UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
GRANITE CONSTRUCTION INCORPORATED
State of Incorporation:
I.R.S. Employer Identification Number:
Delaware
77-0239383
Address of principal executive offices:
585 W. Beach Street
Watsonville, California 95076
(831) 724-1011
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
GVA
New York Stock Exchange
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. ☒Yes ☐ No
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). ☒Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
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). ☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 22, 2019.
Class
Outstanding
46,741,311
Index
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2019, December 31, 2018 and September 30, 2018
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2018
Condensed Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018
Notes to the Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 4.
Mine Safety Disclosures
Item 6.
Exhibits
SIGNATURES
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32
EXHIBIT 101.INS
EXHIBIT 101.SCH
EXHIBIT 101.CAL
EXHIBIT 101.DEF
EXHIBIT 101.LAB
EXHIBIT 101.PRE
FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - in thousands, except share and per share data)
September 30, 2019
December 31, 2018
September 30, 2018
ASSETS
Current assets
Cash and cash equivalents ($77,870, $131,965 and $125,165 related to consolidated construction joint ventures (“CCJVs”))
Short-term marketable securities
Receivables, net ($29,108, $21,237 and $26,142 related to CCJVs)
Contract assets ($39,717, $19,699 and $20,968 related to CCJVs)
Inventories
Equity in construction joint ventures
Other current assets ($10,765, $11,744 and $11,361 related to CCJVs)
Total current assets
Property and equipment, net ($27,752, $34,761 and $36,061 related to CCJVs)
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 ($50,625, $37,086 and $33,426 related to CCJVs)
Contract liabilities ($21,378, $60,288 and $67,139 related to CCJVs)
Accrued expenses and other current liabilities ($4,193, $2,046 and $1,975 related to CCJVs)
Total current liabilities
Long-term debt
Lease liabilities
Other long-term liabilities
Commitments and contingencies
Equity
Preferred stock, $0.01 par value, authorized 3,000,000 shares, none outstanding
Common stock, $0.01 par value, authorized 150,000,000 shares; issued and outstanding: 46,741,263 shares as of September 30, 2019, 46,665,889 shares as of December 31, 2018 and 46,897,092 shares as of September 30, 2018
Additional paid-in capital
Accumulated other comprehensive (loss) income
Retained earnings
Total Granite Construction Incorporated shareholders’ equity
Non-controlling interests
Total equity
Total liabilities and equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - in thousands, except per share data)
Three Months Ended September 30,
Nine Months Ended September 30,
2019
2018
Revenue
Transportation
Water
Specialty
Materials
Total revenue
Cost of revenue
Total cost of revenue
Gross profit
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
Other expense (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) per share attributable to common shareholders
Weighted average shares of common stock
Basic
Diluted
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited - in thousands)
Other comprehensive income (loss), net of tax:
Net unrealized (loss) gain on derivatives
Less: reclassification for net gains included in interest expense
Net change
Foreign currency translation adjustments, net
Other comprehensive income (loss)
Comprehensive income (loss)
Non-controlling interests in comprehensive income (loss)
Comprehensive income (loss) attributable to Granite Construction Incorporated
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited - in thousands, except share data)
Outstanding Shares
Common Stock
Additional Paid-In Capital
Accumulated Other Comprehensive (Loss) Income
Retained Earnings
Total Granite Shareholders’ Equity
Non-controlling Interests
Total Equity
Balances at June 30, 2019
Net income
Other comprehensive income
Purchases of common stock1
Restricted stock units (“RSUs”) vested
Dividends on common stock ($0.13 per share)
Transactions with non-controlling interests
Employee Stock Purchase Plan (“ESPP”), amortized RSUs and other
Balances at September 30, 2019
Balances at June 30, 2018
RSUs vested
Issuance of Convertible Notes
ESPP, amortized RSUs and other
Balances at September 30, 2018
Balances at December 31, 2018
Net (loss) income
Other comprehensive loss
Dividends on common stock ($0.39 per share)
Effect of adopting ASU Topic 842 (see Note 2)
Balances at December 31, 2017
Effect of adopting Accounting Standards Codification Topic 606
Issuance of common stock for Layne acquisition
Premium on 8.0% Convertible Notes
1Represents shares purchased in connection with employee tax withholding for RSUs vested under our 2012 Equity Incentive Plan. Amounts are comprised primarily of amortized restricted stock units.
The accompanying notes are an integral part of these condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation, depletion and amortization
Gain on sales of property and equipment, net
Change in deferred income taxes
Stock-based compensation
Equity in net loss from unconsolidated joint ventures
Net income from affiliates
Distributions from unconsolidated construction joint ventures and affiliates
Other assets, net
Net cash (used in) provided by operating activities
Investing activities
Purchases of marketable securities
Maturities of marketable securities
Purchases of property and equipment
Proceeds from sales of property and equipment
Cash paid to purchase businesses, net of cash and restricted cash acquired
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
Distributions to non-controlling partners, net
Other financing activities, net
Net cash (used in) provided by financing activities
Net (decrease) increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and $5,825 and $0 in restricted cash at beginning of each period
Cash, cash equivalents and $5,658 and $5,599 in restricted cash at end of each 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
Other non-cash operating activities:
Performance guarantees
Non-cash investing and financing activities:
Common stock issued in acquisition
Common stock issued in conversion of 8% Convertible Notes
RSUs issued, net of forfeitures
Accrued cash dividends
Accrued equipment purchases
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, 2018. 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, 2019 and 2018 and the results of our operations and cash flows for the periods presented. The December 31, 2018 condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP.
Our operations are typically affected more by weather conditions during the first and fourth quarters of our fiscal year which may alter our construction schedules and can create variability in our revenues and profitability. Therefore, the results of operations for the three and nine months ended September 30, 2019 are not 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, 2019 of Accounting Standards Update (“ASU”) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which had no material impact on our condensed consolidated financial statements. In addition, as discussed in Note 2, during the three months ended March 31, 2019, we adopted ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income and ASU No. 2016-02, Leases and subsequently issued related ASUs (“Topic 842”).
On May 22, 2019, we acquired certain assets and equipment of Lametti & Sons, Inc. a Minnesota-based company with expertise in cured-in-place pipe rehabilitation and trenchless renewal for $6.2 million cash.
Reclassifications: Certain immaterial reclassifications of prior period amounts have been made to conform to the current period presentation.
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).
