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EX-31.1 - EXHIBIT 31.1 - GRANITE CONSTRUCTION INCex311-gvax6302014q2.htm
EX-31.2 - EXHIBIT 31.2 - GRANITE CONSTRUCTION INCex312-gvax6302014q2.htm
EX-32 - EXHIBIT 32 - GRANITE CONSTRUCTION INCex32-gvax6302014q2.htm
EX-95 - EXHIBIT 95 - GRANITE CONSTRUCTION INCex95-gvax6302014q12.htm
10-Q - FORM 10-Q 6/30/14 PDF COPY - GRANITE CONSTRUCTION INCgva06302014.pdf
EXCEL - IDEA: XBRL DOCUMENT - GRANITE CONSTRUCTION INCFinancial_Report.xls

 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2014
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to ___________
 
 
 
Commission File Number: 1-12911
 
GRANITE CONSTRUCTION INCORPORATED
State of Incorporation:
I.R.S. Employer Identification Number:
Delaware
77-0239383
 
Address of principal executive offices:
585 W. Beach Street
Watsonville, California 95076
(831) 724-1011
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. xYes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). xYes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 24, 2014.
Class
 
Outstanding
Common Stock, $0.01 par value
 
39,150,090



 




Index

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EXHIBIT 101.INS 
EXHIBIT 101.SCH 
EXHIBIT 101.CAL 
EXHIBIT 101.DEF
EXHIBIT 101.LAB 
EXHIBIT 101.PRE 

 
 

2
 
 
 
 




PART I. FINANCIAL INFORMATION

Item 1.
FINANCIAL STATEMENTS

GRANITE CONSTRUCTION INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - in thousands, except share and per share data)
 
 
June 30,
2014
 
December 31,
2013
 
June 30, 2013
As Revised
ASSETS
 
 
 
 
 
 
Current assets
 
 
 
 
 
 

Cash and cash equivalents ($29,109, $38,800 and $63,806 related to consolidated construction joint ventures (“CCJVs”))
 
$
146,458

 
$
229,121

 
$
247,833

Short-term marketable securities
 
27,898

 
49,968

 
21,271

Receivables, net ($45,825, $38,372, and $59,807 related to CCJVs)
 
363,614

 
313,598

 
336,418

Costs and estimated earnings in excess of billings
 
76,228

 
33,306

 
62,426

Inventories
 
79,501

 
62,474

 
68,905

Real estate held for development and sale
 
11,761

 
12,478

 
50,696

Deferred income taxes
 
55,874

 
55,874

 
36,687

Equity in construction joint ventures
 
185,859

 
162,673

 
148,727

Other current assets
 
30,727

 
30,711

 
36,203

Total current assets
 
977,920

 
950,203

 
1,009,166

Property and equipment, net ($16,957, $22,216, and $34,891 related to CCJVs)
 
426,700

 
436,859

 
470,893

Long-term marketable securities
 
84,234

 
67,234

 
55,225

Investments in affiliates
 
33,936

 
32,480

 
31,421

Goodwill
 
53,799

 
53,799

 
53,598

Other noncurrent assets
 
76,797

 
76,580

 
80,365

Total assets
 
$
1,653,386

 
$
1,617,155

 
$
1,700,668

 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 

 
 

 
 

Current liabilities
 
 

 
 

 
 

Current maturities of long-term debt
 
$
21

 
$
21

 
$
20

Current maturities of non-recourse debt
 
1,226

 
1,226

 
2,147

Accounts payable ($26,246, $16,937, and $18,297 related to CCJVs)
 
210,777

 
160,706

 
188,124

Billings in excess of costs and estimated earnings ($27,876, $60,185, $72,094 related to CCJVs)
 
125,957

 
138,375

 
144,462

Accrued expenses and other current liabilities ($3,805, $11,299, and $9,153 related to CCJVs)
 
187,348

 
197,242

 
200,758

Total current liabilities
 
525,329

 
497,570

 
535,511

Long-term debt
 
270,127

 
270,127

 
270,148

Long-term non-recourse debt
 
6,129

 
6,741

 
7,354

Other long-term liabilities
 
48,455

 
48,580

 
46,817

Deferred income taxes
 
9,803

 
7,793

 
8,055

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 39,131,647 shares as of June 30, 2014, 38,917,728 shares as of December 31, 2013 and 38,852,463 shares as of June 30, 2013
 
391

 
389

 
389

Additional paid-in capital
 
130,181

 
126,449

 
121,368

Retained earnings
 
637,905

 
655,102

 
681,311

Total Granite Construction Incorporated shareholders’ equity
 
768,477

 
781,940

 
803,068

Non-controlling interests
 
25,066

 
4,404

 
29,715

Total equity
 
793,543

 
786,344

 
832,783

Total liabilities and equity
 
$
1,653,386

 
$
1,617,155

 
$
1,700,668

The accompanying notes are an integral part of these condensed consolidated financial statements.

3
 
 
 
 




GRANITE CONSTRUCTION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - in thousands, except per share data)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013 As Revised
 
2014
 
2013 As Revised
Revenue
 
 
 
 
 
 
 
 
Construction
 
$
269,220

 
$
308,602

 
$
426,261

 
$
485,720

Large Project Construction
 
244,328

 
181,557

 
431,663

 
353,271

Construction Materials
 
72,322

 
60,185

 
107,771

 
89,936

Real Estate
 

 
4

 
22

 
125

Total revenue
 
585,870

 
550,348

 
965,717

 
929,052

Cost of revenue
 
 
 
 

 
 
 
 

Construction
 
244,393

 
284,532

 
392,289

 
448,451

Large Project Construction
 
193,536

 
159,986

 
365,080

 
308,979

Construction Materials
 
65,524

 
56,231

 
104,526

 
91,957

Real Estate
 
2

 
3

 

 
13

Total cost of revenue
 
503,455

 
500,752

 
861,895

 
849,400

Gross profit
 
82,415

 
49,596

 
103,822

 
79,652

Selling, general and administrative expenses
 
51,098

 
46,789

 
100,346

 
103,950

Gain on sales of property and equipment
 
2,993

 
3,306

 
3,886

 
4,394

Operating income (loss)
 
34,310

 
6,113

 
7,362

 
(19,904
)
Other income (expense)
 
 
 
 

 
 
 
 

Interest income
 
413

 
380

 
893

 
508

Interest expense
 
(4,339
)
 
(3,700
)
 
(7,937
)
 
(7,345
)
Equity in income of affiliates
 
410

 
698

 
1,202

 
275

Other income (expense), net
 
1,697

 
(495
)
 
1,645

 
608

Total other expense
 
(1,819
)
 
(3,117
)
 
(4,197
)
 
(5,954
)
Income (loss) before provision for (benefit from) income taxes
 
32,491

 
2,996

 
3,165

 
(25,858
)
Provision for (benefit from) income taxes
 
10,284

 
1,214

 
2,220

 
(7,813
)
Net income (loss)
 
22,207

 
1,782

 
945

 
(18,045
)
Amount attributable to non-controlling interests
 
(8,566
)
 
(363
)
 
(7,858
)
 
(2,518
)
Net income (loss) attributable to Granite Construction Incorporated
 
$
13,641

 
$
1,419

 
$
(6,913
)
 
$
(20,563
)
 
 
 
 
 
 
 
 
 
Net income (loss) per share attributable to common shareholders (see Note 12)
 
 
 
 
 
 

Basic
 
$
0.35

 
$
0.04

 
$
(0.18
)
 
$
(0.53
)
Diluted
 
$
0.34

 
$
0.04

 
$
(0.18
)
 
$
(0.53
)
Weighted average shares of common stock
 
 
 
 

 
 
 
 

Basic
 
39,115

 
38,829

 
39,033

 
38,720

Diluted
 
39,807

 
39,769

 
39,033

 
38,720

Dividends per common share
 
$
0.13

 
$
0.13

 
$
0.26

 
$
0.26

 The accompanying notes are an integral part of these condensed consolidated financial statements.

