UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2016
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 _____
Commission file number 1-12911
Granite Construction Incorporated
(Exact name of registrant as specified in its charter)
Delaware | 77-0239383 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
585 West Beach Street | ||
Watsonville, California | 95076 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:
(831) 724-1011Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.01 par value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒x No ☐o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☒o No ☐x
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 ☒x No ☐o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)submit). Yes ☒x No ☐o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☒x Accelerated filer ☐o Non-accelerated filer ☐o Smaller reporting company ☐ Emerging growth company o☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐o No x☒
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was $1.8$2.5 billion as of
At February 15, 2017, 39,624,98619, 2019, 46,685,414 shares of Common Stock, par value $0.01, of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information called for by Part III is incorporated by reference to the definitive Proxy Statement for the Annual Meeting of Shareholders of Granite Construction Incorporated to be held on June 8, 2017,6, 2019, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2016.2018.
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EXHIBIT 101.CAL | |||
EXHIBIT 101.DEF | |||
EXHIBIT 101.LAB | |||
EXHIBIT 101.PRE | |||
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From time to time, Granite makes certain comments and disclosures in reports and statements, including in this Annual Report on Form 10-K, or statements made by its officers or directors, that are not based on historical facts, including statements regarding future events, occurrences, circumstances, activities, performance, outcomes and results that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by words such as “future,” “outlook,” “assumes,” “believes,” “expects,” “estimates,” “anticipates,” “intends,” “plans,” “appears,” “may,” “will,” “should,” “could,” “would,” “continue,” and the negatives thereof or other comparable terminology or by the context in which they are made. In addition, other written or oral statements which constitute forward-looking statements have been made and may in the future be made by or on behalf of Granite. These forward-looking statements are estimates reflecting the best judgment of senior management and reflect our current expectations regarding future events, occurrences, circumstances, activities, performance, outcomes and results. These expectations may or may not be realized. Some of these expectations may be based on beliefs, assumptions or estimates that may prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our expectationsforward-looking statements 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 this report 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 Annual Report on Form 10-K, and, except as required by law, we undertake no obligation to revise or update any forward-looking statements for any reason.
Introduction
Granite Construction Company was originally incorporated in 1922. In 1990, Granite Construction Incorporated was formed as the holding company for Granite Construction Company and its wholly-ownedwholly owned and consolidated subsidiaries and was incorporated in Delaware. Unless otherwise indicated, the terms “we,” “us,” “our,” “Company” and “Granite” refer to Granite Construction Incorporated and its wholly owned and consolidated subsidiaries.
We deliver infrastructure solutions for public and private clients primarily in the United States. We are one of the largest diversified heavy civil contractors and construction materials producersinfrastructure companies in the United States. We operate nationwide, serving both public and private sector clients. Within the public sector, we primarily concentrate on 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 and wastewaterwater-related facilities, utilities, tunnels, dams and other infrastructure-related projects. Within the private sector, we perform site preparation and infrastructure services for residential development, energy development, commercial and industrial sites, and other facilities, as well as provide construction management professional services.
On June 14, 2018, we completed the $349.8 million acquisition of Layne Christensen Company (“Layne”), a U.S.-based global water management, infrastructure services and drilling company in a stock-for-stock merger which was comprised of $321.0 million in Company common stock and $28.8 million in cash to settle all outstanding stock options, restricted stock awards and unvested performance shares of Layne. In addition to issuances of Granite common stock and the settlement of various equity awards, we assumed $191.5 million in convertible notes at fair value. Layne is a leader in water management and drilling and therefore this acquisition significantly enhances Granite’s presence in the water infrastructure market. Layne has a network of 52 offices located throughout North and Latin America. See Note 2 and Note 15 of “Notes to the Consolidated Financial Statements” for further discussion of the acquisition and the assumed convertible notes, respectively.
In addition, on April 3, 2018, we acquired LiquiForce, a privately owned company which provides sewer lining rehabilitation services to public and private sector water and wastewater customers in both Canada and the U.S. We acquired LiquiForce for $35.9 million in cash primarily borrowed under our revolving credit facility. See Note 15 of “Notes to the Consolidated Financial Statements” for further discussion of our revolving credit facility.
Layne will operate as a wholly owned subsidiary of Granite Construction Incorporated, and its results are reported in the newly formed Water and Mineral Services operating group in the Water, Specialty and Materials segments. LiquiForce results are reported in the Water and Mineral Services operating group in the Water segment.
Operating Structure
During the third quarter of 2018, we revised our reportable segments, which are the same as our operating segments, as a result of a change in how our chief operating decision maker (our Chief Executive Officer) regularly reviews financial information to allocate resources and assess performance. This change is consistent with our strategic, end-market diversification strategy. Our business is organized into threenew reportable business segments. These business segments which correspond to this end-market focus are: Transportation, Water, Specialty and Materials. The end-market segments Transportation, Water and Specialty replace the Construction and Large Project Construction reportable segments with the composition of our Materials segment remaining unchanged except for the addition of proprietary sanitary and Construction Materials.storm water rehabilitation products including cured-in-place pipe felt and fiberglass-based lining tubes related to the acquisition of Layne. Prior-year information has been recast to reflect this change. See Note 1822 of “Notes to the Consolidated Financial Statements” for additional information about our reportable business segments.
In addition to business segments, we review our business by operating groups and by public and private market sectors.groups. Our operating groups are defined as follows: (i) California; (ii) Northwest, which primarily includes offices in Alaska, Arizona, Nevada, Utah and Washington; (iii) Heavy Civil, which primarily includes offices in California, Florida, New York and Texas; and (iv) Kenny,Federal which primarily includes offices in Illinois. EachCalifornia, Colorado, Texas and Guam; (v) Midwest (formerly Kenny less the underground business), which primarily includes offices in Illinois and (vi) Water and Mineral Services (which includes LiquiForce, Layne and the underground business of thesethe former Kenny operating groupsgroup), which primarily includes financial results from our Constructionoffices across the Unites States, Canada and Large Project Construction segments. A project’s results are reported in the operating group that is responsible for the project, not necessarily the geographic area where the work is located. In some cases, the operations of an operating group include the results of work performed outside of that geographic region. Our California and Northwest operating groups include financial results from our Construction Materials segment.
Transportation: Construction:Revenue from our ConstructionTransportation segment was $1.4$2.0 billion and $1.3$1.9 billion (54.3% (59.5% and 53.3%65.1% of our total revenue) in 20162018 and 2015,2017, respectively. Revenue from our ConstructionThe Transportation segment is derived from both public and private sector clients. The Construction segment performs construction management, as well as various civil construction projects with a large portion of the work focusedfocuses on new construction and improvementrehabilitation of streets, roads, highways,pavement preservation, bridges, site work, underground, power-related facilities, water-related facilities, utilitiesrail lines, airports and other infrastructure projects. These projects are typically bid-build projects completed within two years with a contract value of less than $75 million.marine ports for use mostly by the general public.
Water: Revenue from our Large Project ConstructionWater segment was $888.2$338.3 million and $812.7$133.7 million (35.3%(10.2% and 34.3%4.5% of our total revenue) in 20162018 and 2015,2017, respectively. The Large Project ConstructionWater segment focuses on large,water-related construction and water management solutions for municipal agencies, commercial water suppliers, industrial facilities and energy companies. It also provides trenchless cured-in-place pipe rehabilitation.
Specialty: Revenue from our Specialty segment was $626.6 million and $615.8 million (18.9% and 20.6% of our total revenue) in 2018 and 2017, respectively. The Specialty segment focuses on construction of various complex projects including infrastructure / site development, mining, public safety, tunnel and power projects.
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In addition to our bid-build projects, which typically have a longer duration than our Construction segment work. These projects include major highways, mass transit facilities, bridges, tunnels, waterway locks and dams, pipelines, canals, power-related facilities, water-related facilities, utilities and airport infrastructure. This segment primarily includes bid-build, design-build and construction management/general contractor contracts, together with various contractwe utilize alternative procurement methods relatingof project delivery including, but not limited to, public-private partnerships, generally with contract values in excess of $75 million.
We participate in joint ventures with other construction companies mainly on projects in our Large Project Construction segment.companies. Joint ventures are typically used for large, technically complex projects, including design-build projects, where it is necessary or desirable to share risk and resources. Joint venture partners typically provide independently prepared estimates, shared financing and equipment, and often bring local knowledge and expertise. For more information see the “Joint Ventures” section below.
Materials:
Revenue from ourBusiness Strategy
Our business strategy is to consistently deliver ideas, innovations, products and services to our clients to power today’s mobile society by executing entrepreneurial market strategies that leverage the benefits of our company-wide resources and our core values. Our most fundamental objective is to increase long-term shareholder value as measured by the appreciation of the value of our common stock over a period of time, as well as dividend payouts. In alphabetical order, the following are key factors in our ability to achieve these objectives:
Decentralized Profit Centers -
Each of our operating groups is established as an individual profit center which encourages entrepreneurial activity while allowing the operating groups to benefit from centralized administrative, operational expertise and support functions.Dedicated Construction Equipment
- We own and lease a large fleet of well-maintained heavy construction equipment. Dedicated access to a large pool of construction equipment enables us to compete more effectively by ensuring availability and maximizing returns on investment of the equipment.Diversification -
To mitigate the risks inherent in the construction business as the result of general economic factors, we pursue projects: (i) in both the public and private sectors; (ii) in diverse end markets such as federal, rail, power, water and renewable energy markets; (iii) for a wide range ofEmployee Development
- We believe that our employees are the primary factor for the successful implementation of our business strategies. Significant resources are employed to attract, develop and retain extraordinary and diverse talent and fully promote each employee’s capabilities.Operational Excellence - We have a continual focus on Operational Excellence, which includes the following:
Code of Conduct - We believe in maintaining high ethical standards through an established code of conduct and an effective company-wide compliance program, while being guided by our core values at all times.
Sustainability - Our focus on sustainability encompasses many aspects of how we conduct ourselves and practice our Core Values. We believe sustainability is important to our clients, employees, shareholders, and communities, and is also a long-term business driver. By focusing on specific initiatives that address social, environmental and economic challenges, we can minimize risk and increase our competitive advantage.
Productivity - We strive to use our resources efficiently to deliver work on time and on budget.
Quality - We believe in satisfying our clients, mitigating risk, and driving improvement by performing work right the first time.
Safety - We believe the safety of our employees, the public and the environment is a moral obligation as well as good business. By identifying and concentrating resources to address jobsite hazards, we continually strive to eliminate our incident rates and the costs associated with accidents.
Performance-Based Incentives -Managers are incentivized with cash compensation and restricted stock unit equity awards, payable upon the attainment of pre-established annual financial and non-financial metrics.
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Risk-Balanced Growth - We intend to grow our business by working on many types of infrastructure projects, as well as by expanding into new geographic areas and end markets organically and through acquisitions. Growth opportunities are evaluated relative to their incremental impact to the execution risk and profitability profile of our operating portfolio.
Selective Bidding
- We focus our resources on bidding jobs that meet our selective bidding criteria, which include analyzing the risk of a potential job relative to: (i) available personnel to estimate and prepare the proposal as well as to effectively manage and build the project; (ii) the competitive environment; (iii) our experience with the type of work and with the owner; (iv) local resources and partnerships; (v) equipment resources; and (vi) the size, complexity and expected profitability of the job.Vertical Integration -Quality We own and High Ethical Standards - We believe in the importancelease aggregate reserves and own processing plants and liner tube manufacturing facilities that are vertically integrated into our construction operations. By ensuring availability of performing highthese resources and providing quality work. Additionally,products, we believe we have a competitive advantage in maintaining high ethical standards through an established code of conduct and an effective company-wide compliance program, while being guided by our Core Values at all times.
We purchase raw materials, including but not limited to, aggregate products, cement, diesel and gasoline fuel, liquid asphalt, natural gas, propane, resin and steel from numerous sources. Our aggregate reserves supply a portion of the raw materials needed in our construction projects. The price and availability of raw materials may vary from year to year due to market conditions and production capacities. We do not foresee a lack of availability of any raw materials over the next twelve months.
Seasonality
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, profitability and the required number of employees.
Customers
Customers in our Construction segmentTransportation, Water and Specialty segments are predominantly in the public sector and include certain federal agencies, state departments of transportation, local transit authorities, county and city public works departments, school districts and developers, utilities and private owners of industrial, commercial and residential sites. Customers of our Large Project Construction and Construction segments are predominantly in the public sector and currently include various state departments of transportation, local transit authorities, utilities and federal agencies. Customers of our Construction Materials segment include internal usage by our own construction projects, as well as third-party customers. Our third partythird-party customers include, but, are not limited to, contractors, landscapers, manufacturers of products requiring aggregate materials, retailers, homeowners, farmers and brokers.
During the yearyears ended December 31, 2018, 2017 and 2016, our largest volume customer, including both prime and subcontractor arrangements, was the California Department of Transportation (“Caltrans”). Revenue recognized from contracts with Caltrans during 2018, 2017 and 2016 represented $282.9 million (8.5% of total revenue), $281.7 million (9.4% of total revenue) and $222.4 million (8.8% of our total revenue), ofrespectively, which $173.4 million (12.7% of segment revenue) was primarily in the Construction segment and $48.7 million (5.5% of segment revenue) was in the Large Project ConstructionTransportation segment. During the years ended December 31, 2015 and 2014, our largest volume customers, including both prime and subcontractor arrangements, were the New York State Department of Transportation (“NYSDOT”) and Caltrans, respectively. Revenue recognized from contracts with NYSDOT during 2015 represented $199.0 million (8.4% of total revenue), all of which was in the Large Project Construction segment (24.5% of segment revenue). Revenue recognized from contracts with Caltrans during 2014 totaled $195.4 million (8.6% of total revenue), of which $178.7 million (15.1% of segment revenue) was in the Construction segment and $16.8 million (2.0% of segment revenue) was in the Large Project Construction segment.
Contract Backlog
Our contract backlog consists of the unearned 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. Certain government contracts where funding is appropriated on a periodic basis are included in contract backlog at the time of the award and when it is probable that the contract value will be funded and executed. Certain contracts contain contract options that are exercisable at the option of our customers without requiring us to go through an additional competitive bidding process or contain task orders that are signed under master contracts under which we perform work only when the customer awards specific task orders to us. Awarded contracts that include unexercised contract options and unissued task orders are included in contract backlog to the extent options are exercisedoption exercise or task order issuance is probable.
Substantially all of the contracts in our contract backlog as well as unexercised contract options and unissued task orders, 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 (see “Contract Provisions and Subcontracting”). Many projects in our Construction segment are added to contract backlog and completed within the same fiscal year and, therefore, may not be reflected in our beginning or year-end contract backlog. Contract backlog by segment is presented in “Contract Backlog” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our contract backlog was $3.5 billion and $2.9$3.7 billion at
At December 31, 20162018 and 2015,2017, we owned the following number of construction equipment and vehicles:
December 31, |
| 2018 |
|
| 2017 |
| ||
Heavy construction equipment |
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| 2,928 |
|
|
| 1,905 |
|
Trucks, truck-tractors, trailers and vehicles |
|
| 5,395 |
|
|
| 3,618 |
|
| December 31, | 2016 | 2015 | ||
| Heavy construction equipment | 1,934 | 1,964 | ||
| Trucks, truck-tractors, trailers and vehicles | 3,503 | 3,440 | ||
Our portfolio of equipment includes backhoes, barges, bulldozers, cranes, excavators, loaders, motor graders, pavers, rollers, scrapers, trucks, special equipment for pipeline rehabilitation, drilling rigs and tunnel boring machines that are used in all of our Construction, Large Project Construction and Construction Materials segments. We pool certain equipment to maximize utilization. We continually monitor and adjust our fleet size so that it is consistent with the size of our business, considering both existing contract backlog and expected future work. We lease or rent equipment to supplement our portfolio of equipment in response to construction activity cycles. In 20162018 and 2015,2017, we spent $65.1$58.5 million and $20.0$43.6 million, respectively, on purchases of construction equipment and vehicles. The increase in 2016 was primarily due to purchases to replace a mature construction equipment fleet, to replace trucks for California Air Resources Board (“CARB”) regulation compliance as well as $17.8 million of job specific equipment for our Large Project Construction segment of which approximately $9.4 million is our consolidated construction joint ventures (“CCJVs”) partners’ share.
Employees
On
December 31,We believe our employees are our most valuable resource, and our workforce possesses a strong dedication to and pride in our company. Our managerial and supervisory personnel have an average of approximately 1011 years of service with Granite.
Competition
Competitors in our Construction segmentTransportation, Specialty and Water segments typically range from small, local construction companies to large, regional, national and international construction companies. We compete with numerous companies in individual markets; however, there are few, if any, companies which compete in all of our market areas. Many of our ConstructionTransportation, Specialty and Water segment competitors have the ability to perform work in either the private or public sectors. When opportunities for work in one sector are reduced, competitors tend to look for opportunities in the other sector. This migration has the potential to reduce revenue growth and/or increase pressure on gross profit margins.
We own and/or have long-term leases on aggregate resources that we believe provide a competitive advantage in certain markets for both the ConstructionTransportation, Specialty and Large Project ConstructionWater segments.
Competitors in our Construction Materials segment typically range from small local materials companies to large regional, national and international materials companies. We compete with numerous companies in individual markets; however, there are few, if any, companies which compete in all of our market areas.
Factors influencing our competitiveness include price, estimating abilities, knowledge of local markets and conditions, project management, financial strength, reputation for quality, aggregate materials availability, and machinery and equipment. Historically, the construction business has not required large amounts of capital for the smaller size construction work, pursued by our Construction segment, which can result in relative ease of market entry for companies possessing acceptable qualifications. By contrast, thelarger size construction work pursued and performed by our Large Project Construction segment typically requires large amounts of capital that may make entry into the market by future competitors more difficult. Historically, the required amount of capital has not had a significant impact on our ability to compete in the marketplace. Although the construction business is highly competitive, we believe we are well positioned to compete effectively in the markets in which we operate.
Contract Provisions and Subcontracting
Contracts with our customers are primarily “fixed unit price” or “fixed price.” Under fixed unit price contracts, we are committed to providing materials or services at fixed unit prices (for example, dollars per cubic yard of concrete placed or cubic yard of earth excavated). While the fixed unit price contract shifts the risk of estimating the quantity of units required for a particular project to the customer, any increase in our unit cost over the expected unit cost in the bid, whether due to inflation, inefficiency, incorrect estimates or other factors, is borne by us unless otherwise provided in the contract. Fixed price contracts are priced on a lump-sum basis under which we bear the risk that we may not be able to perform the work for the specified contract amount. The percentage of fixed price contracts in our contract backlog was
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There are a number of factors that can create variability in contract performance as compared to the original bid. Such factors can positively or negatively impact costs and profitability, may cause higher than anticipated construction costs and can create additional liability to the contract owner. The most significant of these include:
the completeness and accuracy of the original bid;
costs associated with scope changes;
changes in costs of labor and/or materials;
extended overhead and other costs due to owner, weather and other delays;
subcontractor performance issues;
changes in productivity expectations;
site conditions that differ from those assumed in the original bid (to the extent contract remedies are unavailable);bid;
changes from original design on design-build projects;
the availability and skill level of workers in the geographic location of the project;
a change in the availability and proximity of equipment and materials;
our ability to fully and promptly recover on affirmative claims and back charges for additional contract costs; and
the customer’s ability to properly administer the contract.
The ability to realize improvements on project profitability at times is more limited than the risk of lower profitability. For example, design-build projects typically incur additional costs such as right-of-way and permit acquisition costs. In addition, design-build contracts carry additional risks such as those associated with design errors and estimating quantities and prices before the project design is completed. We manage this additional risk by including contingencies to our bid amounts, obtaining errors and omissions insurance and obtaining indemnifications from our design consultants where possible. However, there is no guarantee that these risk management strategies will always be successful.
Most of our contracts, including those with the government, provide for termination at the convenience of the contract owner, with provisions to pay us for work performed through the date of termination. We have not been materially adversely affected by these provisions in the past. Many of our contracts contain provisions that require us to pay liquidated damages if specified completion schedule requirements are not met, and these amounts could be significant.
We act as prime contractor on most of our construction projects. We complete the majority of our projects with our own resources and subcontract specialized activities such as electrical and mechanical work. As prime contractor, we are responsible for the performance of the entire contract, including subcontract work. Thus, we may be subject to increased costs associated with the failure of one or more subcontractors to perform as anticipated. Based on our analysis of their construction and financial capabilities, among other criteria, we typically require the subcontractor to furnish a bond or other type of security to guarantee their performance and/or we retain payments in accordance with contract terms until their performance is complete. Disadvantaged business enterprise regulations require us to use our good faith efforts to subcontract a specified portion of contract work done for governmental agencies to certain types of disadvantaged contractors or suppliers. As with all of our subcontractors, some may not be able to obtain surety bonds or other types of performance security.
Joint Ventures
We participate in various construction joint ventures of which we are a limited member (“joint ventures”) in order to share expertise, risk and resources for certain highly complex projects. Generally, each construction joint venture is formed as a partnership or limited liability company to accomplish a specific project and is jointly controlled by the joint venture partners. We select our joint venture partners (“partner(s)”) based on our analysis of their construction and financial capabilities, expertise in the type of work to be performed and past working relationships, among other criteria. The joint venture agreements typically provide that our interests in any profits and assets, and our respective share in any losses and liabilities, that may result from the performance of the contract are limited to our stated percentage interest in the project.
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Under each joint venture agreement, one partner is designated as the sponsor. The sponsoring partner typically provides all administrative, accounting and most of the project management support for the project and generally receives a fee from the joint venture for these services. We have been designated as the sponsoring partner in certain of our current joint venture projects and are a non-sponsoring partner in others.
We consolidate joint ventures where we have determined that through our participation we have a variable interest and are the primary beneficiary as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, and related standards. Where we have determined we are not the primary beneficiary of a joint venture but do exercise significant influence, we account for our share of the operations of jointly controlledunconsolidated construction joint ventures on a pro rata basis in revenue and cost of revenue in the consolidated statements of operations and in equity in construction joint ventures in the consolidated balance sheets. We account for non-construction unconsolidated joint ventures under the equity method of accounting in accordance with ASC Topic 323, Investments - Equity Method and Joint Ventures and include our share of the operations in equity in income of affiliates in the consolidated statements of operations and in investment in affiliates in the consolidated balance sheets. We have been divesting equity method investments in real estate affiliates as part of our 2010 Enterprise Improvement Plan.
We also participate in various “line item” joint venture agreements under which each partner is responsible for performing certain discrete items of the total scope of contracted work. The revenue for these discrete items is defined in the contract with the project owner and each joint venture partner bears the profitability risk associated only with its own work. There is not a single set of books and records for a line item joint venture. Each partner accounts for its items of work individually as it would for any self-performed contract. We account for our portion of these contracts as revenues and cost of revenue in the consolidated statements of operations and in relevant balances in the consolidated balance sheets.
The agreements with our partner(s) for both construction joint ventures and line item joint ventures define each partner’s management role and financial responsibility in the project. The amount of operational exposure is generally limited to our stated ownership interest. However, due to the joint and several nature of the performance obligations under the related owner contracts, if oneany of the partners failsfail 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). We estimate our liability for performance guarantees for our unconsolidated and line item joint ventures and include them in accrued expenses and other current liabilities with a corresponding increase in equity in construction joint ventures in the consolidated balance sheets. We reassess our liability when and if changes in circumstances occur. The liability and corresponding asset are removed from the consolidated balance sheets upon completion and customer acceptance of the project. Circumstances that could lead to a loss under these agreements beyond our stated ownership interest include the failure of a partner to contribute additional funds to the venture in the event the project incurs a loss or additional costs that we could incur should a partner fail to provide the services and resources that it had committed to provide in the agreement. 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.
At December 31,
Insurance and Bonding
We maintain general and excess liability, construction equipment, workers’ compensation and medical insurance; all in amounts consistent with industry practice.
In connection with our business, we generally are required to provide various types of surety bonds that provide an additional measure of security for our performance under certain public and private sector contracts. Our ability to obtain surety bonds depends upon our capitalization, working capital, past performance, management expertise and external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of our contract backlog that we have currently bonded and their current underwriting standards, which may change from time to time. The capacity of the surety market is subject to market-based fluctuations driven primarily by the level of surety industry losses and the degree of surety market consolidation. When the surety market capacity shrinks it results in higher premiums and increased difficulty obtaining bonding, in particular for larger, more complex projects throughout the market. In order toTo help mitigate this risk, we employ a co-surety structure involving three sureties. Although we do not believe that fluctuations in surety market capacity have significantly affected our ability to grow our business, there is no assurance that it will not significantly affect our ability to obtain new contracts in the future (see “Item 1A. Risk Factors”).
We are subject to the Foreign Corrupt Practices Act (“FCPA”), which prohibits U.S. and other business entities from making improper payments to foreign government officials, political parties or political party officials. We are also subject to the applicable anti-corruption laws in the jurisdictions in which we operate, thus potentially exposing us to liability and potential penalties in multiple jurisdictions. The anti-corruption provisions of the FCPA are enforced by the Department of Justice while other state or federal agencies may seek recourse against the Company for issues related to FCPA. In addition, the Securities and Exchange Commission (“SEC”) requires strict compliance with certain accounting and internal control standards set forth under the FCPA. Failure to comply with the FCPA and other laws can expose us and/or individual employees to potentially severe criminal and civil penalties. Such penalties may have a material adverse effect on our business, financial condition and results of operations.
We devote resources to the development, maintenance, communication and enforcement of our Code of Conduct, our anti-bribery compliance policies, our internal control processes and compliance related policies. We strive to conduct timely internal investigations of potential violations and take appropriate action depending upon the outcome of the investigation.
Environmental Regulations
Our operations are subject to various federal, state and local laws and regulations relating to the environment, including those relating to discharges to air, water and land, the handling and disposal of solid and hazardous waste, the handling of underground storage tanks and the cleanup of properties affected by hazardous substances. Certain environmental laws impose substantial penalties for non-compliance and others, such as the federal Comprehensive Environmental Response, Compensation and Liability Act, impose strict, retroactive, joint and several liability upon persons responsible for releases of hazardous substances. We continually evaluate whether we must take additional steps at our locations to ensure compliance with environmental laws. While compliance with applicable regulatory requirements has not materially adversely affected our operations in the past, there can be no assurance that these requirements will not change and that compliance will not adversely affect our operations in the future. In addition, our aggregate materials operations require operating permits granted by governmental agencies. We believe that tighter regulations for the protection of the environment and other factors will make it increasingly difficult to obtain new permits and renewal of existing permits may be subject to more restrictive conditions than currently exist.
The California Air Resource Board requires California equipment owners/operators to reduce diesel particulate and nitrogen oxide emissions from in-use off-road diesel equipment and to meet progressively more restrictive emission targets from 2010 to 2020. In December 2008, CARB approved a similar regulation for in-use on-road diesel equipment that includes more restrictive emission targets from 2010 to 2022. The emission targets require California off-road and on-road diesel equipment owners to retrofit2022 by retrofitting equipment with diesel emission control devices or replacereplacing equipment with new engine technology as it becomes available, which has resulted and will result in higher equipment-related expenses. In December 2010, CARB amended both regulationsavailable. Over the past few years we have been proactively replacing our fleet prior to grant economic relief to affected fleets by extending initial compliance dates as well as adding additional compliance requirements. To-date, costs to prepare the Company for compliance have totaled $24.5 million and costs of compliance in 2017 are estimated2022 deadline to be $0.8 million. We will continue to managein compliance costs; however, it isand do not possible to determine the totalexpect significant future cost of compliance.
As is the case with other companies in our industry, some of our aggregate products contain varying amounts of crystalline silica, a common mineral. Also, some of our construction and material processing operations release, as dust, crystalline silica that is in the materials being handled. Excessive, prolonged inhalation of very small-sized particles of crystalline silica has allegedly been associated with respiratory disease (including Silicosis). During 2016, the Occupational Safety and Health Administration (“OSHA”) implemented new and more stringent occupational exposure thresholds for crystalline silica exposure as respirable dust. In addition, the Mine Safety and Health Administration is proposing the identical rule as implemented by OSHA. We have implemented dust control procedures to measure compliance with requisite thresholds and to verify that respiratory protective equipment is made available as necessary. We also communicate, through safety data sheets and other means, what we believe to be appropriate warnings and cautions to employees and customers about the risks associated with excessive, prolonged inhalation of mineral dust in general and crystalline silica in particular (see “Item 1A. Risk Factors”). The scope of new exposure limits indicates that additional engineering controls, beyond providing respirators will be required to reduce potential exposure in response to the reduced exposure limits. The OSHA crystalline silica rule is currently being challengedGeneral Industry and Construction Standards were phased in during late 2017 and were fully implemented in 2018. Expenses related to this implementation were immaterial during the courts. These rule changes are being trackedyears ended December 31, 2018 and monitored to evaluate potential future compliance costs; however, it is not possible at this time to determine the future cost of compliance.
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 reportsCurrent 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”).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.
9
Information regarding our executive officers is set forth below.
Name | Age | Position | ||
James H. Roberts | 62 | President and Chief Executive Officer | ||
Jigisha Desai | ||||
52 | Senior Vice President and Chief Financial Officer | |||
Kyle T. Larkin | 47 | Senior Vice President and Group Manager | ||
James D. Richards | 55 | Senior Vice President and Group Manager | ||
Dale Swanberg | 56 | Senior Vice President and Group Manager |
Mr. Roberts joined Granite in 1981 and has served in various capacities, including President and Chief Executive Officer since September 2010. He also served as Executive Vice President and Chief Operating Officer from September 2009 through August 2010, Senior Vice President from May 2004 through September 2009, Granite West Manager from February 2007 through September 2009, Branch Division Manager from May 2004 through February 2007, Vice President and Assistant Branch Division Manager from 1999 to 2004, and Regional Manager of Nevada and Utah Operations from 1995 to 1999. Mr. Roberts served as Chairman of The National Asphalt Pavement Association in 2006. He received a B.S.C.E. in 1979 and an M.S.C.E. in 1980 from the University of California, Berkeley, and an M.B.A. from the University of Southern California in 1981. He also completed the Stanford Executive Program in 2009.
Ms. Desai joined Granite in 1993 and has served as Granite’s ExecutiveSenior Vice President and Chief OperatingFinancial Officer since August 2014. From June 2006 through July 2014, he served in various executive positions with CH2M HILL, including Managing Director, Global Operations; Managing Director, United Kingdom Ministry of Defense Programs; President, Government Facilities and Infrastructure Business Group; President, CH2M HILL Constructors, Inc. and Global Business Development and Planning Director. Prior to CH2M Hill, Mr. Miller2018. She served as DirectorVice President of Federal ProgramsCorporate Finance, Treasurer & Assistant Financial Officer from 2013-2018, Vice President, Treasurer & Assistant Financial Officer from 2007-2013, Assistant Treasurer & Assistant Secretary from 2001-2007 and Treasury Manager from 1993-2001. Ms. Desai is a Member of the Finance Committee for Jacobs Engineering Group. From 1989 to 1995, Mr. Miller served in the United States Air Force in the Human Systems Division, Weapons System Program Office and the Air Force Center for Environmental Excellence. HePajaro Valley Health Trust. Ms. Desai received a B.A.Bachelor’s degree in BiologyAccounting from the University of LouisvilleHouston in 1987, an M.B.A. in Corporate Finance from Golden Gate University in 1992 and an M.S.completed Harvard Business School’s Advanced Management Program in Civil Engineering from the University of Texas at San Antonio.
Mr. Larkin joined Granite in 2008 and has served as Chief Financial Officer since November 2010. She has served as Executive Vice President since December 2015, Senior Vice President from January 2013 through December 2015, Vice President from July 2008 through December 2012, Interim Chief Financial Officer from June 2010 to October 2010 and Corporate Controller from July 2008 through May 2010. From 1993 to 2007, she served in various corporate and operational finance positions with The Gillette Company (acquired by The Procter & Gamble Company in 2005), including Finance Director for the Duracell and Braun North American business units. Ms. Krzeminski also served as the Director of Gillette’s Sarbanes-Oxley Section 404 Compliance program and as Gillette’s Director of Corporate Financial Reporting. Ms. Krzeminski is currently a member of the board of directors of Terracon. Her experience also includes several years in public accounting with an international accounting firm. Ms. Krzeminski received a B.S. in Business Administration-Accounting from San Diego State University.
Mr. Richards joined Granite in January 1992 and has served as Senior Vice President and Group Manager since January 2013. He also served as Arizona Region Manager from February 2006 through December 2012, Arizona Region Chief Estimator from January 2000 through January 2006 and in other positions at Granite’s Arizona Branch between 1992 and 2000. Prior to joining Granite, he served as a U.S. Army Officer. Mr. Richards received a B.S. in Civil Engineering from New Mexico State University in 1987.
Mr. Swanberg joined Granite in 2015 and has served as Senior Vice President and Group Manager since January 1, 2017 and as Vice President and Deputy Group Manager sincefrom April 2015.2015 to December 2016. In 2013, Mr. Swanberg served as the Chief Operating Officer of Flatiron Construction. Prior to Flatiron Construction, he served in various positions for the Walsh Group from 1985 to 2012, including as the President of the Heavy Civil Group. Mr. Swanberg received a B.S. in Civil Engineering from Bradley University in 1984.
10
Set forth below and elsewhere in this report and in other documents we file with the SEC are various risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report or otherwise adversely affect our business.
Unfavorable economic conditions may have an adverse impact on our business.Volatility in the global financial system, deterioration in general economic activity, and fiscal, monetary and other policies that the U.S. governmentfederal, state and local government(s) may enact, including infrastructure spending or Congress’ deficit reduction measures, may have an adverse impact on our business, financial position, results of operations, cash flows and liquidity. In particular, low tax revenues, budget deficits, financing constraints, including timing of long-term federal, state and local funding releases, and competing priorities could negatively impact the ability of government agencies to fund existing or new infrastructure projects in the public sector. In addition, these factors could have a material adverse effect on the financial market and economic conditions in the United States as well as throughout the world, which may limit our ability and the ability of our customers to obtain financing and/or could impair our ability to execute our acquisition strategy. In addition, levels of new commercial and residential construction projects could be adversely affected by oversupply of existing inventories of commercial and residential properties, low property values and a restrictive financing environment.
We work in a highly competitive marketplace.We have multiple competitors in all of the areas in which we work, and some of our competitors are larger than we are and may have greater resources than we do. Government funding for public works projects is limited, thus contributing to competition for the limited number of public projects available. This increased competition may result in a decrease in new awards at acceptable profit margins. In addition, should downturns in residential and commercial construction activity occur, the competition for available public sector work would intensify, which could impact our revenue, contract backlog and profit margins.
Government contracts generally have strict regulatory requirements.Approximately 83.7%80.3% of our Construction and Large Project Constructionconstruction related revenue in 20162018 was derived from contracts funded by federal, state and local government agencies and authorities. Government contracts are subject to specific procurement regulations, contract provisions and a variety of socioeconomic requirements relating to their formation, administration, performance and accounting and often include express or implied certifications of compliance. Claims for civil or criminal fraud may be brought for violations of regulations, requirements or statutes. We may also be subject to qui tam litigation brought by private individuals on behalf of the government under the Federal Civil False Claims Act, which could include claims for up to treble damages. Further, if we fail to comply with any of the regulations, requirements or statutes or if we have a substantial number of accumulated Occupational Safety and Health Administration, Mine Safety and Health Administration or other workplace safety violations, our existing government contracts could be terminated and we could be suspended from government contracting or subcontracting, including federally funded projects at the state level. Should one or more of these events occur, it could have a material adverse effect on our financial position, results of operations, cash flows and liquidity.
Government contractors are subject to suspension or debarment from government contracting.Our substantial dependence on government contracts exposes us to a variety of risks that differ from those associated with private sector contracts. Various statutes to which our operations are subject, including the Davis-Bacon Act (which regulates wages and benefits), the Walsh-Healy Act (which prescribes a minimum wage and regulates overtime and working conditions), Executive Order 11246 (which establishes equal employment opportunity and affirmative action requirements) and the Drug-Free Workplace Act, provide for mandatory suspension and/or debarment of contractors in certain circumstances involving statutory violations. In addition, the Federal Acquisition Regulation and various state statutes provide for discretionary suspension and/or debarment in certain circumstances that might call into question a contractor’s willingness or ability to act responsibly, including as a result of being convicted of, or being found civilly liable for, fraud or a criminal offense in connection with obtaining, attempting to obtain or performing a public contract or subcontract. The scope and duration of any suspension or debarment may vary depending upon the facts and the statutory or regulatory grounds for debarment and could have a material adverse effect on our financial position, results of operations, cash flows and liquidity.
Our success depends on attracting and retaining qualified personnel, joint venture partners and subcontractors in a competitive environment.The success of our business is dependent on our ability to attract, develop and retain qualified personnel, joint venture partners, advisors and subcontractors. Changes in general or local economic conditions and the resulting impact on the labor market and on our joint venture partners may make it difficult to attract or retain qualified individuals in the geographic areas where we perform our work. If we are unable to provide competitive compensation packages, high-quality training programs and attractive work environments or to establish and maintain successful partnerships, our reputation, relationships and/or ability to profitably execute our work could be adversely impacted.
11
In connection with acquisitions or divestitures, we may become subject to liabilities. In connection with any acquisitions, we may acquire liabilities or defects such as legal claims, including but not limited to third partyliability and other tort claims; claims for breach of contract; employment-related claims; environmental liabilities, conditions or damage; permitting, regulatory or other compliance with law issues; or tax liabilities. If we acquire any of these liabilities, and they are not adequately covered by insurance or an enforceable indemnity or similar agreement from a creditworthy counterparty, we may be responsible for significant out-of-pocket expenditures. In connection with any divestitures, we may incur liabilities for breaches of representations and warranties or failure to comply with operating covenants under any agreement for a divestiture. In addition, we may indemnify a counterparty in a divestiture for certain liabilities of the subsidiary or operations subject to the divestiture transaction. These liabilities, if they materialize, could have a material adverse effect on our business, financial condition and results of operations.
As a part of our growth strategy we have made and may make future acquisitions, and acquisitions involve many risks. These risks include:
difficulties integrating the operations and personnel of the acquired companies;
diversion of management’s attention from ongoing operations;
potential difficulties and increased costs associated with completion of any assumed construction projects;
insufficient revenues to offset increased expenses associated with acquisitions and the potential loss of key employees or customers of the acquired companies;
assumption of liabilities of an acquired business, including liabilities that were unknown at the time the acquisition was negotiated;
difficulties relating to assimilating the personnel, services, and systems of an acquired business and to assimilating marketing and other operational capabilities;
increased burdens on our staff and on our administrative, internal control and operating systems, which may hinder our legal and regulatory compliance activities;
difficulties in applying and integrating our system of internal controls to an acquired business;
if we issue additional equity securities, such issuances could have the effect of diluting our earnings per share as well as our existing shareholders’ individual ownership percentages in the Company;
the recording of goodwill or other non-amortizable intangible assets that will be subject to subsequent impairment testing and potential impairment charges, as well as amortization expenses related to certain other intangible assets; and
while we often obtain indemnification rights from the sellers of acquired businesses, such rights may be difficult to enforce and the indemnitors may not have the ability to financially support the indemnity.
Failure to manage and successfully integrate acquisitions could harm our financial position, results of operations, cash flows and liquidity.
An inability to obtain bonding could have a negative impact on our operations and results.As more fully described in “Insurance and Bonding” under “Item 1. Business,” we generally are required to provide surety bonds securing our performance under the majority of our public and private sector contracts. Our inability to obtain reasonably priced surety bonds in the future and, while we monitor the financial health of our insurers and the insurance market, catastrophic events could reduce available limits or the breadth of coverage both of which could significantly affect our ability to be awarded new contracts whichand could, therefore, have a material adverse effect on our financial position, results of operations, cash flows and liquidity.
We may be unable to identify and contract with qualified Disadvantaged Business Enterprise (“DBE”) contractors to perform as subcontractors.Certain of our government agency projects contain minimum DBE participation clauses. If we subsequently fail to complete these projects with the minimum DBE participation, we may be held responsible for breach of contract, which may include restrictions on our ability to bid on future projects as well as monetary damages. To the extent we are responsible for monetary damages, the total costs of the project could exceed our original estimates, we could experience reduced profits or a loss for that project and there could be a material adverse impact to our financial position, results of operations, cash flows and liquidity.
12
Design-build contracts subject us to the risk of design errors and omissions.Design-build is increasingly being used as a method of project delivery as it provides the owner with a single point of responsibility for both design and construction. We generally subcontract design responsibility to architectural and engineering firms. However, in the event of a design error or omission causing damages, there is risk that the subcontractor or their errors and omissions insurance would not be able to absorb the liability. In this case we may be responsible, resulting in a potentially material adverse effect on our financial position, results of operations, cash flows and liquidity.
Many of our contracts have penalties for late completion.In some instances, including many of our fixed price contracts, we guarantee that we will complete a project by a certain date. If we subsequently fail to complete the project as scheduled we may be held responsible for costs resulting from the delay, generally in the form of contractually agreed-upon liquidated damages. To the extent these events occur, the total cost of the project could exceed our original estimate and we could experience reduced profits or a loss on that project and there could be a material adverse impact to our financial position, results of operations, cash flows and liquidity.
Strikes or work stoppages could have a negative impact on our operations and results.We are party to collective bargaining agreements covering a portion of our craft workforce. Although strikes or work stoppages have not had a significant impact on our operations or results in the past, such labor actions could have a significant impact on our operations and results if they occur in the future.
Failure of our subcontractors to perform as anticipated could have a negative impact on our results.As further described in “Contract Provisions and Subcontracting” under “Item 1. Business,” we subcontract portions of many of our contracts to specialty subcontractors, but we are ultimately responsible for the successful completion of their work. Although we seek to require bonding or other forms of guarantees, we are not always successful in obtaining those bonds or guarantees from our higher-risk subcontractors. In this case we may be responsible for the failures on the part of our subcontractors to perform as anticipated, resulting in a potentially adverse impact on our cash flows and liquidity. In addition, the total costs of a project could exceed our original estimates and we could experience reduced profits or a loss for that project, which could have an adverse impact on our financial position, results of operations, cash flows and liquidity.