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
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. Recently Issued and Adopted Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. This ASU will be effective commencing with our quarter ending March 31, 2020. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act of 2017, from accumulated other comprehensive income (“AOCI”) to retained earnings. This ASU was effective commencing with our quarter ended March 31, 2019 and we elected not to reclassify the immaterial stranded tax effects from AOCI to retained earnings. We adopted the policy that future income tax effects which are stranded in AOCI will be released under the item-by-item approach.
Effect of adopting Topic 842
The core principle of Topic 842 requires lessees to recognize operating leases as right of use (“ROU”) assets and lease liabilities on the balance sheet as described below. Prior to adoption of Topic 842, we recognized operating lease payments as an expense on a straight-line basis over the lease term on our consolidated statements of operations and did not recognize ROU assets or lease liabilities on our consolidated balance sheets.
We adopted Topic 842 using a modified retrospective transition approach with no prior-period retrospective adjustments, recognizing a net cumulative decrease to retained earnings and added ROU assets, short and long term lease liabilities of approximately $0.5 million, $72.2 million, $14.9 million and $60.4 million, respectively, as of January 1, 2019.
We applied Topic 842 to all noncancelable operating leases outstanding as of January 1, 2019 except those related to quarry properties and those that at lease commencement have an actual and intended lease term shorter than twelve months.
We elected to apply optional practical expedients which allowed us to forego reassessments of 1) whether any expired or existing contracts are or contain leases; 2) the lease classification for any expired or existing leases; and 3) the initial direct costs for any existing leases.
In connection with the adoption of Topic 842, we implemented the following accounting policy:
ROU Assets and Liabilities: A lease contract conveys the right to use an underlying asset for a period of time in exchange for consideration. At inception, we determine whether a contract contains a lease by determining if there is an identified asset and if the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time.
At lease commencement, we measure and record a lease liability equal to the present value of the remaining lease payments, generally discounted using the borrowing rate on our secured debt as the implicit rate is not readily determinable on many of our leases. We use a single maturity discount rate if it is not materially different than the discount rates applied to each of the leases in the portfolio.
On the lease commencement date, the amount of the ROU assets consist of the following:
•
the amount of the initial measurement of the lease liability;
any lease payments made at or before the commencement date, minus any lease incentives received; and
any initial direct costs incurred.
Most of our lease contracts do not have the option to extend or renew. We assess the option for individual leases, and we generally consider the base term to be the term of lease contracts.
On a quarterly basis, we determine if subcontractor, vendor or service provider agreements contain embedded leases by assessing if an asset is explicitly or implicitly specified in the agreement and the counterparty has the right to substitute the asset.
3. Acquisitions
On June 14, 2018 (the “acquisition date”), we completed the acquisition of the Layne Christensen Company (“Layne”). We have finalized the purchase price accounting and there were no material measurement period adjustments during the three and nine months ended September 30, 2019. The financial information in the table below summarizes the combined results of operations of Granite and Layne, on a pro forma basis, as though the companies had been combined as of January 1, 2017 (in thousands, except per share amounts). The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2017.
Three Months Ended
Nine Months Ended
Net income attributable to Granite
Basic net income per share attributable to common shareholders
Diluted net income per share attributable to common shareholders
These amounts have been calculated after applying Granite’s accounting policies and adjusting the results of Layne to reflect the additional depreciation and amortization that would have been recorded assuming the fair value adjustments to property and equipment and intangible assets had been applied starting on January 1, 2017. Acquisition and integration expenses related to Layne are excluded as the timing of the transaction is assumed to be January 1, 2017. The statutory tax rate of 26% was used for the pro forma adjustments.
4. 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. 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. In our review of these changes for the three and nine months ended September 30, 2019 and 2018, 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, revisions in estimates, including estimated cost recovery of customer affirmative claims and back charges, that individually had an impact of $5.0 million or more on gross profit resulted in decreases to gross profit and income (loss) before provision for (benefit from) income taxes of $80.7 million and $264.1 million, respectively, and decreases in net income (loss) of $62.9 million and $200.6 million ($1.33 and $4.29 per diluted share), respectively.
For the three and nine months ended September 30, 2018, revisions in estimates, including estimated cost recovery of customer affirmative claims and back charges, that individually had an impact of $5.0 million or more on gross profit resulted in decreases to gross profit and income (loss) before provision for (benefit from) income taxes of $19.3 million and $57.8 million, respectively, and decreases in net income of $14.6 million and $43.7 million ($0.31 and $1.02 per diluted share), respectively.
Decreases for all periods presented were in our Transportation segment except for one project in Water segment during the nine months ended September 30, 2019 and one project in Specialty segment during both three and nine months ended September 30, 2019. There were no increases from revisions in estimates, which individually would have had an impact of $5.0 million or more on gross profit, for the periods presented.
The impact to gross profit is summarized as follows:
(dollars in millions)
Number of projects with downward estimate changes
Range of reduction in gross profit from each project, net
Decrease to project profitability
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.The decreases during the nine months ended September 30, 2019 were also due to an unfavorable court ruling on a designer back charge claim and were impacted by a business added in the Layne acquisition last year that we exited during the quarter. The decreases during the three and nine months ended September 30, 2018 were due to additional costs and lower productivity than originally anticipated as well as additional weather related costs and a decrease in estimated recovery from customer affirmative claims.
5. Disaggregation of Revenue
The following tables present our disaggregated revenue (in thousands):
Total
California
Federal
Heavy Civil
Midwest
Northwest
Water and Mineral Services
6. Unearned Revenue
The following tables present our unearned revenue as of the respective periods (in thousands):
June 30, 2019
7. Contract Assets and Liabilities
During the three and nine months ended September 30, 2019, we recognized revenue of $13.2 million and $118.8 million, respectively, that was included in the contract liability balance at December 31, 2018. During the three and nine months ended September 30, 2018, we recognized revenue of $0.6 million and $103.3 million, respectively, that was included in the contract liability balance at January 1, 2018.
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 $32.8 million and $117.6 million during the three and nine months ended September 30, 2019, respectively, and $25.3 million and $86.2 million during the three and nine months ended September 30, 2018, respectively. The changes in contract transaction price were from items such as executed or estimated change orders and unresolved contract modifications and claims.
As of September 30, 2019, December 31, 2018 and September 30, 2018, the aggregate claim recovery estimates included in contract asset and liability balances were $60.6 million, $45.1 million and $37.2 million, respectively.