4
 
 
 
 




GRANITE CONSTRUCTION INCORPORATED
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited - in thousands)
 
Six Months Ended June 30,
 
2014
 
2013 As Revised
 
Operating activities
 
 
 
 
 
Net income (loss)
 
$
945

 
$
(18,045
)
 
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
 

 
Gain on restructuring, net
 

 
(497
)
 
Depreciation, depletion and amortization
 
31,878

 
34,362

 
Gain on sales of property and equipment
 
(3,886
)
 
(4,394
)
 
Change in deferred income taxes
 
1,613

 

 
Stock-based compensation
 
6,585

 
8,101

 
Equity in net income from unconsolidated joint ventures
 
(25,724
)
 
(31,201
)
 
Changes in assets and liabilities:
 
 
 
 

 
Receivables
 
(44,160
)
 
(9,176
)
 
Costs and estimated earnings in excess of billings, net
 
(56,150
)
 
(35,243
)
 
Inventories
 
(17,027
)
 
(9,120
)
 
Contributions to unconsolidated construction joint ventures
 
(13,797
)
 
(16,209
)
 
Distributions from unconsolidated construction joint ventures
 
16,528

 
42,486

 
Other assets, net
 
(1,579
)
 
(6,519
)
 
Accounts payable
 
42,235

 
(11,724
)
 
Accrued expenses and other current liabilities, net
 
(9,849
)
 
5,531

 
Net cash used in operating activities
 
(72,388
)
 
(51,648
)
 
Investing activities
 
 

 
 

 
Purchases of marketable securities
 
(34,991
)
 
(14,975
)
 
Maturities of marketable securities
 
25,000

 
43,000

 
Proceeds from sale of marketable securities
 
15,000

 
5,000

 
Purchases of property and equipment
 
(20,091
)
 
(19,422
)
 
Proceeds from sales of property and equipment
 
5,838

 
8,481

 
Payment of Kenny post-closing adjustments
 

 
(4,621
)
 
Other investing activities, net
 
47

 
163

 
Net cash (used in) provided by investing activities
 
(9,197
)
 
17,626

 
Financing activities
 
 

 
 

 
Long-term debt principal repayments
 
(613
)
 
(10,594
)
 
Cash dividends paid
 
(10,142
)
 
(10,078
)
 
Purchases of common stock
 
(4,369
)
 
(5,022
)
 
Contributions from non-controlling partners
 
13,442

 
6,001

 
Distributions to non-controlling partners
 
(686
)
 
(21,142
)
 
Other financing activities
 
1,290

 
700

 
Net cash used in financing activities
 
(1,078
)
 
(40,135
)
 
Decrease in cash and cash equivalents
 
(82,663
)
 
(74,157
)
 
Cash and cash equivalents at beginning of period
 
229,121

 
321,990

 
Cash and cash equivalents at end of period
 
$
146,458

 
$
247,833

 
Supplementary Information
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
Interest
 
$
7,337

 
$
7,339

 
Income taxes
 
2,144

 
2,006

 
Other non-cash activities:
 
 
 
 
 
Performance guarantees
 
$
(617
)
 
$
21,813

 
Non-cash investing and financing activities:
 
 

 
 

 
Restricted stock units issued, net of forfeitures
 
$
6,969

 
$
14,862

 
Accrued cash dividends
 
5,087

 
5,051

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

5
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1.
Basis of Presentation
 
The condensed consolidated financial statements included herein have been prepared by Granite Construction Incorporated (“we,” “us,” “our,” “Company” or “Granite”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted, although we believe the disclosures which are made are adequate to make the information presented not misleading. Further, the condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to state fairly our financial position at June 30, 2014 and 2013 and the results of our operations and cash flows for the periods presented. The December 31, 2013 condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP.
We prepared the accompanying condensed consolidated financial statements on the same basis as our annual consolidated financial statements. Our operations are typically affected more by weather conditions during the first and fourth quarters of our fiscal year which may alter our construction schedules and can create variability in our revenues and profitability. Therefore, the results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year.
Certain revisions and reclassifications have been made to historical financial data in our condensed consolidated financial statements as follows:

We have revised our condensed consolidated balance sheet as of June 30, 2013 and our condensed consolidated statements of operations and cash flows for the three and six months ended June 30, 2013 to correct errors identified during the preparation of our 2013 Annual Report on Form 10-K. The errors primarily related to equipment-related costs of $1.7 million. The Company assessed the materiality of the errors individually and in the aggregate on the prior interim periods’ financial statements in accordance with the SEC’s Staff Accounting Bulletin No. 99 and, based on an analysis of quantitative and qualitative factors, determined that the errors were not material to the Company’s condensed consolidated financial statements for the second quarter of 2013; therefore, these previously issued condensed consolidated financial statements can continue to be relied upon and an amendment of the previously filed Quarterly Report on Form 10-Q is not required. However, for comparability, the Company has revised its condensed consolidated balance sheet as of June 30, 2013 and its condensed consolidated statements of operations and cash flows for the three and six months ended June 30, 2013 as presented herein to correct these errors.
Historically, cash flows used in or provided by unconsolidated construction joint ventures were presented as one line item within operating cash flows. To improve transparency in the related balances sheet accounts, we have now presented separately the significant activity. In addition, we reclassified $21.8 million related to performance guarantees for the six months ended June 30, 2013 out of equity in construction joint ventures and accrued expenses and other current liabilities, net to the non-cash supplemental table of the condensed consolidated statement of cash flows. These changes did not impact total cash used in or provided by operating, investing or financing activities.


6
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following tables set forth the impact of the accounting errors and reclassification adjustments on the previously reported condensed consolidated balance sheet as of June 30, 2013 and the condensed statements of operations and cash flows for the three and six months ended June 30, 2013 (in thousands):
Condensed Consolidated Balance Sheet
 
June 30, 2013
 
 
As Reported
 
Revisions
 
Revised
Total current assets
 
$
1,009,530

 
$
(364
)
 
$
1,009,166

Noncurrent assets
 
691,874

 
(372
)
 
$
691,502

Total assets
 
$
1,701,404

 
$
(736
)
 
$
1,700,668

 
 
 

 
 

 
 
Total current liabilities
 
$
534,856

 
$
655

 
$
535,511

Noncurrent liabilities
 
332,374

 

 
332,374

Total Granite Construction Incorporated shareholders’ equity
 
804,367

 
(1,299
)
 
803,068

Non-controlling interests
 
29,807

 
(92
)
 
29,715

Total liabilities and equity
 
$
1,701,404

 
$
(736
)
 
$
1,700,668

Condensed Consolidated Statements of Operations
 
 
Three Months Ended June 30, 2013
 
 
As Reported
 
Revisions
 
Revised
Total revenue
 
$
550,162

 
$
186

 
$
550,348

Total cost of revenue
 
498,965

 
1,787

 
500,752

Gross profit (loss)
 
51,197

 
(1,601
)
 
49,596

Selling, general and administrative expenses
 
46,454

 
335

 
46,789

Operating income (loss)
 
8,049

 
(1,936
)
 
6,113

Income (loss) before provision for income taxes
 
4,932

 
(1,936
)
 
2,996

Provision for (benefit from) income taxes
 
1,766

 
(552
)
 
1,214

Net Income (loss)
 
3,166

 
(1,384
)
 
1,782

Amount attributable to non-controlling interests
 
(448
)
 
85

 
(363
)
Net income (loss) attributable to Granite Construction Incorporated
 
$
2,718

 
$
(1,299
)
 
$
1,419

 
 
 
 
 
 
 
Net income (loss) per share attributable to common shareholders (see Note 12)
 
 
 
 
Basic
 
$
0.07

 
$
(0.03
)
 
$
0.04

Diluted
 
$
0.07

 
$
(0.03
)
 
$
0.04


7
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Six Months Ended June 30, 2013
 
 
As Reported
 
Revisions
 
Revised
Total revenue
 
$
928,866

 
$
186

 
$
929,052

Total cost of revenue
 
847,613

 
1,787

 
849,400

Gross profit (loss)
 
81,253

 
(1,601
)
 
79,652

Selling, general and administrative expenses
 
103,615

 
335

 
103,950

Operating loss
 
(17,968
)
 
(1,936
)
 
(19,904
)
Loss before benefit from income taxes
 
(23,922
)
 
(1,936
)
 
(25,858
)
Benefit from income taxes
 
(7,261
)
 
(552
)
 
(7,813
)
Net loss
 
(16,661
)
 
(1,384
)
 
(18,045
)
Amount attributable to non-controlling interests
 
(2,603
)
 
85

 
(2,518
)
Net loss attributable to Granite Construction Incorporated
 
$
(19,264
)
 
$
(1,299
)
 
$
(20,563
)
 
 
 
 
 
 
 
Net loss per share attributable to common shareholders (see Note 12)
 
 
 
 
Basic
 
$
(0.50
)
 
$
(0.03
)
 