Our joint venture contracts subject us to risks and uncertainties, some of which are outside of our control.As further described in Note 1 of “Notes to the Consolidated Financial Statements” and under “Item 1. Business; Joint Ventures,” we perform certain construction contracts as a limited member of joint ventures. Participating in these arrangements exposes us to risks and uncertainties, including the risk that if our partners fail to perform under joint and several liability contracts, we could be liable for completion of the entire contract. In addition, if our partners are not able or willing to provide their share of capital investment to fund the operations of the venture, there could be unanticipated costs to complete the projects, financial penalties or liquidated damages. These situations could have a material adverse effect on our financial position, results of operations, cash flows and liquidity.
To the extent we are not the controlling partner, we have limited control over many of the decisions made with respect to the related construction projects. These joint ventures may not be subject to the same compliance requirements, including those related to internal control over financial reporting. While we have controls to sufficiently mitigate the risks associated with reliance on their control environment and financial information, to the extent the controlling partner makes decisions that negatively impact the joint venture or internal control problems arise within the joint venture, it could have a material adverse impact on our business, financial position, results of operations, cash flows and liquidity.
Our failure to adequately recover on affirmative claims brought by us against project owners or other project participants (e.g., back charges against subcontractors) for additional contract costs could have a negative impact on our liquidity and future operations.In certain circumstances, we assert affirmative claims against project owners, engineers, consultants, subcontractors or others involved in a project for additional costs exceeding the contract price or for amounts not included in the original contract price. These types of affirmative claims occur due to matters such as delays or changes from the initial project scope, both of which may result in additional costs. Often, these affirmative claims can be the subject of lengthy arbitration or litigation proceedings, and it is difficult to accurately predict when and on what terms they will be fully resolved. The potential gross profit impact of recoveries for affirmative claims may be material in future periods when they, or a portion of them, become probable and estimable or are settled. When these types of events occur, we use working capital to cover cost overruns pending the resolution of the relevant affirmative claims and may incur additional costs when pursuing such potential recoveries. A failure to recover on these types of affirmative claims promptly and fully could have a negative impact on our financial position, results of operations, cash flows and liquidity. In addition, while clients and subcontractors may be obligated to indemnify us against certain liabilities, such third parties may refuse or be unable to pay us.
13
Unavailability of insurance coverage could have a negative effect on our operations and results.We maintain insurance coverage as part of our overall risk management strategy and pursuant to requirements to maintain specific coverage that are contained in our financing agreements and in most of our construction contracts. Although we have been able to obtain reasonably priced insurance coverage to meet our requirements in the past, there is no assurance that we will be able to do so in the future, and our inability to obtain such coverage could have an adverse impact on our ability to procure new work, which could have a material adverse effect on our financial position, results of operations, cash flows and liquidity.
Accounting for our revenues and costs involves significant estimates.As further described in “Critical Accounting Policies and Estimates” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” accounting for our contract-related revenues and costs, as well as other expenses, requires management to make a variety of significant estimates and assumptions. Although we believe we have sufficient experience and processes to enable us to formulate appropriate assumptions and produce reasonably dependable estimates, these assumptions and estimates may change significantly in the future and could result in the reversal of previously recognized revenue and profit. Such changes could have a material adverse effect on our financial position and results of operations.
We use certain commodity products that are subject to significant price fluctuations. Petroleum based products, such as fuels, lubricants, and liquid asphalt, are used to power or lubricate our equipment, operate our plants, and a significant ingredient in the asphaltic concrete we manufacture for sale to third parties and use in our asphalt paving construction projects. Although we are partially protected by asphalt or fuel price escalation clauses in some of our contracts, many contracts provide no such protection. We also use steel and other commodities in our construction projects that can be subject to significant price fluctuations. To mitigate these risks, we pre-purchase commodities, enter into supply agreements or enter into financial contracts to secure pricing. Although we have not been significantly adversely affected by price fluctuations in the past, there is no guarantee that we will not be in the future.
We are subject to environmental and other regulation.As more fully described in “Environmental Regulations” under “Item 1. Business,” we are subject to a number of federal, state and local laws and regulations relating to the environment, workplace safety and a variety of socioeconomic requirements. Noncompliance with such laws and regulations can result in substantial penalties, or termination or suspension of government contracts as well as civil and criminal liability. In addition, some environmental laws and regulations impose liability and responsibility on present and former owners, operators or users of facilities and sites for contamination at such facilities and sites, without regard to causation or knowledge of contamination. We occasionally evaluate various alternatives with respect to our facilities, including possible dispositions or closures. Investigations undertaken in connection with these activities may lead to discoveries of contamination that must be remediated, and closures of facilities may trigger compliance requirements that are not applicable to operating facilities. While compliance with these laws and regulations has not materially adversely affected our operations in the past, there can be no assurance that these requirements will not change and that compliance will not adversely affect our operations in the future. Furthermore, we cannot provide assurance that existing or future circumstances or developments with respect to contamination will not require us to make significant remediation or restoration expenditures.
Weather can significantly affect our revenues and profitability.Our ability to perform work is significantly affected by weather conditions such as precipitation and temperature. Changes in weather conditions can cause delays and otherwise significantly affect our project costs. The impact of weather conditions can result in variability in our quarterly revenues and profitability, particularly in the first and fourth quarters of the year.
Increasing restrictions on securing aggregate reserves could negatively affect our future operations and results.Tighter regulations and the finite nature of property containing suitable aggregate reserves are making it increasingly challenging and costly to secure aggregate reserves. Although we have thus far been able to secure reserves to support our business, our financial position, results of operations, cash flows and liquidity may be adversely affected by an increasingly difficult permitting process.
14
Force majeure events, including natural disasters and terrorists’ actions, could negatively impact our business, which may affect our financial condition, results of operations or cash flows. Force majeure or extraordinary events beyond the control of the contracting parties, such as natural and man-made disasters, as well as terrorist actions, could negatively impact the economies in which we operate. We typically negotiate contract language where we are allowed certain relief from force majeure events in private client contracts and review and attempt to mitigate force majeure events in both public and private client contracts. We remain obligated to perform our services after most extraordinary events subject to relief that may be available pursuant to a force majeure clause. If we are not able to react quickly to force majeure events, our operations may be affected, which could have a material adverse effect on our financial position, results of operations, cash flows and liquidity.
Changes to our outsourced software or infrastructure vendors as well as any sudden loss, breach of security, disruption or unexpected data or vendor loss associated with our information technology systems could have a material adverse effect on our business. We rely on third-party software and infrastructure to run critical accounting, project management and financial information systems. If software or infrastructure vendors decide to discontinue further development, integration or long-term maintenance support for our information systems, or there is any system interruption, delay, breach of security, loss of data or loss of a vendor, we may need to migrate some or all of our accounting, project management and financial information to other systems. Despite business continuity plans, these disruptions could increase our operational expense as well as impact the management of our business operations, which could have a material adverse effect on our financial position, results of operations, cash flows and liquidity.
An inability to safeguardCybersecurity attacks on or breaches of our information technology environment could result inbusiness interruptions, remediation costs and/or legal claims.To protect confidential customer, vendor, financial and employee information, we employ information security measures that secure our information systems from cybersecurity attacks or breaches. Even with these measures, we may be subject to unauthorized access of digital data with the intent to misappropriate information, corrupt data or cause operational disruptions. If a failure of our safeguarding measures were to occur, it could have a negative impact to our business and result in business interruptions, remediation costs and/or legal claims, which could have a material adverse effect on our financial position, results of operations, cash flows and liquidity.
A change in tax laws or regulations of any federal, state or international jurisdiction in which we operate could increase our tax burden and otherwise adversely affect our financial position, results of operations, cash flows and liquidity.We continue to assess the impact of various U.S. federal, state, local and international legislative proposals that could result in a material increase to our U.S. federal, state, local and/or international taxes. We cannot predict whether any specific legislation will be enacted or the terms of any such legislation. However, if such proposals were to be enacted, or if modifications were to be made to certain existing regulations, the consequences could have a material adverse impact on us, including increasing our tax burden, increasing our cost of tax compliance or otherwise adversely affecting our financial position, results of operations, cash flows and liquidity.
Our contract backlog is subject to unexpected adjustments and cancellations and could be an uncertain indicator of our future earnings.We cannot guarantee that the revenues projected in our contract backlog will be realized or, if realized, will be profitable. Projects reflected in our contract backlog may be affected by project cancellations, scope adjustments, time extensions or other changes. Such changes may adversely affect the revenue and profit we ultimately realize on these projects.
Our business strategy includes growing our international operations, in Canada and U.S. Territories, which are subject to a number of special risks.As part of our strategic diversification efforts, we may enter into more construction contracts in Canada or U.S. Territories,international locations, which may subject us to a number of special risks unique to foreign countries and/or operations. Due to the special risks associated with non-U.S. operations, our exposure to such risks may not be proportionate to the percentage of our revenues attributable to such operations.
15
Rising inflation and/or interest rates could have an adverse effect on our business, financial condition and results of operations.Economic factors, including inflation and fluctuations in interest rates, could have a negative impact on our business. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could have a material adverse effect on our financial position, results of operations, cash flows and liquidity.
The foregoing list is not all-inclusive. There can be no assurance that we have correctly identified and appropriately assessed all factors affecting our business or that the publicly available and other information with respect to these matters is complete and correct. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect us. These developments could have material adverse effects on our business, financial condition, results of operations and liquidity. For these reasons, the reader is cautioned not to place undue reliance on our forward-looking statements.
None.
16
Quarry Properties
As of
December 31,.
We estimate our permitted proven
1 and probable2 aggregate reserves to be approximately1
Proven reserves are determined through the testing of samples obtained from closely spaced subsurface drilling and/or exposed pit faces. Proven reserves are sufficiently understood so that quantity, quality, and engineering conditions are known with sufficient accuracy to be mined without the need for any further subsurface work. Actual required spacing is based on geologic judgment about the predictability and continuity of each deposit.2
Probable reserves are determined through the testing of samples obtained from subsurface drilling but the sample points are too widely spaced to allow detailed prediction of quantity, quality, and engineering conditions. Additional subsurface work may be needed prior to mining the reserve.17
The following tables present information about our quarry properties as of December 31, 20162018 (tons in millions):
|
| Type |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Quarry Properties |
| Sand & Gravel |
|
| Hard Rock |
|
| Permitted Aggregate Reserves (tons) |
|
| Unpermitted Aggregate Reserves (tons) |
|
| Three-Year Annual Average Production Rate (tons) |
|
| Average Reserve Life |
| ||||||
Owned quarry properties |
|
| 24 |
|
|
| 5 |
|
|
| 384.6 |
|
|
| 286.2 |
|
|
| 5.3 |
|
|
| 73 |
|
Leased quarry properties1 |
|
| 20 |
|
|
| 11 |
|
|
| 275.0 |
|
|
| 101.6 |
|
|
| 8.0 |
|
|
| 35 |
|
| Type | ||||||
| Quarry Properties | Sand & Gravel | Hard Rock | Permitted Aggregate Reserves (tons) | Unpermitted Aggregate Reserves (tons) | Three-Year Annual Average Production Rate (tons) | Average Reserve Life |
| Owned quarry properties | 25 | 5 | 430.4 | 341.5 | 6.0 | 72 |
Leased quarry properties1 | 23 | 12 | 297.4 | 41.6 | 5.2 | 57 |
1
Our leases have terms which range from month-to-month to 45 years with most including an option to
|
|
|
|
|
| Permitted Reserves for Each Product Type (tons) |
|
| Percentage of Permitted Reserves Owned and Leased |
| ||||||||||
State |
| Number of Properties |
|
| Sand & Gravel |
|
| Hard Rock |
|
| Owned |
|
| Leased |
| |||||
California |
|
| 23 |
|
|
| 227.5 |
|
|
| 214.6 |
|
|
| 56 | % |
|
| 44 | % |
Non-California |
|
| 37 |
|
|
| 129.0 |
|
|
| 88.5 |
|
|
| 64 | % |
|
| 36 | % |
Permitted Reserves for Each Product Type (tons) | Percentage of Permitted Reserves Owned and Leased | ||||||
| State | Number of Properties | Sand & Gravel | Hard Rock | Owned | Leased | ||
| California | 28 | 249.0 | 246.8 | 58 | % | 42 | % |
| Non-California | 37 | 139.0 | 93.0 | 61 | % | 39 | % |
Plant Properties
We operate plants at our quarry sites to process aggregates into construction materials. Some of our sites may have more than one crushing, concrete or asphalt processing plant. In an effort to continuously increase efficiencies based on external and internal demands, we sold or otherwise disposed of four plants during 2018 and several plants and the associated land in California during 20162017. The gains associated with these sales were immaterial during 2018 and 2015. These sales or dispositions resulted in gains during 2016 and 2015 of approximately $2.6 million and $0.2 million, respectively, that were recorded to gain on sales of property and equipment in the consolidated statements of operations.2017. At December 31, 20162018 and
December 31, |
| 2018 |
|
| 2017 |
| ||
Aggregate crushing plants |
|
| 29 |
|
|
| 29 |
|
Asphalt concrete plants |
|
| 49 |
|
|
| 49 |
|
Cement concrete batch plants |
|
| 5 |
|
|
| 7 |
|
Asphalt rubber plants |
|
| 7 |
|
|
| 6 |
|
Lime slurry plants |
|
| 6 |
|
|
| 8 |
|
Pipe liner product factories |
|
| 2 |
|
|
| — |
|
| December 31, | 2016 | 2015 | ||
| Aggregate crushing plants | 30 | 32 | ||
| Asphalt concrete plants | 50 | 50 | ||
| Cement concrete batch plants | 7 | 8 | ||
| Asphalt rubber plants | 6 | 5 | ||
| Lime slurry plants | 8 | 9 | ||
These plants are primarily used by all of our Construction and Construction Materials segments.
Other Properties
The following table provides our estimate of certain information about other properties as of
December 31,
|
| Land Area (acres) |
|
| Building Square Feet |
| ||
Office and shop space (owned and leased) |
|
| 1,387 |
|
|
| 2,092,222 |
|
| Land Area (acres) | Building Square Feet | |
| Office and shop space (owned and leased) | 1,276 | 1,233,597 |
The office and shape space is used by all of our office and shop space was attributable to our Construction segment,
18
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 outcomes of which cannot be predicted with certainty. We and our affiliates are also subject to government inquiries in the ordinary course of business seeking information concerning our compliance with government construction contracting requirements and various laws and regulations, the outcomes of which cannot be predicted with certainty.
Some of the matters in which we or our joint ventures and affiliates are involved may involve compensatory, punitive, or other claims or sanctions that, if granted, could require us to pay damages or make other expenditures in amounts that are not probable to be incurred or cannot currently be reasonably estimated. In addition, in some circumstances our government contracts could be terminated, we could be suspended, debarred or incur other administrative penalties or sanctions, or payment of our costs could be disallowed. While any of our pending legal proceedings may be subject to early resolution as a result of our ongoing efforts to resolve the proceedingproceedings 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 December 31, 20162018 and 20152017 related to these matters were approximately $4.3 million and $5.2 million, respectively, and were primarily included in accounts payable and accrued expenses and other current liabilities in our consolidated balance sheets.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, was immaterial, as of December 31, 2016. Our estimates of such mattersincluding those related to liquidated damages, could change in future periods.
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 Annual Report on Form 10-K.
19
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the New York Stock Exchange under the ticker symbol GVA.
| Market Price and Dividends of Common Stock | ||||||||||||
| 2016 Quarters Ended | December 31, | September 30, | June 30, | March 31, | ||||||||
| High | $ | 62.18 | $ | 51.35 | $ | 48.59 | $ | 47.99 | ||||
| Low | 42.59 | 44.35 | 40.16 | 35.69 | ||||||||
| Dividends per share | 0.13 | 0.13 | 0.13 | 0.13 | ||||||||
| 2015 Quarters Ended | December 31, | September 30, | June 30, | March 31, | ||||||||
| High | $ | 44.40 | $ | 36.07 | $ | 38.68 | $ | 38.42 | ||||
| Low | 28.45 | 28.94 | 33.85 | 31.54 | ||||||||
| Dividends per share | 0.13 | 0.13 | 0.13 | 0.13 | ||||||||
The following table sets forth information regarding the repurchase of shares of our common stock during the three months ended
December 31,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 |
| ||||
Oct 1, 2018 through Oct 31, 2018 |
|
| 152 |
|
| $ | 44.74 |
|
|
| — |
|
| $ | 200,000,000 |
|
Nov 1, 2018 through Nov 30, 2018 |
|
| 455 |
|
| $ | 51.62 |
|
|
| — |
|
| $ | 200,000,000 |
|
Dec 1, 2018 through Dec 31, 2018 |
|
| 3,670 |
|
| $ | 44.75 |
|
|
| 252,072 |
|
| $ | 190,000,029 |
|
|
|
| 4,277 |
|
| $ | 45.48 |
|
|
| 252,072 |
|
|
|
|
|
| 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 | |||||
| October 1 through October 31, 2016 | 1,031 | $ | 46.37 | — | $ | 200,000,000 | |||
| November 1 through November 30, 2016 | 704 | $ | 59.60 | — | $ | 200,000,000 | |||
| December 1 through December 31, 2016 | 3,263 | $ | 58.32 | — | $ | 200,000,000 | |||
| Total | 4,998 | $ | 56.04 | — | |||||
2
20
The following graph compares the cumulative 5-year total return provided to shareholders on Granite Construction Incorporated’s common stock holders relative to the cumulative total returns of the S&P 500 index and the Dow Jones U.S. Heavy Construction index. The Dow Jones U.S. Heavy Construction index includes the following companies: AECOM, Chicago Bridge & Iron Co NV, EMCORArcosa Inc, Dycom Industries Inc., Emcor Group Inc., Fluor Corp., Jacobs Engineering Group Inc., KBR Inc., Mastec Inc., Quanta Services Inc., and ValmontValmont Industries Inc. Certain of these companies differ from Granite in that they derive more revenue and profit from non-U.S. operations and have customers in different markets. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from December 31, 20112013 through December 31, 2016.2018.
December 31, |
| 2013 |
|
| 2014 |
|
| 2015 |
|
| 2016 |
|
| 2017 |
|
| 2018 |
| ||||||
Granite Construction Incorporated |
| $ | 100.00 |
|
| $ | 110.26 |
|
| $ | 126.28 |
|
| $ | 163.63 |
|
| $ | 190.53 |
|
| $ | 122.32 |
|
S&P 500 |
|
| 100.00 |
|
|
| 113.69 |
|
|
| 115.26 |
|
|
| 129.05 |
|
|
| 157.22 |
|
|
| 150.33 |
|
Dow Jones U.S. Heavy Construction |
|
| 100.00 |
|
|
| 74.48 |
|
|
| 65.89 |
|
|
| 81.29 |
|
|
| 85.65 |
|
|
| 63.28 |
|
| December 31, | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||
| Granite Construction Incorporated | $ | 100.00 | $ | 144.34 | $ | 152.66 | $ | 168.33 | $ | 192.79 | $ | 249.81 | ||||||
| S&P 500 | 100.00 | 116.00 | 153.58 | 174.60 | 177.01 | 198.18 | ||||||||||||
| Dow Jones U.S. Heavy Construction | 100.00 | 121.43 | 159.41 | 118.72 | 105.04 | 129.58 | ||||||||||||
21
Other than contract backlog, the selected consolidated financial data set forth below have been derived from our consolidated financial statements. Refer to the consolidated financial statements for further information. These historical results are not necessarily indicative of the results of operations to be expected for any future period.
Selected Consolidated Financial Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
| 2014 |
| |||||
Operating Summary1 |
| (In Thousands, Except Per Share Data) |
| |||||||||||||||||
Revenue2 |
| $ | 3,318,414 |
|
| $ | 2,989,713 |
|
| $ | 2,514,617 |
|
| $ | 2,371,029 |
|
| $ | 2,275,270 |
|
Gross profit2 |
|
| 389,192 |
|
|
| 314,933 |
|
|
| 301,370 |
|
|
| 299,836 |
|
|
| 239,741 |
|
As a percent of revenue |
|
| 11.7 | % |
|
| 10.5 | % |
|
| 12.0 | % |
|
| 12.6 | % |
|
| 10.5 | % |
Selling, general and administrative expenses |
|
| 272,776 |
|
|
| 220,400 |
|
|
| 217,374 |
|
|
| 197,814 |
|
|
| 190,613 |
|
As a percent of revenue |
|
| 8.2 | % |
|
| 7.4 | % |
|
| 8.6 | % |
|
| 8.3 | % |
|
| 8.5 | % |
Acquisition and integration expenses3 |
|
| 60,045 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
As a percent of revenue |
|
| 1.8 | % |
|
| — | % |
|
| — | % |
|
| — | % |
|
| — | % |
Net income |
|
| 53,741 |
|
|
| 75,801 |
|
|
| 66,200 |
|
|
| 68,248 |
|
|
| 35,876 |
|
Amount attributable to non-controlling interests |
|
| (11,331 | ) |
|
| (6,703 | ) |
|
| (9,078 | ) |
|
| (7,763 | ) |
|
| (10,530 | ) |
Net income attributable to Granite Construction Incorporated2 |
|
| 42,410 |
|
|
| 69,098 |
|
|
| 57,122 |
|
|
| 60,485 |
|
|
| 25,346 |
|
As a percent of revenue |
|
| 1.3 | % |
|
| 2.3 | % |
|
| 2.3 | % |
|
| 2.6 | % |
|
| 1.1 | % |
Net income per share attributable to common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.97 |
|
| $ | 1.74 |
|
| $ | 1.44 |
|
| $ | 1.54 |
|
| $ | 0.65 |
|
Diluted |
| $ | 0.96 |
|
| $ | 1.71 |
|
| $ | 1.42 |
|
| $ | 1.52 |
|
| $ | 0.64 |
|
Weighted average shares of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 43,564 |
|
|
| 39,795 |
|
|
| 39,557 |
|
|
| 39,337 |
|
|
| 39,096 |
|
Diluted |
|
| 44,025 |
|
|
| 40,372 |
|
|
| 40,225 |
|
|
| 39,868 |
|
|
| 39,795 |
|
Dividends per common share |
| $ | 0.52 |
|
| $ | 0.52 |
|
| $ | 0.52 |
|
| $ | 0.52 |
|
| $ | 0.52 |
|
Consolidated Balance Sheets1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 2,476,601 |
|
| $ | 1,871,978 |
|
| $ | 1,733,453 |
|
| $ | 1,626,878 |
|
| $ | 1,600,048 |
|
Cash, cash equivalents and marketable securities |
|
| 338,904 |
|
|
| 366,501 |
|
|
| 317,105 |
|
|
| 358,531 |
|
|
| 358,028 |
|
Working capital |
|
| 737,547 |
|
|
| 576,804 |
|
|
| 559,058 |
|
|
| 519,177 |
|
|
| 454,121 |
|
Current maturities of long-term debt |
|
| 47,286 |
|
|
| 46,048 |
|
|
| 14,796 |
|
|
| 14,800 |
|
|
| 1,247 |
|
Long-term debt |
|
| 335,119 |
|
|
| 178,453 |
|
|
| 229,498 |
|
|
| 244,323 |
|
|
| 275,621 |
|
Other long-term liabilities |
|
| 66,006 |
|
|
| 45,446 |
|
|
| 51,430 |
|
|
| 46,613 |
|
|
| 44,495 |
|
Granite shareholders’ equity |
|
| 1,351,633 |
|
|
| 945,108 |
|
|
| 885,988 |
|
|
| 839,237 |
|
|
| 794,385 |
|
Common shares outstanding |
|
| 46,666 |
|
|
| 39,871 |
|
|
| 39,621 |
|
|
| 39,413 |
|
|
| 39,186 |
|
Contract backlog |
| $ | 3,689,621 |
|
| $ | 3,718,157 |
|
| $ | 3,484,405 |
|
| $ | 2,908,438 |
|
| $ | 2,718,873 |
|
| Selected Consolidated Financial Data | |||||||||||||||
| Years Ended December 31, | 2016 | 2015 | 2014 | 2013 | 20123 | ||||||||||
| Operating Summary | (In Thousands, Except Per Share Data) | ||||||||||||||
| Revenue | $ | 2,514,617 | $ | 2,371,029 | $ | 2,275,270 | $ | 2,266,901 | $ | 2,083,037 | |||||
Gross profit1 | 301,370 | 299,836 | 239,741 | 177,177 | 225,895 | ||||||||||
| As a percent of revenue | 12.0 | % | 12.6 | % | 10.5 | % | 7.8 | % | 10.8 | % | |||||
Selling, general and administrative expenses1 | 219,299 | 203,817 | 193,256 | 191,860 | 176,235 | ||||||||||
| As a percent of revenue | 8.7 | % | 8.6 | % | 8.5 | % | 8.5 | % | 8.5 | % | |||||
Restructuring and impairment (gains) charges, net2 | (1,925 | ) | (6,003 | ) | (2,643 | ) | 52,139 | (3,728 | ) | ||||||
| Net income (loss) | 66,200 | 68,248 | 35,876 | (44,766 | ) | 59,920 | |||||||||
| Amount attributable to non-controlling interests | (9,078 | ) | (7,763 | ) | (10,530 | ) | 8,343 | (14,637 | ) | ||||||
| Net income (loss) attributable to Granite | 57,122 | 60,485 | 25,346 | (36,423 | ) | 45,283 | |||||||||
| As a percent of revenue | 2.3 | % | 2.6 | % | 1.1 | % | (1.6 | )% | 2.2 | % | |||||
Net income (loss) per share attributable to common shareholders: | |||||||||||||||
| Basic | $ | 1.44 | $ | 1.54 | $ | 0.65 | $ | (0.94 | ) | $ | 1.17 | ||||
| Diluted | $ | 1.42 | $ | 1.52 | $ | 0.64 | $ | (0.94 | ) | $ | 1.15 | ||||
| Weighted average shares of common stock: | |||||||||||||||
| Basic | 39,557 | 39,337 | 39,096 | 38,803 | 38,447 | ||||||||||
| Diluted | 40,225 | 39,868 | 39,795 | 38,803 | 39,076 | ||||||||||
| Dividends per common share | $ | 0.52 | $ | 0.52 | $ | 0.52 | $ | 0.52 | $ | 0.52 | |||||
| Consolidated Balance Sheet | |||||||||||||||
| Total assets | $ | 1,733,453 | $ | 1,626,878 | $ | 1,600,048 | $ | 1,609,362 | $ | 1,721,324 | |||||
| Cash, cash equivalents and marketable securities | 317,105 | 358,531 | 358,028 | 346,323 | 433,420 | ||||||||||
| Working capital | 559,058 | 519,177 | 454,121 | 396,759 | 454,098 | ||||||||||
| Current maturities of long-term debt | 14,796 | 14,800 | 1,247 | 1,247 | 19,060 | ||||||||||
| Long-term debt | 229,498 | 244,323 | 275,621 | 276,868 | 271,070 | ||||||||||
| Other long-term liabilities | 51,430 | 46,613 | 44,495 | 48,580 | 47,124 | ||||||||||
| Granite shareholders’ equity | 885,988 | 839,237 | 794,385 | 781,940 | 829,953 | ||||||||||
| Book value per share | 22.36 | 21.29 | 20.27 | 20.09 | 21.43 | ||||||||||
| Common shares outstanding | 39,621 | 39,413 | 39,186 | 38,918 | 38,731 | ||||||||||
| Contract backlog | $ | 3,484,405 | $ | 2,908,438 | $ | 2,718,873 | $ | 2,526,751 | $ | 1,708,761 | |||||
1
2During the year ended December 31, 2017, we identified and corrected amounts related to revisions in estimates that should have been recorded during the year ended December 31, 2016. These corrections resulted in a $4.9 million decrease to revenue and gross profit and a $1.6 million decrease in net income attributable to Granite Construction Incorporated for the year ended December 31, 2017 (see Note 3 of “Notes to the Consolidated Financial Statements”).
3During the year ended December 31, 2018, we incurred $60.0 million in acquisition and integration costs that were primarily in connection with acquisitions of Layne and LiquiForce. See Note 2 of “Notes to the Consolidated Financial Statements” for further discussion.
22
General
We deliver infrastructure solutions for public and private clients primarily in the United States. We are one of the largest diversified heavy civil contractors and construction materials producersinfrastructure companies in the United States, engaged inStates. Within the public sector, we primarily concentrate on heavy-civil infrastructure projects, including the construction and improvement of streets, roads, highways, mass transit facilities, airport infrastructure, bridges, trenchless and underground utilities, power-related facilities, water-related facilities, utilities, tunnels, dams and other infrastructure-related projects. We own aggregate reservesWithin the private sector, we perform site preparation and plantinfrastructure services for residential development, energy development, commercial and industrial sites, and other facilities, to produceas well as provide construction materials for use in our construction business and for sale to third parties. Our permanent offices are located in Alaska, Arizona, California, Florida, Illinois, Nevada, New York, Texas, Utah and Washington. We have three reportable business segments: Construction, Large Project Construction and Construction Materials (see Note 18 of “Notes to the Consolidated Financial Statements”).
In addition to business segments, we review our business by operating groups and by public and private market sectors.groups. Our operating groups are defined as follows: (i) California; (ii) Northwest, which primarily includes offices in Alaska, Arizona, Nevada, Utah and Washington; (iii) Heavy Civil, which primarily includes offices in California, Florida, New York and Texas; and (iv) Kenny,Federal which primarily includes an officeoffices in Illinois. EachCalifornia, Colorado, Texas and Guam; (v) Midwest (formerly Kenny less the underground business), which primarily includes offices in Illinois and (vi) Water and Mineral Services (which includes LiquiForce, Layne and the underground business of thesethe former Kenny operating groups may include financial results from our Constructiongroup), which primarily includes offices across the United States, Canada and Large Project Construction segments. A project’s results are reported in the operating group that is responsible for the project, not necessarily the geographic area where the work is located. In some cases, the operations of an operating group include the results of work performed outside of that geographic region. Our California and Northwest operating groups include financial results from our Construction Materials segment.
The four primary economic drivers of our business are (i) the overall health of the U.S. economy; (ii) federal, state and local public funding levels; (iii) population growth resulting in public and private development; and (iv) the need to replace or repair aging infrastructure. A stagnant or declining economy will generally result in reduced demand for construction and construction materials in the private sector. This reduced demand increases competition for private sector projects and will ultimately also increase competition in the public sector as companies migrate from bidding on scarce private sector work to projects in the public sector. In addition, a stagnant or declining economy tends to produce less tax revenue for public agencies, thereby decreasing a source of funds available for spending on public infrastructure improvements. Some funding sources that have been specifically earmarked for infrastructure spending, such as diesel and gasoline taxes, are not as directly affected by a stagnant or declining economy, unless actual consumption is reduced or gasoline sales tax revenues decline consistent with fuel prices. However, even these can be temporarily at risk as federal, state and local governments take actions to balance their budgets. Additionally, fuel prices and more fuel efficient vehicles can have a dampening effect on consumption, resulting in overall lower tax revenue. Conversely, increased levels of public funding as well as an expanding or robust economy will generally increase demand for our services and provide opportunities for revenue growth and margin improvement.
Critical Accounting Policies and Estimates
The financial statements included in “Item 8. Financial Statements and Supplementary Data” have been prepared in accordance with accounting principles generally accepted in the United States of America.America (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Our estimates and related judgments and assumptions are continually evaluated based on available information and experiences; however, actual amounts could differ from those estimates.
The following are accounting policies and estimates that involve significant management judgment and can have significant effects on the Company’s reported results of operations. The Audit/Compliance Committee of our Board of Directors has reviewed our disclosure of critical accounting policies and estimates.
Revenue and Earnings Recognition for Construction Contracts
Our revenue is primarily derived from construction contracts that can span several quarters or years and from sales of construction related materials. We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers and subsequently issued additional related ASUs (“Topic 606”). Topic 606 provides for a five-step model for recognizing revenue from contracts with customers as follows:
1. | Identify the contract |
2. | Identify performance obligations |
3. | Determine the transaction price |
4. | Allocate the transaction price |
5. | Recognize revenue |
Generally, our contracts contain one performance obligation. Contracts with customers in our Materials segment are typically defined by our customary business practices and are valued at the contractual selling price per unit. Our customary business practices are for the delivery of a separately identifiable good at a point in time which is typically when delivery to the customer occurs. Contracts in our Transportation, Water and Specialty segments may contain multiple distinct promises or multiple contracts within a master agreement (e.g. contracts that cross multiple locations/geographies and task orders), which we review at contract inception to determine if they represent multiple performance obligations or multiple separate contracts. This review consists of determining if promises or groups of promises are distinct within the context of the contract, including construction joint ventures,whether contracts are physically contiguous, contain task orders, purchase or sales orders, termination clauses and/or elements not related to design and/or build.
23
The transaction price is the amount of consideration to which we expect to be entitled in exchange for transferring goods and services to the customer. The consideration promised in a contract with customers of our Transportation, Water and Specialty segments may include both fixed amounts and variable amounts (e.g. bonuses/incentives or penalties/liquidated damages) to the extent that a significant reversal of cumulative revenue recognized underwill not occur when the percentageuncertainty associated with the variable consideration is subsequently resolved (i.e., probable and estimable). When a contract has a single performance obligation, the entire transaction price is attributed to that performance obligation. When a contract has more than one performance obligation, the transaction price is allocated to each performance obligation based on estimated relative standalone selling prices of completion methodthe goods or services at the inception of the contract, which typically is determined using cost plus an appropriate margin.
Subsequent to the ratioinception of costs incurreda contract in our Transportation, Water and Specialty segments, the transaction price could change for various reasons, including the executed or estimated amount of change orders and unresolved contract modifications and claims to estimated total costs.
Changes are made to the transaction price from unapproved change orders is recognized to the extent the related costs have been incurred, the amount can be reliablyreasonably estimated and recovery is probable.
On certain projects we have submitted and have pending unresolved contract modifications and affirmative claims (“affirmative claims”) to recover additional costs and the associated profit, if applicable, to which the Company believes it is entitled under the terms of contracts with customers, subcontractors, vendors or others are pending or have been submitted on certain projects.others. The owners or their authorized representatives and/or other third parties may be in partial or full agreement with the modifications or affirmative claims, or may have rejected or disagree entirely or partially as to such entitlement.
Changes are made to the transaction price from affirmative claims with customers is recognized to the extent of costs incurred when it is probable that additional revenue on a claim settlement with a customer will result in additional revenueis probable and the amount can be reasonably estimated.estimable. A reduction to costs related to affirmative claims with non-customers with whom we have a contractual arrangement (“back charges”) is recognized when the estimated recovery is probable and the amount can be reasonably estimated. Except for contractual back charges, a reduction to cost related to affirmative claims against non-customers is recognized when the claims are settled.estimable. Recognizing affirmative claims and back charge recoveries requires significant judgments of certain factors including, but not limited to, dispute resolution developments and outcomes, anticipated negotiation results, and the cost of resolving such mattersmatters.
Certain construction contracts include retention provisions to provide assurance to our customers that we will perform in accordance with the contract terms and estimates.
Typically, performance obligations related to contracts whenever evidence indicatesin our Transportation, Water and Specialty segments are satisfied over time because our performance typically creates or enhances an asset that the estimated totalcustomer controls as the asset is created or enhanced. We recognize revenue as performance obligations are satisfied and control of the promised good and/or service is transferred to the customer. Revenue in our Transportation, Water and Specialty segments is ordinarily recognized over time as control is transferred to the customers by measuring the progress toward complete satisfaction of the performance obligation(s) using an input (i.e., “cost to cost”) method. Under the cost to cost method, costs incurred to-date are generally the best depiction of a contract exceeds its estimated total revenue. transfer of control.
All contract costs, including those associated with affirmative claims, change orders and back charges, are recorded as incurred and revisions to estimated total costs are reflected as soon as the obligation to perform is determined. Contract costs consist of direct costs on contracts, including labor and materials, amounts payable to subcontractors, direct overhead costs and equipment expense (primarily depreciation, fuel, maintenance and repairs). All state and federal government contracts and many of our other contracts provide for termination of the contract at the convenience of the party contracting with us, with provisions to pay us for work performed through the date of termination. Pre-contract costs are expensed as incurred.
The accuracy of our revenue and profit recognition in a given period depends on the accuracy of our estimates of the cost to complete each project. Cost estimates for all of our significant projects use a detailed “bottom up” approach, and we believe our experience allows us to create materially reliable estimates. There are a number of factors that can contribute to changes in estimates of contract cost and profitability. The most significant of these include:
the completeness and accuracy of the original bid;
costs associated with scope changes;
changes in costs of labor and/or materials;
extended overhead and other costs due to owner, weather and other delays;
subcontractor performance issues;
changes in productivity expectations;
site conditions that differ from those assumed in the original bid (to the extent contract remedies are unavailable);bid;
changes from original design on design-build projects;
the availability and skill level of workers in the geographic location of the project;
a change in the availability and proximity of equipment and materials;
our ability to fully and promptly recover on affirmative claims and back charges for additional contract costs; and
the customer’s ability to properly administer the contract.
24
The foregoing factors, as well as the stage of completion of contracts in process and the mix of contracts at different margins may cause fluctuations in gross profit between periods.and gross profit margin from period to period. Significant changes in cost estimates, particularly in our larger, more complex projects have had, and can in future periods have, a significant effect on our profitability.
Costs to obtain our contracts (“pre-bid costs”) that are not expected to be recovered from the customer are expensed as incurred and included in selling, general and administrative expenses on our consolidated statements of operations. Although unusual, pre-bid costs that are explicitly chargeable to the customer even if the contract is not obtained are included in accounts receivable on our consolidated balance sheets when we are notified that we are not the low bidder with a corresponding reduction to selling, general and administrative expenses on our consolidated statements of operations.
Goodwill
As a result of December 31, 2016the change in our reportable segments, we reassessed our reporting units and 2015, have determinedwe had fivehave eight reporting units in which goodwill was recorded as follows:follows:
Midwest Group Transportation
Midwest Group ConstructionSpecialty
Northwest Group ConstructionTransportation
Northwest Group Construction Materials
California ConstructionGroup Transportation
Water and Mineral Services Group Water
Water and Mineral Services Group Specialty
Water and Mineral Services Group Materials
We perform our goodwill impairment tests annually as of November 1 and more frequently when events and circumstances occur that indicate a possible impairment of goodwill. In addition, we evaluate goodwill for impairment if events or circumstances change between annual tests indicating a possible impairment. Examples of such events or circumstances include, but are not limited to, the following:
a significant adverse change in legal factors or in the business climate;
an adverse action or assessment by a regulator;
a more likely than not expectation that a segment or a significant portion thereof will be sold; or
the testing for recoverability of a significant asset group within the segment.
In performing step one of the quantitative goodwill impairment tests, we calculate the estimated fair value of the reporting unit in which the goodwill is recorded using the discounted cash flows and market multiple methods. Judgments inherent in these methods include the determination of appropriate discount rates, the amount and timing of expected future cash flows and growth rates, and appropriate benchmark companies. The cash flows used in our 20162018 discounted cash flow model were based on five-year financial forecasts, which in turn were based on the 2017-20192018-2022 operating plan developed internally by management adjusted for market participant-based assumptions. Our discount rate assumptions are based on an assessment of the equity cost of capital and appropriate capital structure for our reporting units. In assessing the reasonableness of our determined fair values of our reporting units, we evaluate the reasonableness of our results against our current market capitalization.
The estimated fair value is compared to the net book value of the reporting unit, including goodwill. If the net book value of a reporting unit exceeds its fair value, we measure and record the amount of the impairment loss by comparing the implied fair value of the reporting unit exceeds its net book value, goodwill of the reporting unit is considered not impaired. If the fair value of the reporting unit is less than its net book value, goodwill is impaired and the excess of the reporting unit’s goodwill withnet book value over the carrying amount of that goodwill.
During 2018, due to the change in reportable segments, the resulting change to reporting units and in accordance with ASC Topic 350,
Intangibles - Goodwill and Other, we conducted impairment tests on reporting units that were most susceptible to fluctuations in results. We conducted these tests before the change on the Kenny Large Project Construction and Kenny Construction reporting units and after the change on the Midwest Group Transportation, Midwest Group Specialty and Water and Mineral Services Group Water reporting units. These assessments indicated that the estimated fair values ofFor our 2018 annual goodwill impairment test, we elected to perform a qualitative analysis and after assessing the totality of events and circumstances, we determined that it is more likely than not that the fair value of these reporting units with goodwill. Outwere greater than the carrying amounts; therefore, a quantitative goodwill impairment test was not performed. Factors we considered were macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy, changes in customers, changes in the composition or carrying amount of the fivea reporting units with goodwill, the Kenny Large Project Construction business is the most susceptible to fluctuationssegments’ net assets, and changes in results depending on awarded work given the large size and limited frequency of awards. While we believe the current cushion for the reporting unit is adequate to absorb these fluctuations, a material decline in job win rates could have a material impact to this reporting unit’s estimated fair value.
25
We carry insurance policies to cover various risks, primarily general liability, automobile liability, workers compensation and employee medical expenses under which we are liable to reimburse the insurance company for a portion of each claim paid. Payment for general liability and workers compensation claim amounts generally range from the first $0.5 million to $1.0 million per occurrence. We accrue for probable losses, both reported and unreported, that are reasonably estimable using actuarial methods based on historic trends, modified, if necessary, by recent events. Changes in our loss assumptions caused by changes in actual experience would affect our assessment of the ultimate liability and could have an effect on our operating results and financial position up to $1.0 million per occurrence for general liability and workers compensation or $0.3 million for medical insurance.
Current Economic Environment and Outlook
As America’s Infrastructure Company, our growth is focused on continued end-market and geographic diversification. Granite provides solutions to the 2016 fiscal year with backlog of $3.5 billion, a year-end record. Overall demand remainsTransportation, Water, Specialty and Materials end-markets. The Company is well positioned to leverage opportunities in these end markets to drive steady, in an environment of modest economic growth. long-term value creation for Granite’s stakeholders.