The components of the contract asset balances as of the respective dates were as follows (in thousands):
Costs in excess of billings and estimated earnings
Contract retention
Total contract assets
As of September 30, 2019, December 31, 2018 and September 30, 2018, no individual contract retention balance exceeded 10% of total contract assets at any of the presented dates. The majority of the contract retention balance is expected to be collected within one year and there were no balances determined to be uncollectible.
The components of the contract liability balances as of the respective dates were as follows (in thousands):
Billings in excess of costs and estimated earnings, net of retention
Provisions for losses
Total contract liabilities
8. Receivables, net
(in thousands)
Contracts completed and in progress:
Billed
Unbilled
Total contracts completed and in progress
Material sales
Other
Total gross receivables
Less: allowance for doubtful accounts
Total net receivables
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. Included in other receivables at September 30, 2019, December 31, 2018 and September 30, 2018 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.
9. Marketable Securities
All marketable securities were classified as held-to-maturity as of the dates presented and the carrying amounts of held-to-maturity securities were as follows:
U.S. Government and agency obligations
Corporate bonds
Total short-term marketable securities
Total long-term marketable securities
Total marketable securities
Scheduled maturities of held-to-maturity investments were as follows:
Due within one year
Due in one to five years
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
Level 1
Level 2
Level 3
Cash equivalents
Money market funds
Other current liabilities
Interest rate cash flow hedge
Total liabilities
Other current assets
Commodity Swap
In February 2019, we entered into a commodity swap designated as a cash flow hedge covering the periods from March to October 2019 with an original notional amount of $8.7 million which represented approximately 60.0% of our forecasted purchases for fixed price asphalt during these periods. The commodity swap is reported at fair value using Level 2 inputs in the condensed consolidated balance sheets. Gains or losses on the effective portion are initially reported as a component of AOCI and subsequently reclassified to cost of revenue in the condensed consolidated statements of operations when the monthly hedged commodity payment is settled. As of September 30, 2019, the fair value of the cash flow hedge was immaterial and was included in other current assets in the condensed consolidated balance sheets. During the three and nine months ended September 30, 2019, the unrealized gain, net of taxes, on the effective portion was immaterial, there was no ineffective portion, the cost of revenue reclassified from AOCI was immaterial and we estimate an immaterial amount to be reclassified from AOCI into pre-tax earnings within the next twelve months.
Other Assets and Liabilities
The carrying values and estimated fair values of our financial instruments that are not required to be recorded at fair value in the condensed consolidated balance sheets were as follows:
Fair Value Hierarchy
Carrying Value
Fair Value
Assets:
Liabilities (including current maturities):
2019 Notes1
Credit Agreement - term loan1
Credit Agreement - revolving credit facility1
Convertible notes
1 See Note 14 for definitions of, and more information about, the 2019 Notes and Credit Agreement.
During the three and nine months ended September 30, 2019 and 2018, 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 months ended September 30, 2019, 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, 2019, there was approximately $2.8 billion of construction revenue to be recognized on unconsolidated and line item construction joint venture contracts of which $1.0 billion represented our share and the remaining $1.8 billion represented our partners’ share. We are not able to estimate amounts that may be required beyond the remaining cost of the work to be performed. These costs could be offset by billings to the customer or by proceeds from our partners’ corporate and/or other guarantees.
Consolidated Construction Joint Ventures (“CCJVs”)
At September 30, 2019, we were engaged in seven active CCJV projects with total contract values ranging from $0.7 million to $410.5 million for a combined total of $1.2 billion. Our share of revenue remaining to be recognized on these CCJVs was $338.1 million and ranged from $0.3 million to $137.2 million. Our proportionate share of the equity in these joint ventures was between 50.0% and 65.0%. During the three and nine months ended September 30, 2019, total revenue from CCJVs was $71.1 million and $217.0 million, respectively, and during the three and nine months ended September 30, 2018, total revenue from CCJVs was $61.6 million and $173.1 million, respectively. During the nine months ended September 30, 2019 and 2018, CCJVs used $19.3 million and provided $31.5 million of operating cash flows, respectively.
Unconsolidated Construction Joint Ventures
As of September 30, 2019, we were engaged in nine active unconsolidated joint venture projects with total contract values ranging from $85.2 million to $3.8 billion for a combined total of $11.5 billion of which our share was $3.3 billion. Our proportionate share of the equity in these unconsolidated construction joint ventures ranged from 20.0% to 50.0%. As of September 30, 2019, our share of the revenue remaining to be recognized on these unconsolidated construction joint ventures was $812.1 million and ranged from $1.7 million to $226.0 million.
The following is summary financial information related to unconsolidated construction joint ventures:
Assets
Cash, cash equivalents and marketable securities
Other current assets1
Noncurrent assets
Less partners’ interest
Granite’s interest1,2
Liabilities
Less partners’ interest and adjustments3
Granite’s interest
Equity in construction joint ventures4
1 Included in this balance and in accrued expenses and other current liabilities on our condensed consolidated balance sheets was $81.9 million, $88.2 million and $88.6 million related to performance guarantees as of September 30, 2019, December 31, 2018 and September 30, 2018.
2 Included in this balance as of September 30, 2019, December 31, 2018 and September 30, 2018 was $96.8 million, $78.1 million and $67.1 million, respectively, related to Granite’s share of estimated cost recovery of customer affirmative claims. In addition, this balance included $11.8 million, $15.6 million and $12.5 million related to Granite’s share of estimated recovery of back charge claims as of September 30, 2019, December 31, 2018 and September 30, 2018, respectively.
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 the condensed consolidated balance sheets were amounts related to deficits in construction joint ventures, which includes provisions for losses, that were $65.1 million, $11.5 million and $ 11.6 million as of September 30, 2019, December 31, 2018 and September 30, 2018, respectively.
Less partners’ interest and adjustments1
Granite’s interest in gross loss2
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.