$
(0.53
)
Diluted
 
$
(0.50
)
 
$
(0.03
)
 
$
(0.53
)
Condensed Consolidated Statement of Cash Flows
 
 
Six months ended June 30, 2013
 
 
As Reported
 
Revisions
 
Reclassifications
 
Revised
Net Loss
 
$
(16,661
)
 
$
(1,384
)
 
$

 
$
(18,045
)
Depreciation, depletion and amortization
 
33,988

 
374

 

 
34,362

Equity in net income from unconsolidated joint ventures
 

 

 
(31,201
)
 
(31,201
)
Costs and estimated earnings in excess of billings, net
 
(24,873
)
 
1,335

 
(11,705
)
 
(35,243
)
Equity in construction joint ventures
 
(42,336
)
 

 
42,336

 

Contributions to unconsolidated construction joint ventures
 

 

 
(16,209
)
 
(16,209
)
Distributions from unconsolidated construction joint ventures
 

 

 
42,486

 
42,486

Other assets, net
 
(5,957
)
 
(562
)
 

 
(6,519
)
Accounts payable
 
(10,548
)
 

 
(1,176
)
 
(11,724
)
Accrued expenses and other current liabilities, net
 
29,825

 
237

 
(24,531
)
 
5,531

Total
 
$
(36,562
)
 
$

 
$

 
$
(36,562
)


8
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2.
Recently Issued Accounting Pronouncement
In May 2014 the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. This ASU’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects consideration to which the company expects to be entitled in exchange for those goods or services. The ASU will be effective commencing with our quarter ending March 31, 2017. We are currently assessing the potential impact of this ASU on our consolidated financial statements.

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. We recognize revenue on affirmative claims when we have a signed agreement and recognize revenue associated with unapproved change orders to the extent the related costs have been incurred, the amount can be reliably estimated and recovery is probable. We recognize costs associate with affirmative claims and unapproved change orders as incurred and revisions to estimated total costs as soon as the obligation to perform is determined. Approved change orders and affirmative claims, as well as changes in related estimates of costs to complete, are considered revisions in estimates. We use the cumulative catch-up method applicable to construction contract accounting to account for revisions in estimates. Under this method, revisions in estimates are accounted for in their entirety in the period of change. There can be no assurance that we will not experience further changes in circumstances or otherwise be required to further revise our profitability estimates.
For the majority of our contracts, revenue in an amount equal to cost incurred is recognized until there is sufficient information to determine the estimated profit on the project with a reasonable level of certainty. The gross profit impact from projects that reached profit recognition is not included in the tables below. During the three and six months ended June 30, 2014, the initial gross profit impact from projects that reached profit recognition was $24.5 million and $28.6 million, respectively, and was $8.7 million and $15.2 million for the three and six months ended June 30, 2013, respectively.

9
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Construction
The net changes in project profitability from revisions in estimates, both increases and decreases, that individually had an impact of $1.0 million or more on gross profit were net decreases of $1.4 million and $8.3 million for the three and six months ended June 30, 2014 respectively. The net changes for the three and six months ended June 30, 2013 were net decreases of $0.5 million and $0.3 million, respectively. The projects are summarized as follows:

Increases
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in millions)
 
 
2014
 
 
2013
 
 
2014
 
 
2013
Number of projects with upward estimate changes
 
 

 
 
1

 
 

 
 
2

Range of increase in gross profit from each project, net
$

 
$
1.6

 
$

 
$
1.4 - 1.7

Increase on project profitability
 
$

 
$
1.6

 
$

 
$
3.1


The increases during the three and six months ended June 30, 2013 were due to owner-directed scope changes.

Decreases
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in millions)
 
 
2014
 
 
2013
 
 
2014
 
 
2013
Number of projects with downward estimate changes
 
 
1

 
 
1

 
 
5

 
 
2

Reduction in gross profit from each project, net
 
$
1.4

 
$
2.1

 
$
1.1 - 2.2

 
$
1.0 - 2.4

Decrease on project profitability
 
$
1.4

 
$
2.1

 
$
8.3

 
$
3.4


The decreases during the three and six months ended June 30, 2014 and 2013 were due to additional costs and lower productivity than originally anticipated.



10
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Large Project Construction

The net changes in project profitability from revisions in estimates, both increases and decreases, that individually had an impact of $1.0 million or more on gross profit were net increases of $25.7 million and $34.5 million for the three and six months ended June 30, 2014, respectively. The net changes for the three and six months ended June 30, 2013 were net increases of $8.7 million and $17.9 million, respectively. Amounts attributable to non-controlling interests were $8.2 million and $7.5 million of the net increases for the three and six months ended June 30, 2014, respectively, and were $0.4 million and $1.4 million for the three and six months ended June 30, 2013, respectively. The projects are summarized as follows:

Increases
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in millions)
 
 
2014
 
 
2013
 
 
2014
 
 
2013
Number of projects with upward estimate changes
 
 
6

 
 
5

 
 
9

 
 
5

Range of increase in gross profit from each project, net
 
$
1.1 - 19.7

 
$
1.3 - 8.3

 
$
1.1 - 16.3

 
$
1.5 - 16.1

Increase on project profitability
 
$
28.0

 
$
15.8

 
$
41.3

 
$
31.9

The increases during the three and six months ended June 30, 2014 were due to higher productively than originally anticipated, owner-directed scope changes and settlement of outstanding issues with contract owners. The increases during the three and six months ended June 30, 2013 were due to production at a higher rate than anticipated, resolution of project uncertainties and owner-directed scope changes.
Decreases
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in millions)
 
 
2014
 
 
2013
 
 
2014
 
 
2013
Number of projects with downward estimate changes
 
 
1

 
 
2

 
 
1

 
 
2

Range of reduction in gross profit from each project, net
 
$
2.3

 
$
2.8 - 4.3

 
$
6.8

 
$
5.2 - 8.8

Decrease on project profitability
 
$
2.3

 
$
7.1

 
$
6.8

 
$
14.0

The decreases during the three and six months ended June 30, 2014 were due to additional costs and lower productivity than originally anticipated. The decreases during the three and six months ended June 30, 2013 were due to lower productivity than anticipated.

11
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4.
Marketable Securities
 
All marketable securities were classified as held-to-maturity for the dates presented and the carrying amounts of held-to-maturity securities were as follows:
(in thousands)
 
June 30,
2014
 
December 31,
2013
 
June 30,
2013
U.S. Government and agency obligations
 
$
7,906

 
$
10,000

 
$
613

Commercial paper 
 
19,992

 
39,968

 
14,992

Municipal bonds
 

 

 
5,666

Total short-term marketable securities
 
27,898

 
49,968

 
21,271

U.S. Government and agency obligations
 
84,234

 
67,234

 
55,225

Total long-term marketable securities
 
84,234

 
67,234

 
55,225

Total marketable securities
 
$
112,132

 
$
117,202

 
$
76,496


Scheduled maturities of held-to-maturity investments were as follows:
(in thousands)
June 30,
2014
Due within one year
$
27,898

Due in one to five years
84,234

Total
$
112,132


12
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

5.
Fair Value Measurement
 
Fair value accounting standards describe three levels 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. 
The following tables summarize significant assets and liabilities measured at fair value in the condensed consolidated balance sheets on a recurring basis for each of the fair value levels (in thousands):
 
 
Fair Value Measurement at Reporting Date Using
June 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
 
 

 
 

 
 

 
 

Money market funds
 
$
31,583

 
$

 
$

 
$
31,583

Total assets
 
$
31,583

 
$

 
$

 
$
31,583

 
 
Fair Value Measurement at Reporting Date Using
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
 
 

 
 

 
 

 
 

Money market funds
 
$
89,336

 
$

 
$

 
$
89,336

Total assets
 
$
89,336

 
$

 
$

 
$
89,336

 
 
Fair Value Measurement at Reporting Date Using
June 30, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents  
 
 

 
 

 
 

 
 

Money market funds
 
$
144,605

 
$

 
$

 
$
144,605

Total assets
 
$
144,605

 
$

 
$

 
$
144,605


A reconciliation of cash equivalents to consolidated cash and cash equivalents is as follows:
(in thousands)
 
June 30,
2014
 
December 31,
2013
 
June 30, 2013 As Revised
Cash equivalents
 
$
31,583

 
$
89,336

 
$
144,605

Cash
 
114,875

 
139,785

 
103,228

Total cash and cash equivalents
 
$
146,458

 
$
229,121

 
$
247,833




13
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The carrying values and estimated fair values of our financial instruments that are not required to be recorded at fair value in the condensed consolidated balance sheets are as follows: 
 
 
 
 
June 30, 2014
 
December 31, 2013
 
June 30, 2013
(in thousands)
 
Fair Value Hierarchy
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets:
 
 
 
 

 
 

 
 
 
 
 
 
 
 

Held-to-maturity marketable securities1
 
Level 1
 
$
112,132

 
$
111,999

 
$
117,202

 
$
116,915

 
$
76,496

 
$
76,100

Liabilities (including current maturities):
 
 
 
 
 
 
 
 
 
 
Senior notes payable2
 
Level 3
 
$
200,000

 
$
222,920

 
$
200,000

 
$
225,865

 
$
200,000

 
$
227,902

Credit Agreement loan2
 
Level 3
 
70,000

 
69,781

 
70,000

 
69,601

 
70,000

 
69,321

1Held-to-maturity marketable securities are periodically assessed for other-than-temporary impairment.
2The fair values of the senior notes payable and Credit Agreement (defined in Note 11) loan are based on borrowing rates available to us for long-term loans with similar terms, average maturities, and credit risk.