Public and private markets remain highlymarket activity and demand remains robust, against a backdrop of dynamic, competitive with privateend markets. Company contract backlog of $3.7 billion continues to reflect steady economic growth. Private market activity remains a key growth and diversification opportunity across our business, and its portion of our portfolio continues to expand in focus and significance. Today, public infrastructure investment is beginning to grow at state, regional, and local levels, and this investment provides our industry with visibility to funding that we have not experienced in more than a decade. This positive, multi-year public-spending demand will benefit our Transportation, Water and Materials segments.
Across end-markets, our focus on bottom-line improvement continues to emphasize managing risks and being compensated appropriately for the complex skills and resources required to build public infrastructure projects, across geographies and end markets driving growth opportunitiesacross project scope. We are sharply focused on executing work with appropriate returns relative to risks for Granite’s stakeholders.
In Transportation, at the past few years. We continue to anticipate notable near- and long-term growth opportunities for our Construction and Construction Materials segments, driven by a balance of private non-residential demand and an expected demand increase linked to public infrastructure spending trends in 2017 and beyond.
In the first half of 2018, we completed the acquisition of 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. Strong market and funding dynamics position our legacy and acquired businesses in the newly created Water segment for significant growth. Water market demand remains healthy across geographies as states and municipal water authorities weigh options for overdue water infrastructure investment. At the federal level, Congress recently approved more than $200the America’s Water Infrastructure Act of 2018, which includes $4.4 billion for the Environmental Protection Agency drinking-water program. This legislation also creates the Water Resources Development Act, which authorizes $3.7 billion of long-termfederal funds for a dozen U.S. Army Corps of Engineers flood-protection and other projects.
We are optimistic that Congress and the Administration in 2019 will jointly move forward to create a bipartisan Federal Infrastructure Bill that not only stabilizes the nearly insolvent Highway Trust Fund, but also creates a vision and path forward for the rebuilding the infrastructure investment in the form of local measures, with the majority of this in California and Washington State. In California, state officials continue to make progress toward legislation on a long-term transportation bill, which could deliver much overdue investment beginning in late-2017.
Results of Operations
Comparative Financial Summary |
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
| $ | 3,318,414 |
|
| $ | 2,989,713 |
|
| $ | 2,514,617 |
|
Gross profit |
|
| 389,192 |
|
|
| 314,933 |
|
|
| 301,370 |
|
Selling, general and administrative expenses |
|
| 272,776 |
|
|
| 220,400 |
|
|
| 217,374 |
|
Acquisition and integration expenses |
|
| 60,045 |
|
|
| — |
|
|
| — |
|
Operating income |
|
| 64,043 |
|
|
| 98,715 |
|
|
| 92,354 |
|
Total other income |
|
| (112 | ) |
|
| (5,748 | ) |
|
| (4,008 | ) |
Amount attributable to non-controlling interests |
|
| (11,331 | ) |
|
| (6,703 | ) |
|
| (9,078 | ) |
Net income attributable to Granite Construction Incorporated |
|
| 42,410 |
|
|
| 69,098 |
|
|
| 57,122 |
|
| Comparative Financial Summary | ||||||||||||
| Years Ended December 31, | 2016 | 2015 | 2014 | |||||||||
| (in thousands) | ||||||||||||
| Total revenue | $ | 2,514,617 | $ | 2,371,029 | $ | 2,275,270 | ||||||
| Gross profit | 301,370 | 299,836 | 239,741 | |||||||||
| Selling, general and administrative expenses | 219,299 | 203,817 | 193,256 | |||||||||
| Operating income | 92,354 | 110,308 | 65,100 | |||||||||
| Total other (income) expense | (4,008 | ) | 6,881 | 9,503 | ||||||||
| Amount attributable to non-controlling interests | (9,078 | ) | (7,763 | ) | (10,530 | ) | ||||||
| Net income attributable to Granite Construction Incorporated | 57,122 | 60,485 | 25,346 | |||||||||
| Total Revenue by Segment | |||||||||||||||||||
| Years Ended December 31, | 2016 | 2015 | 2014 | ||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||
| Construction | $ | 1,365,198 | 54.3 | % | $ | 1,262,675 | 53.2 | % | $ | 1,186,445 | 52.1 | % | |||||||
| Large Project Construction | 888,193 | 35.3 | 812,720 | 34.3 | 825,044 | 36.3 | |||||||||||||
| Construction Materials | 261,226 | 10.4 | 295,634 | 12.5 | 263,781 | 11.6 | |||||||||||||
| Total | $ | 2,514,617 | 100.0 | % | $ | 2,371,029 | 100.0 | % | $ | 2,275,270 | 100.0 | % | |||||||
26
Total Revenue by Segment
Years Ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| ||||||||||||
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation |
| $ | 1,976,743 |
|
| 59.5 | % |
| $ | 1,947,420 |
|
| 65.1 | % |
| $ | 1,626,786 |
|
| 64.7 | % |
Water |
|
| 338,250 |
|
| 10.2 |
|
|
| 133,699 |
|
| 4.5 |
|
|
| 161,282 |
|
| 6.4 |
|
Specialty |
|
| 626,619 |
|
| 18.9 |
|
|
| 615,818 |
|
| 20.6 |
|
|
| 465,323 |
|
| 18.5 |
|
Materials |
|
| 376,802 |
|
| 11.4 |
|
|
| 292,776 |
|
| 9.8 |
|
|
| 261,226 |
|
| 10.4 |
|
Total |
| $ | 3,318,414 |
|
| 100.0 | % |
| $ | 2,989,713 |
|
| 100.0 | % |
| $ | 2,514,617 |
|
| 100.0 | % |
Transportation Revenue
Years Ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| ||||||||||||
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heavy Civil |
| $ | 818,715 |
|
| 41.5 | % |
| $ | 773,990 |
|
| 39.7 | % |
| $ | 688,527 |
|
| 42.3 | % |
Northwest |
|
| 465,085 |
|
| 23.5 |
|
|
| 611,021 |
|
| 31.4 |
|
|
| 486,037 |
|
| 29.9 |
|
California |
|
| 607,737 |
|
| 30.7 |
|
|
| 470,996 |
|
| 24.2 |
|
|
| 378,838 |
|
| 23.3 |
|
Midwest |
|
| 84,523 |
|
| 4.3 |
|
|
| 60,007 |
|
| 3.1 |
|
|
| 68,235 |
|
| 4.2 |
|
Federal |
|
| 683 |
|
| — |
|
|
| 31,406 |
|
| 1.6 |
|
|
| 5,149 |
|
| 0.3 |
|
Total |
| $ | 1,976,743 |
|
| 100.0 | % |
| $ | 1,947,420 |
|
| 100.0 | % |
| $ | 1,626,786 |
|
| 100.0 | % |
| Construction Revenue | |||||||||||||||||||
| Years Ended December 31, | 2016 | 2015 | 2014 | ||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||
| California: | |||||||||||||||||||
| Public sector | $ | 370,397 | 27.1 | % | $ | 403,904 | 32.0 | % | $ | 388,049 | 32.7 | % | |||||||
| Private sector | 191,000 | 14.0 | 127,338 | 10.1 | 103,791 | 8.7 | |||||||||||||
| Northwest: | |||||||||||||||||||
| Public sector | 462,529 | 34.0 | 415,787 | 32.9 | 396,919 | 33.5 | |||||||||||||
| Private sector | 93,830 | 6.9 | 109,682 | 8.7 | 133,271 | 11.2 | |||||||||||||
| Heavy Civil: | |||||||||||||||||||
| Public sector | 23,829 | 1.7 | 29,505 | 2.3 | 19,642 | 1.7 | |||||||||||||
| Private sector | 651 | — | — | — | — | — | |||||||||||||
| Kenny: | |||||||||||||||||||
| Public sector | 166,454 | 12.2 | 98,526 | 7.8 | 93,291 | 7.9 | |||||||||||||
| Private sector | 56,508 | 4.1 | 77,933 | 6.2 | 51,482 | 4.3 | |||||||||||||
| Total | $ | 1,365,198 | 100.0 | % | $ | 1,262,675 | 100.0 | % | $ | 1,186,445 | 100.0 | % | |||||||
Transportation revenue for the year ended
During 2018 and 2017, revenue earned from the public sector was 93.9% and 94.8%, respectively, of the total Transportation segment revenue.
Water Revenue
Years Ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| ||||||||||||
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water and Mineral Services |
| $ | 257,620 |
|
| 76.2 | % |
| $ | 61,964 |
|
| 46.4 | % |
| $ | 76,388 |
|
| 47.4 | % |
Heavy Civil |
|
| 19,945 |
|
| 5.9 |
|
|
| 23,153 |
|
| 17.3 |
|
|
| 16,279 |
|
| 10.1 |
|
California |
|
| 52,757 |
|
| 15.6 |
|
|
| 39,071 |
|
| 29.2 |
|
|
| 40,250 |
|
| 25.0 |
|
Northwest |
|
| 3,882 |
|
| 1.1 |
|
|
| 623 |
|
| 0.5 |
|
|
| 9,853 |
|
| 6.1 |
|
Midwest |
|
| 1,930 |
|
| 0.6 |
|
|
| 7,004 |
|
| 5.2 |
|
|
| 17,316 |
|
| 10.7 |
|
Federal |
|
| 2,116 |
|
| 0.6 |
|
|
| 1,884 |
|
| 1.4 |
|
|
| 1,196 |
|
| 0.7 |
|
Total |
| $ | 338,250 |
|
| 100.0 | % |
| $ | 133,699 |
|
| 100.0 | % |
| $ | 161,282 |
|
| 100.0 | % |
Water revenue in 2018 increased $204.6 million, or over 100%, compared to 2017 primarily due to increases in the Water and Mineral Services operating group from the Layne and LiquiForce acquisitions. See Note 2 of “Notes to the Consolidated Financial Statements” for further discussion of acquisitions.
During 2018 and 2017, revenue earned from the public sector was 73.9% and 88.6%, respectively, of the total Water segment revenue.
27
Years Ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| ||||||||||||
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest |
| $ | 223,517 |
|
| 35.6 | % |
| $ | 345,147 |
|
| 56.1 | % |
| $ | 181,395 |
|
| 38.9 | % |
California |
|
| 143,471 |
|
| 22.9 |
|
|
| 160,572 |
|
| 26.1 |
|
|
| 185,079 |
|
| 39.8 |
|
Federal |
|
| 41,471 |
|
| 6.6 |
|
|
| 5,196 |
|
| 0.8 |
|
|
| 4,470 |
|
| 1.0 |
|
Northwest |
|
| 159,517 |
|
| 25.5 |
|
|
| 104,793 |
|
| 17.0 |
|
|
| 94,379 |
|
| 20.3 |
|
Water and Mineral Services |
|
| 58,643 |
|
| 9.4 |
|
|
| 110 |
|
| — |
|
|
| — |
|
| — |
|
Total |
| $ | 626,619 |
|
| 100.0 | % |
| $ | 615,818 |
|
| 100.0 | % |
| $ | 465,323 |
|
| 100.0 | % |
Specialty revenue in 2018 increased volumes$10.8 million, or 1.8%, when compared to 2017 due to increases in the Northwest operating group from new awards and in Federal operating group from entering the year with greater contract backlog in the Northwestaddition to an increase in Water and Kenny public sectors, as well as from an improved success rate on bidding activity for solar work in the California private sector. The increases were partially offset by declines in the Northwest and Kenny private sectors as well as a decline in the California public sectorMineral Services operating group from the completionacquisitions of projects in 2016 coupled with lower beginning contract backlogLayne and a decline in the volume of awarded work during 2016.
| Large Project Construction Revenue | |||||||||||||||||||||
| Years Ended December 31, | 2016 | 2015 | 2014 | ||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||
California1 | $ | 42,770 | 4.8 | % | $ | 23,461 | 2.9 | % | $ | 57,229 | 6.9 | % | |||||||||
Northwest1 | 33,909 | 3.8 | 45,843 | 5.6 | 13,883 | 1.7 | |||||||||||||||
Heavy Civil1 | 691,151 | 77.8 | 615,070 | 75.7 | 633,063 | 76.7 | |||||||||||||||
| Kenny: | |||||||||||||||||||||
| Public sector | 95,893 | 10.8 | 86,291 | 10.6 | 103,828 | 12.6 | |||||||||||||||
| Private sector | 24,470 | 2.8 | 42,055 | 5.2 | 17,041 | 2.1 | |||||||||||||||
| Total | $ | 888,193 | 100.0 | % | $ | 812,720 | 100.0 | % | $ | 825,044 | 100.0 | % | |||||||||
During 2018 and 2017, revenue earned from the Kenny private sector.
Materials Revenue
Year Ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| ||||||||||||
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California |
| $ | 213,673 |
|
| 56.7 | % |
| $ | 178,048 |
|
| 60.8 | % |
| $ | 148,778 |
|
| 57.0 | % |
Northwest |
|
| 138,924 |
|
| 36.9 |
|
|
| 114,728 |
|
| 39.2 |
|
|
| 112,448 |
|
| 43.0 |
|
Water and Mineral Services |
|
| 24,205 |
|
| 6.4 |
|
|
| — |
|
| — |
|
|
| — |
|
| — |
|
Total |
| $ | 376,802 |
|
| 100.0 | % |
| $ | 292,776 |
|
| 100.0 | % |
| $ | 261,226 |
|
| 100.0 | % |
| Construction Materials Revenue | |||||||||||||||||||||
| Years Ended December 31, | 2016 | 2015 | 2014 | ||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||
| California | $ | 148,778 | 57.0 | % | $ | 191,605 | 64.8 | % | $ | 152,959 | 58.0 | % | |||||||||
| Northwest | 112,448 | 43.0 | 104,029 | 35.2 | 110,822 | 42.0 | |||||||||||||||
| Total | $ | 261,226 | 100.0 | % | $ | 295,634 | 100.0 | % | $ | 263,781 | 100.0 | % | |||||||||
Materials revenue for the year ended December 31, 2016 decreased $34.4in 2018 increased $84.0 million, or 11.6%28.7%, when compared to 2017. In addition to increases in the year ended December 31, 2015 primarilyWater and Mineral services operating group from the acquisition of Layne, increases in the California and Northwest operating groups were due to a net declineincreases in sales volume across most of our markets in California with demand shifting to increased internal (Construction segment) use in 2016.
Contract Backlog
Our contract backlog consists of the unearned 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. Certain government contracts where funding is appropriated on a periodic basis are included in contract backlog at the time of the award when it is probable the contract value will be funded and executed. Awarded contracts that include unexercised contract options andor unissued task orders are included in contract backlog to the extent options are exercisedoption exercise or task order issuance is probable as further described in “Contract Backlog” under “Item 1. Business.”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
December 31, |
| 2018 |
|
| 2017 |
| ||||||
(dollars in thousands) |
|
|
|
|
|
| ||||||
Transportation |
| $ | 2,815,124 |
| 76.3 | % |
| $ | 2,868,542 |
| 77.2 | % |
Water |
|
| 328,883 |
| 8.9 |
|
|
| 145,812 |
| 3.9 |
|
Specialty |
|
| 545,614 |
| 14.8 |
|
|
| 703,803 |
| 18.9 |
|
Total |
| $ | 3,689,621 |
| 100.0 | % |
| $ | 3,718,157 |
| 100.0 | % |
Transportation Contract Backlog
(dollars in thousands) |
| December 31, 2018 |
|
| January 1, 2018 |
| ||||||
Unearned revenue |
| $ | 2,185,309 |
| 77.6 | % |
| $ | 2,858,747 |
| 99.7 | % |
Other awards1 |
|
| 629,815 |
| 22.4 |
|
|
| 9,795 |
| 0.3 |
|
Total |
| $ | 2,815,124 |
| 100.0 | % |
| $ | 2,868,542 |
| 100.0 | % |
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.
28
December 31, |
| 2018 |
|
| 2017 |
| ||||||
(dollars in thousands) |
|
|
|
|
|
| ||||||
Heavy Civil |
| $ | 1,944,338 |
| 69.1 | % |
| $ | 2,200,105 |
| 76.7 | % |
Northwest |
|
| 340,850 |
| 12.1 |
|
|
| 273,864 |
| 9.5 |
|
California |
|
| 318,155 |
| 11.3 |
|
|
| 303,673 |
| 10.6 |
|
Midwest |
|
| 211,647 |
| 7.5 |
|
|
| 90,584 |
| 3.2 |
|
Federal |
|
| 134 |
| — |
|
|
| 316 |
| — |
|
Total |
| $ | 2,815,124 |
| 100.0 | % |
| $ | 2,868,542 |
| 100.0 | % |
Transportation contract backlog of $2.8 billion at December 31, 2018 remained relatively unchanged compared to 2017. Not yet included in our contract backlog is approximately $700 million in project wins that will be added to Transportation segment contract backlog as task orders are approved.
Non-controlling partners’ share of Transportation contract backlog as of December 31, 2018 and 2017 was $178.9 million and $206.3 million respectively.
Two contracts in our Transportation segment had forecasted losses with remaining revenue of $27.8 million, or 1.0%, and $21.9 million, or 0.8%, of Transportation contract backlog at December 31, 2018. At December 31, 2017, one contract in our Transportation segment had forecasted losses with remaining revenue of $106.2 million, or 3.7%, of Transportation contract backlog. Provisions are recognized in the respective dates:consolidated statements of operations for the full amount of estimated losses on uncompleted contracts whenever evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue. Future revisions to these estimated losses will be recorded in the periods in which the revisions are estimated.
Water Contract Backlog
(dollars in thousands) |
| December 31, 2018 |
|
| January 1, 2018 |
| ||||||
Unearned revenue |
| $ | 218,708 |
| 66.5 | % |
| $ | 78,406 |
| 53.8 | % |
Other awards1 |
|
| 110,175 |
| 33.5 |
|
|
| 67,406 |
| 46.2 |
|
Total |
| $ | 328,883 |
| 100.0 | % |
| $ | 145,812 |
| 100.0 | % |
1Other awards include contract awards to the extent we believe contract execution and funding is probable.
December 31, |
| 2018 |
|
| 2017 |
| ||||||
(dollars in thousands) |
|
|
|
|
|
| ||||||
Water and Mineral Services |
| $ | 299,771 |
| 91.1 | % |
| $ | 71,523 |
| 49.1 | % |
Heavy Civil |
|
| 19,758 |
| 6.0 |
|
|
| 38,183 |
| 26.2 |
|
California |
|
| 6,162 |
| 1.9 |
|
|
| 27,328 |
| 18.7 |
|
Northwest |
|
| 786 |
| 0.2 |
|
|
| 2,606 |
| 1.8 |
|
Midwest |
|
| 211 |
| 0.1 |
|
|
| 1,961 |
| 1.3 |
|
Federal |
|
| 2,195 |
| 0.7 |
|
|
| 4,211 |
| 2.9 |
|
Total |
| $ | 328,883 |
| 100.0 | % |
| $ | 145,812 |
| 100.0 | % |
| Total Contract Backlog by Segment | ||||||||||||||
| December 31, | 2016 | 2015 | ||||||||||||
| (dollars in thousands) | ||||||||||||||
| Construction | $ | 1,030,487 | 29.6 | % | $ | 860,657 | 29.6 | % | ||||||
| Large Project Construction | 2,453,918 | 70.4 | 2,047,781 | 70.4 | ||||||||||
| Total | $ | 3,484,405 | 100.0 | % | $ | 2,908,438 | 100.0 | % | ||||||
| Construction Contract Backlog | ||||||||||||||
| December 31, | 2016 | 2015 | ||||||||||||
| (dollars in thousands) | ||||||||||||||
| California: | ||||||||||||||
| Public sector | $ | 227,379 | 22.1 | % | $ | 233,691 | 27.1 | % | ||||||
| Private sector | 73,958 | 7.2 | 52,313 | 6.1 | ||||||||||
| Northwest: | ||||||||||||||
| Public sector | 311,382 | 30.2 | 285,331 | 33.2 | ||||||||||
| Private sector | 27,582 | 2.7 | 12,922 | 1.5 | ||||||||||
| Heavy Civil: | ||||||||||||||
| Public sector | 92,214 | 8.9 | 81,931 | 9.5 | ||||||||||
| Private sector | 4,195 | 0.4 | — | — | ||||||||||
| Kenny: | ||||||||||||||
| Public sector | 235,298 | 22.8 | 143,386 | 16.7 | ||||||||||
| Private sector | 58,479 | 5.7 | 51,083 | 5.9 | ||||||||||
| Total | $ | 1,030,487 | 100.0 | % | $ | 860,657 | 100.0 | % | ||||||
Water contract backlog of $1.0 billion at
Specialty Contract Backlog
(dollars in thousands) |
| December 31, 2018 |
|
| January 1, 2018 |
| ||||||
Unearned revenue |
| $ | 474,016 |
| 86.9 | % |
| $ | 646,696 |
| 91.9 | % |
Other awards1 |
|
| 71,598 |
| 13.1 |
|
|
| 57,107 |
| 8.1 |
|
Total |
| $ | 545,614 |
| 100.0 | % |
| $ | 703,803 |
| 100.0 | % |
1Other awards include contract awards to the extent we believe contract execution and funding is probable.
29
December 31, |
| 2018 |
|
| 2017 |
| ||||||
(dollars in thousands) |
|
|
|
|
|
| ||||||
Midwest |
| $ | 249,968 |
| 45.8 | % |
| $ | 422,874 |
| 60.1 | % |
California |
|
| 63,019 |
| 11.6 |
|
|
| 79,172 |
| 11.2 |
|
Federal |
|
| 149,210 |
| 27.3 |
|
|
| 162,644 |
| 23.1 |
|
Northwest |
|
| 83,417 |
| 15.3 |
|
|
| 39,113 |
| 5.6 |
|
Total |
| $ | 545,614 |
| 100.0 | % |
| $ | 703,803 |
| 100.0 | % |
Specialty contract backlog of $545.0 million as of December 31, 2018 was $158.8 million, or 22.6%, lower than at December 31, 2017 primarily due to a decrease in the private sector of the CaliforniaMidwest operating group partially offset byfrom progress on existing projects in the public sector of the California operating group. Significant new awards during the fourth quarter of 2016partially offset by an increase in the Northwest Heavy Civil and Kenny operating groups included a $30.1 million project in Arizona, a $24.9 million project in Utah and a $23.3 million power project in New York.
| Large Project Construction Contract Backlog | ||||||||||||||
| December 31, | 2016 | 2015 | ||||||||||||
| (dollars in thousands) | ||||||||||||||
Heavy Civil1 | $ | 1,746,915 | 71.3 | % | $ | 1,623,832 | 79.3 | % | ||||||
California1 | 86,703 | 3.5 | 24,132 | 1.2 | ||||||||||
Northwest1 | 91,894 | 3.7 | 66,920 | 3.3 | ||||||||||
| Kenny: | ||||||||||||||
Public sector2 | 428,159 | 17.4 | 264,559 | 12.9 | ||||||||||
| Private sector | 100,247 | 4.1 | 68,338 | 3.3 | ||||||||||
| Total | $ | 2,453,918 | 100.0 | % | $ | 2,047,781 | 100.0 | % | ||||||
Non-controlling partners’ share of Large Project ConstructionSpecialty contract backlog as of December 31, 20162018 and
Gross Profit
The following table presents gross profit by business segment for the respective periods:
Years Ended December 31, |
| 2018 |
|
|
| 2017 |
|
|
| 2016 |
|
| |||
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation |
| $ | 190,045 |
|
|
| $ | 170,135 |
|
|
| $ | 161,829 |
|
|
Percent of segment revenue |
|
| 9.6 |
| % |
|
| 8.7 |
| % |
|
| 9.9 |
| % |
Water |
|
| 59,574 |
|
|
|
| 12,270 |
|
|
|
| 19,885 |
|
|
Percent of segment revenue |
| 17.6 |
|
|
| 9.2 |
|
|
| 12.3 |
|
| |||
Specialty |
|
| 90,888 |
|
|
|
| 87,446 |
|
|
|
| 82,458 |
|
|
Percent of segment revenue |
| 14.5 |
|
|
| 14.2 |
|
|
| 17.7 |
|
| |||
Materials |
|
| 48,685 |
|
|
|
| 45,082 |
|
|
|
| 37,198 |
|
|
Percent of segment revenue |
|
| 12.9 |
|
|
|
| 15.4 |
|
|
|
| 14.2 |
|
|
Total gross profit |
| $ | 389,192 |
|
|
| $ | 314,933 |
|
|
| $ | 301,370 |
|
|
Percent of total revenue |
|
| 11.7 |
| % |
|
| 10.5 |
| % |
|
| 12.0 |
| % |
| Years Ended December 31, | 2016 | 2015 | 2014 | |||||||||
| (dollars in thousands) | ||||||||||||
| Construction | $ | 209,215 | $ | 187,506 | $ | 113,953 | ||||||
| Percent of segment revenue | 15.3 | % | 14.8 | % | 9.6 | % | ||||||
| Large Project Construction | 64,137 | 79,467 | 107,097 | |||||||||
| Percent of segment revenue | 7.2 | 9.8 | 13.0 | |||||||||
| Construction Materials | 28,018 | 32,863 | 18,691 | |||||||||
| Percent of segment revenue | 10.7 | 11.1 | 7.1 | |||||||||
Total gross profit1 | $ | 301,370 | $ | 299,836 | $ | 239,741 | ||||||
| Percent of total revenue | 12.0 | % | 12.6 | % | 10.5 | % | ||||||
Transportation gross profit for 2015 and 2014 is approximately $3.5the year ended December 31, 2018 increased by $19.9 million, and $2.5 million, respectively, lower than the amounts previously reported in the 2015 Annual Report on Form 10-Kor 11.7%, when compared to 2017 primarily due to reclassificationsincreased revenue volume and margin improvement in our California operating group due to an increase in highway rehabilitation work partially offset by a decline in our Northwest operating group from reduced revenue volume and in our Heavy Civil operating group from a net negative impact from revisions in estimates (see Note 3 of restricted stock amortization from general and administration expenses“Notes to cost of revenue to align it with the associated salaries.
Water gross profit for the year ended December 31, 2018 increased by $47.3 million, or over 100%, when compared to 2017 primarily due to increased revenue volume and margin improvement from the acquisition of Layne and LiquiForce.
Specialty gross profit for the year ended December 31, 2018 increased by $3.4 million, or 3.9%, when compared to 2017. The increases were primarily due to increased revenue volume from an increase in beginning backlog and margin improvement from the acquisition of Layne partially offset by a decline in our Midwest operating group from reduced revenue volume.
Materials gross profit for the year ended December 31, 2018 increased private sector projects, increased margin on contract backlog at the beginning of 2016by $3.6 million, or 8.0%, when compared to 2015 and reduced net revisions in estimates (see Note 2 of “Notes2017 due to the Consolidated Financial Statements” for more information on the reduced project write-downs).
30
The following table presents the components of selling, general and administrative expenses for the respective periods:
Years Ended December 31, |
| 2018 |
|
|
| 2017 |
|
|
| 2016 |
|
| |||
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related expenses |
| $ | 55,591 |
|
|
| $ | 45,631 |
|
|
| $ | 46,015 |
|
|
Incentive compensation |
|
| 5,177 |
|
|
|
| 4,412 |
|
|
|
| 2,650 |
|
|
Restricted stock unit amortization |
|
| 2,655 |
|
|
|
| 2,569 |
|
|
|
| 1,809 |
|
|
Other selling expenses |
|
| 13,957 |
|
|
|
| 7,688 |
|
|
|
| 10,122 |
|
|
Total selling |
|
| 77,380 |
|
|
|
| 60,300 |
|
|
|
| 60,596 |
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related expenses |
|
| 87,631 |
|
|
|
| 77,571 |
|
|
|
| 71,032 |
|
|
Incentive compensation |
|
| 8,542 |
|
|
|
| 9,402 |
|
|
|
| 9,345 |
|
|
Restricted stock unit amortization |
|
| 10,149 |
|
|
|
| 10,996 |
|
|
|
| 9,670 |
|
|
Other general and administrative expenses |
|
| 89,074 |
|
|
|
| 62,131 |
|
|
|
| 66,731 |
|
|
Total general and administrative |
|
| 195,396 |
|
|
|
| 160,100 |
|
|
|
| 156,778 |
|
|
Total selling, general and administrative |
| $ | 272,776 |
|
|
| $ | 220,400 |
|
|
| $ | 217,374 |
|
|
Percent of revenue |
|
| 8.2 |
| % |
|
| 7.4 |
| % |
|
| 8.6 |
| % |
| Years Ended December 31, | 2016 | 2015 | 2014 | |||||||||
| (dollars in thousands) | ||||||||||||
| Selling | ||||||||||||
| Salaries and related expenses | $ | 46,015 | $ | 43,193 | $ | 42,334 | ||||||
| Incentive compensation | 2,650 | 3,370 | 1,457 | |||||||||
| Restricted stock amortization | 1,809 | 1,257 | 1,522 | |||||||||
| Other selling expenses | 10,122 | 7,940 | 10,290 | |||||||||
| Total selling | 60,596 | 55,760 | 55,603 | |||||||||
| General and administrative | ||||||||||||
| Salaries and related expenses | 71,032 | 67,939 | 61,022 | |||||||||
| Incentive compensation | 9,345 | 8,653 | 976 | |||||||||
| Restricted stock amortization | 9,670 | 4,611 | 8,247 | |||||||||
| Other general and administrative expenses | 68,656 | 66,854 | 67,408 | |||||||||
| Total general and administrative | 158,703 | 148,057 | 137,653 | |||||||||
Total selling, general and administrative1 | $ | 219,299 | $ | 203,817 | $ | 193,256 | ||||||
| Percent of revenue | 8.7 | % | 8.6 | % | 8.5 | % | ||||||
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 20152018 increased $52.4 million, or 23.8%, compared to 2017. Selling, general and 2014 are approximately $3.5 million and $2.5 million, respectively, lower than the amounts previously reportedadministrative expenses as a percentage of revenue increased to 8.2% in the 2015 Annual Report on Form 10-K2018 from 7.4% in 2017 primarily due to reclassificationsthe addition of restricted stock amortization from generalLayne and administration expenses to cost of revenue to align it with the associated salaries.
Selling, general and administrative expenses include variable cash and restricted stock unit (“RSU”) service and performance-based incentives for select management personnel on which our compensation strategyplan heavily relies. The cash portionSee Note 17 of these incentives is expensed when earned while the RSU portion is expensed as earned over the vesting period of the RSU award (generally three years; however, immediate vesting may apply to certain awards pursuant“Notes to the 2012 Equity Incentive Plan).
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 20162018 increased $4.8$17.1 million, or
General and Administrative Expenses
General and administrative expenses include costs related to our operational offices that are not allocated to direct contract costs and expenses related to our corporate functions. Other general and administrative expenses include travel and entertainment, outside services, information technology, depreciation, occupancy, training, office supplies, changes in the fair market value of our Non-Qualified Deferred Compensation plan liability and other miscellaneous expenses, none of which individually exceeded 10% of total general and administrative expenses. Total general and administrative expenses for
Acquisition and Integration expenses
Year Ended December 31, |
| 2018 |
| |
(in thousands) |
|
|
|
|
Professional services and other expenses |
| $ | 46,898 |
|
Severance and personnel costs |
|
| 13,147 |
|
Total |
| $ | 60,045 |
|
These costs were primarily associated with the fair market valueacquisition and integration of our Non-Qualified Deferred Compensation plan liability, which is offset in other (income) expense.
31
The following table presents the components of other (income) expense for the respective periods:
Years Ended December 31, |
| 2018 |
|
|
| 2017 |
|
|
| 2016 |
|
| |||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
| $ | (6,082 | ) |
|
| $ | (4,742 | ) |
|
| $ | (3,225 | ) |
|
Interest expense |
|
| 14,571 |
|
|
|
| 10,800 |
|
|
|
| 12,366 |
|
|
Equity in income of affiliates |
|
| (6,935 | ) |
|
|
| (7,107 | ) |
|
|
| (7,177 | ) |
|
Other income, net |
|
| (1,666 | ) |
|
|
| (4,699 | ) |
|
|
| (5,972 | ) |
|
Total other income |
| $ | (112 | ) |
|
| $ | (5,748 | ) |
|
| $ | (4,008 | ) |
|
| Years Ended December 31, | 2016 | 2015 | 2014 | |||||||||
| (in thousands) | ||||||||||||
| Interest income | $ | (3,225 | ) | $ | (2,135 | ) | $ | (1,872 | ) | |||
| Interest expense | 12,366 | 14,257 | 14,159 | |||||||||
| Equity in income of affiliates | (7,177 | ) | (3,210 | ) | (901 | ) | ||||||
| Other income, net | (5,972 | ) | (2,031 | ) | (1,883 | ) | ||||||
| Total other (income) expense | $ | (4,008 | ) | $ | 6,881 | $ | 9,503 | |||||
Interest expenseincome for 2016 decreased $1.92018 increased $1.3 million when compared to 20152017 primarily due to a reduction of the principal balance of our 2019 Notes (as defined in the Senior Notes Payable section below) from payments made in late 2015, partially offset by an increase in the effective interest rate. Equity in income of affiliatesrates associated with our marketable securities and cash equivalents. Interest expense for 20162018 increased $4.0$3.8 million when compared to 20152017 primarily due to income in the normal courserecent draws under our revolving credit facility to fund acquisitions of business associated with an unconsolidated real estate affiliateLiquiForce and with our asphalt terminal business in Nevada.Layne. Other income, net for 2016 increased $3.92018 decreased $3.0 million primarily due to a gain associated with a consolidated real estate entity as well as from changes in the fair market values of our Non-Qualified Deferred Compensation plan assets and our interest rate swap during 2016.
Income Taxes
The following table presents the provision for income taxes for the respective periods:
Years Ended December 31, |
| 2018 |
|
|
| 2017 |
|
|
| 2016 |
|
| |||
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
| $ | 10,414 |
|
|
| $ | 28,662 |
|
|
| $ | 30,162 |
|
|
Effective tax rate |
|
| 16.2 |
| % |
|
| 27.4 |
| % |
|
| 31.3 |
| % |
| Years Ended December 31, | 2016 | 2015 | 2014 | |||||||||
| (dollars in thousands) | ||||||||||||
| Provision for income taxes | $ | 30,162 | $ | 35,179 | $ | 19,721 | ||||||
| Effective tax rate | 31.3 | % | 34.0 | % | 35.5 | % | ||||||
Our 2016 tax rate decreased by 2.7%11.2% from 34.0%27.4% to 31.3%16.2% when compared to 20152017 primarily due to an increasethe impact of the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Reform”) enacted in non-controlling interestsDecember 2017 and an increaseadjustments to provisional amounts, discussed below, which is partially offset by one-time nondeductible acquisition and integration expenses incurred in 2018. The one-time nondeductible acquisition and integration expenses are included in the domestic production activities deduction.
On December 22, 2017 Tax Reform was signed into law. As a result of Tax Reform, the U.S. statutory tax rate was lowered from 35% to 21% effective January 1, 2018, a territorial tax system was implemented, and a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries was imposed, among other changes. ASC Topic 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment. ASU 2018-05, Income Taxes (Topic 740) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain tax effects of Tax Reform. The Company recognized the provisional tax impacts of Tax Reform in its consolidated financial statements for the year ended December 31, 2017. The majority of the impacts were related to the revaluation of deferred tax assets and liabilities at December 31, 2017 and the one-time repatriation tax. During the year ended December 31, 2018, within the one-year measurement period ending December 22, 2018, an $8.0 million benefit to the provisional amount was recorded primarily related to the revaluation of deferred tax assets and liabilities including adjustments to two unconsolidated joint ventures based on changes to the tax positions taken by the related consolidating joint venture partners during 2018. The accounting for the income tax effects of Tax Reform is now complete.
Amount Attributable to Non-controlling Interests
The following table presents the income amount attributable to non-controlling interests in consolidated subsidiaries for the respective periods:
Years Ended December 31, |
| 2018 |
|
|
| 2017 |
|
|
| 2016 |
|
| |||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount attributable to non-controlling interests |
| $ | (11,331 | ) |
|
| $ | (6,703 | ) |
|
| $ | (9,078 | ) |
|
| Years Ended December 31, | 2016 | 2015 | 2014 | |||||||||
| (in thousands) | ||||||||||||
| Amount attributable to non-controlling interests | $ | (9,078 | ) | $ | (7,763 | ) | $ | (10,530 | ) | |||
The income amount attributable to non-controlling interests represents the non-controlling owners’ share of the income or loss of our consolidated construction joint ventures and a real estate entity.ventures. The increase for 20162018 when compared to 20152017 was primarily due to a change in the estimated recovery from back charge claims in 2016 and income from consolidated construction joint ventures awarded in the third quarter of 2015.
32
Revenue: ConstructionTransportation revenue for the year ended December 31, 2015in 2017 increased by $76.2$320.6 million, or 6.4%19.7%, compared to the year ended December 31, 20142016 primarily due to increased volumes from entering the year with greater contract backlog in the California, Northwest, Heavy Civil and Kenny private sectors and both sectors of the Northwest,Federal operating groups as well as from an improved success rate on bidding activity in the California and Heavy Civil and Kenny public sectors.operating groups. The increases were partially offset by a declinenet negative impact from revisions in the Northwest private sector from completion of projects in 2015 that were not replaced.
Water revenue in 2017 decreased by $27.6 million, or 17.1%, compared to 2016 primarily due to decreases in the Water and Mineral Services operating group from a declinethe completion of projects in settlements of outstanding issues with contract owners in 2015 relative to 2014,2016, a decrease in awards in 2017 and from the impactbeginning the period with lower contract backlog in the Midwest and Northwest operating groups.
Specialty revenue in 2017 increased by $150.5 million, or 32.3%, compared to 2016, primarily due to entering the year with greater contract backlog and from jobs reaching a reasonably certain profit recognition threshold, as well as costs from outstanding affirmative claimsan improved success rate on bidding activity on power work in the Midwest and change orders. These decreases wereCalifornia operating groups partially offset by increases from estimated claim recoveriesdeclines in the Heavy Civilawards in both operating group, entering 2015 with greater backlog than in 2014 in the Northwest operating group and the start-up of new jobs in the Kenny private sector.
Materials revenue for the year ended December 31, 2015in 2017 increased $31.9$31.6 million, or 12.1%, when compared to the year ended December 31, 20142016 primarily due increased unitto net increase in sales volumesvolume from stronger economic driversimproved demand and a net increase in most of the Western states where we operate our plant facilities, partially offset by volume decreases in other Western states.
Contract Backlog:
Water contract backlog of $145.8 million at December 31, 2017 was $68.0 million, or 31.8%, lower than at December 31, 2016 primarily due to the progress and completion of existing projects in the Water and Mineral Services, Heavy Civil and KennyMidwest operating groups partially offset by improved success rate of bidding activity in the California and Northwest operating groups.
Specialty contract backlog of $703.8 million at December 31, 2017 was $64.9 million, or 8.4%, lower than at December 31, 2016 primarily due to the progress onand completion of existing projects in the CaliforniaMidwest operating group without receiving new awards.
Gross Profit: Transportation gross profit in 2017 increased $8.3 million, or 2.1%5.1%, higher than at December 31, 2014compared to 2016. The increases were primarily due to new awards in the Heavy Civil and Kenny operating groups offset by progress on existing projects.
Water gross profit from estimated cost recoveries on affirmative claims during 2015 for which the majority of related costs were recorded in prior periods.
Specialty gross profit in 2017 increased $5.0 million, or 6.0%, compared to 2016 primarily due to increased revenue volume. Specialty gross margin as a percentage of segment revenue for 2017 decreased to 14.2% from estimated cost recoveries on affirmative claims.
Materials gross profit for the year ended December 31, 2015in 2017 increased $14.2$7.9 million, or 75.8%21.1%, compared to the year ended December 31, 2014. Construction2016. Materials gross margin as a percentage of segment revenue for 20152017 increased to 11.1%15.4% from 7.1%14.2% in 2014. The increases were primarily due to increased volumes from overall improvement in the economy relative to the fixed cost of operating our plants.
Selling, General and Administrative Expenses: Selling, general and administrative expenses for 2017 increased $3.0 million, or 1.4%, compared to stipends from owners2016. Selling expenses for 2017 remained relatively unchanged compared to defray a portion of bidding expenses received in 2015 and not 2014 for large project opportunities.2016. Total general and administrative expenses for 20152017 increased $10.4$3.3 million, or 7.6%2.1%, compared to 2014,2016 primarily due to an increase in incentive compensationsalaries and related expenses from an increase in net incomeemployee benefits and compensation. These increases were partially offset by a decrease in restricted stock amortization due to decreases in prior year RSU awards.
Other Expense (Income):
Provision for Income Taxes:
OurAmount Attributable to Non-controlling Interests:
The decrease forThe timing differences between our cash inflows and outflows require us to maintain adequate levels of working capital. We believe our cash and cash equivalents, short-term investments, available borrowing capacity and cash expected to be generated from operations will be sufficient to meet our expected working capital needs, capital expenditures, financial commitments, cash dividend payments, and other liquidity requirements associated with our existing operations for the next twelve months. We maintain a collateralized credit facility of $295.0 million, of which $161.2 million was available at December 31, 2016 (see Credit Agreement discussion below), toTo provide capital needs to fund growth opportunities, either internal or generated through acquisitions or to pay installments on our 2019 Notes, (see Seniorwe maintain a collateralized committed credit facility with an original value of $500.0 million, of which $113.6 million was available at December 31, 2018, and an uncommitted option to increase the facility to $200.0 million subject to the lenders providing the additional commitments. See Note 15 of “Notes to the Consolidated Financial Statements” for definitions and further discussion regarding our 2019 Notes Payable discussion below).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. WeWhile we typically invoice our customers on a monthly basis. Ourbasis, our contracts frequently call for retention that is a specified percentage withheld from each payment until the contract is completed and the work accepted by the customer.
