public agencies on these challenges. Through the work of Granite teams, the inability to bid in certain jurisdictions has not had a significant impact to Granite’s liquidity or results of operations.
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. As described in the Explanatory Note, we have restated our unaudited condensed consolidated financial statements for three and nine months ended September 30, 2019, the impact of which is reflected in the tables below.
The following table presents a financial summary for the three and nine months ended September 30, 2020 and 2019:
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
As Restated |
As Restated |
|||||||||||||||
|
(in thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||
|
Total revenue |
$ | 1,065,189 | $ | 1,112,114 | $ | 2,616,887 | $ | 2,560,019 | ||||||||
|
Gross profit |
125,997 | 122,558 | 238,139 | 170,454 | ||||||||||||
|
Selling, general and administrative expenses |
82,505 | 73,424 | 252,568 | 224,577 | ||||||||||||
| Acquisition and integration expenses | 73 | 2,744 | 73 | 13,769 | ||||||||||||
|
Non-cash impairment charges (See Note 4) |
132,277 | — | 156,690 | — | ||||||||||||
|
Operating (loss) income |
(85,801 | ) | 53,491 | (166,322 | ) | (53,956 | ) | |||||||||
|
Total other expense (income) |
1,284 | (3,022 | ) | 10,766 | (5,799 | ) | ||||||||||
|
Amount attributable to non-controlling interests |
7,195 | 1,135 | 18,741 | (4,170 | ) | |||||||||||
|
Net (loss) income attributable to Granite Construction Incorporated |
(91,162 | ) | 45,901 | (153,127 | ) | (40,811 | ) | |||||||||
Revenue
Total Revenue by Segment
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
|
As Restated |
As Restated |
|||||||||||||||||||||||||||||||
|
(dollars in thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||||||||||||||||||
|
Transportation |
$ | 623,999 | 58.6 | % | $ | 623,867 | 56.1 | % | $ | 1,510,001 | 57.7 | % | $ | 1,407,577 | 55.0 | % | ||||||||||||||||
|
Water |
106,599 | 10.0 | 134,404 | 12.1 | 317,980 | 12.2 | 345,556 | 13.5 | ||||||||||||||||||||||||
|
Specialty |
205,134 | 19.3 | 224,744 | 20.2 | 513,087 | 19.6 | 538,497 | 21.0 | ||||||||||||||||||||||||
|
Materials |
129,457 | 12.1 | 129,099 | 11.6 | 275,819 | 10.5 | 268,389 | 10.5 | ||||||||||||||||||||||||
|
Total |
$ | 1,065,189 | 100.0 | % | $ | 1,112,114 | 100.0 | % | $ | 2,616,887 | 100.0 | % | $ | 2,560,019 | 100.0 | % | ||||||||||||||||
Transportation Revenue
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
|
As Restated |
As Restated |
|||||||||||||||||||||||||||||||
|
(dollars in thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||||||||||||||||||
|
California |
$ | 224,636 | 36.0 | % | $ | 197,057 | 31.5 | % | $ | 478,590 | 31.7 | % | $ | 404,981 | 28.8 | % | ||||||||||||||||
|
Federal |
3,140 | 0.5 | 56 | — | 5,306 | 0.4 | 133 | — | ||||||||||||||||||||||||
|
Heavy Civil |
165,434 | 26.5 | 187,828 | 30.1 | 519,963 | 34.4 | 501,330 | 35.6 | ||||||||||||||||||||||||
|
Midwest |
43,896 | 7.0 | 27,359 | 4.4 | 103,081 | 6.8 | 73,555 | 5.2 | ||||||||||||||||||||||||
|
Northwest |
186,893 | 30.0 | 211,567 | 34.0 | 403,061 | 26.7 | 427,578 | 30.4 | ||||||||||||||||||||||||
|
Total |
$ | 623,999 | 100.0 | % | $ | 623,867 | 100.0 | % | $ | 1,510,001 | 100.0 | % | $ | 1,407,577 | 100.0 | % | ||||||||||||||||
Transportation revenue for the three and nine months ended September 30, 2020 remained relatively unchanged and increased $102.4 million, or 7.3%, respectively, when compared to 2019 due to increases in the California and Midwest operating groups from beginning the year with higher contract backlog and progress in existing projects partially offset by decreases in the Heavy Civil operating group from projects winding down and in the Northwest operating group which began the year with lower contract backlog. The increase during the nine months ended September 30, 2020 was also due to a the decrease in the net negative impact from revisions in estimates in the Heavy Civil operating group (see Note 5 of “Notes to the Condensed Consolidated Financial Statements” for more information). During the three and nine months ended September 30, 2020 and 2019 the majority of revenue earned in the Transportation segment was from the public sector.