2 While total revenue, Granite’s interest in revenue, total cost of revenue, and total net loss were correctly stated, Granite’s interest in cost of revenue, gross loss and net loss for the three and six months ended June 30, 2019 were misstated for the quarter ended June 30, 2019. Granite’s originally reported interest in cost of revenue, gross loss and net loss was: $144.0 million, $107.2 million and $106.3 million, respectively, for the three months ended June 30, 2019 and was $275.5 million, $106.2 million and $105.8 million, respectively, for the six months ended June 30, 2019. Granite’s interest in cost of revenue, gross loss and net loss should have been: $171.0 million, $134.2 million and $133.3 million, respectively, for the three months ended June 30, 2019 and $302.5 million, $133.2 million and $132.8 million, respectively, for the six months ended June 30, 2019. The misstatements did not impact the condensed consolidated balance sheet, statements of operations, statements of comprehensive loss or statements of shareholders’ equity in any period. However, the misstatements did result in a misclassification of $27.0 million within operating activities of the condensed consolidated statements of cash flows for the six months ended June 30, 2019 to equity in net loss from unconsolidated joint ventures from accrued expenses and other current liabilities, net. There was no impact to the net cash used in operating activities for the six months ended June 30, 2019. We assessed the materiality of the errors in accordance with the SEC’s Staff Accounting Bulletin 99 and concluded that the errors were not material to either of these previously issued financial statements. Accordingly, we will revise our previously issued financial statements prospectively to correct these errors.
During the three and nine months ended September 30, 2019, unconsolidated construction joint venture net losses were $(19.6) million and $(33.3) million, respectively, of which our share were net losses of $(40.2) million and $(173.0) million, respectively. During the three and nine months ended September 30, 2018, unconsolidated construction joint venture net losses were $(47.6) million and $(162.0) million, respectively, of which our share were net losses of $(3.1) million and $(16.3) million, respectively. The differences between our share of the joint venture net loss during 2018 and 2019 when compared to the joint venture net loss primarily resulted from differences between our estimated total revenue and cost of revenue when compared to that of our partners’ on four projects. The differences are due to timing differences from varying accounting policies and in public company quarterly reporting requirements. These joint venture net loss amounts exclude our corporate overhead required to manage the joint ventures and include taxes only to the extent the applicable states have joint venture level taxes.
12. Investments in Affiliates
Our investments in affiliates balance consists of equity method investments in the following types of entities:
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:
Long-term liabilities1
Net assets
Granite’s share of net assets
1 The balance primarily relates to debt associated with our real estate investments.
Of the $309.2 million in total assets as of September 30, 2019, we had investments in thirteen foreign entities with total assets ranging from $0.2 million to $69.0 million, three real estate entities with total assets ranging from $8.3 million to $43.2 million and the asphalt terminal entity had total assets of $32.5 million. We have direct and indirect investments in the foreign entities and our percent ownership ranged from 25.0% to 50.0% as of September 30, 2019. The equity method investments in real estate affiliates included $14.1 million, $16.3 million and $17.5 million in residential real estate in Texas as of September 30, 2019, December 31, 2018 and September 30, 2018, respectively. The remaining balances were in commercial real estate in Texas.
13. Property and Equipment, net
Balances of major classes of assets and allowances for depreciation and depletion are included in property and equipment, net in the condensed consolidated balance sheets and were as follows:
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
14. Long-Term Debt and Credit Arrangements
Senior notes payable
Credit Agreement term loan
Credit Agreement revolving credit loan
Total debt
Less current maturities
Total long-term debt
The aggregate minimum principal maturities of long-term debt, including current maturities and excluding debt issuance costs, related to balances at September 30, 2019 are as follows: $2.1 million during the remainder of 2019; $8.4 million in 2020; $8.5 million in 2021; $8.5 million in 2022; $367.3 in 2023 and $8.9 million in 2024 and thereafter.
Senior Notes Payable
Senior notes payable as of December 31, 2018 and September 30, 2018 of $40.0 million and $80.0 million, respectively, were due to a group of institutional holders and had an interest rate of 6.11% per annum (“2019 Notes”). As of December 31, 2018, all of the $40.0 million was included in current maturities of long-term debt on the condensed consolidated balance sheets. As of September 30, 2018, $40.0 million of the outstanding balance was included in each of current maturities of long-term debt and long-term debt in the condensed consolidated balance sheets. On July 29, 2019, we called and redeemed the $40.0 million outstanding balance which were originally due in December 2019.
Credit Agreement
Granite entered into the Third Amended and Restated Credit Agreement dated May 31, 2018. The credit agreement provided for a $150.0 million term loan, of which $140.6 million was outstanding on September 30, 2019, and a $350.0 million revolving credit facility. We entered into Amendment No. 1 to Third Amended and Restated Credit Agreement (as amended, the “Credit Agreement”) dated July 29, 2019 as discussed below.
The term loan requires that Granite repay 1.25% of the principal balance each quarter until the maturity date, at which point the remaining balance is due. As of each September 30, 2019, December 31, 2018 and September 30, 2018, $7.5 million of the term loan balance was included in current maturities of long-term debt on the condensed consolidated balance sheets and the remaining $133.1 million, $138.8 million and $140.6 million, respectively, was included in long-term debt.
As of September 30, 2019, the total stated amount of all issued and outstanding letters of credit under the Credit Agreement was $32.3 million. As of September 30, 2019, December 31, 2018 and September 30, 2018, $250.0 million, $197.0 million and $137.0 million, respectively, was outstanding under the revolving credit facility. As of September 30, 2019, the total unused availability under the Credit Agreement was $67.7 million. The letters of credit will expire between October 2019 and June 2020.
Borrowings under the Credit Agreement bear interest at LIBOR or a base rate (at our option), plus an applicable margin based on the Consolidated Leverage Ratio (as defined in the Credit Agreement) calculated quarterly. The applicable margin was 2.00% for loans bearing interest based on LIBOR and 1.00% for loans bearing interest at the base rate at September 30, 2019. Accordingly, the effective interest rate using three-month LIBOR and base rate was 4.09% and 6.00%, respectively, at September 30, 2019 and we elected to use LIBOR for both the term loan and the revolving credit facility.
As of September 30, 2019, the conditions for the exercise of our right under Credit Agreement to have liens released were not satisfied.
Covenants and Events of Default
Our Credit Agreement requires us to comply with various affirmative, restrictive and financial covenants. Our failure to comply with any of these covenants, or to pay principal, interest or other amounts when due thereunder, would constitute an event of default under the Credit Agreement. As of September 30, 2019, we were compliant with the financial covenants contained in the Credit Agreement.
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, 2019, our lease contracts were classified as operating leases and had terms ranging from month-to-month to 29 years. As of September 30, 2019, our operating leases were included in ROU assets, accrued and other current liabilities and lease liabilities on our condensed consolidated balance sheets and were $70.5 million, $16.0 million and $56.7 million, respectively. As of September 30, 2019, we had no lease contracts that had not yet commenced but created significant rights and obligations.