The carrying values of receivables, other current assets, and accrued expenses and other current liabilities approximate their fair values due to the short-term nature of these instruments. In addition, the fair value of non-recourse debt measured using Level 3 inputs approximates its carrying value due to its relative short-term nature and competitive interest rates. During the three and six months ended June 30, 2014 and 2013, we did not record any fair value adjustments related to nonfinancial assets and liabilities measured at fair value on a nonrecurring basis.
In March 2014, we entered into an interest rate swap with a notional amount of $100.0 million which matures in June 2018 to convert the interest rate of our 2019 Notes (defined in Note 11) from a fixed rate of 6.11% to a floating rate of 4.15% plus six-month LIBOR. The interest rate swap is reported at fair value using Level 2 inputs, and gains or losses are recorded in other income (expense), net in our condensed consolidated statement of operations and were $1.0 million and $0.6 million during the three and six months ended June 30, 2014.

6.
Receivables, net

Receivables, net at June 30, 2014, December 31, 2013 and June 30, 2013 are as follows:
(in thousands)
 
June 30,
2014
 
December 31,
2013
 
June 30,
2013
Construction contracts:
 
 
 
 
 
 
Completed and in progress
 
$
237,870

 
$
193,538

 
$
207,488

Retentions
 
69,678

 
73,103

 
76,288

Total construction contracts
 
307,548

 
266,641

 
283,776

Construction material sales
 
48,932

 
36,813

 
43,535

Other
 
7,677

 
12,657

 
11,700

Total gross receivables
 
364,157

 
316,111

 
339,011

Less: allowance for doubtful accounts
 
543

 
2,513

 
2,593

Total net receivables
 
$
363,614

 
$
313,598

 
$
336,418


Receivables include amounts billed and billable to clients for services provided and/or according to contract terms as of the end of the applicable period and do not bear interest. Certain contracts include provisions that permit us to submit invoices in advance of providing services, based on the passage of time, achievement of milestones or upon completion of the project and, to the extent not collected, are included in receivables. To the extent the related costs have not been billed, the contract balance is included in costs and estimated earnings in excess of billings on the condensed consolidated balance sheets. Included in other receivables at June 30, 2014, December 31, 2013 and June 30, 2013 were items such as notes receivable, fuel tax refunds and income tax refunds. No such receivables individually exceeded 10% of total net receivables at any of these dates.

14
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Financing receivables consisted of long-term notes receivable and retentions receivable. As of June 30, 2014, December 31, 2013, and June 30, 2013 long-term notes receivable outstanding were $1.1 million, $1.3 million and $1.6 million, respectively. The balance primarily related to loans made to employees and was included in other noncurrent assets in our condensed consolidated balance sheets.
Certain construction contracts include retainage provisions. The balances billed but not paid by customers pursuant to these provisions generally become due upon completion and acceptance of the contract by the owners. No such receivables individually exceeded 10% of total net receivables at any of the presented dates. As of June 30, 2014, the majority of the retentions receivable are expected to be collected within one year.
We segregate our retention receivables into two categories: escrow and non-escrow. The balances in each category were as follows:
(in thousands)
 
June 30,
2014
 
December 31,
2013
 
June 30,
2013
Escrow
 
$
25,093

 
$
25,124

 
$
31,892

Non-escrow
 
44,585

 
47,979

 
44,396

Total retention receivables
 
$
69,678

 
$
73,103

 
$
76,288


The escrow receivables include amounts due to Granite which have been deposited into an escrow account and bear interest. Typically, escrow retention receivables are held until work on a project is complete and has been accepted by the owner who then releases those funds, along with accrued interest, to us. There is minimal risk of not collecting on these amounts.
Non-escrow retention receivables are amounts that the project owner has contractually withheld that are to be paid upon owner acceptance of contract completion. We evaluate our non-escrow retention receivables for collectability using certain customer information that includes the following:
Federal - includes federal agencies such as the Bureau of Reclamation, the Army Corp of Engineers, and the Bureau of Indian Affairs. The obligations of these agencies are backed by the federal government. Consequently, there is minimal risk of not collecting the amounts we are entitled to receive.    
State - primarily state departments of transportation. The risk of not collecting on these accounts is small; however, we have experienced occasional delays in payment as states have struggled with budget issues.
Local - these customers include local agencies such as cities, counties and other local municipal agencies. The risk of not collecting on these accounts is small; however, we have experienced occasional delays in payment as some local agencies have struggled with budget issues.       
Private - includes individuals, developers and corporations. The majority of our collection risk is associated with these customers. We perform ongoing credit evaluations of our customers and generally do not require collateral, although the law provides us certain remedies, including, but not limited to, the ability to file mechanics’ liens on real property improved for private customers in the event of non-payment by such customers.

The following table summarizes the amount of our non-escrow retention receivables within each category:
(in thousands)
 
June 30,
2014
 
December 31,
2013
 
June 30,
2013
Federal
 
$
1,543

 
$
2,878

 
$
3,325

State
 
5,078

 
5,579

 
2,757

Local
 
30,213

 
31,122

 
32,500

Private
 
7,751

 
8,400

 
5,814

Total
 
$
44,585

 
$
47,979

 
$
44,396

 

15
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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. Based on contract terms, non-escrow retention receivables are typically due within 60 days of owner acceptance of contract completion. We consider retention amounts beyond 60 days of owner acceptance of contract completion to be past due. The following tables present the aging of our non-escrow retention receivables (in thousands):
June 30, 2014
 
Current
 
1 - 90 Days
Past Due
 
Over 90 Days
Past Due
 
Total
Federal
 
$
1,532

 
$

 
$
11

 
$
1,543

State
 
4,837

 
168

 
73

 
5,078

Local
 
25,210

 
654

 
4,349

 
30,213

Private
 
6,591

 
107

 
1,053

 
7,751

Total
 
$
38,170

 
$
929

 
$
5,486

 
$
44,585

December 31, 2013
 
Current
 
1 - 90 Days
Past Due
 
Over 90 Days
Past Due
 
Total
Federal
 
$
2,843

 
$
13

 
$
22

 
$
2,878

State
 
4,919

 
326

 
334

 
5,579

Local
 
24,705

 
1,024

 
5,393

 
31,122

Private
 
6,817

 
287

 
1,296

 
8,400

Total
 
$
39,284

 
$
1,650

 
$
7,045

 
$
47,979

June 30, 2013
 
Current
 
1 - 90 Days
Past Due
 
Over 90 Days
Past Due
 
Total
Federal
 
$
2,551

 
$
236

 
$
538

 
$
3,325

State
 
1,327

 
619

 
811

 
2,757

Local
 
25,362

 
1,496

 
5,642

 
32,500

Private
 
4,571

 
634

 
609

 
5,814

Total
 
$
33,811

 
$
2,985

 
$
7,600

 
$
44,396


Federal, state and local agencies generally require several approvals to release payments, and these approvals often take more than 90 days past contractual due dates to obtain. Amounts past due from government agencies primarily result from delays caused by paperwork processing and/or obtaining proper agency approvals rather than lack of funds, which was the case with the majority of local agencies with past due balances as of June 30, 2014. We generally receive payment within one year of owner acceptance. As of June 30, 2014, December 31, 2013 and June 30, 2013, our allowance for doubtful accounts contained no material provision related to non-escrow retention receivables as we determined there were no significant collectibility issues.