Water Revenue
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
|
As Restated |
As Restated |
|||||||||||||||||||||||||||||||
|
(dollars in thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||||||||||||||||||
|
California |
$ | 10,498 | 9.8 | % | $ | 10,390 | 7.8 | % | $ | 24,225 | 7.6 | % | $ | 14,390 | 4.2 | % | ||||||||||||||||
|
Federal |
341 | 0.3 | 155 | 0.1 | 1,309 | 0.4 | 1,034 | 0.3 | ||||||||||||||||||||||||
|
Heavy Civil |
9,985 | 9.4 | 389 | 0.3 | 28,260 | 8.9 | 7,370 | 2.1 | ||||||||||||||||||||||||
|
Midwest |
— | — | 39 | — | 152 | — | 123 | — | ||||||||||||||||||||||||
|
Northwest |
444 | 0.5 | 1,095 | 0.8 | 4,344 | 1.4 | 3,675 | 1.1 | ||||||||||||||||||||||||
|
Water and Mineral Services |
85,331 | 80.0 | 122,336 | 91.0 | 259,690 | 81.7 | 318,964 | 92.3 | ||||||||||||||||||||||||
|
Total |
$ | 106,599 | 100.0 | % | $ | 134,404 | 100.0 | % | $ | 317,980 | 100.0 | % | $ | 345,556 | 100.0 | % | ||||||||||||||||
Water revenue for the three and nine months ended September 30, 2020 decreased by $27.8 million, or 20.7%, and $27.6 million, or 8.0%, respectively, when compared to 2019 primarily due to decreases in the Water and Mineral Services operating group from delays in recently awarded projects and deferrals in bidding processes as a result of the COVID-19 pandemic. Decreases were partially offset by increases in the Heavy Civil and California operating groups which began the year with higher contract backlog. During the three and nine months ended September 30, 2020 and 2019 the majority of revenue earned in the Water segment was from the public sector.
Specialty Revenue
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
|
As Restated |
As Restated |
|||||||||||||||||||||||||||||||
|
(dollars in thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||||||||||||||||||
|
California |
$ | 62,623 | 30.5 | % | $ | 60,791 | 27.0 | % | $ | 158,076 | 30.8 | % | $ | 135,928 | 25.2 | % | ||||||||||||||||
|
Federal |
28,765 | 14.0 | 23,973 | 10.7 | 78,760 | 15.4 | 57,698 | 10.7 | ||||||||||||||||||||||||
|
Heavy Civil |
12,892 | 6.3 | — | — | 27,963 | 5.4 | — | — | ||||||||||||||||||||||||
|
Midwest |
24,392 | 11.9 | 45,701 | 20.3 | 74,543 | 14.5 | 119,148 | 22.1 | ||||||||||||||||||||||||
|
Northwest |
57,247 | 27.9 | 70,754 | 31.5 | 125,647 | 24.5 | 151,621 | 28.2 | ||||||||||||||||||||||||
|
Water and Mineral Services |
19,215 | 9.4 | 23,525 | 10.5 | 48,098 | 9.4 | 74,102 | 13.8 | ||||||||||||||||||||||||
|
Total |
$ | 205,134 | 100.0 | % | $ | 224,744 | 100.0 | % | $ | 513,087 | 100.0 | % | $ | 538,497 | 100.0 | % | ||||||||||||||||
Specialty revenue for the three and nine months ended September 30, 2020 decreased by $19.6 million, or 8.7%, and $25.4 million, or 4.7%, respectively, when compared to 2019 primarily due to beginning the year with lower contract backlog in the Midwest, Northwest and Water and Mineral Services operating groups partially offset by increases in the Heavy Civil and Federal operating groups which began the year with higher contract backlog and in the California and Northwest operating groups from new awards in 2020. Decreases in the Water and Mineral Services operating group during three and nine months ended September 30, 2020 were also from an adverse change in the business climate, exasperated by economic disruption and market conditions associated with the COVID-19 pandemic. During the three and nine months ended September 30, 2020 and 2019 revenue earned in the Specialty segment was from both the public and private sectors.
Materials Revenue
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
|
(dollars in thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||||||||||||||||||
|
California |
$ | 75,901 | 58.6 | % | $ | 71,251 | 55.2 | % | $ | 161,397 | 58.6 | % | $ | 145,278 | 54.1 | % | ||||||||||||||||
|
Northwest |
48,674 | 37.6 | 51,662 | 40.0 | 103,812 | 37.6 | 107,040 | 39.9 | ||||||||||||||||||||||||
|
Water and Mineral Services |
4,882 | 3.8 | 6,186 | 4.8 | 10,610 | 3.8 | 16,071 | 6.0 | ||||||||||||||||||||||||
|
Total |
$ | 129,457 | 100.0 | % | $ | 129,099 | 100.0 | % | $ | 275,819 | 100.0 | % | $ | 268,389 | 100.0 | % | ||||||||||||||||
Materials revenue for the three months ended September 30, 2020 remained relatively unchanged when compared to 2019 and increased by $7.4 million, or 2.8%, for the nine months ended September 30, 2020 primarily due to an increase in volume as a result of favorable weather during 2020 in the California operating group as compared to 2019.