Lease expense was $5.0 million and $13.9 million during the three and nine months ended September 30, 2019, which included operating lease costs related to short-term leases and variable lease costs.
As of September 30, 2019, our weighted-average remaining lease term was 6.0 years and the weighted-average discount rate was 3.99%.
As of September 30, 2019, the lease liability is equal to the present value of the remaining lease payments, discounted using the incremental borrowing rate on our secured debt using a single maturity discount rate as it is not materially different than the discount rates applied to each of the leases in the portfolio.
The following table summarizes our undiscounted lease liabilities outstanding as of September 30, 2019 (in thousands):
Remainder of 2019
2020
2021
2022
2023
2024 through 2035
Total future minimum lease payments
Less: imputed interest
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:
(in thousands, except per share amounts)
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 convertible notes 1
Weighted average common shares outstanding, diluted
1 Due to the net loss for the nine months ended September 30, 2019, RSUs representing approximately 393,000 shares have been excluded from the number of shares used in calculating diluted net loss per share, as their inclusion would be antidilutive.
2 Weighted average shares of approximately 1.1 million have been included in the number of shares used in calculating diluted net income per share for the three months ended September 30, 2018 based on the assumption that the 8% Convertible Notes were converted to Granite shares as of July 1, 2018 through their conversion on August 15, 2018. The shares have been excluded from the nine months ended September 30, 2018 as their inclusion would be antidilutive.
17. Income Taxes
The following table presents the provision for (benefit from) income taxes for the respective periods:
(dollars in thousands)
Our effective tax rate remained relatively unchanged for the three months ended September 30, 2019 when compared to the same period in 2018 due to the impact of discrete items relative to income (loss) before provision for (benefit from) income taxes. Our effective tax rate increased to 26.6% for the nine months ended September 30, 2019 from 14.5% when compared to the same period in 2018. This change was primarily due to a $37.0 million discrete tax benefit recorded in 2019 on the decrease to project profitability as it relates to four legacy, unconsolidated heavy civil joint venture projects compared to a net $3.5 million discrete tax benefit recorded in 2018 due to adjustments to provisional amounts related to the U.S. Tax Cuts and Jobs Act of 2017 which was partially offset by a discrete tax expense on one-time nondeductible acquisition and integration expenses
18. 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 our condensed consolidated balance sheets. The aggregate liabilities recorded as of September 30, 2019, December 31, 2018 and September 30, 2018 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 putative securities class action was filed in the United States District Court for the Northern District of California against the Company, James H. Roberts, our President and Chief Executive Officer, and Jigisha Desai, our Senior Vice President and Chief Financial Officer. The complaint is brought on behalf of an alleged class of persons or entities that acquired our common stock between October 26, 2018 and August 1, 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 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. We are in the preliminary stages of reviewing the allegations made in the complaint and, as a result, we cannot predict the outcome or consequences of this case, which we intend to defend vigorously.
19. Business Segment Information
Summarized segment information is as follows (in thousands):
Total revenue from reportable segments
Elimination of intersegment revenue
Revenue from external customers
Gross (loss) profit
Segment assets
A reconciliation of segment gross profit to consolidated income (loss) before provision for (benefit from) income taxes is as follows:
Total gross profit from reportable segments
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 and in this Quarterly Report Form 10-Q 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 heavy-civil 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.
In the first half of 2018, we completed the acquisition of the Layne Christensen Company (“Layne”), a water and mining infrastructure services and drilling company, as well as LiquiForce, a regional company in Canada and the Midwest providing lateral and mainline pipe lining services in the water and wastewater markets. In addition, on May 22, 2019, we acquired certain assets and equipment of Lametti & Sons, Inc. a Minnesota-based company with cured-in-place pipe rehabilitation and trenchless renewal experience for $6.2 million in cash.
Current Economic Environment and Outlook
Granite, America’s Infrastructure Company, provides solutions to the Transportation, Water, Specialty and Materials end-markets. We are one of the largest diversified construction and construction materials companies in the United States and are positioned to leverage opportunities across end markets and geographies. As we execute our strategy, we remain committed to creating consistent value for Granite’s stakeholders.
Through May of this year, we experienced inclement weather across most of the U.S. which negatively impacted our operations. Beginning in June, weather improved for much of the U.S., and our teams have been working through our strong backlog. The Company’s continued focus on bidding discipline and end-market diversification positions the Company well, with solid contract backlog of $3.6 billion and an additional $1.0 billion of construction manager/general contractor and alternative procurement projects. We expect the additional $1.0 billion of construction manager/general contractor and alternative procurement projects to enter backlog as task orders are issued this year, and in future years. As of September 30, 2019, our Committed and Awarded Projects (“CAP”) totaled nearly $4.6 billion and comprises an increasingly strategic portfolio of stored energy for the Company. Public and private market demand remains robust across Granite’s end markets. Private-market activity is a key growth and diversification driver across our business, particularly in our Specialty segment, spurring expansion in our mining, site development and power sectors. Public infrastructure investment is growing at state, regional, and local levels, and this multi-year public-spending investment will benefit our Transportation, Water and Materials segments. It also provides our industry with steady visibility into funding.
At the National level, while we have not seen recent movement on the federal infrastructure initiative to provide a permanent revenue solution for the federal Highway Trust Fund, the Fixing America’s Surface Transportation (“FAST”) Act remains a stabilizing force for transportation markets. The federal government is providing smaller, targeted funding, as is illustrated by the September 2019 U.S. Department of Transportation announcement of an emergency relief fund totaling $871.2 million for roads and bridges impacted by severe weather events. At the state level, 31 states and the District of Colombia have enacted legislation to increase their state motor fuel taxes since 2013, with some states including annual fuel tax indexing provisions. This includes California’s 10-year, $54.2 billion Senate Bill 1 (SB-1), the Road Repair and Accountability Act of 2017. SB-1 continues to spur increased bidding and project lettings where we have seen a meaningful increase of award value when compared to the same prior year period. Other state and local-led program expansions, coupled with Federal and private-sector stability, are key contributors to robust market activity and multi-year funding visibility.