The following table presents our cash, cash equivalents and marketable securities, including amounts from our CCJVs,consolidated construction joint ventures (“CCJVs”), as of the respective dates:
December 31, |
| 2018 |
|
| 2017 |
| ||
(in thousands) |
|
|
|
|
|
|
|
|
Cash and cash equivalents excluding CCJVs |
| $ | 140,839 |
|
| $ | 139,352 |
|
CCJV cash and cash equivalents1 |
|
| 131,965 |
|
|
| 94,359 |
|
Total consolidated cash and cash equivalents |
|
| 272,804 |
|
|
| 233,711 |
|
Short-term and long-term marketable securities2 |
|
| 66,100 |
|
|
| 132,790 |
|
Total cash, cash equivalents and marketable securities |
| $ | 338,904 |
|
| $ | 366,501 |
|
| December 31, | 2016 | 2015 | ||||||
| (in thousands) | ||||||||
| Cash and cash equivalents excluding consolidated joint ventures | $ | 116,211 | $ | 206,626 | ||||
Consolidated construction joint venture cash and cash equivalents1 | 73,115 | 46,210 | ||||||
| Total consolidated cash and cash equivalents | 189,326 | 252,836 | ||||||
Short-term and long-term marketable securities2 | 127,779 | 105,695 | ||||||
| Total cash, cash equivalents and marketable securities | $ | 317,105 | $ | 358,531 | ||||
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 NoteOur primary sources of liquidity are cash and cash equivalents, marketable securities and cash generated from operations. We may also from time to time access our Credit Agreement (defined below),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 consist of U.S. Government and agency obligations and commercial paper.
Granite’s portion of consolidated construction joint ventureCCJV cash and cash equivalents was $44.7$75.5 million and $28.9$56.5 million as of December 31, 20162018 and 2015,2017, respectively. Excluded from the table above is Granite’s portion of unconsolidated construction joint venture cash and cash equivalents was $151.3of $68.3 million and $127.8$91.0 million as of December 31, 20162018 and 2015,2017, 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.
34
| 2018 |
|
| 2017 |
|
| 2016 |
| ||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
| $ | 86,390 |
|
| $ | 146,195 |
|
| $ | 73,146 |
|
Investing activities |
|
| (39,598 | ) |
|
| (59,186 | ) |
|
| (96,390 | ) |
Financing activities |
|
| (1,874 | ) |
|
| (42,624 | ) |
|
| (40,266 | ) |
| Years Ended December 31, | 2016 | 2015 | 2014 | |||||||||
| (in thousands) | ||||||||||||
| Net cash provided by (used in): | ||||||||||||
| Operating activities | $ | 73,146 | $ | 66,978 | $ | 43,142 | ||||||
| Investing activities | (96,390 | ) | (30,707 | ) | 780 | |||||||
| Financing activities | (40,266 | ) | (39,396 | ) | (17,082 | ) | ||||||
As a large construction and heavy civilinfrastructure 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 affirmative claimsclaim and back charge settlements.
Cash provided by operating activities of $73.1$86.4 million during 2016 increased $6.22018 decreased $59.8 million when compared to 2015.2017. The increasedecrease was primarily due to a $23.5$110.4 million increase in net distributions fromcontributions to unconsolidated joint ventures and an $8.8 million increase in cash used by working capital partially offset by a $5.5$59.4 million decreaseincrease in net income after adjusting for non-cash items and a $22.9 million decrease in cash from working capital primarily due to increases from CCJVs.
Cash used in investing activities of $96.4$39.6 million during 20162018 represents a $65.7$19.6 million increase from the amount of cash used by investing activities in 2015.decrease when compared to 2017. The increasechange was primarily due to a $47.0 millionan increase in maturities, net of purchases, of marketable securities and proceeds from the sale of certain non-core assets and the associated liabilities related to the water delivery business within our Water and Mineral Services operating group partially offset by cash used to fund the acquisitions of Layne and LiquiForce and an increase in purchases, net of sales proceeds, of property and equipment (see Capital Expenditures discussion below) and a $24.0 million increase in purchases of marketable securities net of calls and maturities of investments.
Cash used in financing activities of $40.3$1.9 million during 20162018 represents a $40.8 million decrease when compared to 2017. The change was primarily due to increase in line with 2015 drivenproceeds, net of principal repayments from debt partially offset by dividend paymentsan increase in repurchases of common stock related to shares surrendered to pay taxes for vested restricted stock units as well shares repurchased as part of our Board approved repurchase program and an increase in net payments on outstanding indebtedness.
Prior Year
Cash provided by operating activities of $146.2 million during 2017 increased $73.0 million when compared to 2016. The increase was primarily due to a $33.8 million increase in net income after adjusting for non-cash items, a $15.5 million increase in net distributions from unconsolidated joint ventures and a $23.8 million increase in cash from working capital. The increase in cash from working capital was due to a $16.9 million increase in cash provided by working capital liabilities and a $6.9 million decrease in cash used in working capital assets. The increase in cash provided by working capital liabilities was primarily due to an increase in cost volume and the decrease in cash used in working capital assets was primarily due to an improvement in accounts receivable collections partially offset by an increase in revenue volume.
Cash used in investing activities of $59.2 million during 2017 represents a $37.2 million decrease from the amount of cash used by investing activities in 2016. The change was primarily due to a decrease in purchases, net of sales proceeds, of property and equipment and an increase in maturities, net of purchases and proceeds, of marketable securities.
Cash used in financing activities of $42.6 million during 2017 represents a $2.4 million increase in cash used when compared to 2016. The change was primarily due to a decrease in proceeds from long term debt and an increase in repurchases of common stock related to shares surrendered to pay taxes for vested restricted stock units partially offset by an increase in net contributions from non-controlling partners related to consolidated joint ventures.
Capital Expenditures
During the year ended
December 31,35
We recognize derivative instruments as either assets or liabilities in the consolidated balance sheets at fair value using Level 2 inputs.
In January 2016,May 2018, we terminated the interest rate swap we entered into anin January 2016 due to the amendment and restatement of the Credit Agreement (as defined in the Credit Agreement section of Note 15 to “Notes to the Consolidated Financial Statements”). In May 2018, we entered into two interest rate swapswaps designated as cash flow hedges with an effective date of May 2018, a combined initial notional amount of $150.0 million and a maturity date in May 2023. The interest rate swaps are designed to convert the interest rate on our term loan from a variable to fixed interest rate (see Credit Agreement section below).
Debt and Contractual Obligations
The following table summarizes our significant obligations outstanding as of December 31,
|
| Payments Due by Period |
| |||||||||||||||||
(in thousands) |
| Total |
|
| Less than 1 year |
|
| 1-3 years |
|
| 3-5 years |
|
| More than 5 years |
| |||||
Long-term debt – principal1 |
| $ | 383,306 |
|
| $ | 47,556 |
|
| $ | 15,000 |
|
| $ | 320,750 |
|
| $ | — |
|
Long-term debt – interest2 |
|
| 61,848 |
|
|
| 16,478 |
|
|
| 27,101 |
|
|
| 18,269 |
|
|
| — |
|
Operating leases3 |
|
| 83,518 |
|
|
| 20,152 |
|
|
| 33,695 |
|
|
| 20,962 |
|
|
| 8,709 |
|
Other purchase obligations4 |
|
| 18,514 |
|
|
| 18,514 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Deferred compensation obligations5 |
|
| 25,234 |
|
|
| 6,492 |
|
|
| 3,394 |
|
|
| 2,093 |
|
|
| 13,255 |
|
Asset retirement obligations6 |
|
| 21,792 |
|
|
| 4,439 |
|
|
| 4,769 |
|
|
| 3,072 |
|
|
| 9,512 |
|
Total |
| $ | 594,212 |
|
| $ | 113,631 |
|
| $ | 83,959 |
|
| $ | 365,146 |
|
| $ | 31,476 |
|
| Payments Due by Period | |||||||||||||||
| (in thousands) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||
Long-term debt – principal1 | $ | 245,081 | $ | 15,025 | $ | 96,306 | $ | 133,750 | $ | — | |||||
Long-term debt – interest2 | 29,909 | 11,075 | 15,654 | 3,180 | — | ||||||||||
Operating leases3 | 48,293 | 10,451 | 15,045 | 9,571 | 13,226 | ||||||||||
Other purchase obligations4 | 9,713 | 9,713 | — | — | — | ||||||||||
Deferred compensation obligations5 | 21,475 | 2,037 | 2,900 | 1,348 | 15,190 | ||||||||||
Asset retirement obligations6 | 21,935 | 1,897 | 5,453 | 4,015 | 10,570 | ||||||||||
| Total | $ | 376,406 | $ | 50,198 | $ | 135,358 | $ | 151,864 | $ | 38,986 | |||||
1
2
Included in the total is3
These obligations represent the minimum rental commitments and minimum royalty requirements under all noncancellable operating leases. See Note4
These obligations represent firm purchase commitments for equipment and other goods and services not directly connected with our construction contract backlog which are individually greater than $10,000 and have an expected fulfillment date after December 31,5
The timing of expected payment of deferred compensation is based on estimated dates of retirement. Actual dates of retirement could be different and could cause the timing of payments to change.6
Asset retirement obligations represent reclamation and other related costs associated with our owned and leased quarry properties, the majority of which have an estimated settlement date beyond five years. See NoteIn addition to the significant obligations described above, as of December 31,
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
December 31,Our unconsolidatedinvestments in real estate held for development and sale isaffiliates 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. The debt associated with our unconsolidated real estate ventures is disclosed in Note 710 of “Notes to the Consolidated Financial Statements.”
Our debt and credit agreements require us to comply with various affirmative, restrictive and financial covenants, including the financial covenants described below. Our failure to comply with any of these covenants, or to pay principal, interest or other amounts when due thereunder, would constitute an event of default under the applicable agreements. Under certain circumstances, the occurrence of an event of default under one of our debt or credit agreements (or the acceleration of the maturity of the indebtedness under one of our agreements) may constitute an event of default under one or more of our other debt or credit agreements. Default under our debt and credit agreements could result in (i) us no longer being entitled to borrow under the agreements; (ii) termination of the agreements; (iii) the requirement that any letters of credit under the agreements be cash collateralized; (iv) acceleration of the maturity of outstanding indebtedness under the agreements and/or (v) foreclosure on any collaterallien securing the obligations under the agreements.
The most significant financial covenants under the terms of our Credit Agreement and related to the note purchase agreement governing our 2019 NPANotes (“2019 NPA”) require the maintenance of a minimum Consolidated Tangible Net Worth, a minimum Consolidated Interest Coverage Ratio and a maximum Consolidated Leverage Ratio.
As of December 31, 20162018, and pursuant to the definitions in the agreements,2019 NPA, which is more restrictive, our Consolidated Tangible Net Worth was $881.6 million,$1.1 billion which exceeded the minimum of $697.3$791.4 million and our Consolidated Leverage Ratio was 1.541.82, which did not exceed the maximum of 3.00 and our3.00. Our Consolidated Interest Coverage Ratio was 12.30$14.10, which exceeded the minimum of 4.00.
As of December 31, 2016,2018, we were in compliance with all covenants contained in the Credit Agreement and related to the 2019 NPA.Notes. We are not aware of any non-compliance by any of our unconsolidated real estate entities with the covenants contained in their debt agreements.
Share Purchase Program
As announced on April 29, 2016, on April 7, 2016, the Board of Directors authorized us to purchase up to $200.0 million of our common stock at management’s discretion, which replaced the former authorization including the amount available. We did not purchaseAs part of this authorization we have established a plan to facilitate common stock repurchases. During the fourth quarter of 2018, we purchased approximately 252,000 shares under theat an average price of $39.64 per share purchase program in any of the periods presented.for $10.0 million. The specific timing and amount of any future purchases will vary based on market conditions, securities law limitations and other factors.
Recently Issued and Adopted Accounting Pronouncements
See “Note 1 - Summary of Significant Accounting Policies” of “Notes to the Consolidated Financial Statements” under the captions Recently Issued Accounting Pronouncements and Recently Adopted Accounting Pronouncements.
37
In May 2014, the FASB issued ASC Topic 606, IRevenue from Contracts with Customers, and subsequently issued several related Accounting Standards Updates (“ASUs”) (“Topic 606”), which provide guidance for recognizing revenue from contracts with customers. The core principle of Topic 606 is that revenue will be recognized when promised goods or services are transferred to customers in an amount that reflects consideration for which entitlement is expected in exchange for those goods or services. Topic 606 will be effective commencing with our quarter ending March 31, 2018. We currently anticipate adopting Topic 606 using the modified retrospective transition approach that may result in a cumulative adjustment to beginning retained earnings as of January 1, 2018, which we will elect to only apply to contracts with customers that are not substantially complete as of January 1, 2018.
We maintain an investment portfolio of various holdings, types and maturities. We purchase instruments that meet high credit quality standards, as specified in our investment policy. It also limits the amount of credit exposure to any one issue, issuer or type of instrument. The portfolio and accompanying cash balances are targeted to an average maturity of no more than one year from the date the purchase is settled. On an ongoing basis we monitor credit ratings, financial condition and other factors that could affect the carrying amount of our investment portfolio.
Marketable securities, consisting of U.S. government and agency obligations and commercial paper,corporate bonds, are classified as held-to-maturity and are stated at cost, adjusted for amortization of premiums and discounts to maturity.
Given the short-term nature of certain investments, our investment income is subject to the general level of interest rates in the United States at the time of maturity and reinvestment. We have managed the financial market risks due largely to changes in interest rates primarily by managing the maturities in our investment portfolio.
Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash and cash equivalents, short-term and long-term marketable securities, and accounts receivable. We do not havemaintain our cash and cash equivalents and our marketable securities with several financial institutions. We invest with high credit quality financial institutions and, by policy, limit the amount of credit exposure to any material business transactions in foreign currencies.
The fair value of our short-term held-to-maturity investment portfolio and related income would not be significantly affected by changes in interest rates since the investment maturities are short and the interest rates are primarily fixed.short. The fair value of our long-term held-to-maturity investment portfolio may be affected by changes in interest rates.
Operating in international markets involves exposure to possible volatile movements in currency exchange rates. Layne’s international operations are in Latin America (primarily Mexico) and Canada and LiquiForce has international operations in Canada. Layne’s affiliates also operate in Latin America (see Note 11 of “Notes to the Consolidated Financial Statements”). The majority of the customer contracts in Mexico are U.S. dollar-based, reducing the exposure to currency fluctuations. As of December 31, 2018, we do not have any outstanding foreign currency option contracts.
As foreign currency exchange rates change, the impact to our consolidated statements of operations could be significant and may affect year-to-year comparability of operating results. The impact from foreign currency transactions during 2018 was immaterial.
We are exposed to various commodity price risks, including, but not limited to, diesel fuel, natural gas, propane, steel, cement and liquid asphalt arising from transactions that are entered into in the normal course of business. In order to manage or reduce commodity price risk, we monitor the costs of these commodities at the time of bid and price them into our contracts accordingly. Additionally, some of our contracts include commodity price escalation clauses which partially protect us from increasing prices. At times we enter into supply agreements or pre-purchase commodities to secure pricing and may use financial contracts to further manage price risk.
As of December 31, 2016, $120.02018, $40.0 million of senior notes payable were due to a group of institutional holders in threeone remaining equal installments from 2017 throughinstallment in 2019 and bearbears interest at 6.11% per annum.
As of December 31, 2016,2018, a $95.0$146.3 million term loan was outstanding under the Credit Agreement that had an effectivea variable interest rate of 2.75% using three-month LIBOR and theplus an applicable margin, that we converted under a swap arrangement to a fixed rate of 1.47%2.76% plus the same applicable margin. The applicable margin is based on certain financial ratios calculated quarterly and can vary in future periods. Each 25 basis point increase in the applicable margin would result in $0.2$0.4 million annually in additional interest expense.
As of December 31, 2016, $30.02018, $197.0 million had been drawn and was outstanding under the revolving portion of the Credit Agreement that had an effective interest rate of 2.52%4.02% using one-month LIBOR and the applicable margin. We had the option of electing LIBOR or the base rate and we elected to use LIBOR. LIBOR is a variable rate subject to market changes over the life of the loan with no guarantees to fix as forecasted. Each 25 basis point increase in one-month LIBOR or in the applicable margin of the loan would result in an additional $0.1$0.5 million of annual interest expense.
See “Liquidity and Capital Resources” section above for further discussion on the senior notes payable and Credit Agreement.
38
The table below presents principal amounts due by year and related weighted average interest rates for our cash and cash equivalents, held-to-maturity investments and significant debt obligations as of December 31, 20162018 (dollars in thousands):
|
| 2019 |
|
|
|
| 2020 |
|
|
|
| 2021 |
|
|
|
| 2022 |
|
|
|
| 2023 |
|
|
|
| Thereafter |
|
| Total |
| |||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, held-to-maturity investments |
| $ | 302,806 |
|
|
|
| $ | 26,098 |
|
|
|
| $ | 10,000 |
|
|
|
| $ | — |
|
|
|
| $ | — |
|
|
|
| $ | — |
|
| $ | 338,904 |
|
Weighted average interest rate |
|
| 1.99 | % |
|
|
|
| 1.27 | % |
|
|
|
| 1.87 | % |
|
|
|
| — | % |
|
|
|
| — | % |
|
|
|
| — | % |
|
| 1.94 | % |
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes payable |
| $ | 40,000 |
|
|
|
| $ | — |
|
|
|
| $ | — |
|
|
|
| $ | — |
|
|
|
| $ | — |
|
|
|
| $ | — |
|
| $ | 40,000 |
|
Interest rate |
|
| 6.11 | % |
|
|
|
| — | % |
|
|
|
| — | % |
|
|
|
| — | % |
|
|
|
| — | % |
|
|
|
| — | % |
|
| 6.11 | % |
Credit Agreement - term loan |
| $ | 7,500 |
|
|
|
| $ | 7,500 |
|
|
|
| $ | 7,500 |
|
|
|
| $ | 7,500 |
|
|
|
| $ | 7,500 |
|
|
|
| $ | 108,750 |
|
| $ | 146,250 |
|
Effective interest rate1 |
|
| 4.26 | % |
|
|
|
| 4.26 | % |
|
|
|
| 4.26 | % |
|
|
|
| 4.26 | % |
|
|
|
| 4.26 | % |
|
|
|
| — | % |
|
| 4.26 | % |
Variable rate debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Agreement - revolving credit facility2 |
| $ | — |
|
|
|
| $ | — |
|
|
|
| $ | — |
|
|
|
| $ | — |
|
|
|
| $ | 197,000 |
|
|
|
| $ | — |
|
| $ | 197,000 |
|
Effective interest rate3 |
|
| — | % |
|
|
|
| — | % |
|
|
|
| — | % |
|
|
|
| — | % |
|
|
|
| 4.02 | % |
|
|
|
| — | % |
|
| 4.02 | % |
| 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | |||||||||||||||
| Assets | |||||||||||||||||||||
| Cash, cash equivalents, held-to-maturity investments | $ | 254,211 | $ | 17,906 | $ | 24,988 | $ | 20,000 | $ | — | $ | — | $ | 317,105 | |||||||
| Weighted average interest rate | 0.79 | % | 1.21 | % | 1.33 | % | 1.45 | % | — | % | — | % | 0.90 | % | |||||||
| Liabilities | |||||||||||||||||||||
| Fixed rate debt | |||||||||||||||||||||
Senior notes payable1 | $ | 10,000 | $ | 40,000 | $ | 40,000 | $ | — | $ | — | $ | — | $ | 90,000 | |||||||
| Interest rate | 6.11 | % | 6.11 | % | 6.11 | % | — | % | — | % | — | % | 6.11 | % | |||||||
| Variable rate debt | |||||||||||||||||||||
| Credit Agreement - term loan | $ | 5,000 | $ | 6,250 | $ | 10,000 | $ | 73,750 | $ | — | $ | — | $ | 95,000 | |||||||
Effective interest rate2 | 3.22 | % | 3.22 | % | 3.22 | % | 3.22 | % | — | % | — | % | 3.22 | % | |||||||
Credit Agreement - revolving credit facility1 | $ | — | $ | — | $ | — | $ | 60,000 | $ | — | $ | — | $ | 60,000 | |||||||
Effective interest rate3 | — | % | — | % | — | % | 2.52 | % | — | % | — | % | 2.52 | % | |||||||
1
2The majority of the balance of Credit Agreement - revolving credit facility was drawn to fund the Layne and LiquiForce acquisitions.
3
The weighted average interest rate was calculated using one-month LIBOR rates and the applicable margin in effect as of December 31,The estimated fair value of our cash, cash equivalents and short-term held-to-maturity investments approximates the principal amounts reflected above based on the generally short maturities of these financial instruments. Based on the fixed borrowing rates currently available to us for bank loans with similar terms and average maturities, the fair value of the senior notes payable was approximately $124.7$40.5 million and $165.7$82.2 million as of as of December 31,
39
The following consolidated financial statements of Granite, the supplementary data and the independent registered public accounting firm’s report are incorporated by reference from Part IV, Item 15(1) and (2):
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - At December 31,
Consolidated Statements of Operations - Years Ended December 31,
Consolidated Statements of Comprehensive Income - Years Ended December 31,
Consolidated Statements of Shareholders’ Equity - Years Ended December 31,
Consolidated Statements of Cash Flows - Years Ended December 31,
Notes to the Consolidated Financial Statements
Quarterly Financial Data (unaudited)
Not applicable.
Evaluation of Disclosure Controls and Procedures
: Our management carried out, as of December 31,Changes in Internal Control Over Financial Reporting:
During the quarter ended December 31,Management’s Report on Internal Control Over Financial Reporting:
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d -15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2018.The scope of our assessment of the effectiveness of our internal control over financial reporting did not include LiquiForce or Layne as we acquired LiquiForce on April 3, 2018 and Layne on June 14, 2018. LiquiForce and Layne had total assets that were less than 1% and 16.2%, respectively, of consolidated assets as of December 31, 2018 and revenues that were less than 1% and 8.2%, respectively, of consolidated revenue during the year ended December 31, 2018. We excluded LiquiForce and Layne from the scope of our assessment in accordance with the Securities Exchange Commission’s guidance that allows a recently acquired business to be omitted from the scope of the assessment for one year from the date of its acquisition.
Independent Registered Public Accounting Firm Report:
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this Annual Report on Form 10-K, has issued a report on the Company’s internal control over financial reporting as of December 31,Not Applicable.
40
Certain information required by Part III is omitted from this report. We will file our definitive proxy statement for our Annual Meeting of Shareholders to be held on June 8, 20176, 2019 (the “Proxy Statement”) pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report, and certain information included therein is incorporated herein by reference.
For information regarding our Directors and compliance with Section 16(a) of the Securities Exchange Act of 1934, we direct you to the sections entitled “Proposal 1 - Election and Ratification of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance,” respectively, in the Proxy Statement. For information regarding our Audit/Compliance Committee and our Audit/Compliance Committee’s financial expert, we direct you to the section entitled “Information about the Board of Directors and Corporate Governance - Committees of the Board - Audit/Compliance Committee” in the Proxy Statement. For information regarding our Code of Conduct, we direct you to the section entitled “Information about the Board of Directors and Corporate Governance - Code of Conduct” in the Proxy Statement. Information regarding our executive officers is contained in the section entitled “Executive Officers of the Registrant,” in Part I, Item I of this report. This information is incorporated herein by reference.
For information regarding our Executive Compensation, we direct you to the section captioned “Executive and Director Compensation and Other Matters” in the Proxy Statement. This information is incorporated herein by reference.
This information is located in the sections captioned “Stock Ownership of Certain Beneficial Owners and Certain Management” and “Equity Compensation Plan Information” in the Proxy Statement. This information is incorporated herein by reference.
You will find this information in the sections captioned “Transactions with Related Persons” and “Information about the Board of Directors and Corporate Governance - Director Independence” in the Proxy Statement. This information is incorporated herein by reference.
You will find this information in the section captioned “Independent Registered Public Accountants - Principal Accountant Fees and Services” in the Proxy Statement. This information is incorporated herein by reference.
41
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GRANITE CONSTRUCTION INCORPORATED | |||
By: /s/ Jigisha Desai | |||
Jigisha Desai | |||
Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | |||
Date: February 21, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated and on the dates indicated.
/s/ Claes G. Bjork | February 21, 2019 | |
Claes G. Bjork, Chairman of the Board and Director | ||
/s/ James H. Roberts | February 21, 2019 | |
James H. Roberts, President, Chief Executive Officer, and Director (Principal Executive Officer) | ||
By: /s/ Jigisha Desai | February 21, 2019 | |
Jigisha Desai, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | ||
/s/ James W. Bradford, Jr. | February 21, 2019 | |
James W. Bradford, Jr., Director | ||
/s/ David C. Darnell | February 21, 2019 | |
David C. Darnell, Director | ||
/s/ Patricia D. Galloway | February 21, 2019 | |
Patricia D. Galloway, Director | ||
/s/ Jeffrey J. Lyash | February 21, 2019 | |
Jeffrey J. Lyash, Director | ||
/s/ Alan P. Krusi | February 21, 2019 | |
Alan P. Krusi, Director | ||
/s/ David H. Kelsey | February 21, 2019 | |
David H. Kelsey, Director | ||
/s/ Celeste B. Mastin | February 21, 2019 | |
Celeste B. Mastin, Director | ||
/s/ Michael F. McNally | February 21, 2019 | |
Michael F. McNally, Director | ||
/s/ Gaddi H. Vasquez | February 21, 2019 | |
Gaddi H. Vasquez, Director | ||
42
The following documents are filed as part of this report:
1. Financial Statements.
The following consolidated financial statements and related documents are filed as part of this report:Financial Statements | Page |
F-1 to F-2 | |
Consolidated Balance Sheets at December 31, | F-3 |
F-4 | |
F-5 | |
F-6 | |
F-7 | |
F-8 to | |
F-44 |
2. Financial Statement Schedules.
Schedules are omitted because they are not required or applicable, or the required information is included in the Financial Statements or related notes.3. Exhibits
. The Exhibits listed in the accompanying Exhibit Index43
Exhibit No. | Exhibit Description | |
2.1 | * | |
2.2 | * | |
3.1 | * | |
3.2 | * | |
10.1 | *** | |
10.2 | *** | |
10.2.a | *** | |
10.7 | * | |
10.8 | * | |
10.9 | * | |
10.11 | *** | |
10.12 | *** | |
10.13 | *** | |
10.14 | *** | |
10.15 | *** | |
10.16 | *** | |
10.17 | *** | |
10.18 | *** | |
10.19 | *** | |
10.20 | *** | |
10.21 | *** | |
10.22 | *** | |
10.23 | *** | |
10.24 | *** | |
10.25 | * | |
10.26 | * | Form of Voting Agreement [Exhibit 2.1 to the Company’s Form 8-K filed on February 14, 2018] |
10.27 | * |
44
Exhibit No. | Exhibit Description | |
* | ||
10.29 | * | |
21 | † | |
23.1 | † | |
31.1 | † | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | † | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32 | †† | |
95 | † | |
101.INS | † | XBRL Instance Document |
101.SCH | † | XBRL Taxonomy Extension Schema |
101.CAL | † | XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | † | XBRL Taxonomy Extension Definition Linkbase |
101.LAB | † | XBRL Taxonomy Extension Label Linkbase |
101.PRE | † | XBRL Taxonomy Extension Presentation Linkbase |
* Incorporated by reference
** Compensatory plan or management contract
† Filed herewith
†† Furnished herewith
45
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Granite Construction Incorporated:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated financial statements listed in the index appearing under Item 15(1) present fairly, in all material respects, the financial positionbalance sheets of Granite Construction Incorporated and its subsidiaries at(the “Company”) as of December 31, 20162018 and 2015,2017, and the resultsrelated consolidated statements of their operations, comprehensive income, shareholders’ equity and their cash flows for each of the three years in the period ended December 31, 20162018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016,2018, based on criteria established in
Change in Accounting Principle
As discussed in Note 1 to the Treadway Commission (COSO). consolidated financial statements, the Company changed the manner in which it accounts for revenue from contracts with customers in 2018.
Basis for Opinions
The Company’sCompany's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’sManagement's Report on Internal Control overOver Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements and on the Company’sCompany's internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Layne Christensen Company and LiquiForce from its assessment of internal control over financial reporting as of December 31, 2018, because they were acquired by the Company in purchase business combinations during 2018. We have also excluded Layne Christensen Company and LiquiForce from our audit of internal control over financial reporting. Layne Christensen Company and LiquiForce are wholly-owned subsidiaries whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 16.2% and less than 1% of total assets, respectively, and 8.2% and less than 1% of total revenues, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.
F-1
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
February 17, 2017
We have served as the Company’s auditor since 1982.
F-2
GRANITE CONSTRUCTION INCORPORATED
(dollars in thousands, except share and per share data)
| December 31, |
| 2018 |
|
| 2017 |
|
| ||
| ASSETS |
|
|
|
|
|
|
|
|
|
| Current assets |
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents ($131,965 and $94,359 related to consolidated construction joint ventures (“CCJVs”)) |
| $ | 272,804 |
|
| $ | 233,711 |
|
|
| Short-term marketable securities |
|
| 30,002 |
|
|
| 67,775 |
|
|
| Receivables, net ($21,237 and $52,031 related to CCJVs) |
|
| 473,246 |
|
|
| 479,791 |
|
|
| Contract assets ($19,699 and $0 related to CCJVs) |
|
| 219,754 |
|
|
| — |
|
|
| Costs and estimated earnings in excess of billings ($0 and $1,437 related to CCJVs) |
|
| — |
|
|
| 103,965 |
|
|
| Inventories |
|
| 88,623 |
|
|
| 62,497 |
|
|
| Equity in construction joint ventures |
|
| 282,229 |
|
|
| 247,826 |
|
|
| Other current assets ($11,744 and $10,384 related to CCJVs) |
|
| 48,731 |
|
|
| 36,513 |
|
|
| Total current assets |
|
| 1,415,389 |
|
|
| 1,232,078 |
|
|
| Property and equipment, net ($34,761 and $38,361 related to CCJVs) |
|
| 549,688 |
|
|
| 407,418 |
|
|
| Long-term marketable securities |
|
| 36,098 |
|
|
| 65,015 |
|
|
| Investments in affiliates |
|
| 84,354 |
|
|
| 38,469 |
|
|
| Goodwill |
|
| 259,471 |
|
|
| 53,799 |
|
|
| Other noncurrent assets |
|
| 131,601 |
|
|
| 75,199 |
|
|
| Total assets |
| $ | 2,476,601 |
|
| $ | 1,871,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
| Current liabilities |
|
|
|
|
|
|
|
|
|
| Current maturities of long-term debt |
| $ | 47,286 |
|
| $ | 46,048 |
|
|
| Accounts payable ($37,086 and $34,795 related to CCJVs) |
|
| 251,481 |
|
|
| 237,673 |
|
|
| Contract liabilities ($60,288 and $0 related to CCJVs) |
|
| 105,449 |
|
|
| — |
|
|
| Billings in excess of costs and estimated earnings ($0 and $37,701 related to CCJVs) |
|
| — |
|
|
| 135,146 |
|
|
| Accrued expenses and other current liabilities ($2,046 and $2,126 related to CCJVs) |
|
| 273,626 |
|
|
| 236,407 |
|
|
| Total current liabilities |
|
| 677,842 |
|
|
| 655,274 |
|
|
| Long-term debt |
|
| 335,119 |
|
|
| 178,453 |
|
|
| Deferred income taxes, net |
|
| 4,317 |
|
|
| 1,361 |
|
|
| Other long-term liabilities |
|
| 61,689 |
|
|
| 44,085 |
|
|
| Commitments and contingencies (Notes 20 and 21) |
|
|
|
|
|
|
|
|
|
| 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: 46,665,889 shares as of December 31, 2018, and 39,871,314 shares as of December 31, 2017 |
|
| 467 |
|
|
| 399 |
|
|
| Additional paid-in capital |
|
| 564,559 |
|
|
| 160,376 |
|
|
| Accumulated other comprehensive (loss) income |
|
| (749 | ) |
|
| 634 |
|
|
| Retained earnings |
|
| 787,356 |
|
|
| 783,699 |
|
|
| Total Granite Construction Incorporated shareholders’ equity |
|
| 1,351,633 |
|
|
| 945,108 |
|
|
| Non-controlling interests |
|
| 46,001 |
|
|
| 47,697 |
|
|
| Total equity |
|
| 1,397,634 |
|
|
| 992,805 |
|
|
| Total liabilities and equity |
| $ | 2,476,601 |
|
| $ | 1,871,978 |
|
|
| GRANITE CONSTRUCTION INCORPORATED | |||||||||
| CONSOLIDATED BALANCE SHEETS | |||||||||
| (dollars in thousands, except share and per share data) | |||||||||
| December 31, | 2016 | 2015 | |||||||
| ASSETS | |||||||||
| Current assets | |||||||||
| Cash and cash equivalents ($73,115 and $46,210 related to consolidated construction joint ventures (“CCJVs”)) | $ | 189,326 | $ | 252,836 | |||||
| Short-term marketable securities | 64,884 | 25,043 | |||||||
| Receivables, net ($52,613 and $45,734 related to CCJVs) | 419,345 | 340,822 | |||||||
| Costs and estimated earnings in excess of billings ($5,046 and $826 related to CCJVs) | 73,102 | 59,070 | |||||||
| Inventories | 55,245 | 55,553 | |||||||
| Equity in construction joint ventures | 247,182 | 224,689 | |||||||
| Other current assets ($7,500 and $4,037 related to CCJVs) | 39,908 | 26,985 | |||||||
| Total current assets | 1,088,992 | 984,998 | |||||||
| Property and equipment, net ($20,500 and $5,378 related to CCJVs) | 406,650 | 385,129 | |||||||
| Long-term marketable securities | 62,895 | 80,652 | |||||||
| Investments in affiliates | 35,668 | 33,182 | |||||||
| Goodwill | 53,799 | 53,799 | |||||||
| Deferred income taxes, net | — | 4,329 | |||||||
| Other noncurrent assets | 85,449 | 84,789 | |||||||
| Total assets | $ | 1,733,453 | $ | 1,626,878 | |||||
| LIABILITIES AND EQUITY | |||||||||
| Current liabilities | |||||||||
| Current maturities of long-term debt | $ | 14,796 | $ | 14,800 | |||||
| Accounts payable ($26,419 and $11,909 related to CCJVs) | 199,029 | 157,571 | |||||||
| Billings in excess of costs and estimated earnings ($33,704 and $15,768 related to CCJVs) | 97,522 | 92,515 | |||||||
| Accrued expenses and other current liabilities ($1,544 and $1,171 related to CCJVs) | 218,587 | 200,935 | |||||||
| Total current liabilities | 529,934 | 465,821 | |||||||
| Long-term debt | 229,498 | 244,323 | |||||||
| Deferred income taxes, net | 5,441 | — | |||||||
| Other long-term liabilities | 45,989 | 46,613 | |||||||
| Commitments and contingencies | |||||||||
| Equity | |||||||||
| Preferred stock, $0.01 par value, authorized 3,000,000 shares, none outstanding | — | — | |||||||
| Common stock, $0.01 par value, authorized 150,000,000 shares; issued and outstanding 39,621,140 shares as of December 31, 2016 and 39,412,877 shares as of December 31, 2015 | 396 | 394 | |||||||
| Additional paid-in capital | 150,337 | 140,912 | |||||||
| Accumulated other comprehensive loss | (371 | ) | (1,500 | ) | |||||
| Retained earnings | 735,626 | 699,431 | |||||||
| Total Granite Construction Incorporated shareholders’ equity | 885,988 | 839,237 | |||||||
| Non-controlling interests | 36,603 | 30,884 | |||||||
| Total equity | 922,591 | 870,121 | |||||||
| Total liabilities and equity | $ | 1,733,453 | $ | 1,626,878 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
GRANITE CONSTRUCTION INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share data)
Years Ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Transportation |
| $ | 1,976,743 |
|
| $ | 1,947,420 |
|
| $ | 1,626,786 |
|
Water |
|
| 338,250 |
|
|
| 133,699 |
|
|
| 161,282 |
|
Specialty |
|
| 626,619 |
|
|
| 615,818 |
|
|
| 465,323 |
|
Materials |
|
| 376,802 |
|
|
| 292,776 |
|
|
| 261,226 |
|
Total revenue |
|
| 3,318,414 |
|
|
| 2,989,713 |
|
|
| 2,514,617 |
|
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Transportation |
|
| 1,786,698 |
|
|
| 1,777,285 |
|
|
| 1,464,957 |
|
Water |
|
| 278,676 |
|
|
| 121,429 |
|
|
| 141,397 |
|
Specialty |
|
| 535,731 |
|
|
| 528,372 |
|
|
| 382,865 |
|
Materials |
|
| 328,117 |
|
|
| 247,694 |
|
|
| 224,028 |
|
Total cost of revenue |
|
| 2,929,222 |
|
|
| 2,674,780 |
|
|
| 2,213,247 |
|
Gross profit |
|
| 389,192 |
|
|
| 314,933 |
|
|
| 301,370 |
|
Selling, general and administrative expenses |
|
| 272,776 |
|
|
| 220,400 |
|
|
| 217,374 |
|
Acquisition and integration expenses |
|
| 60,045 |
|
|
| — |
|
|
| — |
|
Gain on sales of property and equipment |
|
| (7,672 | ) |
|
| (4,182 | ) |
|
| (8,358 | ) |
Operating income |
|
| 64,043 |
|
|
| 98,715 |
|
|
| 92,354 |
|
Other (income) expense |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
| (6,082 | ) |
|
| (4,742 | ) |
|
| (3,225 | ) |
Interest expense |
|
| 14,571 |
|
|
| 10,800 |
|
|
| 12,366 |
|
Equity in income of affiliates |
|
| (6,935 | ) |
|
| (7,107 | ) |
|
| (7,177 | ) |
Other income, net |
|
| (1,666 | ) |
|
| (4,699 | ) |
|
| (5,972 | ) |
Total other income |
|
| (112 | ) |
|
| (5,748 | ) |
|
| (4,008 | ) |
Income before provision for income taxes |
|
| 64,155 |
|
|
| 104,463 |
|
|
| 96,362 |
|
Provision for income taxes |
|
| 10,414 |
|
|
| 28,662 |
|
|
| 30,162 |
|
Net income |
|
| 53,741 |
|
|
| 75,801 |
|
|
| 66,200 |
|
Amount attributable to non-controlling interests |
|
| (11,331 | ) |
|
| (6,703 | ) |
|
| (9,078 | ) |
Net income attributable to Granite Construction Incorporated |
| $ | 42,410 |
|
| $ | 69,098 |
|
| $ | 57,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to common shareholders (See Note 18) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.97 |
|
| $ | 1.74 |
|
| $ | 1.44 |
|
Diluted |
| $ | 0.96 |
|
| $ | 1.71 |
|
| $ | 1.42 |
|
Weighted average shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 43,564 |
|
|
| 39,795 |
|
|
| 39,557 |
|
Diluted |
|
| 44,025 |
|
|
| 40,372 |
|
|
| 40,225 |
|
| GRANITE CONSTRUCTION INCORPORATED | ||||||||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||
| (in thousands, except per share data) | ||||||||||||
| Years Ended December 31, | 2016 | 2015 | 2014 | |||||||||
| Revenue | ||||||||||||
| Construction | $ | 1,365,198 | $ | 1,262,675 | $ | 1,186,445 | ||||||
| Large Project Construction | 888,193 | 812,720 | 825,044 | |||||||||
| Construction Materials | 261,226 | 295,634 | 263,781 | |||||||||
| Total revenue | 2,514,617 | 2,371,029 | 2,275,270 | |||||||||
| Cost of revenue | ||||||||||||
| Construction | 1,155,983 | 1,075,169 | 1,072,492 | |||||||||
| Large Project Construction | 824,056 | 733,253 | 717,947 | |||||||||
| Construction Materials | 233,208 | 262,771 | 245,090 | |||||||||
| Total cost of revenue | 2,213,247 | 2,071,193 | 2,035,529 | |||||||||
| Gross profit | 301,370 | 299,836 | 239,741 | |||||||||
| Selling, general and administrative expenses | 219,299 | 203,817 | 193,256 | |||||||||
| Restructuring and impairment gains | (1,925 | ) | (6,003 | ) | (2,643 | ) | ||||||
| Gain on sales of property and equipment | (8,358 | ) | (8,286 | ) | (15,972 | ) | ||||||
| Operating income | 92,354 | 110,308 | 65,100 | |||||||||
| Other (income) expense | ||||||||||||
| Interest income | (3,225 | ) | (2,135 | ) | (1,872 | ) | ||||||
| Interest expense | 12,366 | 14,257 | 14,159 | |||||||||
| Equity in income of affiliates | (7,177 | ) | (3,210 | ) | (901 | ) | ||||||
| Other income, net | (5,972 | ) | (2,031 | ) | (1,883 | ) | ||||||
| Total other (income) expense | (4,008 | ) | 6,881 | 9,503 | ||||||||
| Income before provision for income taxes | 96,362 | 103,427 | 55,597 | |||||||||
| Provision for income taxes | 30,162 | 35,179 | 19,721 | |||||||||
| Net income | 66,200 | 68,248 | 35,876 | |||||||||
| Amount attributable to non-controlling interests | (9,078 | ) | (7,763 | ) | (10,530 | ) | ||||||
| Net income attributable to Granite Construction Incorporated | $ | 57,122 | $ | 60,485 | $ | 25,346 | ||||||
Net income per share attributable to common shareholders (see Note 14) | ||||||||||||
| Basic | $ | 1.44 | $ | 1.54 | $ | 0.65 | ||||||
| Diluted | $ | 1.42 | $ | 1.52 | $ | 0.64 | ||||||
| Weighted average shares of common stock | ||||||||||||
| Basic | 39,557 | 39,337 | 39,096 | |||||||||
| Diluted | 40,225 | 39,868 | 39,795 | |||||||||
| Dividends per common share | $ | 0.52 | $ | 0.52 | $ | 0.52 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
GRANITE CONSTRUCTION INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Years Ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Net income |
| $ | 53,741 |
|
| $ | 75,801 |
|
| $ | 66,200 |
|
Other comprehensive (loss) income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (loss) gain on derivatives |
| $ | (451 | ) |
| $ | 191 |
|
| $ | 184 |
|
Less: reclassification for net (gains) losses included in interest expense |
|
| (214 | ) |
|
| 159 |
|
|
| 319 |
|
Net change |
| $ | (665 | ) |
| $ | 350 |
|
| $ | 503 |
|
Foreign currency translation adjustments, net |
|
| (718 | ) |
|
| 655 |
|
|
| 626 |
|
Other comprehensive (loss) income |
| $ | (1,383 | ) |
| $ | 1,005 |
|
| $ | 1,129 |
|
Comprehensive income |
| $ | 52,358 |
|
| $ | 76,806 |
|
| $ | 67,329 |
|
Non-controlling interests in comprehensive income |
|
| (11,331 | ) |
|
| (6,703 | ) |
|
| (9,078 | ) |
Comprehensive income attributable to Granite Construction Incorporated |
| $ | 41,027 |
|
| $ | 70,103 |
|
| $ | 58,251 |
|
| GRANITE CONSTRUCTION INCORPORATED | ||||||||||||
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | ||||||||||||
| (in thousands) | ||||||||||||
| Years Ended December 31, | 2016 | 2015 | 2014 | |||||||||
| Net income | $ | 66,200 | $ | 68,248 | $ | 35,876 | ||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Net unrealized gain on derivatives | $ | 184 | $ | — | $ | — | ||||||
| Less: reclassification for net losses included in interest expense | 319 | — | — | |||||||||
| Net change | $ | 503 | $ | — | $ | — | ||||||
| Foreign currency translation adjustments, net | 626 | (1,072 | ) | (433 | ) | |||||||
| Other comprehensive income (loss) | $ | 1,129 | $ | (1,072 | ) | $ | (433 | ) | ||||
| Comprehensive income | $ | 67,329 | $ | 67,176 | $ | 35,443 | ||||||
| Non-controlling interests in comprehensive income | (9,078 | ) | (7,763 | ) | (10,530 | ) | ||||||