16
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7.
Construction and Line Item Joint Ventures
 
We participate in various construction joint venture partnerships and a limited liability company of which we are a limited partner or member (“joint ventures”). 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.
At June 30, 2014, there was approximately $3.9 billion of construction revenue to be recognized on unconsolidated and line item construction joint venture contracts of which $1.1 billion represented our share and the remaining $2.8 billion represented our partners’ share. We are not able to estimate amounts that may be required beyond the remaining cost of the work to be performed. These costs could be offset by billings to the customer or by proceeds from our partners’ corporate and/or other guarantees.

Construction Joint Ventures
 
Generally, each construction joint venture is formed to complete a specific contract and is jointly controlled by the venture partners. The associated agreements typically provide that our interests in any profits and assets, and our respective share in any losses and liabilities resulting from the performance of the contracts, are limited to our stated percentage interest in the project. We have no significant commitments beyond completion of the contracts. Under our contractual arrangements, we provide capital to these joint ventures in return for an ownership interest. In addition, partners dedicate resources to the 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 partners. As we absorb our share of these risks, our investment in each venture is exposed to potential losses.
We have determined that certain of these joint ventures are consolidated because they are variable interest entities (“VIEs”) and we are the primary beneficiary, or because they are not VIEs and we hold the majority voting interest.
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 six months ended June 30, 2014, we determined no change was required for existing construction joint ventures.
  

17
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Consolidated Construction Joint Ventures
 
The carrying amounts and classification of assets and liabilities of construction joint ventures we are required to consolidate are included in our condensed consolidated balance sheets as follows:
(in thousands)
 
June 30,
2014
 
December 31,
2013
 
June 30,
2013
Cash and cash equivalents1 
 
$
29,109

 
$
38,800

 
$
63,806

Receivables, net
 
45,825

 
38,372

 
59,807

Costs and estimated earnings in excess of billings1
 
25,217

 
178

 
477

Other current assets
 
4,276

 
4,600

 
3,115

Total current assets
 
104,427

 
81,950

 
127,205

Property and equipment, net
 
16,957

 
22,216

 
34,891

Other noncurrent assets
 

 

 
1,253

Total assets2
 
$
121,384

 
$
104,166

 
$
163,349

 
 
 
 
 
 
 
Accounts payable 
 
$
26,246

 
$
16,937

 
$
18,297

Billings in excess of costs and estimated earnings1 
 
27,876

 
60,185

 
72,094

Accrued expenses and other current liabilities 
 
3,805

 
11,299

 
9,153

Total liabilities2
 
$
57,927

 
$
88,421

 
$
99,544

1The volume and stage of completion of contracts from our consolidated construction joint ventures may cause fluctuations in cash and cash equivalents as well as billings in excess of costs and estimated earnings between periods.
2The assets and liabilities of each joint venture relate solely to that joint venture. The decision to distribute joint venture cash and cash equivalents and assets must generally be made jointly by all of the partners and, accordingly, these cash and cash equivalents and assets generally are not available for the working capital needs of Granite until distributed.

At June 30, 2014, we were engaged in four active consolidated construction joint venture projects with total contract values ranging from $0.4 million to $364.4 million. Our share of revenue remaining to be recognized on these consolidated joint ventures ranged from less than $0.1 million to $51.9 million. Our proportionate share of the equity in these joint ventures was between 51.0% and 65.0%. During the three and six months ended June 30, 2014, total revenue from consolidated construction joint ventures was $66.0 million and $98.2 million, respectively. During the three and six months ended June 30, 2013, total revenue from consolidated construction joint ventures was $45.5 million and $88.7 million, respectively. Total cash used in consolidated construction joint venture operations was $41.9 million and $16.3 million during the six months ended June 30, 2014 and 2013, respectively.

Unconsolidated Construction Joint Ventures
 
We account for our share of construction joint ventures that we are not required to consolidate on a pro rata basis in the condensed consolidated statements of operations and as a single line item on the condensed consolidated balance sheets. As of June 30, 2014, these unconsolidated joint ventures were engaged in nine active unconsolidated construction projects with total contract values ranging from $96.6 million to $3.1 billion. Our proportionate share of the equity in these unconsolidated joint ventures ranged from 20.0% to 50.0%. As of June 30, 2014, our share of the revenue remaining to be recognized on these unconsolidated joint ventures ranged from $0.1 million to $548.2 million.
As of June 30, 2014, one of our unconsolidated construction joint ventures was located in Canada and, therefore, the associated disclosures throughout this footnote include amounts that were translated from Canadian dollars to U.S. dollars using the spot rate in effect as of the reporting date for balance sheet items, and the average rate in effect during the reporting period for the results of operations. The associated foreign currency translation adjustments did not have a material impact on the condensed consolidated financial statements for any of the dates or periods presented.



18
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Following is summary financial information related to unconsolidated construction joint ventures:
(in thousands)
 
June 30,
2014
 
December 31,
2013
 
June 30,
2013
Assets:
 
 
 
 
 
 
Cash and cash equivalents1
 
$
226,217

 
$
385,094

 
$
342,534

Other assets
 
637,896

 
523,827

 
439,812

Less partners’ interest
 
572,753

 
612,530

 
512,775

Granite’s interest
 
291,360

 
296,391

 
269,571

Liabilities:
 
 
 
 
 
 
Accounts payable
 
133,914

 
155,985

 
115,606

Billings in excess of costs and estimated earnings1
 
162,951

 
245,341

 
262,259

Other liabilities
 
63,501

 
104,152

 
25,500

Less partners’ interest
 
254,865

 
371,760

 
282,521

Granite’s interest
 
105,501

 
133,718

 
120,844

Equity in construction joint ventures
 
$
185,859

 
$
162,673

 
$
148,727

 1The volume and stage of completion of contracts from our unconsolidated construction joint ventures may cause fluctuations in cash and cash equivalents as well as billings in excess of costs and estimated earnings between periods. The decision to distribute joint venture cash and cash equivalents and assets must generally be made jointly by all of the partners and, accordingly, these cash and cash equivalents and assets generally are not available for the working capital needs of Granite until distributed.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
 
Total
 
$
392,165

 
$
259,255

 
$
741,331

 
$
484,558

Less partners’ interest1
 
268,526

 
172,656

 
528,383

 
326,361

Granite’s interest
 
123,639

 
86,599

 
212,948

 
158,197

Cost of revenue:
 
 
 
 
 
 
 
 
Total
 
345,704

 
212,779

 
643,166

 
371,475

Less partners’ interest1
 
246,065

 
141,659

 
456,972

 
248,980

Granite’s interest
 
99,639

 
71,120

 
186,194

 
122,495

Granite’s interest in gross profit
 
$
24,000

 
$
15,479

 
$
26,754

 
$
35,702

1Partners’ interest represents amounts to reconcile total revenue and total cost of revenue as reported by our partners to Granite’s interest adjusted to reflect our accounting policies.
During the three and six months ended June 30, 2014, the net income of unconsolidated construction joint ventures was $49.4 million and $100.4 million, respectively, of which our share was $23.2 million and $25.7 million, respectively. During the three and six months ended June 30, 2013, the net income of unconsolidated construction joint ventures was $45.6 million and $111.6 million, respectively, of which our share was $14.2 million and $31.2 million, respectively.

Line Item Joint Ventures
 
The revenue for each line item joint venture partner’s discrete items of work is defined in the contract with the project owner and each venture partner bears the profitability risk associated 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 include only our portion of these contracts in our condensed consolidated financial statements. As of June 30, 2014, we had four active line item joint venture construction projects with total contract values ranging from $42.4 million to $84.9 million of which our portion ranged from $28.5 million to $62.6 million. As of June 30, 2014, our share of revenue remaining to be recognized on these line item joint ventures ranged from less than $0.1 million to $29.5 million.
 