Market demand remains strong in the water-related construction, water resources and wastewater rehabilitation markets. Here, market and funding dynamics position our legacy and acquired businesses included in the Water segment for significant growth. Across the Water segment’s end markets, states and municipal water authorities weigh options for overdue water and wastewater infrastructure investment. For our wastewater rehabilitation business, this includes potential awards for infrastructure improvements mandated through consent decrees issued by municipalities. At the federal level, Congress approved the America’s Water Infrastructure Act of 2018, which includes $4.4 billion for the Environmental Protection Agency's drinking water program. This legislation also creates the Water Resources Development Act, which authorizes $3.7 billion of federal funds for U.S. Army Corps of Engineers' flood-protection and other projects.
The Company announced this quarter that it has completed its strategic review of the Heavy Civil operating group and that it is taking additional steps to reduce risk and exposure to large, complex projects where the trend has been for risks that are difficult to mitigate in the current contracting environment. The 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 will narrow the footprint of our Heavy Civil operating group and align our Heavy Civil Group and Construction and Materials operations teams across the Transportation segment. This expands the opportunity to align the Heavy Civil group processes more closely with our successful vertically integrated construction and materials model. Our focus will be to pursue opportunities in markets where Granite’s presence, capabilities and resources provide strategic advantages.
Granite continues to emphasize lower-risk, smaller-scope projects, particularly negotiated work, construction management/general contractor, construction management at-risk and other best-value procurement methods. Across end-markets, our focus on bottom and top-line improvement continues to emphasize managing risks and pricing appropriately for the complex skills and resources required to build America’s infrastructure projects. We are focused on pursuing and executing work with appropriate returns relative to risks for Granite’s stakeholders.
Results of Operations
Our operations are typically affected more by weather conditions during the first and fourth quarters of our fiscal year which may alter our construction schedules and can create variability in our revenues and profitability. Therefore, the results of operations of a given quarter are not indicative of the results to be expected for the full year.
The following table presents a financial summary for the three and nine months ended September 30, 2019 and 2018:
Total Revenue by Segment
Transportation Revenue
Transportation revenue for the three and nine months ended September 30, 2019 decreased $12.2 million, or 2.0%, and $131.9 million, or 9.0%, respectively, when compared to 2018 primarily due to a decrease in the Heavy Civil operating group from revisions in estimates (see Note 4 of “Notes to the Condensed Consolidated Financial Statements” for more information) and in the California operating group from unfavorable weather during the first half of 2019, partially offset by increases in the Northwest operating group from beginning the year with higher contract backlog as well as progress on existing projects. During the three and nine months ended September 30, 2019 and 2018 the majority of revenue earned in the Transportation segment was from the public sector.
Water Revenue
Water revenue for the three and nine months ended September 30, 2019 increased by $11.6 million, or 9.3%, and $132.0 million, or 61.1%, respectively, when compared to 2018 primarily due to increases in the Water and Mineral Services operating group due to progress on existing projects for the three months ended September 30, 2019. The acquisitions of Layne and LiquiForce in the second quarter of 2018 also contributed to the increases during the nine months ended September 30, 2019, which were partially offset by decreases in the California operating group from unfavorable weather conditions during 2019. During the three and nine months ended September 30, 2019 and 2018 the majority of revenue earned in the Water segment was from the public sector.
Specialty Revenue
Specialty revenue for the three and nine months ended September 30, 2019 increased $33.6 million, or 17.6%, and $79.1 million, or 17.1%, respectively, when compared to 2018 primarily due to increases in the California, Federal and Northwest operating groups from beginning the periods with higher contract backlog, progress on existing projects and from new awards in 2019 partially offset by decreases in the Midwest operating group from beginning the periods with lower contract backlog. In addition, revenue for the nine months ended September 30, 2019 increased in the Water and Mineral Services operating group as a result of our acquisition of Layne. During the three and nine months ended September 30, 2019 and 2018 revenue earned in the Specialty segment was from both the public and private sectors.
Materials Revenue
Materials revenue for the three months ended September 30, 2019 remained relatively unchanged and decreased by $7.9 million, or 2.9%, for the nine months ended September 30, 2019 when compared to 2018 primarily due to the decreases in the California operating group from reduced volume due to unfavorable weather conditions in the first half of the year partially offset by increases in the Water and Mineral Services operating group as a result of our acquisition of Layne.
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 it 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
Transportation Contract Backlog
Unearned revenue
Other awards1
1 Other awards include unissued task orders and unexercised contract options to the extent their issuance or exercise is probable as well as contract awards to the extent we believe contract execution and funding is probable.
Transportation contract backlog of $2.7 billion at September 30, 2019 was $285.9 million, or 9.7%, lower than at June 30, 2019 primarily due to progress on existing projects partially offset by increases from new awards. Significant new awards during the three months ended September 30, 2019 included a $37 million interstate expansion project in Wisconsin and a $20 million runway rehabilitation project in Washington. As noted in the Current Economic Environment and Outlook section above, the $1.0 billion in project wins that are not yet included in our contract backlog are expected to be added to Transportation segment contract backlog this year, and in future years.
Non-controlling partners’ share of Transportation contract backlog as of September 30, 2019, June 30, 2019 and September 30, 2018 was $179.3 million, $195.1 million and $191.5 million, respectively.
Four contracts in our Transportation segment had total forecasted losses with remaining revenue of $298.8 million, or 11.3%, of Transportation contract backlog at September 30, 2019.
Water Contract Backlog
1Other awards include unissued task orders and unexercised contract options to the extent their issuance or exercise is probable as well as contract awards to the extent we believe contract execution and funding is probable.
Water contract backlog of $244.9 million as of September 30, 2019 was $73.3 million, or 23.0%, lower than at June 30, 2019. The decrease in Water and Mineral Services operating group due to progress on existing projects was partially offset by increases in the California operating group due to new awards during the three months ended September 30, 2019.
Specialty Contract Backlog
Specialty contract backlog of $746.6 million as of September 30, 2019 was $187.3 million, or 33.5%, higher than at June 30, 2019 due to increases in the Heavy Civil and Federal operating groups from increased success rate on bidding activity partially offset by decreases in the California, Northwest and Midwest operating groups from progress on existing projects. Significant new awards during the three months ended September 30, 2019 included a $22 million site development project and a $10 million airfield improvement project in California.
Non-controlling partners’ share of Specialty contract backlog as of September 30, 2019, June 30, 2019 and September 30, 2018 was $99.5 million, $93.6 million and $133.4 million, respectively.