Contract Backlog
Our contract backlog consists of the revenue we expect to record in the future 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 a contract is awarded and to the extent we believe contract execution and funding is probable. Awarded contracts that include unexercised contract options or unissued task orders are included in contract backlog to the extent option exercise 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
|
As Restated |
||||||||||||||||||||||||
| (dollars in thousands) | September 30, 2020 | June 30, 2020 | September 30, 2019 | |||||||||||||||||||||
|
Transportation |
$ | 2,313,072 | 70.5 | % | $ | 2,633,936 | 74.3 | % | $ | 2,686,403 | 73.0 | % | ||||||||||||
|
Water |
346,253 | 10.5 | % | 232,133 | 6.5 | % | 248,459 | 6.7 | % | |||||||||||||||
|
Specialty |
623,452 | 19.0 | % | 681,255 | 19.2 | % | 749,251 | 20.3 | % | |||||||||||||||
|
Total |
$ | 3,282,777 | 100.0 | % | $ | 3,547,324 | 100.0 | % | $ | 3,684,113 | 100.0 | % | ||||||||||||
Transportation Contract Backlog
|
As Restated |
||||||||||||||||||||||||
| (dollars in thousands) | September 30, 2020 | June 30, 2020 | September 30, 2019 | |||||||||||||||||||||
|
Unearned revenue |
$ | 2,311,906 | 99.9 | % | $ | 2,626,520 | 99.7 | % | $ | 2,661,179 | 99.1 | % | ||||||||||||
|
Other awards (1) |
1,166 | 0.1 | % | 7,416 | 0.3 | % | 25,224 | 0.9 | % | |||||||||||||||
|
Total |
$ | 2,313,072 | 100.0 | % | $ | 2,633,936 | 100.0 | % | $ | 2,686,403 | 100.0 | % | ||||||||||||
(1) Other awards include contract awards to the extent we believe contract execution and funding is probable.
|
As Restated |
||||||||||||||||||||||||
| (dollars in thousands) | September 30, 2020 | June 30, 2020 | September 30, 2019 | |||||||||||||||||||||
|
California |
$ | 564,154 | 24.4 | % | $ | 641,708 | 24.4 | % | $ | 531,948 | 19.8 | % | ||||||||||||
|
Federal |
13,787 | 0.6 | % | 16,464 | 0.6 | % | 14,699 | 0.5 | % | |||||||||||||||
|
Heavy Civil |
1,059,939 | 45.8 | % | 1,188,678 | 45.1 | % | 1,627,696 | 60.6 | % | |||||||||||||||
|
Midwest |
169,538 | 7.3 | % | 214,016 | 8.1 | % | 235,970 | 8.8 | % | |||||||||||||||
|
Northwest |
505,654 | 21.9 | % | 573,070 | 21.8 | % | 276,090 | 10.3 | % | |||||||||||||||
|
Total |
$ | 2,313,072 | 100.0 | % | $ | 2,633,936 | 100.0 | % | $ | 2,686,403 | 100.0 | % | ||||||||||||
Transportation contract backlog of $2.3 billion at September 30, 2020 was $320.9 million, or 12.2%, lower than at June 30, 2020 primarily due to progress on existing projects in all operating groups, partially offset by new awards. Significant new awards during the three months ended September 30, 2020 included a $12.0 million roadway construction project in California and a $24.0 million design-build project in Washington.
Non-controlling partners’ share of Transportation contract backlog as of September 30, 2020, June 30, 2020 and September 30, 2019 was $282.4 million, $280.0 million and $183.6 million, respectively. Four contracts in our Transportation segment had total forecasted losses with remaining revenue of $477.0 million, or 20.6%, of Transportation contract backlog at September 30, 2020 .