19
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8.
Real Estate Entities and Investments in Affiliates
 
The operations of our Real Estate segment are conducted through our wholly-owned subsidiary, Granite Land Company (“GLC”). Generally, GLC participates with third-party partners in entities that are formed to accomplish specific real estate development projects. 
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 six months ended June 30, 2014 and 2013, we determined no change was required for existing real estate ventures.
Our real estate affiliates include limited partnerships or limited liability companies of which we are a limited partner or member. The agreements with GLC’s partners in these real estate entities define each partner’s management role and financial responsibility in the project. The amount of GLC’s exposure is limited to GLC’s equity investment in the real estate joint venture. However, if one of GLC’s partners is unable to fulfill its management role or make its required financial contribution, GLC may assume, at its option, full management and/or financial responsibility for the project.
All of the assets of these real estate entities in which we are a participant through our GLC subsidiary are classified as real estate held for development and sale and are pledged as collateral for the associated debt. All outstanding debt of these entities is non-recourse to Granite. However, there is recourse to our real estate affiliates that incurred the debt (i.e., the limited partnership or limited liability company of which we are a limited partner or member).
GLC receives authorization to provide additional financial support for certain of its real estate entities in increments to address changes in business plans. During the six months ended June 30, 2014, GLC did not increase its authorized financial support, and during the six months ended June 30, 2013 was authorized to increase its financial support to one consolidated real estate entity by $5.9 million to meet existing debt obligations. As of June 30, 2014, $1.9 million of the total authorized investment had yet to be contributed to the consolidated entity.
To determine if impairment charges should be recognized, the carrying amount of each real estate development project is reviewed on a quarterly basis. Based on our quarterly evaluations of each project’s business plan, we recorded no material impairment charges to our real estate development projects or investments during the three and six months ended June 30, 2014 and 2013.
During 2013, we concluded the majority of our 2010 Enterprise Improvement Plan (“EIP”) which included the impairment and planned orderly divestiture of our real estate investment business consistent with our strategy to focus on our core business. Consequently, during 2013 we recorded impairment charges on certain real estate assets in accordance with our EIP. When real estate assets which we continue to have a financial interest are sold, we may recognize additional restructuring charges or gains; however, we do not expect these charges or gains to be material to our consolidated financial statements. No restructuring charges were recorded during the three and six months ended June 30, 2014 and an immaterial restructuring gain was recorded during the three and six months ended June 30, 2013.


20
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Consolidated Real Estate Entities 
As of June 30, 2014, December 31, 2013 and June 30, 2013, real estate held for development and sale associated with consolidated real estate entities included in our condensed consolidated balance sheets was $11.8 million, $12.5 million and $50.7 million, respectively. Non-recourse debt, including current maturities, associated with these entities was $7.4 million, $8.0 million and $9.5 million as of June 30, 2014, December 31, 2013 and June 30, 2013, respectively. All other amounts associated with these entities were insignificant as of the dates presented. Residential real estate held for development and sale in Washington State was $11.6 million as of both June 30, 2014 and December 31, 2013, and was $40.7 million as of June 30, 2013. The remaining balances were in various commercial projects in California and Texas.
Investments in Affiliates
Our investments in affiliates balance consists of the following:
(in thousands)
 
June 30,
2014
 
December 31,
2013
 
June 30,
2013
Equity method investments in real estate affiliates
 
$
23,082

 
$
21,392

 
$
20,378

Equity method investments in other affiliates
 
10,854

 
11,088

 
11,043

Total investments in affiliates
 
$
33,936

 
$
32,480

 
$
31,421

We have determined that certain real estate joint ventures are not consolidated because they are VIEs and we are not the primary beneficiary. We have determined that certain non-real estate joint ventures are not consolidated because they are not VIEs and we do not hold the majority voting interest. As such, these entities are accounted for using the equity method. We account for our share of the operating results of these equity method investments in other income in the condensed consolidated statements of operations and as a single line item on our condensed consolidated balance sheets as investments in affiliates.
The following table provides summarized balance sheet information for our affiliates accounted for under the equity method on a combined basis:
(in thousands)
 
June 30,
2014
 
December 31,
2013
 
June 30,
2013
Total assets
 
$
171,991

 
$
173,988

 
$
160,422

Net assets
 
98,342

 
99,444

 
93,771

Granite’s share of net assets
 
33,936

 
32,480

 
31,421

 
The equity method investments in real estate included $16.7 million, $14.9 million and $14.1 million in residential real estate in Texas as of June 30, 2014, December 31, 2013 and June 30, 2013, respectively. The remaining balances were in commercial real estate in Texas. Of the $172.0 million in total assets as of June 30, 2014, real estate entities had total assets ranging from $2.7 million to $55.6 million and non-real estate entities had total assets ranging from $0.3 million to $22.2 million. As of each of the periods presented, the most significant non-real estate equity method investment was a 50% interest in a limited liability company which owns and operates an asphalt terminal and operates an emulsion plant in Nevada.


21
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

9.
Property and Equipment, net
 
Balances of major classes of assets and allowances for depreciation and depletion are included in property and equipment, net on our condensed consolidated balance sheets as follows:
(in thousands)
 
June 30,
2014
 
December 31,
2013
 
June 30, 2013 As Revised
Equipment and vehicles
 
$
769,271

 
$
765,971

 
$
760,271

Quarry property
 
170,279

 
170,442

 
180,325

Land and land improvements
 
120,982

 
119,917

 
125,489

Buildings and leasehold improvements
 
83,994

 
83,494

 
83,733

Office furniture and equipment
 
70,192

 
70,156

 
68,822

Property and equipment
 
1,214,718

 
1,209,980

 
1,218,640

Less: accumulated depreciation and depletion
 
788,018

 
773,121

 
747,747

Property and equipment, net
 
$
426,700

 
$
436,859

 
$
470,893


10.
Intangible Assets
 
Indefinite-lived Intangible Assets

Indefinite-lived intangible assets primarily consist of goodwill and use rights. Use rights of $0.4 million are included in other noncurrent assets on our condensed consolidated balance sheets as of June 30, 2014, December 31, 2013 and June 30, 2013.

The following table presents the goodwill balance by reporting segment (in thousands):
 
 
June 30,
2014
 
December 31,
2013
 
June 30,
2013
Construction
 
$
29,260

 
$
29,260

 
$
28,300

Large Project Construction
 
22,593

 
22,593

 
23,184

Construction Materials
 
1,946

 
1,946

 
2,114

Total goodwill
 
$
53,799

 
$
53,799

 
$
53,598



22
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Amortized Intangible Assets

Following is the breakdown of our amortized intangible assets that are included in other noncurrent assets on our condensed consolidated balance sheets (in thousands):
 
 
 
 
Accumulated
 
 
June 30, 2014
 
Gross Value
 
Amortization
 
Net Book Value
Permits
 
$
29,713

 
$
(12,554
)
 
$
17,159

Trade name
 
4,100

 
(647
)
 
3,453

Customer lists
 
4,398

 
(2,638
)
 
1,760

Acquired backlog
 
7,900

 
(7,102
)
 
798

Covenants not to compete and other
 
2,459

 
(2,426
)
 
33

Total amortized intangible assets
 
$
48,570

 
$
(25,367
)
 
$
23,203

 
 
 
 
Accumulated
 
 
December 31, 2013
 
Gross Value
 
Amortization
 
Net Book Value
Permits
 
$
29,713

 
$
(11,992
)
 
$
17,721

Trade name
 
4,100

 
(432
)
 
3,668

Customer lists
 
4,398

 
(2,491
)
 
1,907

Acquired backlog
 
7,900

 
(6,835
)
 
1,065

Covenants not to compete and other
 
2,459

 
(2,408
)
 
51

Total amortized intangible assets
 
$
48,570

 
$
(24,158
)
 
$
24,412

 
 
 
 
Accumulated
 
 
June 30, 2013
 
Gross Value
 
Amortization
 
Net Book Value
Permits
 
$
29,713

 
$
(11,430
)
 
$
18,283

Acquired backlog
 
7,900

 
(3,447
)
 
4,453

Trade name
 
4,100

 
(216
)
 
3,884

Customer lists
 
4,398

 
(2,344
)
 
2,054

Covenants not to compete and other
 
2,459

 
(2,347
)
 
112

Total amortized intangible assets
 
$
48,570

 
$
(19,784
)
 
$
28,786

Amortization expense related to amortized intangible assets for the three and six months ended June 30, 2014 was $0.6 million and $1.2 million respectively. Amortization expense related to amortized intangible assets for the three and six months ended June 30, 2013 was $2.3 million and $4.5 million, respectively. Based on the amortized assets balance at June 30, 2014, amortization expense expected to be recorded in the future is as follows: $1.5 million for the remainder of 2014; $2.1 million in 2015; $1.8 million in 2016; $1.7 million in 2017; $1.7 million in 2018; and $14.4 million thereafter.
 