Gross Profit (Loss)
The following table presents gross profit (loss) by business segment for the respective periods:
Percent of segment revenue
%
19.0
Total gross profit
Percent of total revenue
Transportation gross profit (loss) for the three and nine months ended September 30, 2019 decreased by $57.3 million, or 80.8%, and $203.4 million, or over 100%, respectively, when compared to 2018 primarily due to an increase in negative net impact from revisions in estimates in our Heavy Civil operating group (See Note 4 of “Notes to the Condensed Consolidated Financial Statements”).
Water gross profit for the three and nine months ended September 30, 2019 decreased by $9.1 million, or 37.6%, and $6.7 million, or 16.3%, respectively, when compared to 2018. Gross profit as a percentage of segment revenue for the three and nine months ended September 30, 2019 decreased to 11.1% from 19.4% and to 9.9% from 19.0%, respectively, when compared to 2018. Decreases were primarily due to decreased revenue volume in our California operating group due to unfavorable weather, from emergency work performed in early 2018 that was not repeated in 2019 and an increase in negative net impact from revisions in estimates for the three months ended September 30, 2019 in our Water and Mineral Services operating group (See Note 4 of “Notes to the Condensed Consolidated Financial Statements”).
Specialty gross profit for the three and nine months ended September 30, 2019 increased by $10.2 million, or 36.3%, and $10.1 million, or 15.4%, respectively, when compared to 2018 primarily due to increased revenue volume.
Materials gross profit for the three months ended September 30, 2019 increased by $3.2 million, or 14.8%, when compared to 2018 due to increased revenue volume in our Northwest operating group and decreased by $1.6 million, or 4.4%, for the nine months ended September 30, 2019 due to decreased revenue in the California operating group from unfavorable weather conditions.
Selling, General and Administrative Expenses
The following table presents the components of selling, general and administrative expenses for the respective periods:
Selling
Salaries and related expenses
Restricted stock unit amortization
Other selling expenses
Total selling
General and administrative
Other general and administrative expenses
Total general and administrative
Total selling, general and administrative
Percent of revenue
Selling, general and administrative expenses for the three and nine months ended September 30, 2019 increased $2.7 million, or 3.8%, and $31.2 million, or 16.2%, respectively, when compared to 2018. Selling, general and administrative expenses as a percent of revenue for the three months ended September 30, 2019 remained unchanged and increased to 9.0% from 8.0% for the nine months ended September 30, 2019 when compared to 2018.
Selling Expenses
Selling expenses include the costs for estimating and bidding, business development and materials facility permits. Selling expenses can vary depending on the volume of projects in process and the number of employees assigned to estimating and bidding activities. As projects are completed or the volume of work slows down, we temporarily redeploy project employees to bid on new projects, moving their salaries and related costs from cost of revenue to selling expenses. Selling expenses were relatively flat during the three months ended September 30, 2019 and increased $2.7 million, or 4.9%, during the nine months ended September 30, 2019 when compared to 2018 primarily due to the increase in salaries and related expenses as a result of our acquisitions of Layne and LiquiForce.
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, 2019 increased $3.3 million, or 6.4%, and $28.5 million, or 20.8%, respectively, when compared to 2018 due to an increase in other general and administrative expenses from a change in the fair market value of our Non-Qualified Deferred Compensation plan liability, which is offset in other income, net, as well as increases during the nine months ended September 30, 2019 in salaries and other general and administrative expenses primarily as a result of our acquisitions of Layne and LiquiForce.
Acquisition and Integration expenses
These costs were primarily associated with the acquisition and integration of Layne and LiquiForce and decreased during the three and nine months ended September 30, 2019 when compared to the same periods in 2018 due to a reduction in acquisition expenses as 2019 expenses are primarily related to integration.
Income Taxes
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 17 of “Notes to the Condensed Consolidated Financial Statements,” under certain circumstances the resolution of certain legal proceedings to which we are subject could have direct or indirect consequences that could have a material adverse effect on our financial position, results of operations, cash flows and/or liquidity.
Liquidity and Capital Resources
The timing differences between our cash inflows and outflows require us to maintain adequate levels of working capital. We believe our cash and cash equivalents, short-term investments, available borrowing capacity and cash expected to be generated from operations will be sufficient to meet our expected working capital needs, capital expenditures, financial commitments, cash dividend payments, and other liquidity requirements associated with our existing operations for the next twelve months. To provide capital needs to fund growth opportunities, either internal or generated through acquisitions, we maintain a collateralized credit facility that consists of a term loan and a revolving credit facility with an original value of $500.0 million, of which $67.7 million was available for borrowing under the revolving credit facility at September 30, 2019 and an uncommitted option to increase the facility by $200.0 million subject to the lenders providing the additional commitments. See Note 14 of “Notes to the Condensed Consolidated Financial Statements” for definitions and further discussion regarding our 2019 Notes and Credit Agreement. If we experience a prolonged change in our business operating results or make a significant acquisition, we may need additional sources of financing, which, even if available, may be limited by the terms of our existing debt covenants, or may require the amendment of our existing debt agreements. There can be no assurance that sufficient capital will continue to be available in the future or that it will be available on terms acceptable to us.
Our revenue, gross profit and the resulting cash flows can differ significantly from period to period due to a variety of factors, including our projects’ progressions toward completion, outstanding contract change orders and affirmative claims and the payment terms of our contracts. 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.
The following table presents our cash, cash equivalents and marketable securities, including amounts from our consolidated construction joint ventures (“CCJVs”), as of the respective dates:
CCJV cash and cash equivalents1
1 The volume and stage of completion of contracts from our CCJVs may cause fluctuations in joint venture cash and cash equivalents between periods. These funds generally are not available for the working capital or other liquidity needs of Granite until distributed.
2 See Note 9 of “Notes to the Condensed Consolidated Financial Statements” for the composition of our marketable securities.
Our primary sources of liquidity are cash and cash equivalents, marketable securities and cash generated from operations. We may also from time to time access our credit facility, issue and sell equity, debt or hybrid securities or engage in other capital markets transactions.
Our cash and cash equivalents consisted of deposits and money market funds held with established national financial institutions. Marketable securities consisted of U.S. Government and agency obligations and corporate bonds.