Water Contract Backlog
|
As Restated |
||||||||||||||||||||||||
| (dollars in thousands) | September 30, 2020 | June 30, 2020 | September 30, 2019 | |||||||||||||||||||||
|
Unearned revenue |
$ | 197,554 | 57.1 | % | $ | 227,864 | 98.2 | % | $ | 235,153 | 94.6 | % | ||||||||||||
|
Other awards (1) |
148,699 | 42.9 | % | 4,269 | 1.8 | % | 13,306 | 5.4 | % | |||||||||||||||
|
Total |
$ | 346,253 | 100.0 | % | $ | 232,133 | 100.0 | % | $ | 248,459 | 100.0 | % | ||||||||||||
(1) Other awards include contract awards to the extent we believe contract execution and funding is probable.
|
As Restated |
||||||||||||||||||||||||
| (dollars in thousands) | September 30, 2020 | June 30, 2020 | September 30, 2019 | |||||||||||||||||||||
|
California |
$ | 52,598 | 15.2 | % | $ | 61,151 | 26.3 | % | $ | 19,594 | 7.8 | % | ||||||||||||
|
Federal |
494 | 0.1 | % | 861 | 0.4 | % | 1,181 | 0.5 | % | |||||||||||||||
|
Heavy Civil |
24,803 | 7.2 | % | 34,961 | 15.1 | % | 52,820 | 21.3 | % | |||||||||||||||
|
Northwest |
721 | 0.2 | % | 330 | 0.1 | % | 1,880 | 0.8 | % | |||||||||||||||
|
Water and Mineral Services |
267,637 | 77.3 | % | 134,830 | 58.1 | % | 172,984 | 69.6 | % | |||||||||||||||
|
Total |
$ | 346,253 | 100.0 | % | $ | 232,133 | 100.0 | % | $ | 248,459 | 100.0 | % | ||||||||||||
Water contract backlog of $346.3 million as of September 30, 2020 was $114.1 million, or 49.2%, higher than at June 30, 2020. The increase in the Water and Mineral Services operating group was from new awards during the three months ended September 30, 2020 and was partially offset by decreases from progress on existing projects.
Specialty Contract Backlog
|
As Restated |
||||||||||||||||||||||||
| (dollars in thousands) | September 30, 2020 | June 30, 2020 | September 30, 2019 | |||||||||||||||||||||
|
Unearned revenue |
$ | 604,894 | 97.0 | % | $ | 681,255 | 100.0 | % | $ | 735,764 | 98.2 | % | ||||||||||||
|
Other awards (1) |
18,558 | 3.0 | % | — | 0.0 | % | 13,487 | 1.8 | % | |||||||||||||||
|
Total |
$ | 623,452 | 100.0 | % | $ | 681,255 | 100.0 | % | $ | 749,251 | 100.0 | % | ||||||||||||
(1) Other awards include contract awards to the extent we believe contract execution and funding is probable.
|
As Restated |
||||||||||||||||||||||||
| (dollars in thousands) | September 30, 2020 | June 30, 2020 | September 30, 2019 | |||||||||||||||||||||
|
California |
$ | 134,306 | 21.6 | % | $ | 122,989 | 18.0 | % | $ | 103,224 | 13.8 | % | ||||||||||||
|
Federal |
107,273 | 17.2 | % | 123,169 | 18.1 | % | 177,685 | 23.7 | % | |||||||||||||||
|
Heavy Civil |
224,427 | 36.0 | % | 233,068 | 34.2 | % | 245,478 | 32.8 | % | |||||||||||||||
|
Midwest |
106,694 | 17.1 | % | 112,299 | 16.5 | % | 147,905 | 19.7 | % | |||||||||||||||
|
Northwest |
50,752 | 8.1 | % | 89,730 | 13.2 | % | 74,959 | 10.0 | % | |||||||||||||||
|
Total |
$ | 623,452 | 100.0 | % | $ | 681,255 | 100.0 | % | $ | 749,251 | 100.0 | % | ||||||||||||
Specialty contract backlog of $623.5 million as of September 30, 2020 was $57.8 million, or 8.5%, lower than at June 30, 2020 due to progress on existing projects in all operating groups other than California and Midwest operating groups which had an increase from an improved success rate on bidding activity. Significant new awards during the three months ended September 30, 2020 included a $10.0 million highway improvement project in California.
Non-controlling partners’ share of Specialty contract backlog as of September 30, 2020, June 30, 2020 and September 30, 2019 was $64.8 million, $71.0 million and $100.4 million, respectively.