| Comprehensive income attributable to Granite | $ | 58,251 | $ | 59,413 | $ | 24,913 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
GRANITE CONSTRUCTION INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(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 December 31, 2015 |
|
| 39,412,877 |
| $ |
| 394 |
| $ |
| 140,912 |
| $ |
| (1,500 | ) | $ |
| 699,431 |
| $ |
| 839,237 |
| $ |
| 30,884 |
| $ |
| 870,121 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 57,122 |
|
|
| 57,122 |
|
|
| 9,078 |
|
|
| 66,200 |
|
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,129 |
|
|
| — |
|
|
| 1,129 |
|
|
| — |
|
|
| 1,129 |
|
Restricted stock units (“RSUs”) vested |
|
| 308,619 |
|
|
| 3 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3 |
|
|
| — |
|
|
| 3 |
|
Amortized RSUs |
|
| — |
|
|
| — |
|
|
| 13,383 |
|
|
| — |
|
|
| — |
|
|
| 13,383 |
|
|
| — |
|
|
| 13,383 |
|
Common stock purchased for employee tax withholding for vested RSUs |
|
| (116,355 | ) |
|
| (1 | ) |
|
| (5,226 | ) |
|
| — |
|
|
| — |
|
|
| (5,227 | ) |
|
| — |
|
|
| (5,227 | ) |
Dividends on common stock ($0.52 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (20,590 | ) |
|
| (20,590 | ) |
|
| — |
|
|
| (20,590 | ) |
Transactions with non-controlling interests, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,359 | ) |
|
| (3,359 | ) |
Employee Stock Purchase Plan ("ESPP") and other |
|
| 15,999 |
|
|
| — |
|
|
| 1,268 |
|
|
| — |
|
|
| (337 | ) |
|
| 931 |
|
|
| — |
|
|
| 931 |
|
Balances at December 31, 2016 |
|
| 39,621,140 |
|
|
| 396 |
|
|
| 150,337 |
|
|
| (371 | ) |
|
| 735,626 |
|
|
| 885,988 |
|
|
| 36,603 |
|
|
| 922,591 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 69,098 |
|
|
| 69,098 |
|
|
| 6,703 |
|
|
| 75,801 |
|
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,005 |
|
|
| — |
|
|
| 1,005 |
|
|
| — |
|
|
| 1,005 |
|
RSUs vested |
|
| 375,100 |
|
|
| 4 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4 |
|
|
| — |
|
|
| 4 |
|
Amortized RSUs |
|
| — |
|
|
| — |
|
|
| 15,764 |
|
|
| — |
|
|
| — |
|
|
| 15,764 |
|
|
| — |
|
|
| 15,764 |
|
Common stock purchased for employee tax withholding for vested RSUs |
|
| (140,070 | ) |
|
| (1 | ) |
|
| (6,976 | ) |
|
| — |
|
|
| — |
|
|
| (6,977 | ) |
|
| — |
|
|
| (6,977 | ) |
Dividends on common stock ($0.52 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (20,720 | ) |
|
| (20,720 | ) |
|
| — |
|
|
| (20,720 | ) |
Transactions with non-controlling interests, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,391 |
|
|
| 4,391 |
|
ESPP and other |
|
| 15,144 |
|
|
| — |
|
|
| 1,251 |
|
|
| — |
|
|
| (305 | ) |
|
| 946 |
|
|
| — |
|
|
| 946 |
|
Balances at December 31, 2017 |
|
| 39,871,314 |
|
|
| 399 |
|
|
| 160,376 |
|
|
| 634 |
|
|
| 783,699 |
|
|
| 945,108 |
|
|
| 47,697 |
|
|
| 992,805 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 42,410 |
|
|
| 42,410 |
|
|
| 11,331 |
|
|
| 53,741 |
|
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,383 | ) |
|
| — |
|
|
| (1,383 | ) |
|
| — |
|
|
| (1,383 | ) |
RSUs vested |
|
| 315,151 |
|
|
| 3 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3 |
|
|
| — |
|
|
| 3 |
|
Amortized RSUs |
|
| — |
|
|
| — |
|
|
| 14,784 |
|
|
| — |
|
|
| — |
|
|
| 14,784 |
|
|
| — |
|
|
| 14,784 |
|
Common stock purchased for employee tax withholding for vested RSUs |
|
| (112,476 | ) |
|
| (1 | ) |
|
| (6,563 | ) |
|
| — |
|
|
| — |
|
|
| (6,564 | ) |
|
| — |
|
|
| (6,564 | ) |
Shares repurchased and retired |
|
| (252,072 | ) |
|
| (2 | ) |
|
| (9,991 | ) |
|
| — |
|
|
| — |
|
|
| (9,993 | ) |
|
| — |
|
|
| (9,993 | ) |
Dividends on common stock ($0.52 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (23,309 | ) |
|
| (23,309 | ) |
|
| — |
|
|
| (23,309 | ) |
Effect of change in accounting principle (See Note 1) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (15,201 | ) |
|
| (15,201 | ) |
|
| — |
|
|
| (15,201 | ) |
Issuance of common stock for Layne acquisition (See Note 2) |
|
| 5,624,021 |
|
|
| 56 |
|
|
| 321,019 |
|
|
| — |
|
|
| — |
|
|
| 321,075 |
|
|
| 48 |
|
|
| 321,123 |
|
Issuance of common stock for 8.0% Convertible Notes (See Note 15) |
|
| 1,202,134 |
|
|
| 12 |
|
|
| 53,011 |
|
|
| — |
|
|
| — |
|
|
| 53,023 |
|
|
| — |
|
|
| 53,023 |
|
Premium on 8.0% Convertible Notes |
|
| — |
|
|
| — |
|
|
| 30,702 |
|
|
| — |
|
|
| — |
|
|
| 30,702 |
|
|
| — |
|
|
| 30,702 |
|
Transactions with non-controlling interests, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (13,075 | ) |
|
| (13,075 | ) |
ESPP and other |
|
| 17,817 |
|
|
| — |
|
|
| 1,221 |
|
|
| — |
|
|
| (243 | ) |
|
| 978 |
|
|
| — |
|
|
| 978 |
|
Balances at December 31, 2018 |
|
| 46,665,889 |
| $ |
| 467 |
| $ |
| 564,559 |
| $ |
| (749 | ) | $ |
| 787,356 |
| $ |
| 1,351,633 |
| $ |
| 46,001 |
| $ |
| 1,397,634 |
|
| GRANITE CONSTRUCTION INCORPORATED | |||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY | |||||||||||||||||||||||
| (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 December 31, 2013 | 38,917,728 | $ | 389 | $ | 126,444 | $ | 5 | $ | 655,102 | $ | 781,940 | $ | 4,404 | $ | 786,344 | ||||||||
| Net income | — | — | — | — | 25,346 | 25,346 | 10,530 | 35,876 | |||||||||||||||
| Other comprehensive loss | — | — | — | (433 | ) | — | (433 | ) | — | (433 | ) | ||||||||||||
| Stock units vested | 378,027 | 4 | — | — | — | 4 | — | 4 | |||||||||||||||
| Amortized restricted stock units | — | — | 11,160 | — | — | 11,160 | — | 11,160 | |||||||||||||||
| Purchase of common stock | (135,028 | ) | (1 | ) | (5,186 | ) | — | — | (5,187 | ) | — | (5,187 | ) | ||||||||||
| Cash dividends on common stock | — | — | — | — | (20,354 | ) | (20,354 | ) | — | (20,354 | ) | ||||||||||||
| Net tax on stock-based compensation | — | — | 1,080 | — | — | 1,080 | — | 1,080 | |||||||||||||||
| Transactions with non-controlling interests, net | — | — | — | — | — | — | 7,787 | 7,787 | |||||||||||||||
| Employee Stock Purchase Plan (“ESPP”) and other | 25,659 | — | 1,107 | — | (278 | ) | 829 | — | 829 | ||||||||||||||
| Balances at December 31, 2014 | 39,186,386 | 392 | 134,605 | (428 | ) | 659,816 | 794,385 | 22,721 | 817,106 | ||||||||||||||
| Net income | — | — | — | — | 60,485 | 60,485 | 7,763 | 68,248 | |||||||||||||||
| Other comprehensive loss | — | — | — | (1,072 | ) | — | (1,072 | ) | — | (1,072 | ) | ||||||||||||
| Stock units vested | 317,524 | 3 | — | — | — | 3 | — | 3 | |||||||||||||||
| Amortized restricted stock units | — | — | 8,763 | — | — | 8,763 | — | 8,763 | |||||||||||||||
| Purchase of common stock | (114,969 | ) | (1 | ) | (3,855 | ) | — | — | (3,856 | ) | — | (3,856 | ) | ||||||||||
| Cash dividends on common stock | — | — | — | — | (20,476 | ) | (20,476 | ) | — | (20,476 | ) | ||||||||||||
| Transactions with non-controlling interests, net | — | — | — | — | — | — | 400 | 400 | |||||||||||||||
| ESPP and other | 23,936 | — | 1,399 | — | (394 | ) | 1,005 | — | 1,005 | ||||||||||||||
| Balances at December 31, 2015 | 39,412,877 | 394 | 140,912 | (1,500 | ) | 699,431 | 839,237 | 30,884 | 870,121 | ||||||||||||||
| Net income | — | — | — | — | 57,122 | 57,122 | 9,078 | 66,200 | |||||||||||||||
| Other comprehensive income | — | — | — | 1,129 | — | 1,129 | — | 1,129 | |||||||||||||||
| Stock units vested | 308,619 | 3 | — | — | — | 3 | — | 3 | |||||||||||||||
| Amortized restricted stock units | — | — | 13,383 | — | — | 13,383 | — | 13,383 | |||||||||||||||
| Purchase of common stock | (116,355 | ) | (1 | ) | (5,226 | ) | — | — | (5,227 | ) | — | (5,227 | ) | ||||||||||
| Cash dividends on common stock | — | — | — | — | (20,590 | ) | (20,590 | ) | — | (20,590 | ) | ||||||||||||
| Transactions with non-controlling interests, net | — | — | — | — | — | — | (3,359 | ) | (3,359 | ) | |||||||||||||
| ESPP and other | 15,999 | — | 1,268 | — | (337 | ) | 931 | — | 931 | ||||||||||||||
| Balances at December 31, 2016 | 39,621,140 | $ | 396 | $ | 150,337 | $ | (371 | ) | $ | 735,626 | $ | 885,988 | $ | 36,603 | $ | 922,591 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
GRANITE CONSTRUCTION INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 53,741 |
|
| $ | 75,801 |
|
| $ | 66,200 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
| 111,544 |
|
|
| 66,345 |
|
|
| 64,375 |
|
Gain on sales of property, equipment and business, net |
|
| (4,910 | ) |
|
| (4,182 | ) |
|
| (8,358 | ) |
Change in deferred income taxes |
|
| 20,010 |
|
|
| (4,824 | ) |
|
| 9,842 |
|
Stock-based compensation |
|
| 14,784 |
|
|
| 15,764 |
|
|
| 13,383 |
|
Equity in net loss from unconsolidated joint ventures |
|
| 22,688 |
|
|
| 14,634 |
|
|
| (15,614 | ) |
Net income from affiliates |
|
| (6,935 | ) |
|
| (7,107 | ) |
|
| (7,177 | ) |
Other non-cash adjustments |
|
| 4,916 |
|
|
| — |
|
|
| — |
|
Changes in assets and liabilities, net of the effects of acquisitions and sale of business in 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
| (4,584 | ) |
|
| (60,272 | ) |
|
| (75,756 | ) |
Costs and estimated earnings in excess of billings, net |
|
| — |
|
|
| (26,066 | ) |
|
| 2,100 |
|
Contract assets, net |
|
| (17,770 | ) |
|
| — |
|
|
| — |
|
Inventories |
|
| (2,120 | ) |
|
| (7,252 | ) |
|
| 308 |
|
Contributions to unconsolidated construction joint ventures |
|
| (104,333 | ) |
|
| (16,937 | ) |
|
| (11,795 | ) |
Distributions from unconsolidated construction joint ventures |
|
| 16,922 |
|
|
| 39,955 |
|
|
| 19,344 |
|
Other assets, net |
|
| 21,598 |
|
|
| 12,272 |
|
|
| (14,873 | ) |
Accounts payable |
|
| (26,732 | ) |
|
| 36,716 |
|
|
| 37,731 |
|
Accrued expenses and other current liabilities, net |
|
| (12,429 | ) |
|
| 11,348 |
|
|
| (6,564 | ) |
Net cash provided by operating activities |
|
| 86,390 |
|
|
| 146,195 |
|
|
| 73,146 |
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities |
|
| (9,952 | ) |
|
| (124,543 | ) |
|
| (129,685 | ) |
Maturities of marketable securities |
|
| 75,000 |
|
|
| 120,000 |
|
|
| 50,000 |
|
Proceeds from called marketable securities |
|
| — |
|
|
| — |
|
|
| 55,000 |
|
Purchases of property and equipment |
|
| (111,101 | ) |
|
| (67,695 | ) |
|
| (90,970 | ) |
Proceeds from sales of property and equipment |
|
| 16,238 |
|
|
| 10,202 |
|
|
| 12,946 |
|
Cash paid to purchase businesses, net of cash and restricted cash acquired |
|
| (55,027 | ) |
|
| — |
|
|
| — |
|
Proceeds from the sale of a business |
|
| 47,812 |
|
|
| — |
|
|
| — |
|
Other investing activities, net |
|
| (2,568 | ) |
|
| 2,850 |
|
|
| 6,319 |
|
Net cash used in investing activities |
|
| (39,598 | ) |
|
| (59,186 | ) |
|
| (96,390 | ) |
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt |
|
| 203,250 |
|
|
| 25,000 |
|
|
| 30,000 |
|
Debt principal repayments |
|
| (153,924 | ) |
|
| (45,000 | ) |
|
| (45,025 | ) |
Cash dividends paid |
|
| (22,424 | ) |
|
| (20,687 | ) |
|
| (20,563 | ) |
Repurchases of common stock |
|
| (16,557 | ) |
|
| (6,977 | ) |
|
| (5,227 | ) |
Contributions from non-controlling partners |
|
| 200 |
|
|
| 11,500 |
|
|
| 5,250 |
|
Distributions to non-controlling partners |
|
| (13,275 | ) |
|
| (7,109 | ) |
|
| (5,258 | ) |
Other financing activities, net |
|
| 856 |
|
|
| 649 |
|
|
| 557 |
|
Net cash used in financing activities |
|
| (1,874 | ) |
|
| (42,624 | ) |
|
| (40,266 | ) |
Net increase in cash, cash equivalents and restricted cash |
|
| 44,918 |
|
|
| 44,385 |
|
|
| (63,510 | ) |
Cash and cash equivalents and restricted cash of $0 at beginning of each period |
|
| 233,711 |
|
|
| 189,326 |
|
|
| 252,836 |
|
Cash, cash equivalents and restricted cash of $5,825, $0 and $0 at end of period |
| $ | 278,629 |
|
| $ | 233,711 |
|
| $ | 189,326 |
|
Supplementary Information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
| $ | 14,864 |
|
| $ | 11,446 |
|
| $ | 13,392 |
|
Income taxes |
|
| 19,069 |
|
|
| 33,948 |
|
|
| 29,872 |
|
Other non-cash operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Performance guarantees |
| $ | — |
|
| $ | 5,497 |
|
| $ | 17,596 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in acquisition |
| $ | 321,019 |
|
| $ | — |
|
| $ | — |
|
Common stock issued in conversion of 8% Convertible Notes |
|
| 53,086 |
|
|
| — |
|
|
| — |
|
Premium on 8.0% Convertible Notes |
|
| 30,702 |
|
|
| — |
|
|
| — |
|
Restricted stock units issued, net of forfeitures (See Note 17) |
|
| 13,728 |
|
|
| 11,505 |
|
|
| 21,101 |
|
Accrued cash dividends |
|
| 6,068 |
|
|
| 5,183 |
|
|
| 5,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| GRANITE CONSTRUCTION INCORPORATED | ||||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||||
(in thousands) | ||||||||||||
| Years Ended December 31, | 2016 | 2015 | 2014 | |||||||||
| Operating activities | ||||||||||||
| Net income | $ | 66,200 | $ | 68,248 | $ | 35,876 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Non-cash restructuring and impairment gains | (1,000 | ) | (1,044 | ) | (2,643 | ) | ||||||
| Depreciation, depletion and amortization | 64,375 | 64,309 | 68,252 | |||||||||
| Gain on sales of property and equipment | (8,358 | ) | (8,286 | ) | (15,972 | ) | ||||||
| Change in deferred income taxes | 9,842 | 28,258 | 14,907 | |||||||||
| Stock-based compensation | 13,383 | 8,763 | 11,160 | |||||||||
| Equity in net income from unconsolidated joint ventures | (15,614 | ) | (43,374 | ) | (49,168 | ) | ||||||
| Gain on real estate entity | (2,452 | ) | — | — | ||||||||
| Net income from affiliates | (7,177 | ) | (3,210 | ) | (901 | ) | ||||||
| Changes in assets and liabilities: | ||||||||||||
| Receivables | (75,756 | ) | (32,877 | ) | 3,549 | |||||||
| Costs and estimated earnings in excess of billings, net | 2,100 | (22,374 | ) | (13,856 | ) | |||||||
| Inventories | 308 | 13,367 | (6,446 | ) | ||||||||
| Contributions to unconsolidated construction joint ventures | (11,795 | ) | (69,313 | ) | (37,097 | ) | ||||||
| Distributions from unconsolidated construction joint ventures | 19,344 | 53,367 | 67,255 | |||||||||
| Prepaid and other assets, net | (11,421 | ) | (1,078 | ) | 5,519 | |||||||
| Accounts payable | 37,731 | 8,363 | (12,669 | ) | ||||||||
| Accrued expenses and other current liabilities | (6,564 | ) | 3,859 | (24,624 | ) | |||||||
| Net cash provided by operating activities | 73,146 | 66,978 | 43,142 | |||||||||
| Investing activities | ||||||||||||
| Purchases of marketable securities | (129,685 | ) | (104,971 | ) | (64,975 | ) | ||||||
| Maturities of marketable securities | 50,000 | 29,260 | 45,000 | |||||||||
| Proceeds from called marketable securities | 55,000 | 75,000 | 35,000 | |||||||||
| Purchases of property and equipment ($17.8 million, $0 and $3.6 million related to CCJVs) | (90,970 | ) | (44,179 | ) | (43,428 | ) | ||||||
| Proceeds from sales of property and equipment | 12,946 | 13,148 | 28,614 | |||||||||
| Distributions from affiliates | 2,233 | 305 | 494 | |||||||||
| Collection of notes receivable | 4,331 | 943 | 468 | |||||||||
| Other investing activities, net | (245 | ) | (213 | ) | (393 | ) | ||||||
| Net cash (used in) provided by investing activities | (96,390 | ) | (30,707 | ) | 780 | |||||||
| Financing activities | ||||||||||||
| Proceeds from long-term debt | 30,000 | 30,000 | — | |||||||||
| Debt principal payments | (45,025 | ) | (46,763 | ) | (1,226 | ) | ||||||
| Cash dividends paid | (20,563 | ) | (20,445 | ) | (20,319 | ) | ||||||
| Purchases of common stock | (5,227 | ) | (3,777 | ) | (5,124 | ) | ||||||
| Contributions from non-controlling partners | 5,250 | 7,462 | 15,835 | |||||||||
| Distributions to non-controlling partners | (5,258 | ) | (6,992 | ) | (8,066 | ) | ||||||
| Other financing activities | 557 | 1,119 | 1,818 | |||||||||
| Net cash used in financing activities | (40,266 | ) | (39,396 | ) | (17,082 | ) | ||||||
| (Decrease) increase in cash and cash equivalents | (63,510 | ) | (3,125 | ) | 26,840 | |||||||
| Cash and cash equivalents at beginning of year | 252,836 | 255,961 | 229,121 | |||||||||
| Cash and cash equivalents at end of year | $ | 189,326 | $ | 252,836 | $ | 255,961 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
| GRANITE CONSTRUCTION INCORPORATED | ||||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) | ||||||||||||
(in thousands) | ||||||||||||
| Years Ended December 31, | 2016 | 2015 | 2014 | |||||||||
| Supplementary Information | ||||||||||||
| Cash paid during the period for: | ||||||||||||
| Interest | $ | 13,392 | $ | 14,601 | $ | 14,666 | ||||||
| Income taxes | 29,872 | 4,298 | 2,326 | |||||||||
| Other non-cash activities: | ||||||||||||
| Performance guarantees | 17,596 | (10,306 | ) | 21,332 | ||||||||
| Non-cash investing and financing activities: | ||||||||||||
| Restricted stock units issued, net of forfeitures (See Note 13) | $ | 21,101 | $ | 6,220 | $ | 6,514 | ||||||
| Accrued cash dividends | 5,151 | 5,124 | 5,094 | |||||||||
| Accrued equipment purchases | (3,865 | ) | 2,891 | (3,704 | ) | |||||||
1. Summary of Significant Accounting Policies
Description of Business
: Granite Construction Incorporated is one of the largest diversifiedRecent Developments: During 2018, we revised our reportable segments, which are the same as our operating segments, as a result of a change in how our chief operating decision maker (our Chief Executive Officer) regularly reviews financial information to allocate resources and assess performance. This change is consistent with our strategic, end-market diversification strategy. Our new reportable segments which correspond to this end-market focus are: Transportation, Water, Specialty and Materials. The Transportation, Water and Specialty end-market segments replace the Construction and Large Project Construction reportable segments with the composition of our Materials segment remaining unchanged except for the addition of proprietary sanitary and storm water rehabilitation products including cured-in-place pipe felt and fiberglass-based lining tubes related to the acquisition of Layne Christensen Company (“Layne”). Prior-year information has been recast to reflect this change. See Note 22 for further information regarding our reportable segments.
In addition, on April 3, 2018, we acquired LiquiForce and on June 14, 2018, we completed the acquisition of Layne. See Note 2 for further information.
Principles of Consolidation: The consolidated financial statements include the accounts of Granite Construction Incorporated and its wholly owned and majority ownedconsolidated subsidiaries. All material inter-company transactions and accounts have been eliminated. Additionally, we participate in various joint ventures (“joint ventures”). We consolidate these joint ventures where we have determined that through our participation we have a variable interest and are the primary beneficiary as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, and related standards. The factors we use to determine the primary beneficiary of a variable interest entity (“VIE”) may include the decision authority of each partner, which partner manages the day-to-day operations of the project and the amount of our equity investment in relation to that of our partners. IfAlthough not applicable for any of the years presented, if we determine that the power to direct the significant activities is shared equally by two or more joint venture parties, then there is no primary beneficiary and no party consolidates the VIE.
Where we have determined we are not the primary beneficiary of a joint venture but do exercise significant influence, we account for our share of the operations of jointly controlledunconsolidated construction joint ventures on a pro rata basis in revenue and cost of revenue in the consolidated statements of operations and in equity in construction joint ventures onin the consolidated balance sheets. Our investment in unconsolidated construction joint ventures could extend beyond one year and is within the normal operating cycle of the associated construction projects. We account for non-construction unconsolidated joint ventures under the equity method of accounting in accordance with ASC Topic 323, Investments - Equity Method and Joint Ventures and include our share of the operations in equity in income from affiliates in the consolidated statements of operations and in investment in affiliates in the consolidated balance sheets. We have been divesting equity method investments in real estate affiliates as part of our 2010 Enterprise Improvement Plan (“EIP”).
Use of Estimates in the Preparation of Financial Statements
: The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Our estimates and related judgments and assumptions are continually evaluated based on available information and experiences; however, actual amounts could differ from those estimates.Revenue Recognition - Construction Contracts:
1. | Identify the contract |
2. | Identify performance obligations |
3. | Determine the transaction price |
4. | Allocate the transaction price |
5. | Recognize revenue |
F-8
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Generally, our contracts contain one performance obligation.Contracts with customers in our Materials segment are typically defined by our customary business practices and are valued at the contractual selling price per unit. Our customary business practices are for the delivery of a separately identifiable good at a point in time which is typically when delivery to the customer occurs.Contracts in our Transportation, Water and Specialty segments may contain multiple distinct promises or multiple contracts within a master agreement (e.g. contracts that cross multiple locations/geographies and task orders), which we review at contract inception to determine if they represent multiple performance obligations or multiple separate contracts. This review consists of determining if promises or groups of promises are distinct within the context of the contract, including construction joint ventures,whether contracts are physically contiguous, contain task orders, purchase or sales orders, termination clauses and/or elements not related to design and/or build.
The transaction price is the amount of consideration to which we expect to be entitled in exchange for transferring goods and services to the customer. The consideration promised in a contract with customers of our Transportation, Water and Specialty segments may include both fixed amounts and variable amounts (e.g. bonuses/incentives or penalties/liquidated damages) to the extent that a significant reversal of cumulative revenue recognized underwill not occur when the percentageuncertainty associated with the variable consideration is subsequently resolved (i.e., probable and estimable). When a contract has a single performance obligation, the entire transaction price is attributed to that performance obligation. When a contract has more than one performance obligation, the transaction price is allocated to each performance obligation based on estimated relative standalone selling prices of completion methodthe goods or services at the inception of the contract, which typically is determined using cost plus an appropriate margin.
Subsequent to the ratioinception of costs incurreda contract in our Transportation, Water and Specialty segments, the transaction price could change for various reasons, including the executed or estimated amount of change orders and unresolved contract modifications and claims to estimated total costs.
Changes are made to the transaction price from unapproved change orders is recognized to the extent the related costs have been incurred, the amount can be reliablyreasonably estimated and recovery is probable.
On certain projects we have submitted and have pending unresolved contract modifications and affirmative claims (“affirmative claims”) to recover additional costs and the associated profit, if applicable, to which the Company believes it is entitled under the terms of contracts with customers, subcontractors, vendors or others are pending or have been submitted on certain projects.others. The owners or their authorized representatives and/or other third parties may be in partial or full agreement with the modifications or affirmative claims, or may have rejected or disagree entirely or partially as to such entitlement.
Changes are made to the transaction price from affirmative claims with customers is recognized to the extent of costs incurred when it is probable that additional revenue on a claim settlement with a customer will result in additional revenueis probable and the amount can be reasonably estimated.estimable. A reduction to costs related to affirmative claims with non-customers with whom we have a contractual arrangement (“back charges”) is recognized when the estimated recovery is probable and the amount can be reasonably estimated. Except for contractual back charges, a reduction to cost related to affirmative claims against non-customers is recognized when the claims are settled.estimable. Recognizing affirmative claims and back charge recoveries requires significant judgments of certain factors including, but not limited to, dispute resolution developments and outcomes, anticipated negotiation results, and the cost of resolving such matters.
Typically, performance obligations related to contracts whenever evidence indicatesin our Transportation, Water and Specialty segments are satisfied over time because our performance typically creates or enhances an asset that the estimated totalcustomer controls as the asset is created or enhanced. We recognize revenue as performance obligations are satisfied and control of the promised good and/or service is transferred to the customer. Revenue in our Transportation, Water and Specialty segments is ordinarily recognized over time as control is transferred to the customers by measuring the progress toward complete satisfaction of the performance obligation(s) using an input (i.e., “cost to cost”) method. Under the cost to cost method, costs incurred to-date are generally the best depiction of a contract exceeds its estimated total revenue. transfer of control.
All contract costs, including those associated with affirmative claims, change orders and back charges, and change orders, are recorded as incurred and revisions to estimated total costs are reflected as soon as the obligation to perform is determined. Contract costs consist of direct costs on contracts, including labor and materials, amounts payable to subcontractors, direct overhead costs and equipment expense (primarily depreciation, fuel, maintenance and repairs). All state and federal government contracts and many
F-9
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The accuracy of our revenue and profit recognition in a given period depends on the accuracy of our estimates of the cost to complete each project. Cost estimates for all of our significant projects use a detailed “bottom up” approach, and we believe our experience allows us to create materially reliable estimates. There are a number of factors that can contribute to changes in estimates of contract cost and profitability. The most significant of these include:
the completeness and accuracy of the original bid;
costs associated with scope changes;
changes in costs of labor and/or materials;
extended overhead and other costs due to owner, weather and other delays;
subcontractor performance issues;
changes in productivity expectations;
site conditions that differ from those assumed in the original bid (to the extent contract remedies are unavailable);bid;
changes from original design on design-build projects;
the availability and skill level of workers in the geographic location of the project;
a change in the availability and proximity of equipment and materials;
our ability to fully and promptly recover on affirmative claims and back charges for additional contract costs; and
the customer’s ability to properly administer the contract.
The foregoing factors, as well as the stage of completion of contracts in process and the mix of contracts at different margins may cause fluctuations in gross profit between periods.and gross profit margin from period to period. Significant changes in cost estimates, particularly in our larger, more complex projects have had, and can in future periods have, a significant effect on our profitability.
All state and federal government contracts and many of our other contracts provide for termination of the contract at the convenience of the party contracting with us, with provisions to pay us for work performed through the date of termination including demobilization cost.
Costs to obtain our contracts (“pre-bid costs”) that are not expected to be recovered from the salecustomer are expensed as incurred and included in selling, general and administrative expenses on our consolidated statements of materials is recognized when delivery occurs and risk of ownership passesoperations. Although unusual, pre-bid costs that are explicitly chargeable to the customer.customer even if the contract is not obtained are included in accounts receivable on our consolidated balance sheets when we are notified that we are not the low bidder with a corresponding reduction to selling, general and administrative expenses on our consolidated statements of operations.
Unearned Revenue: Unearned revenue represents the aggregate amount of the transaction price allocated to unsatisfied or partially unsatisfied performance obligations at the end of a reporting period. We generally include a project in our unearned revenue at the time a contract is awarded, the contract has been executed and to the extent we believe funding is probable. Certain contracts contain contract options that are exercisable at the option of our customers without requiring us to go through an additional competitive bidding process or contain task orders related to master contracts under which we perform work only when the customer awards specific task orders to us. Contract options and task orders are included in unearned revenue when exercised or issued, respectively.
Substantially all of the contracts in our unearned revenue 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. Many projects are added to unearned revenue and completed within the same fiscal quarter or year and, therefore, may not be reflected in our beginning or ending unearned revenue. Approximately $1.9 billion of the December 31, 2018 unearned revenue is expected to be recognized within the next twelve months and the remaining amount will be recognized thereafter. Unearned revenue is presented by reportable segment and operating group in Note 5.
Costs to mobilize equipment and labor to a job site prior to substantive work beginning (“mobilization costs”) are capitalized as incurred and amortized over the expected duration of the contract. As of December 31, 2018 and January 1, 2018, we had no material capitalized mobilization costs.
Balance Sheet Classifications:
Prepaid expenses and amounts receivable and payable under construction contracts (principally retentions) that may exist over the duration of the contract and could extend beyond one year are included in current assets and liabilities. A one-year time period is used as the basis for classifying all other current assets and liabilities.Cash, and Cash Equivalents
F-10
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
CostsIn connection with the acquisition of Layne, we acquired restricted cash that consists of escrow funds and Estimated Earningsjudicial deposits associated with tax related legal proceedings in ExcessLatin America. Of the total balance, $4.3 million is included in other current assets and the remainder is included in other noncurrent assets in the consolidated balance sheets. The table below presents changes in cash, cash equivalents and restricted cash on the consolidated statements of Billings: cash flows and a reconciliation to the amounts reported in the consolidated balance sheets (in thousands).
Years Ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Cash and cash equivalents, beginning of period |
| $ | 233,711 |
|
| $ | 189,326 |
|
| $ | 252,836 |
|
End of the period |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
| 272,804 |
|
|
| 233,711 |
|
|
| 189,326 |
|
Restricted cash |
|
| 5,825 |
|
|
| — |
|
|
| — |
|
Total cash, cash equivalents and restricted cash, end of period |
|
| 278,629 |
|
|
| 233,711 |
|
|
| 189,326 |
|
Net increase (decrease) in cash, cash equivalents and restricted cash |
| $ | 44,918 |
|
| $ | 44,385 |
|
| $ | (63,510 | ) |
Contract Assets: Our contract assets include amounts due under contractual retainage provisions as well as costs and estimated earnings in excess of billings. Costs and estimated earnings in excess of billings also represent unbilled amounts earned and reimbursable under contracts. These amounts become billable according to the contract terms, which usually consider the passage of time,contracts, including customer affirmative claim recovery estimates, but have a conditional right for billing and payment such as achievement of milestones or completion of the project. With the exception of customer affirmative claims, generally, such unbilled amounts will become billable according to the contract terms and generally will be billed and collected over the next twelve months. Settlement with the customer of outstanding affirmative claims is dependent on the claims resolution process and could extend beyond one year or the project operating cycle.year. Based on our historical experience, we generally consider the collection risk related to thesebillable amounts to be low. When events or conditions indicate that it is probable that the amounts outstanding may become uncollectible, an allowanceunbillable, the transaction price and associated contract asset is estimated and recorded.reduced.
Marketable Securities
: We determine the classification of our marketable securities at the time of purchase and re-evaluate these determinations at each balance sheet date.Derivative Instruments:
We recognize derivative instruments as either assets or liabilities in the consolidated balance sheets at fair value using Level 2 inputs. To receive hedge accounting treatment, derivative instruments that are designated as cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. The effective portion of the gain or loss on cash flow hedges is reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified to interest expense in the consolidated statements of operations when the periodic hedged cash flows are settled. Adjustments to fair value on derivative instruments that do not qualify for hedge accounting treatment are reported through otherFair Value of Financial Assets and Liabilities:
We measure and disclose certain financial assets and liabilities at fair value. ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
We utilize the active market approach to measure fair value for our financial assets and liabilities. We report separately each class of assets and liabilities measured at fair value on a recurring basis and include assets and liabilities that are disclosed but not recorded at fair value in the fair value hierarchy.
F-11
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The carrying value of marketable securities approximates their fair value as determined by market quotes. Rates currently available to us for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. The carrying value of receivables and other amounts arising out of normal contract activities, including retentions, which may be settled beyond one year, is estimated to approximate fair value.
Concentrations of Credit Risk and Other Risks: Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash and cash equivalents, short-term and long-term marketable securities, and accounts receivable. We maintain our cash and cash equivalents and our marketable securities with several financial institutions. We invest with high credit quality financial institutions and, by policy, limit the amount of credit exposure to any one financial institution.
Our receivables are from customers concentrated in the United States and we have no materialhad $7.1 million receivables from foreign operations as of December 31, 2016 or 2015.2018. Receivables from foreign operations were immaterial as of December 31, 2017. We perform ongoing credit evaluations of our customers and generally do not require collateral, although the law provides us the ability to file mechanics’ liens on real property improved for private customers in the event of non-payment by such customers. We maintain an allowance for doubtful accounts which has historically been within management’s estimates.
Foreign Currency Transactions and Translation: Through the acquisitions of Layne and LiquiForce, we now have operations in Latin America (primarily Mexico) and Canada which involve exposure to possible volatile movements in foreign currency exchange rates. We account for foreign currency exchange transactions and translation in accordance with ASC Topic 830, Foreign Currency Matters. In Mexico, most of our customer contracts and a significant portion of our costs are denominated in U.S. dollars; therefore, the functional currency is U.S. dollars. In Canada and Brazil, the functional currency is the local currency. Foreign currency transactions are translated into the functional currency with gains and losses included in other income, net in the consolidated statements of operations. The impact from foreign currency transactions was immaterial for 2018. Assets and liabilities in functional currency are translated into U.S. dollars at exchange rates prevailing at the balance sheet date. Revenues and expenses are translated into U.S. dollars at average foreign currency exchange rates prevailing during the reporting periods. The translation adjustments from functional currency to U.S. dollars are reported in accumulated other comprehensive (loss) income on the consolidated balance sheets.
Inventories: Inventories consist primarily of quarry products, contract-specific materials, water well drilling materials, and sewer remediation materials that are located in the U.S. and mineral extraction and drilling supplies located in the U.S. and Latin America. Cost of inventories are valued at the lower of average cost or market. net realizable value. We write down the inventories reserve quarry productsbased on estimated quantities of materials on hand in excess of approximately one year of demand. At As ofDecember 31, 2016 and 2015,2018, inventory also included materials specifically$13.4 million of supplies related to a project in our Kenny Large Project Constructionthe Water and Mineral Services operating group and was valued at cost.group.
Assets Held for DevelopmentSale: During the three months ended September 30, 2018, management approved the plan to sell certain non-core assets and Sale: the associated liabilities related to the water delivery business within our Water and Mineral Services operating group. The sale of the assets was completed during the fourth quarter of 2018.
Investments in Affiliates: Each real estate development projectinvestment accounted for under the equity method of accounting is reviewed for impairment in accordance with ASC Topic 323, Investments - Equity Method and Joint Ventures. Our investments in affiliates include foreign entities, real estate entities and an asphalt terminal entity. These projectsinvestments are evaluated for impairment using the other-than-temporary impairment model, which requires an impairment charge to be recognized if our investment’s carrying amount exceeds its fair value, and the decline in fair value is deemed to be other than temporary.
significant adverse changes in legal factors or the business climate; and
current period cash flow or operating losses combined with a history of losses, or a forecast of continuing losses associated with the use of the asset.
In addition, events or changes in circumstances specifically related to our real estate entities, include:
significant decreases in the market price of the asset;
accumulation of costs significantly in excess of the amount originally expected for the acquisition, development or construction of the asset; and
significant changes to the development or business plans of a project.
F-12
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Future undiscounted cash flows and fair value assessments for our foreign entities and the asphalt terminal entity are estimated based on market conditions and the political climate. Future undiscounted cash flows and fair value assessments for our real estate entities are estimated based on entitlement status, market conditions, and cost of construction, debt load, development schedules, status of joint venture partners and other factors applicable to the specific project. Fair value is estimated based on the expected future cash flows attributable to the asset or group of assets and on other assumptions that market participants would use in determining fair value, such as market discount rates, transaction prices for other comparable assets, and other market data. Our estimates of cash flows may differ from actual cash flows due to, among other things, fluctuations in interest rates, decisions made by jurisdictional agencies, economic conditions, or changes to our business operations.
Property and Equipment: Property and equipment are stated at cost. Depreciation for construction and other equipment is primarily provided using accelerated methods over lives ranging from threeeighteen months to seven years, and the straight-line method over lives from three to twenty years for the remaining depreciable assets. We believe that accelerated methods best approximate the service provided by the construction and other equipment. Depletion of quarry property is based on the usage of depletable reserves. We frequently sell property and equipment that has reached the end of its useful life or no longer meets our needs, including depleted quarry property. At the time that an asset or an asset group meets the held-for-sale criteria as defined by ASC Topic 360, Property, Plant, and Equipment,we write it down to fair value less cost to sell, if the fair value is below the carrying value. Fair value is estimated by a variety of factors including, but not limited to, market comparative data, historical sales prices, broker quotes and third partythird-party valuations. If material, such property is separately disclosed, otherwise it is held in property and equipment until sold. The cost and accumulated depreciation or depletion of property sold or retired is removed from the consolidated balance sheet and the resulting gains or losses, if any, are reflected in operating income (loss)on the consolidated statement of operations for the period. In the case that we abandon an asset, an amount equal to the carrying amount of the asset, less salvage value, if any, will be recognized as expense in the period that the asset was abandoned. Repairs and maintenance are charged to operationsexpensed as incurred.
Costs related to the development of internal-use software during the preliminary project and post-implementation stages are expensed as incurred. Costs incurred during the application development stage are capitalized. These costs consist primarily of software, hardware and consulting fees, as well as salaries and related costs. Amounts capitalized are reported as a component of office furniture and equipment within property and equipment. Capitalized software costs are depreciated using the straight-line method over the estimated useful life of the related software, which range from three to seven years. During the years ended December 31,
Long-lived Assets:
We review property and equipment and amortizable intangible assets for impairment at an asset group level whenever events or changes in circumstances indicate the net book value of an asset group may not be recoverable. Recoverability of these asset groups is measured by comparison of their net book values to the future undiscounted cash flows the asset groups are expected to generate. If the asset groups are considered to be impaired, an impairment charge will be recognized equal to the amount by which the net book value of the assetAs of December 31, 2018, amortizable intangible assets, which include customer relationships, developed technologies, permits, trademarks/trade names, backlog, favorable contracts and covenants not to compete, acquired backlog, permits, trade namesare being amortized over remaining terms from one to twenty years. As of December 31, 2018, amortizable intangible liabilities, which include unfavorable contracts and customer lists whichleases, are being amortized over remaining terms of two years. All intangible assets and liabilities are amortized on a straight-line basis over terms from one to thirty years.