Granite’s portion of CCJV cash and cash equivalents was $44.4 million, $75.5 million and $72.0 million as of September 30, 2019, December 31, 2018 and September 30, 2018, respectively. Excluded from the table above is Granite’s portion of unconsolidated construction joint venture cash and cash equivalents of $70.5 million, $68.3 million and $75.2 million as of September 30, 2019, December 31, 2018 and September 30, 2018, respectively. The assets of each consolidated and unconsolidated construction joint venture relate solely to that joint venture. The decision to distribute joint venture assets must generally be made jointly by a majority of the members and, accordingly, these assets, including those associated with estimated cost recovery of customer affirmative claims and back charge claims, are generally not available for the working capital needs of Granite until distributed.
Our principal uses of liquidity are paying the costs and expenses associated with our operations, servicing outstanding indebtedness, making capital expenditures and paying dividends on our capital stock. We may also from time to time prepay or repurchase outstanding indebtedness and acquire assets or businesses that are complementary to our operations.
Cash Flows
Net cash (used in) provided by:
As a large infrastructure contractor and construction materials producer, our operating cash flows are subject to seasonal cycles, as well as the cycles associated with winning, performing and closing projects. Additionally, operating cash flows are impacted by the timing related to funding construction joint ventures and the resolution of uncertainties inherent in the complex nature of the work that we perform, including 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.
Cash used in operating activities of $26.5 million for the nine months ended September 30, 2019 represents a $41.2 million decrease when compared to 2018. The change was primarily due to a $22.6 million decrease in cash provided by net loss after adjusting for non-cash items and a $33.5 million increase in cash used in working capital primarily due to increases from CCJVs, partially offset by $14.9 million decrease in net contributions to unconsolidated joint ventures and affiliates.
Cash used in investing activities of $45.2 million for the nine months ended September 30, 2019 represents a $36.1 million decrease when compared to 2018. The change was primarily due to cash paid for the Layne and LiquiForce acquisitions in 2018 in addition to a decrease in purchases, net of sales proceeds, of property and equipment (see Capital Expenditures discussion below) partially offset by a decrease in maturities, net of purchases, of marketable securities.
Cash used in financing activities of $16.6 million for the nine months ended September 30, 2019 represents a $85.3 million increase when compared to 2018. The change was primarily due to an increase in payments on the revolving credit facility during 2019 and a decrease in proceeds from long term debt associated with $105.0 million revolving credit facility draws that were made to fund portions of the Layne and LiquiForce acquisitions in 2018.
Capital Expenditures
During the nine months ended September 30, 2019, we had capital expenditures of $83.3 million compared to $86.1 million during 2018. Major capital expenditures are typically for aggregate and asphalt production facilities, aggregate reserves, construction equipment, buildings and leasehold improvements and investments in our information technology systems. The timing and amount of such expenditures can vary based on the progress of planned capital projects, the type and size of construction projects, changes in business outlook and other factors. We currently anticipate 2019 capital expenditures to be between $90.0 million and $100.0 million for the full year.
Derivatives
We recognize derivative instruments as either assets or liabilities in the condensed consolidated balance sheets at fair value using Level 2 inputs. See Note 10 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, 2019, approximately $3.1 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 Credit Agreement requires us to comply with various affirmative, restrictive and financial covenants. Our failure to comply with any of these covenants, or to pay principal, interest or other amounts when due thereunder, would constitute an event of default under the Credit Agreement. As of September 30, 2019, we were compliant with the financial covenants contained in the Credit Agreement. We called and redeemed the $40.0 million outstanding balance of the 2019 Notes on July 29, 2019 which were originally due in December 2019.
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, which replaced the former authorization including the amount available. As part of this authorization we have established a plan to facilitate common stock repurchases. During the third quarter of 2019, we purchased approximately 100,000 shares at an average price of $29.10 per share for $2.9 million.
As of September 30, 2019, $187.1 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no significant change in our exposure to market risks since December 31, 2018.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Control and Procedures
Our management carried out, as of September 30, 2019, with the participation of our Chief Executive Officer and our Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2019, our disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by us in reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the quarter ended September 30, 2019,there were no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
LEGAL PROCEEDINGS
The description of the matters set forth in Part I, Item 1 of this Report under Note 18 of “Notes to the Condensed Consolidated Financial Statements” is incorporated herein by reference.
RISK FACTORS
Except as set forth below, there has been no material changes to 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, 2018:
We are involved in lawsuits and legal proceedings in the ordinary course of our business and may in the future be subject to other litigation and legal proceedings, and, if any of these are resolved adversely against us, it could harm our business, financial condition and results of operations.
Any litigation or other legal proceedings could result in an unfavorable judgment that may not be reversed upon appeal or in payments of substantial monetary damages or fines, or we may decide to settle lawsuits on similarly unfavorable terms, either of which could adversely affect our business, financial conditions and results of operations. We could also suffer an adverse impact on our reputation and a diversion of management’s attention and resources, which could have a material adverse effect on our business, financial condition and results of operations.
Our financial position could be impacted by worse than anticipated results in our Heavy Civil operating group.
We completed our previously announced strategic review of our Heavy Civil operating group and have taken actions that we believe will be beneficial to us and our stockholders. However, the results of our planned actions, and the timing of expected benefits, remain uncertain. In addition, it is possible that we may elect to undertake additional actions related to our Heavy Civil operating group. Our results of operations, cash flows and liquidity could be materially impacted by underperformance in our Heavy Civil operating group.
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, 2019:
Period
Total number of shares purchased1
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 programs2
July 1, 2019 through July 31, 2019
August 1, 2019 through August 31, 2019
September 1, 2019 through September 30, 2019
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, which replaced the former authorization including the amount available. As part of this authorization we have established a share repurchase program to facilitate common stock repurchases. During the third quarter of 2019, we purchased approximately 100,000 shares at an average price of $29.10 per share for $2.9 million. The specific timing and amount of any future repurchases will vary based on market conditions, securities law limitations and other factors.
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.
EXHIBITS
10.1
†
Amendment No 1 to Third Amended and Restated Credit Agreement, dated July 29, 2019, by and among the Company, Granite Construction Company, and GILC Incorporated, as borrowers, Bank of America, N.A., as Administrative Agent, and the lenders party thereto [Exhibit 10.1 to the Company’s Form 8-K filed on August 2, 2019]
31.1
Certification of Principal Executive Officer
31.2
Certification of Principal Financial Officer
††
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document)
101.SCH
Inline XBRL Taxonomy Extension Schema
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
Filed herewith
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.
Date:
October 25, 2019
By:
/s/ Jigisha Desai
Jigisha Desai
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
35