Gross Profit
The following table presents gross profit (loss) by business segment for the respective periods:
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
As Restated |
2020 |
As Restated |
||||||||||||||
|
(dollars in thousands) |
2020 |
2019 |
2019 |
|||||||||||||
|
Transportation |
$ | 54,322 | $ | 46,865 | $ | 110,888 | $ | 31,016 | ||||||||
|
Percent of segment revenue |
8.7 |
% |
7.5 |
% |
7.3 |
% |
2.2 |
% |
||||||||
|
Water |
12,557 | 12,637 | 34,483 | 31,085 | ||||||||||||
|
Percent of segment revenue |
11.8 | 9.4 | 10.8 | 9.0 | ||||||||||||
|
Specialty |
33,292 | 38,586 | 47,853 | 73,639 | ||||||||||||
|
Percent of segment revenue |
16.2 | 17.2 | 9.3 | 13.7 | ||||||||||||
|
Materials |
25,826 | 24,470 | 44,915 | 34,714 | ||||||||||||
|
Percent of segment revenue |
19.9 |
19.0 |
16.3 | 12.9 | ||||||||||||
|
Total gross profit |
$ | 125,997 | $ | 122,558 | $ | 238,139 | $ | 170,454 | ||||||||
|
Percent of total revenue |
11.8 |
% |
11.0 |
% |
9.1 |
% |
6.7 |
% |
||||||||
Transportation gross profit for the three and nine months ended September 30, 2020 increased by $7.5 million, or 15.9%, and $79.9 million, or more than 100%, respectively, when compared to 2019 primarily due to a decrease in the negative net impact from revisions in estimates in our Heavy Civil operating group (see Note 5 of “Notes to the Condensed Consolidated Financial Statements”).
Water gross profit for the three and nine months ended September 30, 2020 decreased by $0.1 million, or 0.6%, and increased by $3.4 million, or 10.9%, respectively, when compared to 2019 primarily due to a decrease in volume.
Specialty gross profit for the three and nine months ended September 30, 2020 decreased by 5.3 million, or 13.7%, and by $25.8 million, or 35.0%, respectively, when compared to 2019 primarily from the net negative impact from revisions in estimates on one project (see Note 5 of “Notes to the Condensed Consolidated Financial Statements”).
Materials gross profit for the three and nine months ended September 30, 2020 increased by $1.4 million, or 5.5%, and $10.2 million, or 29.4%, respectively, when compared to 2019 due to an increase in volume from favorable weather during 2020 resulting in a decrease in fixed costs.
Selling, General and Administrative Expenses
The following table presents the components of selling, general and administrative expenses for the respective periods:
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
(dollars in thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||
|
Selling |
||||||||||||||||
|
Salaries and related expenses |
$ | 17,225 | $ | 14,842 | $ | 51,142 | $ | 47,296 | ||||||||
|
Restricted stock unit amortization |
264 | 232 | 1,002 | 1,578 | ||||||||||||
|
Other selling expenses |
2,907 | 2,694 | 9,478 | 9,786 | ||||||||||||
|
Total selling |
20,396 | 17,768 | 61,622 | 58,660 | ||||||||||||
|
General and administrative |
||||||||||||||||
|
Salaries and related expenses |
26,257 | 27,073 | 81,171 | 78,682 | ||||||||||||
|
Restricted stock unit amortization |
690 | 739 | 2,812 | 6,218 | ||||||||||||
|
Non-recurring legal and accounting fees |
9,726 | — | 28,440 | — | ||||||||||||
|
Other general and administrative expenses |
25,436 | 27,844 | 78,523 | 81,017 | ||||||||||||
|
Total general and administrative |
62,109 | 55,656 | 190,946 | 165,917 | ||||||||||||
|
Total selling, general and administrative |
$ | 82,505 | $ | 73,424 | $ | 252,568 | $ | 224,577 | ||||||||
|
Percent of revenue |
7.7 |
% |
6.6 |
% |
9.7 |
% |
8.8 |
% |
||||||||
Selling Expenses
Selling expenses include the costs for estimating and bidding including customer reimbursements for portions of our selling/bid submission expenses (i.e. stipends), 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 for the three and nine months ended September 30, 2020 increased by $2.6 million, or 14.8% and $3.0 million, or 5.0%, respectively, when compared to 2019 due to increased bidding activities.
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. Total general and administrative expenses during the three and nine months ended September 30, 2020 increased by $6.5 million, or 11.6%, and $25.0 million, or 15.1%, respectively, when compared to 2019 due to legal and accounting fees incurred during the nine months ended September 30, 2020 that were related to the independent Investigation undertaken by the Audit Committee starting in February 2020.
Income Taxes
The following table presents the provision for (benefit from) income taxes for the respective periods:
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
As Restated |
As Restated |
|||||||||||||||
|
(dollars in thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||
|
Provision for (benefit from) income taxes |
$ | 11,272 | $ | 11,747 | $ | (5,220 | ) | $ | (11,516 | ) | ||||||
| Effective tax rate | (12.9 | )% | 20.8 | % | 2.9 | % | 23.9 | % | ||||||||
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 income (loss) before provision for (benefit from) income taxes. The effect of changes in enacted tax laws, tax rates or tax status is recognized in the interim period in which the change occurs. See Note 17 of “Notes to the Condensed Consolidated Financial Statements” for more information.