F-13
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Goodwill: As a result of December 31, 2016the change in our reportable segments, we reassessed our reporting units and 2015, have determinedwe had fivehave eight reporting units in which goodwill was recorded as follows:
Midwest Group Transportation
Midwest Group ConstructionSpecialty
Northwest Group ConstructionTransportation
Northwest Group Construction Materials
California ConstructionGroup Transportation
Water and Mineral Services Group Water
Water and Mineral Services Group Specialty
Water and Mineral Services Group Materials
Goodwill was reallocated to these reporting units associated with the Kenny Group.based on their relative fair values. See Note 913 for balancesthe goodwill balance by reportable segment.
We perform our goodwill impairment tests annually as of November 1 and more frequently when events and circumstances occur that indicate a possible impairment of goodwill. In addition, we evaluate goodwill for impairment if events or circumstances change between annual tests indicating a possible impairment. Examples of such events or circumstances include, but are not limited to, the following:
a significant adverse change in legal factors or in the business climate;
an adverse action or assessment by a regulator;
a more likely than not expectation that a segment or a significant portion thereof will be sold; or
the testing for recoverability of a significant asset group within the segment.
In performing step one of the quantitative goodwill impairment tests, we calculate the estimated fair value of the reporting unit in which the goodwill is recorded using the discounted cash flows and market multiple methods. Judgments inherent in these methods include the determination of appropriate discount rates, the amount and timing of expected future cash flows and growth rates, and appropriate benchmark companies. The cash flows used in our 20162018 discounted cash flow model were based on five-year financial forecasts, which in turn were based on the 2017-20192018-2022 operating plan developed internally by management adjusted for market participant basedparticipant-based assumptions. Our discount rate assumptions are based on an assessment of the equity cost of capital and appropriate capital structure for our reporting units. In assessing the reasonableness of our determined fair values of our reporting units, we evaluate the reasonableness of our results against our current market capitalization.
The estimated fair value is compared to the net book value of the reporting unit, including goodwill. If the net book value of a reporting unit exceeds its fair value, we measure and record the amount of the impairment loss by comparing the implied fair value of the reporting unit exceeds its net book value, goodwill of the reporting unit is considered not impaired. If the fair value of the reporting unit is less than its net book value, goodwill is impaired and the excess of the reporting unit’s goodwill withnet book value over the carrying amount of that goodwill.
During 2018, due to the change in reportable segments, the resulting change to reporting units and in accordance with ASC Topic 350,
Intangibles - Goodwill and Other, we conducted impairment tests on reporting units that were most susceptible to fluctuations in results. We conducted these tests before the change on the Kenny Large Project Construction and Kenny Construction reporting units and after the change on the Midwest Group Transportation, Midwest Group Specialty and Water and Mineral Services Group Water reporting units. These assessments indicated that the estimated fair values ofFor our 2018 annual goodwill impairment test, we elected to perform a qualitative analysis and after assessing the totality of events and circumstances, we determined that it is more likely than not that the fair value of these reporting units were greater than the carrying amounts; therefore, a quantitative goodwill impairment test was not performed. Factors we considered were macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy, changes in customers, changes in the composition or carrying amount of a reporting segments’ net assets, and changes in our stock price.
Contract Liabilities: Our contract liabilities consist of provisions for losses, billings in excess of costs and estimated earnings and may include retainage. Provisions for losses are recognized in the consolidated statements of operations at least 50%the uncompleted performance obligation level for the reporting units with goodwill. Outamount of total estimated losses in the five reporting units with goodwill,period that evidence indicates that the Kenny Large Project Construction business is the most susceptible to fluctuations in results depending on awarded work given the large size and limited frequencyestimated total cost of awards. While we believe the current cushion for the reporting unit is adequate to absorb these fluctuations, a material decline in job win rates could have a material impact to this reporting unit’sperformance obligation exceeds its estimated fair value.
F-14
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Asset Retirement and Reclamation Obligations: We account for the costs related to legal obligations to reclaim aggregate mining sites and other facilities by recording our estimated reclamation liabilityasset retirement obligation at fair value using Level 3 inputs, capitalizing the estimated liability as part of the related asset’s carrying amount and allocating it to expense over the asset’s useful life. To determine the fair value of the obligation, we estimate the cost for a third-party to perform the legally required reclamation including a reasonable profit margin. This cost is then increased for future estimated inflation based on the estimated years to complete and discounted to fair value using present value techniques with a credit-adjusted, risk-free rate. In estimating the settlement date, we evaluate the current facts and conditions to determine the most likely settlement date.
We review reclamation obligations at least annually for a revision to the cost or a change in the estimated settlement date. Additionally, reclamation obligations are reviewed in the period that a triggering event occurs that would result in either a revision to the cost or a change in the estimated settlement date.
Warranties:Warranties: Many of our construction contracts contain warranty provisions covering defects in equipment, materials, design or workmanship that generally run from six months to one year after our customer accepts the contract. Because of the nature of our projects, including contract owner inspections of the work both during construction and prior to acceptance, we have not experienced material warranty costs for these short-term warranties and, therefore, do not believe an accrual for these costs is necessary. Certain construction contracts carry longer warranty periods, ranging from two to ten years, for which we have accrued an estimate of warranty cost. The warranty liability is estimated based on our experience with the type of work and any known risks relative to the project and was not material as of December 31, 20162018 and 2015.2017.
Accrued Insurance Costs:
We carry insurance policies to cover various risks, primarily general liability, automobile liability, workers compensation and employee medical expenses, under which we are liable to reimburse the insurance company for a portion of each claim paid. The amounts for which we are liable for general liability and workers compensation generally range from the first $0.5 million to $1.0 million per occurrence. We accrue for probable losses, both reported and unreported, that are reasonably estimable using actuarial methods based on historic trends modified, if necessary, by recent events. Changes in our loss assumptions caused by changes in actual experience would affect our assessment of the ultimate liability and could have an effect on our operating results and financial position up to $1.0 million per occurrence for general liability and workers compensation or $0.3 million for medical insurance.Performance Guarantees:
Agreements with our joint venture partners (“partner(s)”) for both construction joint ventures and line item joint ventures define each partner’s management role and financial responsibility in the project. The amount of operational exposure is generally limited to our stated ownership interest. However, due to the joint and several nature of the performance obligations under the related owner contracts, if one of the partners fails 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). We estimate our liability for performance guarantees for our unconsolidated construction joint ventures and line item joint ventures using estimated partner bond rates, which are Level 2 inputs, and include them in accrued expenses and other current liabilities (see NoteContingencies:Contingencies: We are currently involved in various claims and legal proceedings. Loss contingency provisions are recorded if the potential loss from any asserted or unassertedun-asserted claim or legal proceeding is considered probable and the amount can be reasonably estimated. If a potential loss is considered probable but only a range of loss can be determined, the low-end of the range is recorded. These accruals represent management’s best estimate of probable loss. 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. Significant judgment is required in both the determination of probability of loss and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to claims and litigation and may revise our estimates. See Note 17 of “Notes to the Consolidated Financial Statements” and “Item 3. Legal Proceedings”21 for additional information.
Stock-Based Compensation:
We measure and recognize compensation expense, net of estimated forfeitures, over the requisite vesting periods for all stock-based payment awards made. Stock-based compensation is included in selling, general and administrative expenses and cost of revenue on our consolidated statements of operations.F-15
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Income Taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities in the consolidated financial statements and their respective tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
We report a liability in accrued expenses and other current liabilities and in other long-term liabilities in the consolidated balance sheets for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in other (income) expense (income) in the consolidated statements of operations.
Computation of Earnings Perper Share
Reclassifications: Reclassifications: Certain reclassifications of prior period amounts have been made to conform to the current period presentation. These reclassifications included $3.5$6.9 million and $2.5$9.2 million during the years ended December 31, 20152017 and 2014,2016, respectively, of restricted stock unit amortization from general and administration expenses to cost of revenue and gross profit to the Materials segment primarily from the Transportation segment to better align itcosts with the associated salaries.respective segments
Recently Issued Accounting Pronouncements:
In February 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) No. 2016-02,
In March 2016,August 2017, the FASB issued ASU No. 2016-05,
In June 2016,February 2018, the FASB issued ASU No. 2016-13,
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for financial assets held atFair Value Measurement, which modifies the reporting date baseddisclosure requirements on historical experience, current conditions, and reasonable and supportable forecasts.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.
F-16
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and CashIn October 2016, the FASB issued ASU No. 2016-16,
Intra-Entity Transfers of Assets Other ThanIn November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. This ASU was effective commencing with our quarter ended September 30, 2018 and did not have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which is intended to help companies evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses by providing a more robust framework to use in determining when a set of assets and activities is a business. This ASU was effective commencing with our quarter ended March 31, 2018 and did not have an impact upon adoption; however, it may have a material impact in the future if applicable transactions occur.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting, which clarifies that changes to the value, vesting conditions, or award classification of share-based payment awards must be accounted for as modifications. This ASU was effective commencing with our quarter ended March 31, 2018 and did not have an impact on our consolidated financial statements upon adoption; however, it may have a material impact in the future if applicable transactions occur.
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.118, which was effective commencing with our quarter ended March 31, 2018 and the impact to the year ended December 31, 2018 is disclosed in Note 19.
Effect of adopting Topic 606
Effective on January 1, 2019, we adopted Topic 606 using a modified retrospective transition approach. We elected to apply Topic 606 to contracts with customers that are not substantially complete, i.e. less than 90% complete, as of January 1, 2018.The core principle of Topic 606 is that revenue will be recognized when promised goods or services are transferred to customers in an amount that reflects consideration for which entitlement is expected in exchange for those goods or services.
While the adoption of Topic 606 did not have an impact on revenue of our Materials segment, it did impact revenue of our Transportation, Water and Specialty segments specifically in the following areas:
Multiple performance obligations – In accordance with Topic 606, we reviewed construction contracts with customers, including those related to contract modifications, to determine if there are multiple performance obligations. Based on this review, we identified one unconsolidated joint venture contract in our Transportation segment that has multiple performance obligations.
Multiple contracts – We reviewed contracts containing task orders and identified one master contract in our Water segment that consists of multiple individual contracts as defined by Topic 606. Previously, revenue for this contract was forecasted and recorded at the master contract level.
Revenue recognition – We identified one contract in our Specialty segment where performance obligations are satisfied and control of the promised goods and services are transferred to the customer upon delivery of goods rather than over time. Previously, revenue for this contract was recognized over time.
Provisions for losses – We identified one unconsolidated joint venture contract in our Transportation segment that has actual and provisions for losses at the performance obligation level related to completed and uncompleted performance obligations, respectively. Previously, provisions for losses were recorded at the contract level.
The impact to retained earnings as of January 1, 2018 from the adoption of Topic 606 related to the items noted above was a net cumulative decrease of $15.2 million.
F-17
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In March 2016,addition, as of January 1, 2018, we began to separately present contract assets and liabilities on the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur,consolidated balance sheets. Contract assets include amounts due under contractual retainage provisions that were previously included in accounts receivable as well as certain classifications on thecosts and estimated earnings in excess of billings that were previously separately presented. Contract liabilities include billings in excess of costs and estimated earnings that were previously separately presented as well as provisions for losses that were previously included in accrued expenses and other current liabilities. See Note 6 for further information.
Notes 4, 5 and 6 include information relating to our adoption of Topic 606. Note 4 includes information regarding our revenue disaggregated by operating group, Note 5 includes information regarding unearned revenue and Note 6 includes information regarding our contract assets and liabilities.
The amounts by which each consolidated balance sheet line item as of December 31, 2018 and consolidated statement of cash flows. During the quarter ended December 31, 2016, we elected to early adopt the ASU, effective January 1, 2016, which resulted in retrospective adjustments to the 2016 quarterly financial statements that are reflected in the “Quarterly Financial Data” section of this Form 10-K.
December 31, 2018
Consolidated Balance Sheet |
| As Reported |
|
| Balances Without Adoption of Topic 606 |
|
| Effect of Change Higher/(Lower) |
| |||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net |
| $ | 473,246 |
|
| $ | 578,433 |
|
| $ | (105,187 | ) |
Contract assets |
|
| 219,754 |
|
|
| — |
|
|
| 219,754 |
|
Costs and estimated earnings in excess of billings |
|
| — |
|
|
| 151,985 |
|
|
| (151,985 | ) |
Other noncurrent assets |
|
| 131,601 |
|
|
| 126,329 |
|
|
| 5,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity |
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities |
| $ | 105,449 |
|
| $ | — |
|
| $ | 105,449 |
|
Billings in excess of costs and estimated earnings |
|
| — |
|
|
| 139,575 |
|
|
| (139,575 | ) |
Accrued expenses and other current liabilities |
|
| 273,626 |
|
|
| 267,850 |
|
|
| 5,776 |
|
Retained earnings |
|
| 787,356 |
|
|
| 791,151 |
|
|
| (3,795 | ) |
F-18
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 2018
Consolidated Statement of Operations |
| As Reported |
|
| Balances Without Adoption of Topic 606 |
|
| Effect of Change Higher/(Lower) |
| |||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Transportation |
| $ | 1,976,743 |
|
| $ | 1,970,311 |
|
| $ | 6,432 |
|
Water |
|
| 338,250 |
|
|
| 334,807 |
|
|
| 3,443 |
|
Specialty |
|
| 626,619 |
|
|
| 627,230 |
|
|
| (611 | ) |
Materials |
|
| 376,802 |
|
|
| 376,802 |
|
|
| — |
|
Total revenue |
|
| 3,318,414 |
|
|
| 3,309,150 |
|
|
| 9,264 |
|
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Transportation |
| $ | 1,786,698 |
|
| $ | 1,792,794 |
|
| $ | (6,096 | ) |
Water |
|
| 278,676 |
|
|
| 278,676 |
|
|
| — |
|
Specialty |
|
| 535,731 |
|
|
| 535,731 |
|
|
| — |
|
Materials |
|
| 328,117 |
|
|
| 328,117 |
|
|
| — |
|
Total cost of revenue |
|
| 2,929,222 |
|
|
| 2,935,318 |
|
|
| (6,096 | ) |
Gross profit |
| $ | 389,192 |
|
| $ | 373,832 |
|
| $ | 15,360 |
|
Operating income |
|
| 64,043 |
|
|
| 48,683 |
|
|
| 15,360 |
|
Provision for income taxes |
|
| 10,414 |
|
|
| 6,459 |
|
|
| 3,955 |
|
Net income |
|
| 53,741 |
|
|
| 42,336 |
|
|
| 11,405 |
|
Net income attributable to Granite Construction Incorporated |
|
| 42,410 |
|
|
| 31,005 |
|
|
| 11,405 |
|
2. Acquisitions
On June 14, 2018 (“acquisition date”), we completed the acquisition of Layne for $349.8 million in a stock-for-stock merger. We paid $321.0 million of the purchase price with 5.6 million shares of Company common stock and $28.8 million in cash to settle all outstanding stock options, restricted stock awards and unvested performance shares of Layne. In addition to the issuance of Company common stock and the settlement of various equity awards in cash, we assumed $191.5 million in convertible notes at fair value. See Note 15 for further discussion of the assumed convertible notes.
Layne operates as a wholly owned subsidiary of Granite Construction Incorporated and its results are reported in the newly formed Water and Mineral Services operating group in the Water, Specialty and Materials segments. Layne’s customers are in both the public and private sector. We have accounted for this transaction in accordance with ASC Topic 805, Business Combinations (“ASC 805”).
We have included Layne operating results in our consolidated statements of operations since the acquisition date. Revenue attributable to Layne for the year ended December 31, 2018 was $271.7 million and net losses before taxes for the year ended December 31, 2018 were $22.4 million. Income before provision for income taxes for the year ended December 31, 2018 included Layne’s portion of total pre-tax acquisition and integration expenses of $53.5 million.
Preliminary Purchase Price Allocation
In accordance with ASC 805, the total purchase price and assumed liabilities were allocated to the net tangible and identifiable intangible assets based on their estimated fair values as of the acquisition date as presented in the table below (in thousands). Since the acquisition date, we made measurement period adjustments to reflect facts and circumstances in existence as of the acquisition date. These adjustments included decreases of $4.9 million and $2.2 million in property and equipment and deferred income taxes, respectively, partially offset by a net $1.3 million increase in various other items with a resulting increase in goodwill of $5.8 million. In addition, we recorded a $7.6 million decrease and a corresponding increase to the investment in affiliates and goodwill balances, respectively.
F-19
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
As we continue to integrate the acquired business, we may obtain additional information on the acquired identifiable intangible assets which, if significant, may require revisions to preliminary valuation assumptions, estimates and resulting fair values. Although no further adjustments are anticipated, we expect to finalize these amounts within 12 months from the acquisition date.
Assets |
|
|
|
|
Cash |
| $ | 2,995 |
|
Receivables |
|
| 70,160 |
|
Contract assets |
|
| 44,947 |
|
Inventories |
|
| 23,424 |
|
Other current assets |
|
| 5,533 |
|
Property and equipment |
|
| 183,030 |
|
Investments in affiliates |
|
| 55,400 |
|
Deferred income taxes |
|
| 20,959 |
|
Other noncurrent assets (including $5,906 of restricted cash) |
|
| 17,868 |
|
Total tangible assets |
|
| 424,316 |
|
Identifiable intangible assets |
|
| 61,548 |
|
Liabilities |
|
|
|
|
Identifiable intangible liabilities |
|
| 6,800 |
|
Accounts payable |
|
| 38,321 |
|
Contract liabilities |
|
| 7,854 |
|
Accrued expenses and other current liabilities |
|
| 47,583 |
|
Long-term debt |
|
| 191,500 |
|
Other long-term liabilities |
|
| 31,585 |
|
Total liabilities assumed |
|
| 323,643 |
|
Total identifiable net assets acquired |
|
| 162,221 |
|
Goodwill |
|
| 187,619 |
|
Estimated purchase price |
| $ | 349,840 |
|
In addition, on April 3, 2018, we acquired LiquiForce, a privately-owned company which provides sewer lining rehabilitation services to public and private sector water and wastewater customers in both Canada and the U.S. We acquired LiquiForce for $35.9 million in cash primarily borrowed under the Company’s abilitycredit agreement described more fully in Note 15. The tangible and intangible assets acquired and liabilities assumed were $14.3 million, $10.9 million and $8.5 million, respectively, resulting in acquired goodwill of $19.3 million. LiquiForce results are reported in the Water and Mineral Services operating group in the Water segment.
Intangible assets
The following table lists amortized intangible assets and liabilities from the Layne and LiquiForce acquisitions that are included in other noncurrent assets and other long-term liabilities in the consolidated balance sheets as of December 31, 2018 (in thousands):
F-20
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Weighted Average Useful Lives (Years) |
|
| Gross Value |
|
| Accumulated Amortization |
|
| Net Value |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
| 3 |
|
| $ | 35,937 |
|
| $ | (5,880 | ) |
| $ | 30,057 |
|
Backlog |
| 2 |
|
|
| 9,713 |
|
|
| (5,795 | ) |
|
| 3,918 |
|
Developed technologies |
| 4 |
|
|
| 9,233 |
|
|
| (1,384 | ) |
|
| 7,849 |
|
Trademarks/trade name |
| 4 |
|
|
| 9,075 |
|
|
| (1,382 | ) |
|
| 7,693 |
|
Favorable contracts, covenants not to compete and other |
| 1 |
|
|
| 5,731 |
|
|
| (2,461 | ) |
|
| 3,270 |
|
Intangible assets |
|
|
|
| $ | 69,689 |
|
| $ | (16,902 | ) |
| $ | 52,787 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfavorable contracts and leases |
| 2 |
|
| $ | 7,000 |
|
| $ | (4,726 | ) |
| $ | 2,274 |
|
Intangible liabilities |
|
|
|
| $ | 7,000 |
|
| $ | (4,726 | ) |
| $ | 2,274 |
|
The net amortization expense related to continuethe acquired amortized intangible assets and liabilities for the year ended December 31, 2018 was $12.2 million and was included in cost of revenue and selling, general and administrative expenses in the consolidated statements of operations. All of the acquired intangible assets and liabilities will be amortized on a straight-line basis except for backlog, favorable contracts and unfavorable contracts which will be amortized as the associated projects progress, and customer relationships which will be amortized on a going concerndouble declining basis. Amortization expense related to the acquired amortized intangible asset balances at December 31, 2018 is expected to be recorded in the future as requiredfollows: $16.9 million in 2019; $11.7 million in 2020; $9.0 million in 2021; and concluded there$12.9 million thereafter.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and intangible assets. The factors that contributed to the recognition of goodwill from the acquisitions of Layne and LiquiForce include acquiring a workforce with capabilities in the global water management, construction and drilling markets, cost savings opportunities and synergies. For the Layne acquisition, we recorded $125.7 million, $52.5 million, and $9.4 million of goodwill allocated to our Water, Materials and Specialty reportable segments, respectively. For the LiquiForce acquisition, we recorded $19.2 million in goodwill that was allocated to our Water reportable segment. The goodwill from both acquisitions is not expected to be deductible for income tax purposes.
Pro Forma Financial Information
The financial information in the table below summarizes the unaudited 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 (unaudited, in thousands, except per share amounts). The pro forma financial information is unaudited and 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.
Years Ended December 31, | 2018 |
|
| 2017 |
| ||
Revenue | $ | 3,530,989 |
|
| $ | 3,456,656 |
|
Net income |
| 103,594 |
|
|
| (5,759 | ) |
Net income (loss) attributable to Granite |
| 92,263 |
|
|
| (12,462 | ) |
Basic net income (loss) per share attributable to common shareholders |
| 2.00 |
|
|
| (0.27 | ) |
Diluted net income (loss) per share attributable to common shareholders |
| 2.00 |
|
|
| (0.27 | ) |
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 that were no conditions that gave riseincurred during the year ended December 31, 2018 are reflected in year ended December 31, 2017 due to substantial doubt about the ability to continue as a going concern; therefore, additional disclosuresassumed timing of the transaction. The statutory tax rate of 26.0% and 39.0% were not required.
F-21
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Acquisition and integration expenses primarily associated with both the Layne and LiquiForce acquisitions for the year ended December 31, 2018 were comprised of the following (in thousands):
(in thousands) |
|
|
|
|
Professional services and other expenses |
| $ | 46,898 |
|
Severance and personnel costs |
|
| 13,147 |
|
Total |
| $ | 60,045 |
|
3. Revisions in Estimates
Our profit recognition related to construction contracts is based on estimates of costs to complete each project. These estimates can vary significantly in the normal course of business as projects progress, circumstances develop and evolve, and uncertainties are resolved. When we experience significant changes in our estimates of costs to complete, we undergo a process that includes reviewing the nature of the changes to ensure that there are no material amounts that should have been recorded in a prior period rather than as revisions in estimates for the current period. In our review of these changes for the years ended December 31, 2016,
In our review of these changes for the years ended December 31, 2018 and 2016, we did not identify any material amounts that should have been recorded in a prior period. In our review of these changes for the year ended December 31, 2017, we identified and corrected amounts that should have been recorded during the year ended December 31, 2016. This correction resulted in a $4.9 million decrease to Specialty revenue and gross profit and a $1.6 million decrease in net income attributable to Granite Construction Incorporated. We have assessed the impact of this correction to the financial statements of prior periods’ and to the financial statements for the year ended December 31, 2017 and have concluded that the amounts are not material.
In the normal course of business, we have revisions in estimated costs some of which are associated with unresolved affirmative claims and back charges. The estimated or actual recovery related to these estimated costs 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.
The impact to gross profit from significant revisions in estimates related to estimated and actual customer affirmative claims and recovery of back charges as well as the associated estimated contract costs are included in the tables below.
Years Ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Number of projects with downward estimate changes |
|
| 5 |
|
|
| 6 |
|
|
| 4 |
|
Range of reduction in gross profit from each project, net | $ | 5.3 - 32.0 |
| $ | 6.1 - 17.2 |
| $ | 6.0 - 13.6 |
| |||
Decrease to project profitability | $ |
| 86.5 |
| $ |
| 67.2 |
| $ |
| 39.4 |
|
| Years Ended December 31, | 2016 | 2015 | 2014 | |||||||||
| Number of projects with upward estimate changes | 7 | 14 | 7 | |||||||||
| Range of increase in gross profit from each project, net | $ | 1.1 - 4.8 | $ | 1.1 - 6.6 | $ | 1.0 - 1.8 | ||||||
| Increase on project profitability | $ | 14.2 | $ | 30.7 | $ | 9.2 | ||||||
| Years Ended December 31, | 2016 | 2015 | 2014 | |||||||||
| Number of projects with downward estimate changes | 7 | 5 | 6 | |||||||||
| Range of reduction in gross profit from each project, net | $ | 1.0 - 3.9 | $ | 1.0 - 3.3 | $ | 1.6 - 4.1 | ||||||
| Decrease on project profitability | $ | 12.9 | $ | 10.8 | $ | 16.5 | ||||||
The decreases during the years ended December 31, 2016, 20152018, 2017 and 20142016 were due to additional costs and lower productivity than originally anticipated. The 2014 decreases were also due to increasesanticipated as well as additional weather related costs and a decrease in estimated costrecovery from customer affirmative claims.
There were no amounts attributable to complete from outstanding affirmative claimsnon-controlling interests for the year ended December 31, 2018 and change orders.
Included in the net decrease,
| Years Ended December 31, | 2016 | 2015 | 2014 | |||||||||
| Number of projects with upward estimate changes | 8 | 7 | 12 | |||||||||
| Range of increase in gross profit from each project, net | $ | 1.2 - 6.5 | $ | 1.5 - 6.7 | $ | 1.0 - 15.2 | ||||||
| Increase on project profitability | $ | 27.2 | $ | 27.9 | $ | 66.8 | ||||||
| Years Ended December 31, | 2016 | 2015 | 2014 | |||||||||
| Number of projects with downward estimate changes | 5 | 6 | 3 | |||||||||
| Range of reduction in gross profit from each project, net | $ | 1.3 - 13.6 | $ | 1.0 - 5.5 | $ | 1.1 - 16.8 | ||||||
| Decrease on project profitability | $ | 40.7 | $ | 20.3 | $ | 19.9 | ||||||
F-22
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
We disaggregate our revenue based on our reportable segments and operating groups as held-to-maturity asit is the format that is regularly reviewed by management. Our reportable segments are: Transportation, Water, Specialty and Materials. Our operating groups are: (i) California; (ii) Northwest; (iii) Heavy Civil; (iv) Federal (formerly included with Heavy Civil); (v) Midwest (formerly Kenny less the underground business); and (vi) Water and Mineral Services (which includes LiquiForce, Layne and the underground business of the dates presented and the carrying amounts of held-to-maturity securities were as follows (in thousands):
| December 31, | 2016 | 2015 | ||||||
| U.S. Government and agency obligations | $ | 10,002 | $ | 15,051 | ||||
| Commercial paper | 54,882 | 9,992 | ||||||
| Total short-term marketable securities | 64,884 | 25,043 | ||||||
| U.S. Government and agency obligations | 62,895 | 80,652 | ||||||
| Total long-term marketable securities | 62,895 | 80,652 | ||||||
| Total marketable securities | $ | 127,779 | $ | 105,695 | ||||
| December 31, 2016 | |||
| Due within one year | $ | 64,884 | |
| Due in one to five years | 62,895 | ||
| Total | $ | 127,779 | |
Years Ended December 31,
2018 |
| Transportation |
|
| Water |
|
| Specialty |
|
| Materials |
|
| Total |
| |||||
California |
| $ | 607,737 |
|
| $ | 52,757 |
|
| $ | 143,471 |
|
| $ | 213,673 |
|
| $ | 1,017,638 |
|
Northwest |
|
| 465,085 |
|
|
| 3,882 |
|
|
| 159,517 |
|
|
| 138,924 |
|
|
| 767,408 |
|
Heavy Civil |
|
| 818,715 |
|
|
| 19,945 |
|
|
| — |
|
|
| — |
|
|
| 838,660 |
|
Federal |
|
| 683 |
|
|
| 2,116 |
|
|
| 41,471 |
|
|
| — |
|
|
| 44,270 |
|
Midwest |
|
| 84,523 |
|
|
| 1,930 |
|
|
| 223,517 |
|
|
| — |
|
|
| 309,970 |
|
Water and Mineral Services |
|
| — |
|
|
| 257,620 |
|
|
| 58,643 |
|
|
| 24,205 |
|
|
| 340,468 |
|
Total |
| $ | 1,976,743 |
|
| $ | 338,250 |
|
| $ | 626,619 |
|
| $ | 376,802 |
|
| $ | 3,318,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
| Transportation |
|
| Water |
|
| Specialty |
|
| Materials |
|
| Total |
| |||||
California |
| $ | 470,996 |
|
| $ | 39,071 |
|
| $ | 160,572 |
|
| $ | 178,048 |
|
| $ | 848,687 |
|
Northwest |
|
| 611,021 |
|
|
| 623 |
|
|
| 104,793 |
|
|
| 114,728 |
|
|
| 831,165 |
|
Heavy Civil |
|
| 773,990 |
|
|
| 23,153 |
|
|
| — |
|
|
| — |
|
|
| 797,143 |
|
Federal |
|
| 31,406 |
|
|
| 1,884 |
|
|
| 5,196 |
|
|
| — |
|
|
| 38,486 |
|
Midwest |
|
| 60,007 |
|
|
| 7,004 |
|
|
| 345,147 |
|
|
| — |
|
|
| 412,158 |
|
Water and Mineral Services |
|
| — |
|
|
| 61,964 |
|
|
| 110 |
|
|
| — |
|
|
| 62,074 |
|
Total |
| $ | 1,947,420 |
|
| $ | 133,699 |
|
| $ | 615,818 |
|
| $ | 292,776 |
|
| $ | 2,989,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
| Transportation |
|
| Water |
|
| Specialty |
|
| Materials |
|
| Total |
| |||||
California |
| $ | 378,838 |
|
| $ | 40,250 |
|
| $ | 185,079 |
|
| $ | 148,778 |
|
| $ | 752,945 |
|
Northwest |
|
| 486,037 |
|
|
| 9,853 |
|
|
| 94,379 |
|
|
| 112,448 |
|
|
| 702,717 |
|
Heavy Civil |
|
| 688,527 |
|
|
| 16,279 |
|
|
| — |
|
|
| — |
|
|
| 704,806 |
|
Federal |
|
| 5,149 |
|
|
| 1,196 |
|
|
| 4,470 |
|
|
| — |
|
|
| 10,815 |
|
Midwest |
|
| 68,235 |
|
|
| 17,316 |
|
|
| 181,395 |
|
|
| — |
|
|
| 266,946 |
|
Water and Mineral Services |
|
| — |
|
|
| 76,388 |
|
|
| — |
|
|
| — |
|
|
| 76,388 |
|
Total |
| $ | 1,626,786 |
|
| $ | 161,282 |
|
| $ | 465,323 |
|
| $ | 261,226 |
|
| $ | 2,514,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurement at Reporting Date Using | ||||||||||||||||
| December 31, 2016 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Cash equivalents | ||||||||||||||||
| Money market funds | $ | 10,057 | $ | — | $ | — | $ | 10,057 | ||||||||
| Total assets | $ | 10,057 | $ | — | $ | — | $ | 10,057 | ||||||||
| Fair Value Measurement at Reporting Date Using | ||||||||||||||||
| December 31, 2015 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Cash equivalents | ||||||||||||||||
| Money market funds | $ | 62,024 | $ | — | $ | — | $ | 62,024 | ||||||||
| Total assets | $ | 62,024 | $ | — | $ | — | $ | 62,024 | ||||||||
| December 31, | 2016 | 2015 | ||||||
| Cash equivalents | $ | 10,057 | $ | 62,024 | ||||
| Cash | 179,269 | 190,812 | ||||||
| Total cash and cash equivalents | $ | 189,326 | $ | 252,836 | ||||
F-23
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following tables present our forecasted purchases for diesel during these periods. In May 2014, we entered into two natural gas commodity swaps covering the periods from June 2014 to October 2014 and from May 2015 to October 2015 representing roughly 25% of our forecasted purchases of natural gas during these periods. These commodity swaps were settled in October 2015 and gains or losses, including net periodic settlement amounts, were recorded in other income, net in our consolidated statements of operations. During the years ended December 31, 2015 and 2014, we recorded net losses of $0.4 million and $2.0 million, respectively.
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
| Transportation |
| Water |
| Specialty |
| Total |
| ||||
California | $ | 314,261 |
| $ | 6,163 |
| $ | 57,820 |
| $ | 378,244 |
|
Northwest |
| 319,589 |
|
| 786 |
|
| 81,951 |
|
| 402,326 |
|
Heavy Civil |
| 1,473,455 |
|
| 21,951 |
|
| — |
|
| 1,495,387 |
|
Federal |
| — |
|
| — |
|
| 130,644 |
|
| 130,663 |
|
Midwest |
| 78,004 |
|
| 211 |
|
| 203,601 |
|
| 281,816 |
|
Water and Mineral Services |
| — |
|
| 189,597 |
|
| — |
|
| 189,597 |
|
Total | $ | 2,185,309 |
| $ | 218,708 |
| $ | 474,016 |
| $ | 2,878,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
| Transportation |
| Water |
| Specialty |
| Total |
| ||||
California | $ | 299,552 |
| $ | 27,328 |
| $ | 79,176 |
| $ | 406,056 |
|
Northwest |
| 273,864 |
|
| 2,606 |
|
| 39,112 |
|
| 315,582 |
|
Heavy Civil |
| 2,194,430 |
|
| 38,183 |
|
| — |
|
| 2,232,613 |
|
Federal |
| 317 |
|
| 4,212 |
|
| 162,641 |
|
| 167,170 |
|
Midwest |
| 90,584 |
|
| 1,961 |
|
| 365,767 |
|
| 458,312 |
|
Water and Mineral Services |
| — |
|
| 4,116 |
|
| — |
|
| 4,116 |
|
Total | $ | 2,858,747 |
| $ | 78,406 |
| $ | 646,696 |
| $ | 3,583,849 |
|
6. Contract Assets and an initial notional amount of $98.8 million which matures in October 2020. The interest rate swap is designed to convert the interest rate on the term loan described in Note 11 from a variable rate of interest of LIBOR plus an applicable margin to a fixed rate of 1.47% plus the same applicable margin. The interest rate swap is reported at fair value using Level 2 inputs in the consolidated balance sheets. Gains or losses on the effective portion are initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified to interest expense in the consolidated statements of operations when the quarterly hedged interest payment is settled. As of December 31, 2016, the fair value of the cash flow hedge was $0.8 million and was included in other current assets in the consolidated balance sheets. Liabilities
During the year ended December 31, 2016,2018, we recognized revenue of $104.5 million that was included in the unrealized gain, net of taxes, on the effective portion was $0.2 million and was reported as a component of accumulated other comprehensive income (loss). contract liability balance at January 1, 2018.
During the year ended December 31, 2016, there was no ineffective portion2018, we recognized revenue of $114.9 million 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 period. The changes in contract transaction price were from items such as executed or estimated change orders and unresolved contract modifications and claims.
As of December 31, 2018 and January 1, 2018, the interest expense reclassified from accumulated other comprehensive loss was $0.3 million. We estimate $0.3aggregate claim recovery estimates included in contract asset and liability balances were approximately $45.1 million to be reclassified from accumulated other comprehensive income into pre-tax earnings within the next twelve months.
The components of the consolidated balance sheets arecontract asset balances as of the respective dates were as follows (in thousands):
| December 31, 2018 |
| January 1, 2018 |
| ||
Costs in excess of billings and estimated earnings | $ | 120,223 |
| $ | 69,755 |
|
Contract retention |
| 99,531 |
|
| 91,135 |
|
Total contract assets | $ | 219,754 |
| $ | 160,890 |
|
| December 31, | 2016 | 2015 | ||||||||||||||||
| Fair Value Hierarchy | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||
| Assets: | ||||||||||||||||||
| Held-to-maturity marketable securities | Level 1 | $ | 127,779 | $ | 127,365 | $ | 105,695 | $ | 105,336 | |||||||||
| Liabilities (including current maturities): | ||||||||||||||||||
Senior notes payable1 | Level 3 | $ | 120,000 | $ | 124,654 | $ | 160,000 | $ | 165,731 | |||||||||
Credit Agreement term loan1 | Level 3 | $ | 95,000 | $ | 93,991 | $ | 100,000 | $ | 99,375 | |||||||||
Credit Agreement - revolving credit facility1 | Level 3 | $ | 30,000 | $ | 29,452 | $ | — | $ | — | |||||||||
The fair values offollowing table summarizes changes in the senior notes payable and Credit Agreement (defined in Note 11) loan are based on borrowing rates available to uscontract asset balance for long-term loans with similar terms, average maturities, and credit risk.
Balance at January 1, 2018 | $ | 160,890 |
|
Change in the measure of progress on projects, net |
| 911,109 |
|
Acquired contract assets |
| 45,353 |
|
Revisions in estimates, net |
| (11,180 | ) |
Billings |
| (823,286 | ) |
Receipts related to contract retention |
| (63,132 | ) |
Balance at December 31, 2018 | $ | 219,754 |
|
F-24
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)CONTINUED
The components of the contract liability balances as of the respective dates were as follows (in thousands):
| December 31, 2018 |
| January 1, 2018 |
| ||
Billings in excess of costs and estimated earnings, net of retention | $ | 103,250 |
| $ | 82,750 |
|
Provisions for losses |
| 2,199 |
|
| 924 |
|
Total contract liabilities | $ | 105,449 |
| $ | 83,674 |
|
The following table summarizes changes in the contract liability balance for the asset retirement and reclamation obligations were measured using Level 3 inputs and performance guarantees were measured using Level 2 inputs. Asset retirement and reclamation obligations were initially measured using internal discounted cash flow calculations based upon our estimates of future retirement costs - see Note 8 for details of the asset retirement balances and Note 1 for further discussion on fair value measurements. Performance guarantees were measured using estimated partner bond rates - see Note 10 for the liability balances and Note 1 for further discussion on performance guarantees.period presented (in thousands):
Balance at January 1, 2018 | $ | 83,674 |
|
Change in the measure of progress on projects, net |
| (1,332,400 | ) |
Acquired contract liabilities |
| 7,974 |
|
Revisions in estimates, net |
| (4,450 | ) |
Billings |
| 1,349,441 |
|
Change in provision for loss, net |
| 1,210 |
|
Balance at December 31, 2018 | $ | 105,449 |
|
7. Receivables, net (in thousands)
December 31, |
| 2018 |
|
| 2017 |
|
| ||
Contracts completed and in progress: |
|
|
|
|
|
|
|
|
|
Billed |
| $ | 285,521 |
|
| $ | 252,467 |
|
|
Unbilled |
|
| 98,755 |
|
|
| 77,135 |
|
|
Retentions |
|
| — |
|
|
| 91,135 |
|
|
Total contracts completed and in progress |
|
| 384,276 |
|
|
| 420,737 |
|
|
Material sales |
|
| 45,286 |
|
|
| 42,192 |
|
|
Other |
|
| 44,195 |
|
|
| 17,014 |
|
|
Total gross receivables |
|
| 473,757 |
|
|
| 479,943 |
|
|
Less: allowance for doubtful accounts |
|
| 511 |
|
|
| 152 |
|
|
Total net receivables |
| $ | 473,246 |
|
| $ | 479,791 |
|
|
| December 31, | 2016 | 2015 | ||||||
| Construction contracts: | ||||||||
| Completed and in progress | $ | 288,160 | $ | 206,756 | ||||
| Retentions | 84,878 | 91,670 | ||||||
| Total construction contracts | 373,038 | 298,426 | ||||||
| Construction material sales | 29,357 | 28,727 | ||||||
| Other | 17,523 | 14,033 | ||||||
| Total gross receivables | 419,918 | 341,186 | ||||||
| Less: allowance for doubtful accounts | 573 | 364 | ||||||
| Total net receivables | $ | 419,345 | $ | 340,822 | ||||
Receivables include amounts billed and billableunbilled amounts for services provided to clients for services providedwhich we have an unconditional right to payment as of the end of the applicable period and except for escrow receivables, do not bear interest. To the extent costs are not contractually billable or have not been earned, such as claim recovery estimates, the associated revenue is included in costs and estimated earnings in excess of billings or billings
During the years ended December 31, 20162018, 2017 and 2015, the estimated recovery from back charge claims included in Other receivables was $0.3 million and $6.5 million, respectively.
We regularly review our accounts receivable, including past due amounts, to determine their probability of collection. If it is probable that an amount is uncollectible, it is charged to bad debt expense and a corresponding reserve is established in allowance for doubtful accounts. If it is deemed certain that an amount is uncollectible, the amount is written off.
Certain construction contracts include retainage provisions.provisions that were included in contract assets as of December 31, 2018 and in receivables, net as of December 31, 2017 in our consolidated balance sheets. The balances billed but not paid by customers pursuant to these provisions generally become due upon completion and acceptance of the project work or products by the owners. NoAs of December 31, 2018 and 2017, no retention receivable individually exceeded 10% of total net receivables at any of the presented dates. As of December 31, 2016, theThe majority of the retentions receivable are expected to be collected within one year.year and there were no retentions receivables determined to be uncollectible.