23
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11.
Covenants and Events of Default
 
Our debt and credit agreements require us to comply with various affirmative, restrictive and financial covenants. Our failure to comply with any of these covenants, or to pay principal, interest or other amounts when due thereunder, would constitute an event of default under the 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 (1) us no longer being entitled to borrow under the agreements; (2) termination of the agreements; (3) the requirement that any letters of credit under the agreements be cash collateralized; (4) acceleration of the maturity of outstanding indebtedness under the agreements; and/or (5) foreclosure on any collateral securing the obligations under the agreements.
As of June 30, 2014, we were in compliance with the covenants contained in our note purchase agreements governing our senior notes payable (“2019 NPA”) and the credit agreement governing the $215.0 million committed revolving credit facility, with a sublimit for letters of credit of $100.0 million (“Credit Agreement”), as well as the debt agreements related to our consolidated real estate entities. We are not aware of any non-compliance by any of our unconsolidated real estate entities with the covenants contained in their debt agreements.

12.
Weighted Average Shares Outstanding and Earnings Per Share
 
A reconciliation of the weighted average shares outstanding used in calculating basic and diluted net income (loss) per share in the accompanying condensed consolidated statements of operations is as follows (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
Weighted average common stock outstanding
 
39,115

 
38,829

 
39,033

 
38,782

Less: weighted average unvested restricted stock outstanding
 

 

 

 
62

Total basic weighted average shares outstanding
 
39,115

 
38,829

 
39,033

 
38,720

 
 
 
 
 
 
 
 
 
Diluted weighted average shares outstanding:
 
 
 
 
 
 
 
 
Weighted average common stock outstanding, basic
39,115

 
38,829

 
39,033

 
38,720

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Common stock options and restricted stock units1
692

 
940

 

 

Total weighted average shares outstanding assuming dilution
 
39,807

 
39,769

 
39,033

 
38,720

1Due to the net loss for the six months ended June 30, 2014 and 2013, restricted stock units and common stock options representing approximately 746,000 and 851,000 shares, respectively, have been excluded from the number of shares used in calculating diluted net loss per share for the respective periods, as their inclusion would be antidilutive.




24
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Earnings Per Share
 
We calculate earnings per share (“EPS”) under the two-class method by allocating earnings to both common shares and unvested restricted stock which are considered participating securities. However, net losses are not allocated to participating securities for purposes of computing EPS under the two-class method. During the three and six months ended June 30, 2014 and 2013, there were no participating securities and therefore net income was not allocated to participating securities. Following is a calculation of basic and diluted EPS (in thousands, except per share amounts):

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013 As Revised
 
2014
 
2013 As Revised
Basic
 
 
 
 

 
 
 
 
Numerator:
 
 
 
 

 
 
 
 
Net income (loss) allocated to common shareholders for basic calculation
 
$
13,641

 
$
1,419

 
$
(6,913
)
 
$
(20,563
)
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 

 
 
 
 
Weighted average common shares outstanding, basic 
 
39,115

 
38,829

 
39,033

 
38,720

Net income (loss) per share, basic
 
$
0.35

 
$
0.04

 
$
(0.18
)
 
$
(0.53
)
 
 
 
 
 
 
 
 
 
Diluted
 
 
 
 

 
 
 
 
Numerator:
 
 
 
 

 
 
 
 
Net income (loss) allocated to common shareholders for diluted calculation
 
$
13,641

 
$
1,419

 
$
(6,913
)
 
$
(20,563
)
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 

 
 
 
 
Weighted average common shares outstanding, diluted
39,807

 
39,769

 
39,033

 
38,720

Net income (loss) per share, diluted
 
$
0.34

 
$
0.04

 
$
(0.18
)
 
$
(0.53
)


25
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

13.
Equity
 
The following tables summarize our equity activity for the periods presented (in thousands):
 
 
Granite Construction Incorporated
 
Non-controlling Interests
 
Total Equity
Balance at December 31, 2013
 
$
781,940

 
$
4,404

 
$
786,344

Purchase of common stock1
 
(4,369
)
 

 
(4,369
)
Other transactions with shareholders and employees3
 
7,989

 

 
7,989

Transactions with non-controlling interests, net
 

 
12,804

 
12,804

Net (loss) income
 
(6,913
)
 
7,858

 
945

Dividends on common stock
 
(10,170
)
 

 
(10,170
)
Balance at June 30, 2014
 
$
768,477

 
$
25,066

 
$
793,543

 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
$
829,953

 
$
41,905

 
$
871,858

Purchase of common stock2
 
(5,022
)
 

 
(5,022
)
Other transactions with shareholders and employees3
 
8,796

 

 
8,796

Transactions with non-controlling interests, net
 

 
(14,708
)
 
(14,708
)
Net (loss) income
 
(20,563
)
 
2,518

 
(18,045
)
Dividends on common stock
 
(10,096
)
 

 
(10,096
)
Balance at June 30, 2013 As Revised
 
$
803,068

 
$
29,715

 
$
832,783

1Represents 113,000 shares purchased in connection with employee tax withholding for shares/units vested under our Amended and Restated 1999 Equity Incentive Plan.
2Represents 168,000 shares purchased in connection with employee tax withholding for shares/units vested under our Amended and Restated 1999 Equity Incentive Plan.
3Amounts are comprised primarily of amortized restricted stock and units.



 
 


26
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

14.
Legal Proceedings
In the ordinary course of business, we and our affiliates are involved in various legal proceedings alleging, among other things, public 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.
We record liabilities in our condensed consolidated balance sheets representing our estimated 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. The aggregate liabilities recorded as of June 30, 2014, December 31, 2013 and June 30, 2013 related to these matters were approximately $9.9 million, $16.3 million and $11.2 million, respectively, and were primarily included in accrued expenses and other current liabilities on our condensed consolidated balance sheets. Some of the matters in which we or our 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 or debarred, or payment of our costs could be disallowed. While any of our pending legal proceedings may be subject to early resolution as a result of our ongoing efforts to settle, whether or when any legal proceeding will be resolved through settlement is neither predictable nor guaranteed. Accordingly, it is possible that future developments in such proceedings and inquiries could require us to (i) adjust existing accruals, or (ii) record new accruals that we did not originally believe to be probable or that could not be reasonably estimated. Such changes could be material to our financial condition, results of operations and/or cash flows in any particular reporting period. In addition to matters that are considered probable for which the loss can be reasonably estimated, we also disclose certain matters where the loss is considered reasonably possible and is reasonably estimable. Except as noted below, we believe the aggregate range of possible loss related to undisclosed matters considered reasonably possible was not material as of June 30, 2014. Our view as to such matters could change in future periods.
Investigation Related to Grand Avenue Project Disadvantaged Business Enterprise (“DBE”) Issues: On March 6, 2009, the U.S. Department of Transportation, Office of Inspector General served upon our wholly-owned subsidiary, Granite Construction Northeast, Inc. (“Granite Northeast”), a United States District Court, Eastern District of New York Grand Jury subpoena to produce documents. The subpoena sought all documents pertaining to the use of a DBE firm (the “Subcontractor”), and the Subcontractor’s use of a non-DBE subcontractor/consultant, on the Grand Avenue Bus Depot and Central Maintenance Facility for the Borough of Queens Project (the “Grand Avenue Project”), a Granite Northeast project, that began in 2004 and was substantially complete in 2008. The subpoena also sought any documents regarding the use of the Subcontractor as a DBE on any other projects and any other documents related to the Subcontractor or to the subcontractor/consultant. Granite Northeast produced the requested documents, together with other requested information. Subsequently, Granite Northeast was informed by the Department of Justice (“DOJ”) that it is a subject of an investigation, along with others, and that the DOJ believes that Granite Northeast’s claim of DBE credit for the Subcontractor was improper. In addition to the documents produced in response to the Grand Jury subpoena, Granite Northeast has provided requested information to the DOJ, along with other federal and state agencies (collectively the “Agencies”), concerning other DBE entities for which Granite Northeast has historically claimed DBE credit. The Agencies have informed Granite Northeast that they believe that the claimed DBE credit taken for some of those other DBE entities was improper. Granite Northeast has met several times since January 2013 with Assistant United States Attorneys and the Agencies’ representatives to discuss the government’s criminal investigation of the Grand Avenue Project participants, including Granite Northeast, and to discuss their respective positions on, and potential resolution of, the issues raised in the investigation. As a result of this investigation, Granite Northeast is subject to potential civil, criminal, and/or administrative penalties or sanctions, as well as certain costs related to future DBE compliance activities. Granite believes that the incurrence of some form of penalty or sanction is probable, and has therefore recorded what it believes to be the most likely amount of liability it may incur in its condensed consolidated balance sheet as of June 30, 2014. Granite believes that it is reasonably possible that it may incur liability in relation to this matter that is in excess of such accrual; however, it is not possible to reasonably estimate the amount or range of any such excess. The resolution of the matters under investigation could have direct or indirect consequences that could have a material adverse effect on our financial position, results of operations and/or liquidity.