Certain Legal Proceedings
As discussed in Note 18 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
Our primary sources of liquidity are cash and cash equivalents, short-term investments, available borrowing capacity and cash expected to be generated from operations. We may also from time to time access our revolving credit facility, issue and sell equity, debt or hybrid securities or engage in other capital markets transactions. As of September 30, 2020, our cash and cash equivalents consisted of deposits and money market funds held with established national financial institutions and marketable securities consisted of U.S. Government and agency obligations. Our credit facility consists of a term loan and a revolving credit facility. Of the $275.0 million revolving credit facility capacity, $155.9 million was available for borrowing at September 30, 2020. See Note 14 of “Notes to the Condensed Consolidated Financial Statements” for further discussion regarding our credit facility.
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. We believe 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 operating requirements for the next twelve months from the date of this filing. 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.
In evaluating our liquidity position and needs, we consider cash and cash equivalents held by our consolidated construction joint ventures (“CCJVs”). The following table presents our cash, cash equivalents and marketable securities, including amounts from our CCJVs, as of the respective dates:
|
(in thousands) |
September 30, 2020 |
December 31, 2019 |
September 30, 2019 |
|||||||||
|
Cash and cash equivalents excluding CCJVs |
$ | 295,437 | $ | 184,141 | $ | 106,803 | ||||||
|
CCJV cash and cash equivalents (1) |
92,587 | 78,132 | 77,870 | |||||||||
|
Total consolidated cash and cash equivalents |
388,024 | 262,273 | 184,673 | |||||||||
|
Short-term and long-term marketable securities (2) |
5,700 | 32,799 | 47,918 | |||||||||
|
Total cash, cash equivalents and marketable securities |
$ | 393,724 | $ | 295,072 | $ | 232,591 | ||||||
(1) The volume and stage of completion of contracts from our CCJVs may cause fluctuations in joint venture cash and cash equivalents between periods. 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.
(2) All marketable securities were classified as held-to-maturity and consisted of U.S. and agency obligations as of all periods presented.
Granite’s portion of CCJV cash and cash equivalents was $53.4 million, $44.3 million and $44.4 million as of September 30, 2020, December 31, 2019 and September 30, 2019, respectively. Excluded from the table above is Granite’s portion of unconsolidated construction joint venture cash and cash equivalents of $66.2 million, $60.4 million and $70.5 million as of September 30, 2020, December 31, 2019 and September 30, 2019, respectively.
Cash Flows
|
Nine Months Ended September 30, |
||||||||
|
(in thousands) |
2020 |
2019 |
||||||
|
Net cash provided by (used in): |
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Operating activities |
$ | 138,666 | $ | (26,498 | ) | |||
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Investing activities |
(41,901 | ) | (45,208 | ) | ||||
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Financing activities |
24,663 | (16,592 | ) | |||||
Operating activities
As a large infrastructure contractor and construction materials producer, our revenue, gross profit and the resulting operating cash flows can differ significantly from period to period due to a variety of factors, including seasonal cycles, our projects’ progressions toward completion, outstanding contract change orders and affirmative claims, and the payment terms of our contracts. 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 claim and back charge 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. While we typically invoice our customers on a monthly basis, our contracts frequently provide for retention that is a specified percentage withheld from each payment by our customers until the contract is completed and the work accepted by the customer which can cause fluctuations in operating cash flows.
Investing activities
Cash used in investing activities of $41.9 million for the nine months ended September 30, 2020 represents a $3.3 million increase when compared to 2019 primarily due to an increase in maturities of marketable securities.
Financing activities
Cash provided by financing activities of $24.7 million for the nine months ended September 30, 2020 represents a $41.3 million increase when compared to 2019 primarily due to a decrease in debt payments.
Capital Expenditures
During the nine months ended September 30, 2020, we had capital expenditures of $74.9 million compared to $83.3 million during 2019. 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. During the year ended December 31, 2020, capital expenditures were approximately $90.0 million.
Derivatives
We recognize interest rate and commodity swap derivative instruments as either assets or liabilities at fair value using Level 2 inputs in the condensed consolidated balance sheets. See Note 10 to “Notes to the Condensed Consolidated Financial Statements” for further information. The hedge option and warrant derivative transactions related to the 2.75% Convertible Notes were recorded to equity on our condensed consolidated balance sheets based on the cash proceeds. See Note 14 to “Notes to the Condensed Consolidated Financial Statements” for further information.
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 September 30, 2020, approximatel y $2.9 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 investments in real estate affiliates are 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. Our unconsolidated investments in our foreign affiliates are subject to local bank debt primarily for equipment purchases and working capital. This debt is non-recourse to Granite, but it is recourse to the affiliates. The debt associated with our unconsolidated non-construction entities is included in Note 12 of “Notes to the Condensed Consolidated Financial Statements.”