F-25
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
All marketable securities were classified as held-to-maturity as of the dates presented and the carrying amounts of held-to-maturity securities were as follows (in thousands):
December 31, |
| 2018 |
|
| 2017 |
|
| ||
U.S. Government and agency obligations |
| $ | 24,996 |
|
| $ | 17,910 |
|
|
Commercial paper |
|
| — |
|
|
| 49,865 |
|
|
Corporate bonds |
|
| 5,006 |
|
|
| — |
|
|
Total short-term marketable securities |
|
| 30,002 |
|
|
| 67,775 |
|
|
U.S. Government and agency obligations |
|
| 36,098 |
|
|
| 59,993 |
|
|
Corporate bonds |
|
| — |
|
|
| 5,022 |
|
|
Total long-term marketable securities |
|
| 36,098 |
|
|
| 65,015 |
|
|
Total marketable securities |
| $ | 66,100 |
|
| $ | 132,790 |
|
|
Scheduled maturities of held-to-maturity investments were as follows (in thousands):
December 31, |
|
|
| 2018 |
|
| |
Due within one year |
|
|
| $ | 30,002 |
|
|
Due in one to five years |
|
|
|
| 36,098 |
|
|
Total |
|
|
| $ | 66,100 |
|
|
9. Fair Value Measurement
The following tables summarize significant assets and liabilities measured at fair value in the consolidated balance sheets on a recurring basis for each of the fair value levels (in thousands):
|
| Fair Value Measurement at Reporting Date Using |
| |||||||||||||
December 31, 2018 |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
| $ | 84,613 |
|
|
| — |
|
| $ | — |
|
| $ | 84,613 |
|
Other noncurrent assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
| 5,825 |
|
|
| — |
|
|
| — |
|
|
| 5,825 |
|
Total assets |
| $ | 90,438 |
|
| $ | — |
|
| $ | — |
|
| $ | 90,438 |
|
Other current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedge |
| $ | — |
|
| $ | 1,098 |
|
| $ | — |
|
| $ | 1,098 |
|
Total liabilities |
| $ | — |
|
| $ | 1,098 |
|
| $ | — |
|
| $ | 1,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
| $ | 37,284 |
|
| $ | — |
|
| $ | — |
|
| $ | 37,284 |
|
Commercial paper |
|
| 9,967 |
|
|
| — |
|
|
| — |
|
|
| 9,967 |
|
Other current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedge |
|
| — |
|
|
| 1,400 |
|
|
| — |
|
|
| 1,400 |
|
Total assets |
| $ | 47,251 |
|
| $ | 1,400 |
|
| $ | — |
|
| $ | 48,651 |
|
Interest Rate Swaps
In May 2018, we entered into the Third Amended and Restated Credit Agreement (as discussed further in Note 15), terminated the interest rate swap we entered into in January 2016 and entered into two new interest rate swaps designated as cash flow hedges with an effective date of May 2018. The two new cash flow hedges have a combined initial notional amount of $150.0 million and mature in May 2023. The interest rate swaps are designed to convert the interest rate on the term loan as discussed further in Note 15 from a variable interest rate of LIBOR plus an applicable margin to a fixed rate of 2.76% plus the same applicable margin.
F-26
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The carrying values and estimated fair values of our financial instruments that are not required to be recorded at fair value in the consolidated balance sheets are as follows (in thousands):
December 31, |
|
|
| 2018 |
|
| 2017 |
|
| ||||||||||
|
| Fair Value Hierarchy |
| Carrying Value |
|
| Fair Value |
|
| Carrying Value |
|
| Fair Value |
|
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity marketable securities |
| Level 1 |
| $ | 66,100 |
|
| $ | 65,290 |
|
| $ | 132,790 |
|
| $ | 132,002 |
|
|
Liabilities (including current maturities): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Notes1 |
| Level 3 |
| $ | 40,000 |
|
| $ | 40,484 |
|
| $ | 80,000 |
|
| $ | 82,190 |
|
|
Credit Agreement - term loan1 |
| Level 3 |
|
| 146,250 |
|
|
| 147,141 |
|
|
| 90,000 |
|
|
| 89,871 |
|
|
Credit Agreement - revolving credit facility1 |
| Level 3 |
|
| 197,000 |
|
|
| 197,889 |
|
|
| 55,000 |
|
|
| 55,054 |
|
|
1See Note 15 for definitions of, and more information about, the 2019 Notes and Credit Agreement.
At least annually, we measure certain nonfinancial assets and liabilities at fair value on a nonrecurring basis. As of December 31, 2018 and 2017, the nonfinancial assets and liabilities included our asset retirement and reclamation obligations, as well as net assets held for sale and assets and corresponding liabilities associated with performance guarantees. See Note 1 for further discussion.
During the years ended December 31, 2018, 2017 and 2016, we had no material nonfinancial asset and 2015, there were no retention receivables determined to be uncollectible.
10. Construction Joint Ventures
We participate in various construction joint ventures. We have determined that certain of these joint ventures (“are consolidated because they are 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 years ended December 31, 2018, 2017 and 2016, 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 December 31, 2016,2018, there was $5.0$3.1 billion of construction revenue to be recognized on unconsolidated and line item construction joint venture contracts of which $1.6$1.0 billion represented our share and the remaining $3.4$2.1 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. See Note 1014 for disclosure of the performance guarantee amounts recorded in the consolidated balance sheets and Note 1 for additional discussion.
Generally, each construction joint venture is formed to accomplish a specific project and is jointly controlled by the joint venture partners. The joint venture agreements typically provide that our interests in any profits and assets, and our respective share in any losses and liabilities, that may result from the performance of the contracts are limited to our stated percentage interest in the project. Under our joint venture contractual arrangements, we provide capital to these joint ventures in return for an ownership interest. In addition, partners dedicate resources to the joint ventures necessary to complete the contracts and are reimbursed for their cost. The operational risks of each construction joint venture are passed along to the joint venture members. As we absorb our share of these risks, our investment in each venture is exposed to potential gains and losses.
The volume and stage of completion of contracts from our consolidated and unconsolidated construction joint ventures may cause fluctuations in cash and cash equivalents and, for consolidated construction joint ventures, billings in excess of costs and estimated earnings, costs in excess of billings and estimated earningscontract assets, contract liabilities and property and equipment between periods.
The assets and liabilities 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.
F-27
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At December 31, 2016,2018, we were engaged in fiveseven active consolidated construction joint ventureCCJV projects with total contract values ranging from $47.6$14.8 million to $291.6 million.$409.7 million and a combined total of $1.2 billion. Our share of revenue remaining to be recognized on these consolidated joint venturesCCJVs was $365.9 million and ranged from $3.4$0.2 million to $166.6$175.0 million. Our proportionate share of the equity in these joint ventures was between 50.0%50% and 65.0%65%. During the years ended December 31, 2016, 20152018, 2017 and 2014,2016, total revenue from consolidated construction joint venturesCCJVs was $119.8$242.1 million, $54.4$185.5 million and $155.1$119.8 million, respectively. During the years ended December 31, 2018, 2017 and 2016, 2015 and 2014, consolidated construction joint venturesCCJVs provided $37.8$85.6 million, used $16.4$36.9 million and provided $22.5$37.8 million of operating cash flows, respectively.
Unconsolidated Construction Joint Ventures
As discussed in Note 1, where we have determined we are not the primary beneficiary of a joint venture but do exercise significant influence, we account for our share of the operations of unconsolidated construction joint ventures on a pro rata basis in revenue and cost of revenue in the consolidated statements of operations and in equity in construction joint ventures in the consolidated balance sheets.
As of December 31, 2016,2018, we were engaged in elevennine active unconsolidated joint venture projects with total contract values ranging from $78.8$101.7 million to $3.6$3.8 billion and a combined total of $11.3 billion of which our share was $3.3 billion. Our proportionate share of the equity in these unconsolidated joint ventures ranged from 20.0%20% to 50.0%50%. As of December 31, 2016,2018, our share of the revenue remaining to be recognized on these unconsolidated joint ventures was $1.0 billion and ranged from $1.1$1.9 million to $507.4$254.8 million.
The following is summary financial information related to unconsolidated construction joint ventures (in thousands):
December 31, |
| 2018 |
|
| 2017 |
|
| ||
Assets |
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities |
| $ | 229,562 |
|
| $ | 289,940 |
|
|
Other current assets1 |
|
| 814,979 |
|
|
| 812,577 |
|
|
Noncurrent assets |
|
| 204,090 |
|
|
| 219,825 |
|
|
Less partners’ interest |
|
| 822,215 |
|
|
| 869,782 |
|
|
Granite’s interest1,2 |
|
| 426,416 |
|
|
| 452,560 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Current liabilities |
|
| 525,036 |
|
|
| 682,832 |
|
|
Less partners’ interest and adjustments3 |
|
| 369,782 |
|
|
| 462,159 |
|
|
Granite’s interest |
|
| 155,254 |
|
|
| 220,673 |
|
|
Equity in construction joint ventures4 |
| $ | 271,162 |
|
| $ | 231,887 |
|
|
| December 31, | 2016 | 2015 | ||||||
| Assets: | ||||||||
| Cash, cash equivalents and marketable securities | $ | 537,991 | $ | 439,871 | ||||
Other current assets1 | 644,809 | 666,478 | ||||||
| Noncurrent assets | 207,240 | 193,271 | ||||||
| Less partners’ interest | 935,615 | 881,183 | ||||||
Granite’s interest1,2 | 454,425 | 418,437 | ||||||
| Liabilities: | ||||||||
| Current liabilities | 696,215 | 650,300 | ||||||
Less partners’ interest and adjustments3 | 472,324 | 447,926 | ||||||
| Granite’s interest | 223,891 | 202,374 | ||||||
Equity in construction joint ventures4 | $ | 230,534 | $ | 216,063 | ||||
1
Included in this balance and in accrued and other current liabilities on our consolidated balance sheets were amounts related to performance guarantees that were $88.2 million and $88.6 million as of December 31,2
Included in this balance as of December 31,3
Partners’ interest and adjustments includes amounts to reconcile total4
F-28
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)CONTINUED
|
|
| ||||||||||
Years Ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 1,544,406 |
|
| $ | 2,057,336 |
|
| $ | 1,958,158 |
|
Less partners’ interest and adjustments1 |
|
| 1,022,370 |
|
|
| 1,469,550 |
|
|
| 1,387,532 |
|
Granite’s interest |
|
| 522,036 |
|
|
| 587,786 |
|
|
| 570,626 |
|
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
| 1,787,501 |
|
|
| 1,995,915 |
|
|
| 1,915,376 |
|
Less partners’ interest and adjustments1 |
|
| 1,240,135 |
|
|
| 1,394,347 |
|
|
| 1,360,459 |
|
Granite’s interest |
|
| 547,366 |
|
|
| 601,568 |
|
|
| 554,917 |
|
Granite’s interest in gross (loss) profit |
| $ | (25,330 | ) |
| $ | (13,782 | ) |
| $ | 15,709 |
|
| Years Ended December 31, | 2016 | 2015 | 2014 | |||||||||
| Revenue: | ||||||||||||
| Total | $ | 1,958,158 | $ | 1,924,544 | $ | 1,501,894 | ||||||
Less partners’ interest and adjustments1 | 1,387,532 | 1,341,334 | 1,048,514 | |||||||||
| Granite’s interest | 570,626 | 583,210 | 453,380 | |||||||||
| Cost of revenue: | ||||||||||||
| Total | 1,915,376 | 1,819,257 | 1,386,577 | |||||||||
Less partners’ interest and adjustments1 | 1,360,459 | 1,279,954 | 984,062 | |||||||||
| Granite’s interest | 554,917 | 539,303 | 402,515 | |||||||||
| Granite’s interest in gross profit | $ | 15,709 | $ | 43,907 | $ | 50,865 | ||||||
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 accountingDuring the years ended December 31, 2016, 20152018, 2017 and 2014,2016, unconsolidated construction joint venture net (loss) income was $41.8($240.3) million, $105.6$62.2 million and $116.8$41.8 million, respectively, of which our share was ($22.6) million, ($14.4) million and $15.6 million, $43.4 millionrespectively. The differences between our share of the joint venture net loss during the years ended December 31, 2018 and $49.2 million, respectively.2017 when compared to the joint venture net (loss) income primarily resulted from differences between our estimated total revenue and cost of revenue when compared to that of our partners’ on three projects. These joint venture net income amounts exclude our corporate overhead required to manage the joint ventures and include taxes only to the extent the applicable states have joint venture level taxes.
11. Investments in Affiliates
Our investments in affiliates balance is related to our investments in unconsolidated non-construction entities that we account for using the equity method of accounting, including investments in foreign affiliates that we obtained from the Layne acquisition, real estate entities and a non-real estatean asphalt terminal entity.
Our investments in foreign affiliates are engaged in mineral drilling services and the manufacture and supply of drilling equipment, parts and supplies in Latin America. The real estate entities were formed to accomplish specific real estate development projects thatin which our wholly-ownedwholly owned subsidiary, Granite Land Company, (“GLC”), participates in with third-party partners. The non-real estateasphalt terminal entity is a 50% interest in a limited liability company which owns and operates an asphalt terminal and operates an emulsion plant in Nevada.
We have determined that the real estate entities are not consolidated because although they are VIEs, we are not the primary beneficiary. We have determined that the non-real estateforeign affiliates and the asphalt terminal entity isare not consolidated because it isthey are not a VIEVIEs and we do not hold the majority voting interest. As such, this entity isthese entities are accounted for using the equity method. We account for our share of the operating results of the equity method investments in other income in the consolidated statements of operations and as a single line item in the consolidated balance sheets as investments in affiliates
Our investments in affiliates balance consists of equity method investments in the following types of entities (in thousands):
December 31, |
| 2018 |
|
| 2017 |
| ||
Foreign |
| $ | 55,715 |
|
| $ | — |
|
Real estate |
|
| 19,676 |
|
|
| 29,472 |
|
Asphalt terminal |
|
| 8,963 |
|
|
| 8,997 |
|
Total investments in affiliates |
| $ | 84,354 |
|
| $ | 38,469 |
|
| December 31, | 2016 | 2015 | ||||||
| Equity method investments in real estate affiliates | $ | 25,911 | $ | 24,103 | ||||
| Equity method investments in other affiliate | 9,757 | 9,079 | ||||||
| Total investments in affiliates | $ | 35,668 | $ | 33,182 | ||||
F-29
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table provides summarized balance sheet information for our affiliates accounted for under the equity method on a combined basis (in thousands):
December 31, |
| 2018 |
|
| 2017 |
| ||
Current assets |
| $ | 141,930 |
|
| $ | 31,320 |
|
Noncurrent assets |
|
| 170,172 |
|
|
| 129,039 |
|
Total assets |
|
| 312,102 |
|
|
| 160,359 |
|
Current liabilities |
|
| 55,816 |
|
|
| 30,131 |
|
Long-term liabilities1 |
|
| 63,098 |
|
|
| 31,636 |
|
Total liabilities |
|
| 118,914 |
|
|
| 61,767 |
|
Net assets |
|
| 193,188 |
|
|
| 98,592 |
|
Granite’s share of net assets |
| $ | 84,354 |
|
| $ | 38,469 |
|
| December 31, | 2016 | 2015 | ||||||
| Current assets | $ | 30,836 | $ | 26,790 | ||||
| Noncurrent assets | 124,670 | 148,687 | ||||||
| Total assets | 155,506 | 175,477 | ||||||
| Current liabilities | 18,485 | 25,840 | ||||||
Long-term liabilities1 | 37,217 | 45,267 | ||||||
| Total liabilities | 55,702 | 71,107 | ||||||
| Net assets | $ | 99,804 | $ | 104,370 | ||||
| Granite’s share of net assets | $ | 35,668 | $ | 33,182 | ||||
1
The balance primarily relates to debt associated with our real estate investments. The increase in the balance since December 31, 2017 is related to debt of our foreign affiliates associated with purchase of equipment and buildings. See NoteOf the $312.1 million in total assets as of December 31, 2018, we had investments in thirteen foreign entities with total assets ranging from less than $0.2 million to $68.1 million, four real estate entities with total assets ranging from less than $0.3 million to $57.1 million and the asphalt terminal entity had total assets of $21.2 million. We have direct and indirect investments in the foreign entities and our percent ownership ranged from 25% to 50% as of December 31, 2018. The equity method investments in real estate affiliates included $20.8$16.3 million and $18.5$24.3 million in residential real estate in Texas as of December 31, 20162018 and 2015,2017, respectively. The remaining balances were in commercial real estate in Texas. Of the $155.5 million in total assets as of
The following table provides summarized statement of operations information for our affiliates accounted for under the equity method on a combined basis (in thousands):
Years Ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Revenue |
| $ | 187,827 |
|
| $ | 56,372 |
|
| $ | 56,127 |
|
Gross profit |
|
| 51,061 |
|
|
| 23,007 |
|
|
| 22,398 |
|
Income before taxes |
|
| 31,612 |
|
|
| 17,154 |
|
|
| 19,117 |
|
Net income |
|
| 31,612 |
|
|
| 17,154 |
|
|
| 19,117 |
|
Granite’s interest in affiliates’ net income |
|
| 6,935 |
|
|
| 7,107 |
|
|
| 7,177 |
|
| Years Ended December 31, | 2016 | 2015 | 2014 | ||||||
| Revenue | $ | 56,127 | $ | 47,457 | $ | 46,597 | |||
| Gross profit | 22,398 | 19,117 | 10,315 | ||||||
| Income before taxes | 19,117 | 8,446 | 3,647 | ||||||
| Net income | 19,117 | 8,446 | 3,647 | ||||||
| Granite’s interest in affiliates’ net income | 7,177 | 3,210 | 901 | ||||||
12. 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 consolidated balance sheets as follows (in thousands):
December 31, |
| 2018 |
|
| 2017 |
|
| ||
Equipment and vehicles |
| $ | 906,275 |
|
| $ | 778,549 |
|
|
Quarry property |
|
| 180,246 |
|
|
| 182,267 |
|
|
Land and land improvements |
|
| 142,271 |
|
|
| 108,830 |
|
|
Buildings and leasehold improvements |
|
| 108,884 |
|
|
| 82,601 |
|
|
Office furniture and equipment |
|
| 65,680 |
|
|
| 56,894 |
|
|
Property and equipment |
|
| 1,403,356 |
|
|
| 1,209,141 |
|
|
Less: accumulated depreciation and depletion |
|
| 853,668 |
|
|
| 801,723 |
|
|
Property and equipment, net |
| $ | 549,688 |
|
| $ | 407,418 |
|
|
| December 31, | 2016 | 2015 | ||||||
| Equipment and vehicles | $ | 756,602 | $ | 731,224 | ||||
| Quarry property | 174,839 | 178,357 | ||||||
| Land and land improvements | 110,999 | 110,294 | ||||||
| Buildings and leasehold improvements | 82,762 | 82,871 | ||||||
| Office furniture and equipment | 56,381 | 60,821 | ||||||
| Property and equipment | 1,181,583 | 1,163,567 | ||||||
| Less: accumulated depreciation and depletion | 774,933 | 778,438 | ||||||
| Property and equipment, net | $ | 406,650 | $ | 385,129 | ||||
Depreciation and depletion expense primarily included in cost of revenue in our consolidated statements of operations was $96.4 million, $63.8 million and $61.0 million for boththe years ended December 31, 2018, 2017 and 2016, and 2015 and was $64.9 million for the year ended December 31, 2014. We capitalized interest costs of $0.5 million, $0.4 million and $0.7 million in 2016, 2015 and 2014, respectively, related to certain self-constructed assets, of which $0.2 million, $0.4 million and $0.4 million, respectively, were included in investments in affiliates and the remaining amounts were included in property and equipment in the consolidated balance sheets.
We have recorded liabilities associated with our legally required obligations to reclaim owned and leased quarry property and related facilities. As of December 31, 20162018 and 2015, $1.92017, $4.4 million and $2.0$4.8 million, respectively, of our asset retirement obligations were included in accrued expenses and other current liabilities and $20.1$17.4 million and $24.6$17.7 million, respectively, were included in other long-term liabilities in the consolidated balance sheets.
F-30
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following is a reconciliation of these asset retirement obligations (in thousands):
Years Ended December 31, |
| 2018 |
|
| 2017 |
| ||
Beginning balance |
| $ | 22,527 |
|
| $ | 21,936 |
|
Revisions to estimates |
|
| 17 |
|
|
| 462 |
|
Liabilities settled |
|
| (1,790 | ) |
|
| (966 | ) |
Accretion |
|
| 1,038 |
|
|
| 1,095 |
|
Ending balance |
| $ | 21,792 |
|
| $ | 22,527 |
|
| Years Ended December 31, | 2016 | 2015 | ||||
| Beginning balance | $ | 26,558 | $ | 27,441 | ||
| Revisions to estimates | (2,058 | ) | 213 | |||
| Liabilities settled | (3,806 | ) | (2,114 | ) | ||
| Accretion | 1,242 | 1,018 | ||||
| Ending balance | $ | 21,936 | $ | 26,558 | ||
13. Intangible Assets
Indefinite-lived Intangible Assets
Indefinite-lived intangible assets primarily consist of goodwill and use rights. Use rights of
December 31, |
| 2018 |
|
| 2017 |
| ||
Transportation |
| $ | 19,798 |
|
| $ | 19,798 |
|
Water |
|
| 144,319 |
|
|
| 618 |
|
Specialty |
|
| 40,866 |
|
|
| 31,437 |
|
Materials |
|
| 54,488 |
|
|
| 1,946 |
|
Total goodwill |
| $ | 259,471 |
|
| $ | 53,799 |
|
The following table presents the changes in goodwill since December 31, 2017 (in thousands):
Balance at December 31, 2017 | $ | 53,799 |
|
Layne acquisition goodwill |
| 187,619 |
|
LiquiForce acquisition goodwill |
| 19,269 |
|
Goodwill translation and other adjustments |
| (1,216 | ) |
Balance at December 31, 2018 | $ | 259,471 |
|
| December 31, | 2016 | 2015 | ||||||
| Construction | $ | 29,260 | $ | 29,260 | ||||
| Large Project Construction | 22,593 | 22,593 | ||||||
| Construction Materials | 1,946 | 1,946 | ||||||
| Total goodwill | $ | 53,799 | $ | 53,799 | ||||
Amortized Intangible Assets
The following is the breakdown of our amortized intangible assets that are included in other noncurrent assets in the consolidated balance sheets (in thousands):
|
|
|
|
|
| Accumulated |
|
|
|
|
| |
December 31, 2018 |
| Gross Value |
|
| Amortization |
|
| Net Value |
| |||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
| $ | 38,137 |
|
| $ | (7,640 | ) |
| $ | 30,497 |
|
Permits |
|
| 25,959 |
|
|
| (13,494 | ) |
|
| 12,465 |
|
Backlog |
|
| 9,713 |
|
|
| (5,795 | ) |
|
| 3,918 |
|
Developed technologies |
|
| 9,233 |
|
|
| (1,384 | ) |
|
| 7,849 |
|
Trademarks/trade name |
|
| 9,075 |
|
|
| (1,381 | ) |
|
| 7,694 |
|
Favorable contracts, covenants not to compete and other |
|
| 5,781 |
|
|
| (2,489 | ) |
|
| 3,292 |
|
Intangible assets |
|
| 97,898 |
|
|
| (32,183 | ) |
|
| 65,715 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Unfavorable contracts and leases |
| $ | 7,000 |
|
| $ | (4,726 | ) |
| $ | 2,274 |
|
Intangible liabilities |
| $ | 7,000 |
|
| $ | (4,726 | ) |
| $ | 2,274 |
|
Total net amortized intangible assets |
| $ | 90,898 |
|
| $ | (27,457 | ) |
| $ | 63,441 |
|
F-31
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Permits |
| $ | 25,959 |
|
| $ | (12,504 | ) |
| $ | 13,455 |
|
Customer lists |
|
| 2,200 |
|
|
| (1,467 | ) |
|
| 733 |
|
Trademarks/trade name |
|
| 4,100 |
|
|
| (2,159 | ) |
|
| 1,941 |
|
Covenants not to compete and other |
|
| 50 |
|
|
| (26 | ) |
|
| 24 |
|
Total amortized intangible assets |
| $ | 32,309 |
|
| $ | (16,156 | ) |
| $ | 16,153 |
|
| Accumulated | ||||||||||||
| December 31, 2016 | Gross Value | Amortization | Net Value | |||||||||
| Permits | $ | 25,959 | $ | (11,514 | ) | $ | 14,445 | |||||
| Acquired backlog | 1,500 | (1,472 | ) | 28 | ||||||||
| Customer lists | 2,200 | (1,174 | ) | 1,026 | ||||||||
| Trade name | 4,100 | (1,727 | ) | 2,373 | ||||||||
| Covenants not to compete and other | 50 | (24 | ) | 26 | ||||||||
| Total amortized intangible assets | $ | 33,809 | $ | (15,911 | ) | $ | 17,898 | |||||
| December 31, 2015 | ||||||||||||
| Permits | $ | 29,713 | $ | (14,239 | ) | $ | 15,474 | |||||
| Acquired backlog | 7,900 | (7,594 | ) | 306 | ||||||||
| Customer lists | 4,398 | (3,078 | ) | 1,320 | ||||||||
| Trade name | 4,100 | (1,295 | ) | 2,805 | ||||||||
| Covenants not to compete and other | 2,459 | (2,430 | ) | 29 | ||||||||
| Total amortized intangible assets | $ | 48,570 | $ | (28,636 | ) | $ | 19,934 | |||||
The net amortization expense related to amortized intangible assets for the years ended
December 31,14. Accrued Expenses and Other Current Liabilities (in thousands)
:December 31, |
| 2018 |
|
| 2017 |
| ||
Payroll and related employee benefits |
| $ | 78,414 |
|
| $ | 68,210 |
|
Accrued insurance |
|
| 58,519 |
|
|
| 39,946 |
|
Performance guarantees (see Note 1) |
|
| 88,213 |
|
|
| 88,606 |
|
Other |
|
| 48,480 |
|
|
| 39,645 |
|
Total |
| $ | 273,626 |
|
| $ | 236,407 |
|
| December 31, | 2016 | 2015 | ||||
| Payroll and related employee benefits | $ | 53,802 | $ | 56,860 | ||
| Accrued insurance | 44,471 | 41,154 | ||||
| Performance guarantees (see Note 1) | 83,110 | 65,514 | ||||
| Other | 37,204 | 37,407 | ||||
| Total | $ | 218,587 | $ | 200,935 | ||
Other includes dividends payable, accrued legal reserves, warranty reserves, reclamationasset retirement obligations, remediation reserves, remediation reservesdeficits in construction joint ventures and other miscellaneous accruals, none of which are greater than 5% of total current liabilities.
15. Long-Term Debt and Credit Arrangements (in thousands):
December 31, |
| 2018 |
|
| 2017 |
| ||
Senior notes payable |
| $ | 40,000 |
|
| $ | 80,000 |
|
Credit Agreement term loan |
|
| 146,250 |
|
|
| 90,000 |
|
Credit Agreement revolving credit loan |
|
| 197,000 |
|
|
| 55,000 |
|
Debt issuance costs |
|
| (845 | ) |
|
| (499 | ) |
Total debt |
|
| 382,405 |
|
|
| 224,501 |
|
Less current maturities |
|
| 47,286 |
|
|
| 46,048 |
|
Total long-term debt |
| $ | 335,119 |
|
| $ | 178,453 |
|
| December 31, | 2016 | 2015 | ||||
| Senior notes payable | $ | 120,000 | $ | 160,000 | ||
| Credit Agreement term loan | 95,000 | 100,000 | ||||
| Credit Agreement revolving credit loan | 30,000 | — | ||||
| Other notes payable and debt issuance costs | (706 | ) | (877 | ) | ||
| Total debt | 244,294 | 259,123 | ||||
| Less current maturities | 14,796 | 14,800 | ||||
| Total long-term debt | $ | 229,498 | $ | 244,323 | ||
The aggregate minimum principal maturities of long-term debt, including current maturities for each of the five years following
Senior Notes Payable
Senior notes payable in the amount of $120.0$40.0 million and $160.0$80.0 million as of December 31, 2018 and 2017, 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, 2016, three equal annual installments from 2017 through 2019 were remaining. As of December 31, 2016 and 2015, $110.0 million and $150.0 million, respectively,2018, all of the outstanding balances were included in long-term debt in the consolidated balance sheet, including $30.0$40.0 million due for each the 2016 and 2017 installments as we have the ability and intent to pay these installments using borrowings under the Credit Agreement (defined below) or by obtaining other sources of financing. The remaining $10.0 million of both the 2016 and 2017 installments was included in current maturities of long-term debt as of December 31, 2016 and 2015 inon the consolidated balance sheets. In March 2014, we entered into an interest rate swap designed to convertAs of December 31, 2017, $40.0 million of the interest rate from a fixed rateoutstanding balance was included in long-term debt on the consolidated balance sheets and the remaining $40.0 million was included in current maturities of 6.11% to a variable rate of 4.15% plus six-month LIBOR, which was early terminated in December 2016 (see Note 4 for details).
Our obligations under the note purchase agreement governing the 2019 Notes (the “2019 NPA”) are guaranteed by certain of our subsidiaries and are collateralized on an equivalent basis with the Credit Agreement discussed below by liens on substantially all of the assets of the Company and subsidiaries that are guarantors or borrowers under the Credit Agreement. The 2019 NPA provides for the release of liens and re-pledge of collateral on substantially the same terms and conditions as those set forth in the Credit Agreement.
F-32
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Granite entered into the Third Amended and Restated Credit Agreement dated May 31, 2016, we had a $295.0 million credit facility2018 (the “Credit Agreement”), of which $200.0 million was a revolving credit facility and $95.0 million was a term loan that matures on October 28, 2020 (the “Maturity Date”). The Credit Agreement hasprovides for, among other things, (i) a total committed remaining credit facility of $496.3 million, of which $146.3 million is a term loan (all of which was drawn on May 31, 2018) and of which $350.0 million is a revolving credit facility; (ii) an increase to the revolving credit facility and/or term loan at the option of the Company, in an aggregate maximum amount up to $200.0 million subject to the lenders providing the additional commitments; (iii) a maturity date of May 31, 2023 (the “Maturity Date”) and (iv) the elimination of the stipulation to have a $150.0 million minimum cash balance before and after a dividend payment. There was no change in the aggregate sublimit for letters of credit of $100.0 million nor was there any significant change to the affirmative, restrictive or financial covenant terms except for the removal of the minimum Consolidated Tangible Net Worth financial covenant requirement and an increase of the Consolidated Leverage Ratio financial covenant requirement from 3.00 to 3.50 for the four quarters subsequent to a permitted acquisition with cash consideration in excess of $100.0 million.
Of the $100.0$146.3 million term loan, outstanding as of December 31, 2015, we paid $5.0 million1.25% of the principal balance during 2016. Ofwas paid in the remaining $95.0 million,quarter ended December 31, 2018 and 1.25% of the original principal balance is due in seven quarterly installments beginning in March 2017, 2.50% ofeach quarter until the original principal balance is due in eight quarterly installments beginning in December 2018 andMaturity Date at which point the remaining balance is due on the Maturity Date.due. As of December 31, 2016, $90.02018 and 2017, $7.5 million and $6.2 million, respectively, of the $95.0 million term loan was included in long-term debt and the remaining $5.0 millionbalance was included in current maturities of long-term debt inon the consolidated balance sheets.
As of December 31, 2016,2018, the total stated amount of all issued and outstanding letters of credit under the Credit Agreement was $8.8$39.4 million. As of December 31, 2018 and 2017, $197.0 million and $30.0$55.0 million had been drawn forunder the 2016revolving credit facility. The draws made in 2018 funded the payment related to convertible notes, the 2018 installment of the 2019 Notes and the Layne and LiquiForce acquisitions. The draw made in 2017 primarily funded the 2017 installments of the 2019 Notes. TheAs of December 31, 2018, the total unused availability under the Credit Agreement was $161.2$113.6 million. The letters of credit will expire between August 2017June and October 2017.
Borrowings under the Credit Agreement bear interest at LIBOR or a base rate (at our option), plus an applicable margin based on certain financial ratiosthe Consolidated Leverage Ratio calculated quarterly. LIBOR varies based on the applicable loan term, market conditions and other external factors. The applicable margin was 1.75%1.50% for loans bearing interest based on LIBOR and 0.75%0.50% for loans bearing interest at the base rate at December 31, 2016.2018. Accordingly, the effective interest ratesrate using three-month LIBOR and the base rate were 2.75%was 4.31% and 4.50%6.00%, respectively, at December 31, 20162018 and we elected to use LIBOR. LIBOR for both the term loan and the revolving credit facility. In May 2018, we entered into an interest rate swap to convert the interest rate on borrowings under the Credit Agreement from a variable interest rate of LIBOR plus an applicable margin to a fixed rate of 2.76% plus the same applicable margin.
Borrowings at the base rate have no designated term and couldmay be repaid without penalty any time prior to the Maturity Date. Borrowings bearing interest at a LIBOR rate have a term no less than one month and no greater than six months (or such(a longer period, not to exceed 12twelve months, if approved by all lenders). At the end of each term, such borrowings can be paid or continued at our discretion as either a borrowing at the base rate or a borrowing at a LIBOR rate with similar terms.terms and the same or different permitted interest period. Our obligations under the Credit Agreement are guaranteed by certain of our subsidiaries and are collateralized on an equivalent basis with the obligations under the 2019 Notes (defined above) by first priority liens (subject only to other permitted liens) on substantially all of the assets of the Company and certain of our subsidiaries that are required to be guarantors or borrowers under the Credit Agreement.
The Credit Agreement provides for the release of the liens securing the obligations, at our option and expense, so long as certain conditions as defined by the terms in the Credit Agreement are satisfied (“Collateral Release Period”). However, if subsequent to exercising the option, our Consolidated Fixed Charge Coverage Ratio is less than 1.25 or our Consolidated Leverage Ratio is greater than 2.50, then we would be required to promptly re-pledge substantially all of the assets of the Company and our subsidiaries that are guarantors or borrowers under the Credit Agreement. As of December 31, 2016,2018, the conditions for the exercise of our right under the Credit Agreement to have liens released were not satisfied.
Convertible Notes
In connection with our acquisition of Layne, we assumed fair value of $69.9 million of convertible notes that had an interest rate of 4.25% per annum, payable semi-annually in arrears on May 15 and November 15 (“4.25% Convertible Notes”). The 4.25% Convertible Notes had a maturity date of November 15, 2018, unless earlier repurchased, redeemed or converted and were convertible at the option of the holders until the close of business on November 14, 2018. Prior to maturity, $0.5 million par value of the convertible notes were converted and cash settled for $0.3 million consistent with the irrevocable cash settlement election invoked by Layne on May 14, 2018. The $69.0 million remaining par value was redeemed at par plus $1.5 million of accrued interest on November 15, 2018.
F-33
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Also in connection with our acquisition of Layne, we assumed convertible notes with a fair value of $121.6 million that had an interest rate of 8.0% per annum, payable semi-annually on May 1 and November 1 (“8.0% Convertible Notes”). As of December 31, 2018, $30.7 million associated with the conversion feature of the 8.0% Convertible Notes was included in additional paid-in capital on the consolidated balance sheet. The 8.0% Convertible Notes had a maturity date of August 15, 2018 (the “8.0% Maturity Date”). During the three months ended September 30, 2018, $52.0 million of convertible notes were converted to 1.2 million shares of Granite common stock at the election of the note holders. The remaining $38.9 million of convertible notes, as well as $0.9 million of accrued interest as of the 8.0% Maturity Date, were redeemed in cash.
Real Estate Indebtedness
Our unconsolidated investments in real estate held for development and sale isentities are subject to mortgage indebtedness. This indebtedness is non-recourse to Granite, but is recourse to the real estate entity. The terms of this indebtedness are typically renegotiated to reflect the evolving nature of the real estate project as it progresses 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. The debt associated with our unconsolidated real estate venturesentities is disclosed in Note 7.
Covenants and Events of Default
Our debt and credit agreements require us to comply with various affirmative, restrictive and financial covenants, including the financial covenants described below. Our failure to comply with any of these covenants, or to pay principal, interest or other amounts when due thereunder, would constitute an event of default under the applicable agreements. Under certain circumstances, the occurrence of an event of default under one of our debt or credit agreements (or the acceleration of the maturity of the indebtedness under one of our agreements) may constitute an event of default under one or more of our other debt or credit agreements. Default under our debt and credit agreements could result in (i) us no longer being entitled to borrow under the agreements; (ii) termination of the agreements; (iii) the requirement that any letters of credit under the agreements be cash collateralized; (iv) acceleration of the maturity of outstanding indebtedness under the agreements and/or (v) foreclosure on any collaterallien securing the obligations under the agreements.
The most significant financial covenants under the terms of our Credit Agreement and related to the note purchase agreement governing our 2019 NPANotes (“2019 NPA”) require the maintenance of a minimum Consolidated Tangible Net Worth, a minimum Consolidated Interest Coverage Ratio and a maximum Consolidated Leverage Ratio.
As of December 31, 20162018 and pursuant to the definitions in the agreements,2019 NPA, which is more restrictive, our Consolidated Tangible Net Worth was
As of December 31, 2016,2018, we were in compliance with all covenants contained in the Credit Agreement and related to the 2019 NPA. We are not aware of any non-compliance by any of our unconsolidated real estate entities with the covenants contained in their debt agreements.
16. Employee Benefit Plans
Profit Sharing and 401(k) Plan
: The Profit Sharing and 401(k) Plan (the “401(k) Plan”) is a defined contribution plan covering all employees except employees covered by collective bargaining agreements and certain employees of our consolidated construction joint ventures. Each employee’s combined pre-tax 401(k) and post-tax (Roth) contributions cannot exceed 50% of their eligible pay or Internal Revenue Code annual contribution limits. Our 401(k) matching contributions can be up to 6% of an employee’s gross pay at the discretion of the Board of Directors. Our 401(k) matching contributions to the 401(k) Plan for the years ended December 31,Non-Qualified Deferred Compensation Plan
: We offer a Non-Qualified Deferred Compensation Plan (“NQDC Plan”) to a select group of our highly compensatedF-34
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Multi-employer Pension Plans: FourFive of our wholly-ownedwholly owned subsidiaries, Granite Construction Company, Granite Construction Northeast, Inc., Granite Industrial, Inc., and Kenny Construction Company and Layne Christensen Company contribute to various multi-employer pension plans on behalf of union employees. The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects:
Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers.
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
If we chose to stop participating in some of the multi-employer plans, we may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
The following table presents our participation in these plans (dollars in thousands):
|
|
|
| Pension Protection Act (“PPA”) Certified Zone Status1 |
|
|
| Contributions |
|
|
|
|
| ||||||||||
Pension Trust Fund |
| Pension Plan Employer Identification Number |
| 2018 | 2017 |
| FIP / RP Status Pending / Implemented2 |
| 2018 |
|
| 2017 |
|
| 2016 |
|
| Surcharge Imposed |
| Expiration Date of Collective Bargaining Agreement3 | |||
Locals 302 and 612 iUOE-Employers Construction Industry Retirement Plan |
| 91-6028571 |
| Green | Green |
| No |
| $ | 4,726 |
|
| $ | 3,646 |
|
| $ | 3,113 |
|
| No |
| 12/31/2019 5/31/2021 |
Pension Trust Fund for Operating Engineers Pension Plan |
| 94-6090764 |
| Yellow | Red |
| Yes |
|
| 11,363 |
|
|
| 10,431 |
|
|
| 9,266 |
|
| No |
| 6/30/2019 5/15/2020 6/15/2020 6/30/2020 9/30/2020 1/31/2021 10/31/2021 |
Operating Engineers Pension Trust Fund |
| 95-6032478 |
| Yellow | Yellow |
| Yes |
|
| 4,251 |
|
|
| 4,692 |
|
|
| 5,357 |
|
| No |
| 6/30/2019 |
Laborers Pension Trust Fund for Northern California |
| 94-6277608 |
| Green | Yellow |
| Yes |
|
| 3,009 |
|
|
| 2,464 |
|
|
| 2,215 |
|
| No |
| 6/30/2023 |
Construction Laborers Pension Trust for Southern California |
| 43-6159056 |
| Green | Green |
| No |
|
| 2,110 |
|
|
| 2,002 |
|
|
| 2,095 |
|
| No |
| 6/30/2021 |
Laborers Pension Fund |
| 36-2514514 |
| Green | Green |
| No |
|
| 2,458 |
|
|
| 3,208 |
|
|
| 2,328 |
|
| No |
| 5/31/2021 |
All other funds (44 as of December 31, 2018) |
|
|
|
|
|
|
|
|
| 15,994 |
|
|
| 10,341 |
|
|
| 8,708 |
|
|
|
|
|
|
|
|
|
| Total Contributions: |
| $ | 43,911 |
|
| $ | 36,784 |
|
| $ | 33,082 |
|
|
|
|
| ||
| Pension Plan Employer Identification Number | Pension Protection Act (“PPA”) Certified Zone Status1 | FIP / RP Status Pending / Implemented2 | Contributions | Surcharge Imposed | Expiration Date of Collective Bargaining Agreement3 | ||||||||||
| Pension Trust Fund | 2016 | 2015 | 2016 | 2015 | 2014 | ||||||||||
| Locals 302 and 612 IUOE-Employers Construction Industry Retirement Plan | 91-6028571 | Green | Green | No | $ | 3,113 | $ | 3,000 | $ | 3,043 | No | 12/31/2017 5/31/2018 12/31/2019 | |||
| Pension Trust Fund for Operating Engineers Pension Plan | 94-6090764 | Red | Red | Yes | 9,266 | 9,070 | 9,590 | No | 5/15/2017 6/30/2017 1/31/2018 6/30/2019 6/15/2020 6/30/2020 9/30/2020 | ||||||
| Operating Engineers Pension Trust Fund | 95-6032478 | Red | Red | Yes | 5,357 | 3,647 | 3,001 | No | 6/30/2019 | ||||||
| Laborers Pension Trust Fund for Northern California | 94-6277608 | Yellow | Yellow | Yes | 2,215 | 2,403 | 2,682 | No | 6/30/2019 | ||||||
| Construction Laborers Pension Trust for Southern California | 43-6159056 | Green | Green | No | 2,095 | 1,349 | 1,258 | No | 6/30/2018 | ||||||
| Laborers Pension Fund | 36-2514514 | Green | Green | No | 2,328 | 1,919 | 2,230 | No | 5/31/2017 | ||||||
| All other funds (39 as of December 31, 2016) | 8,708 | 7,171 | 7,618 | ||||||||||||
| Total Contributions: | $ | 33,082 | $ | 28,559 | $ | 29,422 | |||||||||
1
The most recent PPA zone status available in2
The “FIP/RP Status Pending/Implemented” column indicates plans for which a financial improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented.3
Lists the expiration date(s) of the collective-bargaining agreement(s) to which the plans are subject. Pension trust funds with a range of expiration dates have various collective bargaining agreements.F-35
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Based upon the most recently available annual reports, the Company’s contribution to each of the individually significant plans listed in the table above was less than 5% of each plan’s total contributions. We currently have no intention of withdrawing from any of the multi-employer pension plans in which we participate that would result in a significant withdrawal liability. In addition, we do not have any significant future obligations or funding requirements related to these plans other than the ongoing contributions that are paid as hours are worked by plan participants.