Covenants and Events of Default
Our Credit Agreement requires us to comply with various affirmative, restrictive and financial covenants, including the financial covenants described below. Our failure to comply with these covenants would constitute an event of default under the Credit Agreement. Additionally, our failure to pay principal, interest or other amounts when due or within the relevant grace period on our 2.75% Convertible Notes or our Credit Agreement would constitute an event of default under the indenture governing our 2.75% Convertible Notes or the Credit Agreement. A default under our Credit Agreement could result in (i) us no longer being entitled to borrow under such facility; (ii) termination of such facility; (iii) the requirement that any letters of credit under such facility be cash collateralized; (iv) acceleration of amounts owed under the Credit Agreement; and/or (v) foreclosure on any lien securing the obligations under such facility. A default under the indenture governing our 2.75% Convertible Notes could result in acceleration of the maturity of the notes.
The most significant financial covenants under the terms of our Credit Agreement require the maintenance of a minimum Consolidated Interest Coverage Ratio and a maximum Consolidated Leverage Ratio. As of September 30, 2020, the Consolidated Leverage Ratio was 2.96, which did not exceed the maximum of 3.25. Our Consolidated Interest Coverage Ratio was 5.69, which exceeded the minimum of 4.00. To accommodate the delays in filing our financial statements, we entered into amendments with our lenders to extend the deadline for filing the 2019 Annual Report on Form 10-K and all of our 2020 Quarterly Reports on Form 10-Qs to February 28, 2021.
Share Repurchase Program
As announced on April 29, 2016, on April 7, 2016, the Board of Directors authorized us to repurchase up to $200.0 million of our common stock at management’s discretion. As part of this authorization we have established a plan to facilitate common stock repurchases. As of September 30, 2020, $157.2 million of the authorization remained available. The specific timing and amount of any future repurchases 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.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There has been no significant change in our exposure to market risk when compared to those disclosed in our 2019 Annual Report on Form 10-K.
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CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by this report as required by paragraph (b) of Rule 13a-15 or Rule 15d-15 of the Exchange Act, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act) were not effective due to material weaknesses previously disclosed in our 2019 Annual Report on Form 10-K. In light of the material weaknesses in our internal control over financial reporting, we performed extensive additional analysis and other procedures to validate that our financial information contained in this Form 10-Q was prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Following such additional analysis and procedures, our management, including our principal executive officer and principal financial officer, has concluded that our financial statements state fairly, in all material respects, our financial position, results of our operations and our cash flows for the periods presented in this Form 10-Q, in conformity with U.S. GAAP.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting that occurred during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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LEGAL PROCEEDINGS |
In the ordinary course of business, we and our affiliates are involved in various legal proceedings alleging, among other things, liability issues or breach of contract or tortious conduct in connection with the performance of services and/or materials provided, the various outcomes of which cannot be predicted with certainty. We and our affiliates are also subject to government inquiries in the ordinary course of business seeking information concerning our compliance with government construction contracting requirements and various laws and regulations, the outcomes which cannot be predicted with certainty.
Some of the matters in which we or our joint ventures and affiliates are involved may involve compensatory, punitive, or other claims or sanctions that, if granted, could require us to pay damages or make other expenditures in amounts that are not probable to be incurred or cannot currently be reasonably estimated. In addition, in some circumstances our government contracts could be terminated, we could be suspended, debarred or incur other administrative penalties or sanctions, or payment of our costs could be disallowed. While any of our pending legal proceedings may be subject to early resolution as a result of our ongoing efforts to resolve the proceedings, whether or when any legal proceeding will be resolved 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, disclosure is also provided when it is reasonably possible and estimable that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the amount recorded.
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 the consolidated balance sheets. The aggregate liabilities recorded as of September 30, 2020 and 2019 related to these matters were immaterial. The aggregate range of possible loss related to (i) matters considered reasonably possible, and (ii) reasonably possible amounts in excess of accrued losses recorded for probable loss contingencies, 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.
On August 13, 2019, a securities class action was filed in the United States District Court for the Northern District of California against the Company, James H. Roberts, our former President and Chief Executive Officer, and Jigisha Desai, our former Senior Vice President and Chief Financial Officer and current Executive Vice President and Chief Strategy Officer. An Amended Complaint was filed on February 20, 2020 that, among other things, added Laurel Krzeminski, our former Chief Financial Officer, as a defendant. The amended complaint is brought on behalf of an alleged class of persons or entities that acquired our common stock between April 30, 2018 and October 24, 2019, and alleges claims arising under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Amended Complaint seeks damages based on allegations that in the Company’s SEC filings the defendants made false and/or misleading statements and failed to disclose material adverse facts about the Company’s business, operations and prospects. On May 20, 2020, the Court denied, in part, the Defendants’ Motion to Dismiss the Amended Complaint. On January 21, 2021, the Court granted Plaintiff’s motion for class certification. We are in the pretrial stages of the litigation, and we cannot predict the outcome or consequences of this case, which we intend to defend vigorously.
On October 23, 2019, a putative class action lawsuit was filed in the Superior Court of California, County of Santa Cruz against the Company, James H. Roberts, our former President and Chief Executive Officer; Laurel Krzeminski, our former Chief Financial Officer, and the then-serving Board of Directors on behalf of persons who acquired shares of Company common stock in the Company’s June 2018 merger with Layne. The complaint asserts causes of action under the Securities Act of 1933 and alleges that the registration statement and prospectus were negligently prepared and included materially false and misleading statements and failed to disclose facts required to be disclosed. On August 10, 2020, the Court sustained our demurrer dismissing the complaint with leave to amend. On September 16, 2020, the plaintiff filed an amended complaint asserting causes of action under the Securities Act of 1933 against the previously named defendants and PricewaterhouseCoopers LLP. We have filed a demurrer seeking to dismiss the amended complaint. We are in the preliminary stages of the litigation and, as a result, we cannot predict the outcome or consequences of the case, which we intend to defend vigorously.
On May 6, 2020, a stockholder derivative lawsuit was filed in the United States District Court for the Northern District of California against James H. Roberts, our former President and Chief Executive Officer, Jigisha Desai, our former Senior Vice President and Chief Financial Officer and current Executive Vice President and Chief Strategy Officer, Laurel Krzeminski, our former Chief Financial Officer, and our then-current Board of Directors (collectively, the “Individual Defendants”), and the Company, as a nominal defendant, asserting claims for breach of fiduciary duty, unjust enrichment, and violations of the Securities Exchange Act of 1934 that occurred between April 30, 2018 and October 24, 2019. The lawsuit alleges that the Individual Defendants knowingly inflated the Company’s revenue, income, and margins in violation of U.S. GAAP, which caused the results during the relevant periods to be materially false and misleading. The Complaint seeks monetary damages and corporate governance reforms. The Court has ordered that the lawsuit in the derivative action be stayed until further order of the Court or until entry of a final judgment in the putative securities class action lawsuit filed in the United States District Court for the Northern District of California. We are in the preliminary stages of the litigation and, as a result, we cannot predict the outcome or consequences of this case, which we intend to defend vigorously.
As of September 30, 2020, no liability related to above matters was recorded because we have concluded such liabilities are not probable and the amounts of such liabilities are not reasonably estimable.
In connection with our disclosure of the Audit Committee’s independent Investigation, we voluntarily contacted the San Francisco office of the SEC Division of Enforcement regarding that Investigation. The SEC has issued us subpoenas for documents in connection with the independent Investigation. We have produced documents to the SEC regarding the accounting issues identified during the independent Investigation and will continue to cooperate with the SEC in its investigation.
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RISK FACTORS |
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, 2019.
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The following table sets forth information regarding the repurchase of shares of our common stock during the three months ended September 30, 2020:
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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) |
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July 1, 2020 through July 31, 2020 |
970 | $ | 18.63 | — | $ | 157,165,044 | ||||||||||
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August 1, 2020 through August 31, 2020 |
229 | $ | 18.81 | — | $ | 157,165,044 | ||||||||||
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September 1, 2020 through September 30, 2020 |
153 | $ | 17.39 | — | $ | 157,165,044 | ||||||||||
| 1,352 | $ | 18.52 | — | |||||||||||||
(1) The number of shares purchased is in connection with employee tax withholding for restricted stock units vested under our 2012 Equity Incentive Plan.
(2) As announced on April 29, 2016, on April 7, 2016, the Board of Directors authorized us to repurchase up to $200.0 million of our common stock at management’s discretion. As part of this authorization we have established a share repurchase program to facilitate common stock repurchases. We did not purchase shares under the share repurchase plan in any of the periods presented. The specific timing and amount of any future repurchases will vary based on market conditions, securities law limitations and other factors.
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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.
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EXHIBITS |
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Filed herewith |
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Furnished herewith |
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.
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GRANITE CONSTRUCTION INCORPORATED |
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Date: |
February 25, 2021 |
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By: |
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/s/ Elizabeth L. Curtis |
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Elizabeth L. Curtis |
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Executive Vice President and Chief Financial Officer |
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(Principal Financial and Accounting Officer) |