17. Shareholders’ Equity
Stock-based Compensation:
The 2012 Equity Incentive Plan provides for the issuance of restricted stock,Restricted Stock Units:
RSUs are issued for services to be rendered and may not be sold, transferred or pledged for such a period as determined by our Compensation Committee. RSU stock compensation cost is measured at our common stock’s fair value based on the market price at the date of grant. We recognize compensation cost only for RSUs that we estimate will ultimately vest. We estimate the number of shares that will ultimately vest at each grant date based on our historical experience and adjust compensation cost based on changes in those estimates over time.RSU compensation cost is recognized ratably over the shorter of the vesting period (generally three years) or the period from grant date to the first maturity date after the holder reaches age 62 and has completed certain specified years of service, when all RSUs become fully vested. Vesting of RSUs is not subject to any market or performance conditions and vesting provisions are at the discretion of the Compensation Committee. An employee may not sell or otherwise transfer unvested RSUs and, in the event employment is terminated prior to the end of the vesting period, any unvested RSUs are surrendered to us. We have no obligation to purchase these RSUs that are surrendered to us.
A summary of the changes in our RSUs during the years ended
December 31,Years Ended December 31, | 2018 |
|
| 2017 |
|
| 2016 |
| ||||||||||||||||
|
| RSUs |
|
| Weighted-Average Grant-Date Fair Value per RSU |
|
| RSUs |
|
| Weighted-Average Grant-Date Fair Value per RSU |
|
| RSUs |
|
| Weighted-Average Grant-Date Fair Value per RSU |
| ||||||
Outstanding, beginning balance |
|
| 524 |
|
| $ | 41.51 |
|
|
| 681 |
|
| $ | 39.15 |
|
|
| 451 |
|
| $ | 32.73 |
|
Granted |
|
| 271 |
|
|
| 59.44 |
|
|
| 259 |
|
|
| 51.31 |
|
|
| 572 |
|
|
| 43.17 |
|
Vested |
|
| (315 | ) |
|
| 48.97 |
|
|
| (372 | ) |
|
| 43.89 |
|
|
| (307 | ) |
|
| 36.24 |
|
Forfeited |
|
| (37 | ) |
|
| 49.17 |
|
|
| (44 | ) |
|
| 43.51 |
|
|
| (35 | ) |
|
| 40.97 |
|
Outstanding, ending balance |
|
| 443 |
|
| $ | 47.65 |
|
|
| 524 |
|
| $ | 41.51 |
|
|
| 681 |
|
| $ | 39.15 |
|
| Years Ended December 31, | 2016 | 2015 | 2014 | ||||||||||||
| RSUs | Weighted-Average Grant-Date Fair Value per RSU | RSUs | Weighted-Average Grant-Date Fair Value per RSU | RSUs | Weighted-Average Grant-Date Fair Value per RSU | ||||||||||
| Outstanding, beginning balance | 451 | $ | 32.73 | 565 | $ | 31.38 | 769 | $ | 29.49 | ||||||
| Granted | 572 | 43.17 | 228 | 33.40 | 212 | 37.94 | |||||||||
| Vested | (307 | ) | 36.24 | (300 | ) | 31.50 | (365 | ) | 30.15 | ||||||
| Forfeited | (35 | ) | 40.97 | (42 | ) | 33.38 | (51 | ) | 31.97 | ||||||
| Outstanding, ending balance | 681 | $ | 39.15 | 451 | $ | 32.73 | 565 | $ | 31.38 | ||||||
Compensation cost related to RSUs was
401(k) Plan:
As of December 31,Employee Stock Purchase Plan:
Our ESPP allows qualifying employees to purchase shares of our common stock through payroll deductions of up to 15% of their compensation, subject to Internal Revenue Code limitations, at a price of 95% of the fair market value as of the end of each of the six-month offering periods, which commence on May 15 and November 15 of each year. During theF-36
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Share Purchase Program:On As announced on April 29, 2016, on April 7, 2016, the Board of Directors authorized us to purchase up to $200.0 million of our common stock at management’s discretion, which replaced the former authorization including the amount available. We did not purchaseAs part of this authorization we have established a share repurchase program to facilitate common stock repurchases. During the last quarter of 2018, we purchased approximately 252,000 shares under theat an average price of $39.64 per share purchase program in any of the periods presented.for $10.0 million. The specific timing and amount of any future purchases will vary based on market conditions, securities law limitations and other factors.
18. Weighted Average Shares Outstanding and Net Income Per Share
The following table presents a reconciliation of the weighted average shares outstanding used in calculating basic and diluted net income per share as well as the calculation of basic and diluted net income per share (in thousands except per share amounts):
Years Ended December 31, |
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Numerator (basic and diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to common shareholders for basic calculation |
|
| $ | 42,410 |
|
| $ | 69,098 |
|
| $ | 57,122 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic |
|
|
| 43,564 |
|
|
| 39,795 |
|
|
| 39,557 |
|
Dilutive effect of RSUs and common stock options |
|
|
| 461 |
|
|
| 577 |
|
|
| 668 |
|
Weighted average common shares outstanding, diluted |
|
|
| 44,025 |
|
|
| 40,372 |
|
|
| 40,225 |
|
Net income per share, basic |
|
| $ | 0.97 |
|
| $ | 1.74 |
|
| $ | 1.44 |
|
Net income per share, diluted |
|
| $ | 0.96 |
|
| $ | 1.71 |
|
| $ | 1.42 |
|
| Years Ended December 31, | 2016 | 2015 | 2014 | |||||||||
| Numerator (basic and diluted): | ||||||||||||
| Net income allocated to common shareholders for basic calculation | $ | 57,122 | $ | 60,485 | $ | 25,346 | ||||||
| Denominator: | ||||||||||||
| Weighted average common shares outstanding, basic | 39,557 | 39,337 | 39,096 | |||||||||
| Dilutive effect of stock options and restricted stock units | 668 | 531 | 699 | |||||||||
| Weighted average common shares outstanding, diluted | 40,225 | 39,868 | 39,795 | |||||||||
| Net income per share, basic | $ | 1.44 | $ | 1.54 | $ | 0.65 | ||||||
| Net income per share, diluted | $ | 1.42 | $ | 1.52 | $ | 0.64 | ||||||
19. Income Taxes
Following is a summary of Contents
Years Ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Domestic |
| $ | 70,071 |
|
| $ | 104,250 |
|
| $ | 96,326 |
|
Foreign |
|
| (5,916 | ) |
|
| 213 |
|
|
| 36 |
|
Total income before provision for income taxes |
| $ | 64,155 |
|
| $ | 104,463 |
|
| $ | 96,362 |
|
Following is a summary of the provision for income taxes (in thousands):
Years Ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Federal: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
| $ | (11,140 | ) |
| $ | 27,889 |
|
| $ | 15,632 |
|
Deferred |
|
| 18,673 |
|
|
| (4,383 | ) |
|
| 9,898 |
|
Total federal |
|
| 7,533 |
|
|
| 23,506 |
|
|
| 25,530 |
|
State: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
| 1,147 |
|
|
| 5,520 |
|
|
| 4,567 |
|
Deferred |
|
| 1,888 |
|
|
| (338 | ) |
|
| 19 |
|
Total state |
|
| 3,035 |
|
|
| 5,182 |
|
|
| 4,586 |
|
Foreign: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
| 381 |
|
|
| (12 | ) |
|
| 25 |
|
Deferred |
|
| (535 | ) |
|
| (14 | ) |
|
| 21 |
|
Total foreign |
|
| (154 | ) |
|
| (26 | ) |
|
| 46 |
|
Total provision for income taxes |
| $ | 10,414 |
|
| $ | 28,662 |
|
| $ | 30,162 |
|
| Years Ended December 31, | 2016 | 2015 | 2014 | ||||||
| Federal: | |||||||||
| Current | $ | 15,657 | $ | 4,810 | $ | 2,529 | |||
| Deferred | 9,919 | 25,955 | 11,142 | ||||||
| Total federal | 25,576 | 30,765 | 13,671 | ||||||
| State: | |||||||||
| Current | 4,567 | 1,914 | 1,897 | ||||||
| Deferred | 19 | 2,500 | 4,153 | ||||||
| Total state | 4,586 | 4,414 | 6,050 | ||||||
| Total provision for income taxes | $ | 30,162 | $ | 35,179 | $ | 19,721 | |||
F-37
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Following is a reconciliation of our provision for income taxes based on the Federal statutory tax rate to our effective tax rate (dollars in thousands):
Years Ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||||||||||||||
Federal statutory tax |
| $ | 13,472 |
|
|
| 21.0 | % |
| $ | 36,562 |
|
|
| 35.0 | % |
| $ | 33,728 |
|
|
| 35.0 | % |
State taxes, net of federal tax benefit |
|
| 3,305 |
|
|
| 5.2 |
|
|
| 3,814 |
|
|
| 3.7 |
|
|
| 2,990 |
|
|
| 3.1 |
|
Foreign taxes |
|
| (190 | ) |
|
| (0.3 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Percentage depletion deduction |
|
| (951 | ) |
|
| (1.5 | ) |
|
| (1,368 | ) |
|
| (1.3 | ) |
|
| (1,352 | ) |
|
| (1.4 | ) |
Domestic production activities deduction |
|
| — |
|
|
| — |
|
|
| (2,765 | ) |
|
| (2.7 | ) |
|
| (1,624 | ) |
|
| (1.7 | ) |
Non-controlling interests |
|
| (2,368 | ) |
|
| (3.7 | ) |
|
| (2,346 | ) |
|
| (2.3 | ) |
|
| (3,177 | ) |
|
| (3.3 | ) |
Nondeductible expenses |
|
| 4,842 |
|
|
| 7.5 |
|
|
| 1,128 |
|
|
| 1.1 |
|
|
| 1,094 |
|
|
| 1.1 |
|
Changes in uncertain tax positions |
|
| (772 | ) |
|
| (1.2 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Capital loss expiration |
|
| 8,480 |
|
|
| 13.2 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Valuation allowance |
|
| (6,852 | ) |
|
| (10.7 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Tax Cuts and Jobs Act of 2017 |
|
| (7,980 | ) |
|
| (12.4 | ) |
|
| (3,664 | ) |
|
| (3.5 | ) |
|
| — |
|
|
| — |
|
Other |
|
| (572 | ) |
|
| (0.9 | ) |
|
| (2,699 | ) |
|
| (2.6 | ) |
|
| (1,497 | ) |
|
| (1.5 | ) |
Total |
| $ | 10,414 |
|
|
| 16.2 | % |
| $ | 28,662 |
|
|
| 27.4 | % |
| $ | 30,162 |
|
|
| 31.3 | % |
| Years Ended December 31, | 2016 | 2015 | 2014 | ||||||||||||
| Federal statutory tax | $ | 33,728 | 35.0 | % | $ | 35,165 | 34.0 | % | $ | 19,459 | 35.0 | % | |||
| State taxes, net of federal tax benefit | 2,990 | 3.1 | 3,769 | 3.6 | 5,420 | 9.7 | |||||||||
| Percentage depletion deduction | (1,352 | ) | (1.4 | ) | (1,444 | ) | (1.4 | ) | (1,217 | ) | (2.2 | ) | |||
| Domestic production activities deduction | (1,624 | ) | (1.7 | ) | (306 | ) | (0.3 | ) | (2 | ) | — | ||||
| Non-controlling interests | (3,177 | ) | (3.3 | ) | (2,639 | ) | (2.6 | ) | (3,686 | ) | (6.6 | ) | |||
| Nondeductible expenses | 1,094 | 1.1 | 219 | 0.2 | 275 | 0.5 | |||||||||
| Other | (1,497 | ) | (1.5 | ) | 415 | 0.5 | (528 | ) | (0.9 | ) | |||||
| Total | $ | 30,162 | 31.3 | % | $ | 35,179 | 34.0 | % | $ | 19,721 | 35.5 | % | |||
The tax effect of nondeductible expenses for the year ended December 31, 2018 increased to 7.5% from 1.1% when compared to the same period in 2017. This change was primarily due to one-time nondeductible acquisition and integration expenses incurred in 2018.
On December 22, 2017 the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Reform”) was signed into law. As a result of Tax Reform, the U.S. statutory tax rate was lowered from 35% to 21% effective January 1, 2018, a territorial tax system was implemented, and a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries was imposed, among other changes. ASC Topic 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment. ASU 2018-05, Income Taxes (Topic 740) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain tax effects of Tax Reform. The Company recognized the provisional tax impacts of Tax Reform in its consolidated financial statements for the year ended December 31, 2017. The majority of the impacts were related to the revaluation of deferred tax assets and liabilities at December 31, 2017 and the one-time repatriation tax. During the year ended December 31, 2018, within the one-year measurement period ending December 22, 2018, an $8.0 million benefit to the provisional amount was recorded primarily related to the revaluation of deferred tax assets and liabilities including adjustments to two unconsolidated joint ventures based on changes to the tax positions taken by the related consolidating joint venture partners during 2018. The accounting for the income tax effects of Tax Reform is now complete.
F-38
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Following is a summary of the deferred tax assets and liabilities (in thousands):
December 31, |
| 2018 |
|
| 2017 |
| ||
Long-term deferred tax assets: |
|
|
|
|
|
|
|
|
Receivables |
| $ | 2,723 |
|
| $ | 526 |
|
Inventory |
|
| 90 |
|
|
| 1,513 |
|
Insurance |
|
| 11,084 |
|
|
| 7,401 |
|
Deferred compensation |
|
| 10,441 |
|
|
| 8,985 |
|
Other accrued liabilities |
|
| 1,906 |
|
|
| 1,525 |
|
Accrued compensation |
|
| 3,803 |
|
|
| 1,738 |
|
Other |
|
| 3,520 |
|
|
| 1,379 |
|
Net operating loss carryforwards |
|
| 67,944 |
|
|
| 2,614 |
|
Valuation allowance |
|
| (31,823 | ) |
|
| (2,471 | ) |
Total long-term deferred tax assets |
|
| 69,688 |
|
|
| 23,210 |
|
Long-term deferred tax liabilities: |
|
|
|
|
|
|
|
|
Property and equipment |
|
| 49,728 |
|
|
| 16,832 |
|
Contract income recognition |
|
| 21,359 |
|
|
| 7,739 |
|
Total long-term deferred tax liabilities |
|
| 71,087 |
|
|
| 24,571 |
|
Net long-term deferred tax liabilities |
| $ | (1,399 | ) |
| $ | (1,361 | ) |
| December 31, | 2016 | 2015 | ||||
| Long-term deferred tax assets: | ||||||
| Receivables | $ | 573 | $ | 332 | ||
| Inventory | 2,212 | 2,710 | ||||
| Insurance | 12,524 | 10,427 | ||||
| Deferred compensation | 12,740 | 11,139 | ||||
| Other accrued liabilities | 2,294 | 3,405 | ||||
| Accrued compensation | 11,031 | 12,639 | ||||
| Other | 2,481 | 3,410 | ||||
| Net operating loss carryforwards | 2,341 | 648 | ||||
| Valuation allowance | (2,153 | ) | (641 | ) | ||
| Total long-term deferred tax assets | 44,043 | 44,069 | ||||
| Long-term deferred tax liabilities: | ||||||
| Property and equipment | 29,400 | 30,285 | ||||
| Contract income recognition | 20,084 | 9,455 | ||||
| Total long-term deferred tax liabilities | 49,484 | 39,740 | ||||
| Net long-term deferred tax (liabilities) assets | $ | (5,441 | ) | $ | 4,329 | |
The deferred income taxes asset, net of $2.9 million at December 31, 2016,2018 is included in other noncurrent assets in our deferred tax asset forconsolidated balance sheets.
The following is a summary of the net operating loss carryforwards relates toat December 31, 2018 (in thousands):
|
| Expiration |
| Gross Carryforward |
|
| Tax Effected Carryforward |
| ||
Federal net operating loss carryforwards |
| 2032-2036 |
| $ | 170,560 |
|
| $ | 35,818 |
|
State net operating loss carryforwards |
| 2019-2036 |
|
| 281,332 |
|
|
| 15,010 |
|
Foreign tax loss carryforwards |
| 2019-2033 |
|
| 57,771 |
|
|
| 17,116 |
|
Total net operating loss carryforwards at December 31, 2018 |
|
| $ | 67,944 |
| |||||
The federal, state and localforeign net operating loss carryforwards above included unrecognized tax benefits taken in prior years and the net operating loss carryforward deferred tax asset is presented net of these unrecognized tax benefits in accordance with ASC 740. The federal and state net operating loss and capital loss carryforwards acquired during the significantLayne acquisition are subject to Internal Revenue Code Section 382 limitations and may be limited in future periods and a portion may expire unused. As we expect to use the federal net operating loss carryforwards expiring beginning in 2035.prior to expiration we believe that it is more likely than not that these deferred tax assets will be realized and no valuation allowance was deemed necessary. We have provided a valuation allowance on the net operating loss deferred tax asset or the net deferred tax assets for certain state and local jurisdictions because we do not believe it is more likely than not that they will be realized.
The following is a summary of the change in valuation allowance (in thousands):
December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Beginning balance |
| $ | 2,471 |
|
| $ | 2,153 |
|
| $ | 641 |
|
Additions due to acquisitions |
|
| 36,410 |
|
|
| — |
|
|
| — |
|
(Deductions) additions, net |
|
| (7,058 | ) |
|
| 318 |
|
|
| 1,512 |
|
Ending balance |
| $ | 31,823 |
|
| $ | 2,471 |
|
| $ | 2,153 |
|
| December 31, | 2016 | 2015 | 2014 | ||||||
| Beginning balance | $ | 641 | $ | 1,185 | $ | 3,731 | |||
| Additions (deductions), net | 1,512 | (544 | ) | (2,546 | ) | ||||
| Ending balance | $ | 2,153 | $ | 641 | $ | 1,185 | |||
The additionsdeduction to the valuation allowance are relatedis mainly due to the revaluationexpiration of our net deferred tax assets related to variousthe federal and state and local jurisdictions during the year ended December 31, 2016. Deductionscapital loss carryforwards discussed above. Additions to the valuation allowance are insignificant for the year ended December 31, 2016.
F-39
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
We intend to indefinitely reinvest certain earnings of our foreign subsidiaries and affiliates. Tax Reform generally eliminates federal income taxes on dividends from foreign subsidiaries therefore we would only be subject to other taxes, such as withholding and local taxes, upon distribution of these earnings. Of the $42.0 million of accumulated undistributed earnings that we consider indefinitely reinvested as of December 31, 2018, it is not practicable to determine the amount of taxes that would be payable upon remittance of these earnings. Deferred foreign withholding taxes have been provided on undistributed earnings of certain foreign subsidiaries and foreign affiliates where the earnings are not considered to be invested indefinitely.
Uncertain tax positions: We file income tax returns in the U.S. and various state and local jurisdictions. We are currently under examination by various state taxing authorities for various tax years. We do not anticipate that any of these audits will result in a material change in our financial position. We are no longer subject to U.S. federal examinations by tax authorities for years before 2011. With few exceptions, as of December 31, 2016,2018, we are no longer subject to state examinations by taxing authorities for years before 2010.2011.
We file income tax returns in foreign jurisdictions where we operate. The returns are subject to examination which may be ongoing at any point in time and tax liabilities are recorded based on estimates of additional taxes which will be due upon settlement of those examinations. The tax years subject to examination by foreign tax authorities vary by jurisdiction, but generally we are no longer subject to examinations by taxing authorities for years before 2015.
We had approximately $3.3$22.4 million and $1.6$3.2 million of total gross unrecognized tax benefits as of December 31, 20162018 and 2015,2017, respectively. There were approximately $3.2$11.0 million and $1.3$3.1 million of unrecognized tax benefits that would affect the effective tax rate in any future period at December 31, 20162018 and 2015,2017, respectively. We do not anticipate a significant increase or decrease inIt is reasonably possible that our unrecognized tax benefits thatbenefit could decrease by approximately $6.4 million in 2019, of which $2.3 million will impact our effective tax rate in 2017.
The following is a tabular reconciliation of unrecognized tax benefits (in thousands), the balance of which is included in other long-term liabilities and other current liabilities in the consolidated balance sheets:
December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Beginning balance |
| $ | 3,171 |
|
| $ | 3,262 |
|
| $ | 1,578 |
|
Gross increases - acquisitions |
|
| 20,153 |
|
|
| — |
|
|
| — |
|
Gross increases – current period tax positions |
|
| 36 |
|
|
| — |
|
|
| 1,902 |
|
Gross decreases – current period tax positions |
|
| (3 | ) |
|
| (73 | ) |
|
| (125 | ) |
Gross increases – prior period tax positions |
|
| 2 |
|
|
| 1 |
|
|
| 2 |
|
Gross decreases – prior period tax positions |
|
| (195 | ) |
|
| (6 | ) |
|
| (5 | ) |
Settlements with taxing authorities/lapse of statute of limitations |
|
| (781 | ) |
|
| (13 | ) |
|
| (90 | ) |
Ending balance |
| $ | 22,383 |
|
| $ | 3,171 |
|
| $ | 3,262 |
|
| December 31, | 2016 | 2015 | 2014 | ||||||
| Beginning balance | $ | 1,578 | $ | 887 | $ | 2,231 | |||
| Gross increases – current period tax positions | 1,902 | 1,006 | — | ||||||
| Gross decreases – current period tax positions | (125 | ) | (156 | ) | (282 | ) | |||
| Gross increases – prior period tax positions | 2 | — | — | ||||||
| Gross decreases – prior period tax positions | (5 | ) | — | (2 | ) | ||||
| Settlements with taxing authorities/lapse of statute of limitations | (90 | ) | (159 | ) | (1,060 | ) | |||
| Ending balance | $ | 3,262 | $ | 1,578 | $ | 887 | |||
We record interest on uncertain tax positions in interest expense and penalties in other income, net in our consolidated statements of operations. During the years ended
December 31,Approximately $0.18.3 million interest income and $0.90.4 million of interest income, respectively. Approximately $0.2 million and $0.1 million of accrued interest and penalties related to our uncertain tax position liability was included in other long-term liabilities and accrued expenses and other current liabilities in our consolidated balance sheets at December 31, 20162018 and 20172015, respectively.
F-40
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Leases: Minimum rental commitments and minimum royalty requirements under all noncancellable operating leases, primarily quarry property, in effect at December 31, 20162018 were (in thousands):
Years Ending December 31, |
|
|
|
|
2019 |
| $ | 20,152 |
|
2020 |
|
| 17,798 |
|
2021 |
|
| 15,897 |
|
2022 |
|
| 13,255 |
|
2023 |
|
| 7,707 |
|
Later years (through 2046) |
|
| 8,709 |
|
Total |
| $ | 83,518 |
|
| Years Ending December 31, | |||
| 2017 | $ | 10,451 | |
| 2018 | 8,896 | ||
| 2019 | 6,149 | ||
| 2020 | 5,316 | ||
| 2021 | 4,255 | ||
| Later years (through 2046) | 13,226 | ||
| Total | $ | 48,293 | |
Operating lease and equipment rental and royalty expense primarily included in cost of revenue in our consolidated statements of operations was
Performance Guarantees
We participate in various joint ventures and line item joint ventures under which each partner is responsible for performing certain discrete items of the total scope of contracted work. See NoteNotes 1, Note 610 and Note 1014 for further details.
Surety Bonds
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
December 31,21. 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 of which cannot be predicted with certainty.
Some of the matters in which we or our joint ventures and affiliates are involved may involve compensatory, punitive, or other claims or sanctions that, if granted, could require us to pay damages or make other expenditures in amounts that are not probable to be incurred or cannot currently be reasonably estimated. In addition, in some circumstances our government contracts could be terminated, we could be suspended, debarred or incur other administrative penalties or sanctions, or payment of our costs could be disallowed. While any of our pending legal proceedings may be subject to early resolution as a result of our ongoing efforts to 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 December 31, 20162018 and 20152017 related to these matters were approximately $4.3 million and $5.2 million, respectively, and were primarily included in accounts payable and accrued expenses and other current liabilities in our consolidated balance sheets.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, was immaterial as of December 31, 2016. Our estimatesincluding those related to such mattersliquidated damages, could change in future periods.
F-41
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As discussed in Note 1, during 2018, we revised our reportable segments, which are the same as our operating segments, as a result of a change in how our chief operating decision maker (our Chief Executive Officer) regularly reviews financial information to allocate resources and assess performance. This change is consistent with our strategic, end-market diversification strategy. Our new reportable segments which correspond to this end-market focus are: Transportation, Water, Specialty and Materials. The Transportation, Water and Specialty end-market segments replace the Construction and Large Project Construction reportable segments with the composition of our Materials segment remaining unchanged except for the addition of proprietary sanitary and Construction Materials.
In addition to business segments, we review our business by operating groups. Our operating groups are defined as follows: (i) California; (ii) Northwest, which primarily includes offices in Alaska, Arizona, Nevada, Utah and Washington; (iii) Heavy Civil, which primarily includes offices in California, Florida, New York and Texas; and (iv) Kenny,Federal which primarily includes an officeoffices in Illinois. EachCalifornia, Colorado, Texas and Guam; (v) Midwest (formerly Kenny less the underground business), which primarily includes offices in Illinois and (vi) Water and Mineral Services (which includes LiquiForce, Layne and the underground business of thesethe former Kenny operating groups may include financial results from our Constructiongroup), which primarily includes offices across the Unites States, Canada and Large Project Construction segments.Latin America. Our California, Northwest and NorthwestWater and Mineral Services operating groups include financial results from our Construction Materials segment.
The Construction segment performs various construction projects with a large portion of the work focused on new construction and improvement of streets, roads, highways, bridges, site work, underground, power-related facilities, utilities and other infrastructure projects. These projects are typically bid-build projects completed within two years with a contract value of less than $75 million.
The Water segment focuses on water-related construction and water management solutions for municipal agencies, commercial water suppliers, industrial facilities and energy companies. It also provides trenchless cured-in-place pipe rehabilitation.
The Specialty segment focuses on construction of various complex projects including infrastructure projects which typically have a longer duration than our Construction segment work. These projects include major highways, mass transit facilities, bridges, tunnels, waterway locks/ site development, mining, public safety, tunnel and dams, pipelines, canals, power-related facilities, utilities and airport infrastructure. This segment primarily includes bid-build, design-build, construction management/general contractor contracts, together with various contract methods relating to public-private partnerships, generally with contract values in excess of $75 million.
The Construction Materials segment minesfocuses on production of aggregates, asphalt and processes aggregatesconstruction related materials as well as proprietary sanitary and operates plants that produce construction materialsstorm water rehabilitation products including cured-in-place pipe felt and fiberglass-based lining tubes both for internal use and for sale to third parties. In addition, the Construction Materials segment includes real estate investment activity that was not material for any of the periods presented.
The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (see Note 1). We evaluate segment performance based on gross profit or loss, and do not include selling, general and administrative expenses or non-operating income or expense. Segment assets include property and equipment, intangibles, goodwill, inventory and equity in construction joint ventures.
F-42
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Summarized segment information is as follows (in thousands):
Years Ended December 31, |
| Transportation |
|
| Water |
|
| Specialty |
|
| Materials |
|
| Total |
| |||||
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from reportable segments |
| $ | 1,976,743 |
|
| $ | 338,250 |
|
| $ | 626,619 |
|
| $ | 522,987 |
|
| $ | 3,464,599 |
|
Elimination of intersegment revenue |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (146,185 | ) |
|
| (146,185 | ) |
Revenue from external customers |
|
| 1,976,743 |
|
|
| 338,250 |
|
|
| 626,619 |
|
|
| 376,802 |
|
|
| 3,318,414 |
|
Gross profit |
|
| 190,045 |
|
|
| 59,574 |
|
|
| 90,888 |
|
|
| 48,685 |
|
|
| 389,192 |
|
Depreciation, depletion and amortization |
|
| 26,715 |
|
|
| 25,779 |
|
|
| 24,017 |
|
|
| 24,015 |
|
|
| 100,526 |
|
Segment assets |
|
| 399,674 |
|
|
| 317,633 |
|
|
| 142,699 |
|
|
| 353,208 |
|
|
| 1,213,214 |
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from reportable segments |
| $ | 1,947,420 |
|
| $ | 133,699 |
|
| $ | 615,818 |
|
| $ | 467,140 |
|
| $ | 3,164,077 |
|
Elimination of intersegment revenue |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (174,364 | ) |
|
| (174,364 | ) |
Revenue from external customers |
|
| 1,947,420 |
|
|
| 133,699 |
|
|
| 615,818 |
|
|
| 292,776 |
|
|
| 2,989,713 |
|
Gross profit |
|
| 170,135 |
|
|
| 12,270 |
|
|
| 87,446 |
|
|
| 45,082 |
|
|
| 314,933 |
|
Depreciation, depletion and amortization |
|
| 22,228 |
|
|
| 2,314 |
|
|
| 9,062 |
|
|
| 22,393 |
|
|
| 55,997 |
|
Segment assets |
|
| 372,050 |
|
|
| 7,241 |
|
|
| 96,845 |
|
|
| 282,709 |
|
|
| 758,845 |
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from reportable segments |
| $ | 1,626,786 |
|
| $ | 161,282 |
|
| $ | 465,323 |
|
| $ | 425,029 |
|
| $ | 2,678,420 |
|
Elimination of intersegment revenue |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (163,803 | ) |
|
| (163,803 | ) |
Revenue from external customers |
|
| 1,626,786 |
|
|
| 161,282 |
|
|
| 465,323 |
|
|
| 261,226 |
|
|
| 2,514,617 |
|
Gross profit |
|
| 161,829 |
|
|
| 19,885 |
|
|
| 82,458 |
|
|
| 37,198 |
|
|
| 301,370 |
|
Depreciation, depletion and amortization |
|
| 22,601 |
|
|
| 2,140 |
|
|
| 4,871 |
|
|
| 23,437 |
|
|
| 53,049 |
|
Segment assets |
|
| 375,951 |
|
|
| 9,446 |
|
|
| 80,901 |
|
|
| 282,472 |
|
|
| 748,770 |
|
| Years Ended December 31, | Construction | Large Project Construction | Construction Materials | Total | ||||||||||||
| 2016 | ||||||||||||||||
| Total revenue from reportable segments | $ | 1,365,198 | $ | 888,193 | $ | 425,029 | $ | 2,678,420 | ||||||||
| Elimination of intersegment revenue | — | — | (163,803 | ) | (163,803 | ) | ||||||||||
| Revenue from external customers | 1,365,198 | 888,193 | 261,226 | 2,514,617 | ||||||||||||
| Gross profit | 209,215 | 64,137 | 28,018 | 301,370 | ||||||||||||
| Depreciation, depletion and amortization | 22,816 | 6,796 | 23,437 | 53,049 | ||||||||||||
| Segment assets | 151,475 | 314,823 | 282,472 | 748,770 | ||||||||||||
| 2015 | ||||||||||||||||
| Total revenue from reportable segments | $ | 1,262,675 | $ | 812,720 | $ | 432,284 | $ | 2,507,679 | ||||||||
| Elimination of intersegment revenue | — | — | (136,650 | ) | (136,650 | ) | ||||||||||
| Revenue from external customers | 1,262,675 | 812,720 | 295,634 | 2,371,029 | ||||||||||||
| Gross profit | 187,506 | 79,467 | 32,863 | 299,836 | ||||||||||||
| Depreciation, depletion and amortization | 20,117 | 10,343 | 22,389 | 52,849 | ||||||||||||
| Segment assets | 139,399 | 274,975 | 288,900 | 703,274 | ||||||||||||
| 2014 | ||||||||||||||||
| Total revenue from reportable segments | $ | 1,186,445 | $ | 825,044 | $ | 385,392 | $ | 2,396,881 | ||||||||
| Elimination of intersegment revenue | — | — | (121,611 | ) | (121,611 | ) | ||||||||||
| Revenue from external customers | 1,186,445 | 825,044 | 263,781 | 2,275,270 | ||||||||||||
| Gross profit | 113,953 | 107,097 | 18,691 | 239,741 | ||||||||||||
| Depreciation, depletion and amortization | 19,141 | 16,197 | 21,976 | 57,314 | ||||||||||||
| Segment assets | 149,018 | 248,464 | 307,229 | 704,711 | ||||||||||||
As of December 31, 2018, segment assets include $15.1 million of property and equipment located in foreign countries (primarily Latin America). As of December 31, 2017 and 2016, all segment assets were located in the United States. During the year ended December 31, 2018, revenue derived from foreign countries (primarily Latin America) was $27.0 million. During the year ended December 31, 2017, revenue derived from foreign countries was immaterial.
A reconciliation of segment gross profit to consolidated income before provision for income taxes is as follows (in thousands):
Years Ended December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Total gross profit from reportable segments |
| $ | 389,192 |
|
| $ | 314,933 |
|
| $ | 301,370 |
|
Selling, general and administrative expenses |
|
| 272,776 |
|
|
| 220,400 |
|
|
| 217,374 |
|
Acquisition and integration expenses |
|
| 60,045 |
|
|
| — |
|
|
| — |
|
Gain on sales of property and equipment |
|
| (7,672 | ) |
|
| (4,182 | ) |
|
| (8,358 | ) |
Total other income |
|
| (112 | ) |
|
| (5,748 | ) |
|
| (4,008 | ) |
Income before provision for income taxes |
| $ | 64,155 |
|
| $ | 104,463 |
|
| $ | 96,362 |
|
| Years Ended December 31, | 2016 | 2015 | 2014 | |||||||||
| Total gross profit from reportable segments | $ | 301,370 | $ | 299,836 | $ | 239,741 | ||||||
| Selling, general and administrative expenses | 219,299 | 203,817 | 193,256 | |||||||||
| Restructuring and impairment gains | (1,925 | ) | (6,003 | ) | (2,643 | ) | ||||||
| Gain on sales of property and equipment | (8,358 | ) | (8,286 | ) | (15,972 | ) | ||||||
| Total other (income) expense | (4,008 | ) | 6,881 | 9,503 | ||||||||
| Income before provision for income taxes | $ | 96,362 | $ | 103,427 | $ | 55,597 | ||||||
F-43
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
A reconciliation of segment assets to consolidated total assets is as follows (in thousands):
December 31, |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Total assets for reportable segments |
| $ | 1,213,214 |
|
| $ | 758,845 |
|
| $ | 748,770 |
|
Assets not allocated to segments: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
| 272,804 |
|
|
| 233,711 |
|
|
| 189,326 |
|
Short-term and long-term marketable securities |
|
| 66,100 |
|
|
| 132,790 |
|
|
| 127,779 |
|
Receivables, net |
|
| 473,246 |
|
|
| 479,791 |
|
|
| 419,345 |
|
Other current assets, excluding segment assets |
|
| 268,485 |
|
|
| 140,478 |
|
|
| 113,010 |
|
Property and equipment, net, excluding segment assets |
|
| 32,903 |
|
|
| 29,242 |
|
|
| 32,397 |
|
Investments in affiliates |
|
| 84,354 |
|
|
| 38,469 |
|
|
| 35,668 |
|
Other noncurrent assets, excluding segment assets |
|
| 65,495 |
|
|
| 58,652 |
|
|
| 67,158 |
|
Consolidated total assets |
| $ | 2,476,601 |
|
| $ | 1,871,978 |
|
| $ | 1,733,453 |
|
| December 31, | 2016 | 2015 | 2014 | |||||||||
| Total assets for reportable segments | $ | 748,770 | $ | 703,274 | $ | 704,711 | ||||||
| Assets not allocated to segments: | ||||||||||||
| Cash and cash equivalents | 189,326 | 252,836 | 255,961 | |||||||||
| Short-term and long-term marketable securities | 127,779 | 105,695 | 102,067 | |||||||||
| Receivables, net | 419,345 | 340,822 | 310,934 | |||||||||
| Deferred income taxes, net | — | 4,329 | 32,785 | |||||||||
| Other current assets, excluding segment assets | 113,010 | 85,556 | 60,615 | |||||||||
| Property and equipment, net, excluding segment assets | 32,397 | 36,721 | 45,188 | |||||||||
| Investments in affiliates | 35,668 | 33,182 | 32,361 | |||||||||
| Other noncurrent assets, excluding segment assets | 67,158 | 64,463 | 55,426 | |||||||||
| Consolidated total assets | $ | 1,733,453 | $ | 1,626,878 | $ | 1,600,048 | ||||||
The following table sets forth selected unaudited quarterly financial information for the years ended
December 31,QUARTERLY FINANCIAL DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited - dollars in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 Quarters Ended |
| December 31, |
|
| September 30, |
|
| June 30, |
|
| March 31, |
| ||||
Revenue |
| $ | 892,325 |
|
| $ | 1,055,591 |
|
| $ | 807,119 |
|
| $ | 563,379 |
|
Gross profit |
|
| 108,049 |
|
|
| 144,491 |
|
|
| 80,369 |
|
|
| 56,283 |
|
As a percent of revenue |
|
| 12.1 | % |
|
| 13.7 | % |
|
| 10.0 | % |
|
| 10.0 | % |
Net income (loss) |
| $ | 10,387 |
|
| $ | 59,097 |
|
| $ | (6,081 | ) |
| $ | (9,662 | ) |
As a percent of revenue |
|
| 1.2 | % |
|
| 5.6 | % |
|
| (0.8 | )% |
|
| (1.7 | )% |
Net income (loss) attributable to Granite |
| $ | 6,546 |
|
| $ | 55,672 |
|
| $ | (8,385 | ) |
| $ | (11,423 | ) |
As a percent of revenue |
|
| 0.7 | % |
|
| 5.3 | % |
|
| (1.0 | )% |
|
| (2.0 | )% |
Net income (loss) per share attributable to common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.14 |
|
| $ | 1.20 |
|
| $ | (0.20 | ) |
| $ | (0.29 | ) |
Diluted |
| $ | 0.14 |
|
| $ | 1.17 |
|
| $ | (0.20 | ) |
| $ | (0.29 | ) |
2017 Quarters Ended |
| December 31, |
|
| September 30, |
|
| June 30, |
|
| March 31, |
| ||||
Revenue |
| $ | 801,274 |
|
| $ | 957,126 |
|
| $ | 762,913 |
|
| $ | 468,400 |
|
Gross profit |
|
| 100,707 |
|
|
| 114,530 |
|
|
| 74,570 |
|
|
| 25,126 |
|
As a percent of revenue |
|
| 12.6 | % |
|
| 12.0 | % |
|
| 9.8 | % |
|
| 5.4 | % |
Net income (loss) |
| $ | 35,325 |
|
| $ | 48,055 |
|
| $ | 16,272 |
|
| $ | (23,851 | ) |
As a percent of revenue |
|
| 4.4 | % |
|
| 5.0 | % |
|
| 2.1 | % |
|
| (5.1 | )% |
Net income (loss) attributable to Granite |
| $ | 32,773 |
|
| $ | 45,982 |
|
| $ | 14,133 |
|
| $ | (23,790 | ) |
As a percent of revenue |
|
| 4.1 | % |
|
| 4.8 | % |
|
| 1.9 | % |
|
| (5.1 | )% |
Net income (loss) per share attributable to common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.82 |
|
| $ | 1.15 |
|
| $ | 0.35 |
|
| $ | (0.60 | ) |
Diluted |
| $ | 0.81 |
|
| $ | 1.14 |
|
| $ | 0.35 |
|
| $ | (0.60 | ) |
| QUARTERLY FINANCIAL DATA | ||||||||||||
| (unaudited - dollars in thousands, except per share data) | ||||||||||||
| 2016 Quarters Ended | December 31, | September 30, | June 30, | March 31, | ||||||||
| Revenue | $ | 666,681 | $ | 803,905 | $ | 604,579 | $ | 439,452 | ||||
| Gross profit | 81,250 | 107,674 | 73,201 | 39,245 | ||||||||
| As a percent of revenue | 12.2 | % | 13.4 | % | 12.1 | % | 8.9 | % | ||||
Net income (loss)2 | $ | 19,264 | $ | 38,172 | $ | 18,526 | $ | (9,762 | ) | |||
| As a percent of revenue | 2.9 | % | 4.7 | % | 3.1 | % | (2.2 | )% | ||||
Net income (loss) attributable to Granite3 | $ | 16,173 | $ | 37,190 | $ | 14,199 | $ | (10,440 | ) | |||
| As a percent of revenue | 2.4 | % | 4.6 | % | 2.3 | % | (2.4 | )% | ||||
Net income (loss) per share attributable to common shareholders: | ||||||||||||
| Basic | $ | 0.41 | $ | 0.94 | $ | 0.36 | $ | (0.27 | ) | |||
| Diluted | $ | 0.40 | $ | 0.92 | $ | 0.35 | $ | (0.27 | ) | |||
| 2015 Quarters Ended | December 31, | September 30, | June 30, | March 31, | ||||||||
| Revenue | $ | 630,162 | $ | 751,376 | $ | 569,242 | $ | 420,249 | ||||
Gross profit1 | 100,624 | 96,083 | 64,200 | 38,929 | ||||||||
| As a percent of revenue | 16.0 | % | 12.8 | % | 11.3 | % | 9.3 | % | ||||
Net income (loss)2 | $ | 35,139 | $ | 32,180 | $ | 9,539 | $ | (8,610 | ) | |||
| As a percent of revenue | 5.6 | % | 4.3 | % | 1.7 | % | (2.0 | )% | ||||
| Net income (loss) attributable to Granite | $ | 28,673 | $ | 30,759 | $ | 9,613 | $ | (8,560 | ) | |||
| As a percent of revenue | 4.6 | % | 4.1 | % | 1.7 | % | (2.0 | )% | ||||
Net income (loss) per share attributable to common shareholders: | ||||||||||||
| Basic | $ | 0.73 | $ | 0.78 | $ | 0.24 | $ | (0.22 | ) | |||
| Diluted | $ | 0.72 | $ | 0.77 | $ | 0.24 | $ | (0.22 | ) | |||
F-44