27
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

15.
Business Segment Information
 
Our reportable segments are: Construction, Large Project Construction, Construction Materials and Real Estate. 
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 Large Project Construction segment focuses on large, complex 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 and dams, pipelines, canals, power related facilities, utilities and airport infrastructure. This segment primarily includes bid-build, design-build, construction management/general contractor contracts, and various contract methods relating to public, private partnerships, generally with contract values in excess of $75 million.
The Construction Materials segment mines and processes aggregates and operates plants that produce construction materials for internal use and for sale to third parties.
The Real Estate segment develops, operates, and sells real estate related projects and provides real estate services for the Company’s operations. The Real Estate segment’s current portfolio consists of residential, retail and office site development projects for sale to home and commercial property developers in Washington and California. During 2013, we concluded the majority of our 2010 EIP which included the impairment and planned orderly divestiture of our real estate investment business consistent with our strategy to focus on our core business. Consequently, during 2013 we recorded impairment charges on certain real estate assets in accordance with our EIP. When real estate assets which we continue to have a financial interest are sold, we may recognize additional restructuring charges or gains; however, we do not expect these charges or gains to be material to our consolidated financial statements. No restructuring charges were recorded during the three and six months ended June 30, 2014 and 2013 and an immaterial gain was recorded during the six months ended June 30, 2013.
The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies contained in our 2013 Annual Report on Form 10-K. We evaluate segment performance based on gross profit or loss, and do not include selling, general and administrative expenses nor non-operating income or expense. Segment assets include property and equipment, intangibles, goodwill, inventory, equity in construction joint ventures and real estate held for development and sale.

28
 
 
 
 



GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Summarized segment information for the three and six months ended June 30, 2014 and 2013 is as follows (in thousands):
 
 
Three Months Ended June 30,
 
 
Construction
 
Large Project Construction
 
Construction Materials
 
Real Estate
 
Total
2014
 
 
 
 

 
 
 
 

 
 

Total revenue from reportable segments
 
$
269,220

 
$
244,328

 
$
97,800

 
$

 
$
611,348

Elimination of intersegment revenue
 

 

 
(25,478
)
 

 
(25,478
)
Revenue from external customers
 
269,220

 
244,328

 
72,322

 

 
585,870

Gross profit (loss)
 
24,827

 
50,792

 
6,798

 
(2
)
 
82,415

Depreciation, depletion and amortization
 
4,229

 
4,020

 
5,512

 

 
13,761

2013 As Revised
 
 
 
 

 
 
 
 
 
 
Total revenue from reportable segments
 
$
308,602

 
$
181,557

 
$
97,872

 
$
4

 
$
588,035

Elimination of intersegment revenue
 

 

 
(37,687
)
 

 
(37,687
)
Revenue from external customers
 
308,602

 
181,557

 
60,185

 
4

 
550,348

Gross profit
 
24,070

 
21,571

 
3,954

 
1

 
49,596

Depreciation, depletion and amortization
 
6,033

 
3,554

 
5,891

 

 
15,478

 
 
Six Months Ended June 30,
 
 
Construction
 
Large Project Construction
 
Construction Materials
 
Real Estate
 
Total
2014
 
 
 
 

 
 
 
 

 
 

Total revenue from reportable segments
 
$
426,261

 
$
431,663

 
$
139,887

 
$
22

 
$
997,833

Elimination of intersegment revenue
 

 

 
(32,116
)
 

 
(32,116
)
Revenue from external customers
 
426,261

 
431,663

 
107,771

 
22

 
965,717

Gross profit
 
33,972

 
66,583

 
3,245

 
22

 
103,822

Depreciation, depletion and amortization
 
8,244

 
7,224

 
10,860

 

 
26,328

Segment assets
 
150,113

 
253,646

 
315,548

 
11,762

 
731,069

 
 
 
 
 
 
 
 
 
 
 
2013 As Revised
 
 

 
 

 
 

 
 

 
 

Total revenue from reportable segments
 
$
485,720

 
$
353,271

 
$
136,262

 
$
125

 
$
975,378

Elimination of intersegment revenue
 

 

 
(46,326
)
 

 
(46,326
)
Revenue from external customers
 
485,720

 
353,271

 
89,936

 
125

 
929,052

Gross profit (loss)
 
37,269

 
44,292

 
(2,021
)
 
112

 
79,652

Depreciation, depletion and amortization
 
11,692

 
5,530

 
11,456

 

 
28,678

Segment assets
 
161,524

 
206,778

 
351,295

 
50,697

 
770,294

 
 
 
 
 
 
 
 
 
 
 

A reconciliation of segment gross profit to consolidated income (loss) before provision for (benefit from) income taxes is as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
 
2014
 
2013 As Revised
 
2014
 
2013 As Revised
Total gross profit from reportable segments
 
$
82,415

 
$
49,596

 
$
103,822

 
$
79,652

Selling, general and administrative expenses 
 
(51,098
)
 
(46,789
)
 
(100,346
)
 
(103,950
)
Gain on sales of property and equipment
 
2,993

 
3,306

 
3,886

 
4,394

Other expense
 
(1,819
)
 
(3,117
)
 
(4,197
)
 
(5,954
)
Income (loss) before provision for (benefit from) income taxes
 
$
32,491

 
$
2,996

 
$
3,165

 
$
(25,858
)

29
 
 
 
 




Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Disclosure
 
From time to time, Granite makes certain comments and disclosures in reports and statements, including in this Quarterly Report on Form 10-Q, or statements made by its officers or directors, that are not based on historical facts, including statements regarding future events, occurrences, circumstances, activities, performance, outcomes and results, that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by words such as “future,” “outlook,” “assumes,” “believes,” “expects,” “estimates,” “anticipates,” “intends,” “plans,” “appears,” “may,” “will,” “should,” “could,” “would,” “continue,” and the negatives thereof or other comparable terminology or by the context in which they are made. In addition, other written or oral statements 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 expectations not being realized or otherwise materially affect our business, financial condition, results of operations, cash flows and liquidity. Such risks and uncertainties include, but are not limited to, those more specifically described in our Annual Report on Form 10-K under “Item 1A. Risk Factors.” Due to the inherent risks and uncertainties associated with our forward-looking statements, the reader is cautioned not to place undue reliance on them. The reader is also cautioned that the forward-looking statements contained herein speak only as of the date of this Quarterly Report on Form 10-Q and, except as required by law, we undertake no obligation to revise or update any forward-looking statements for any reason.


30
 
 
 
 




Overview
 
We are one of the largest diversified heavy civil contractors and construction materials producers in the United States, engaged in the construction and improvement of streets, roads, highways, mass transit facilities, airport infrastructure, bridges, trenchless and underground utilities, power related facilities, utilities, tunnels, dams and other infrastructure-related projects. We own aggregate reserves and plant facilities to produce construction materials for use in our construction business and for sale to third parties. We also operate a real estate investment business that we have been divesting of over the past three years as part of our 2010 Enterprise Improvement Plan (“EIP”). Our permanent offices are located in Alaska, Arizona, California, Colorado, Florida, Illinois, Nevada, New York, Texas, Utah and Washington. We have four reportable business segments: Construction, Large Project Construction, Construction Materials and Real Estate (see Note 15 of “Notes to the Condensed Consolidated Financial Statements”).
Our construction contracts are obtained through competitive bidding in response to solicitations by both public agencies and private parties and on a negotiated basis as a result of solicitations from private parties. Project owners use a variety of methods to make contractors aware of new projects, including posting bidding opportunities on agency websites, disclosing long-term infrastructure plans, advertising and other general solicitations. Our bidding activity is affected by such factors as the nature and volume of advertising and other solicitations, contract backlog, available personnel, current utilization of equipment and other resources, our ability to obtain necessary surety bonds and competitive considerations. Our contract review process includes identifying risks and opportunities during the bidding process and managing these risks through mitigation efforts such as insurance and pricing. Contracts fitting certain criteria of size and complexity are reviewed by various levels of management and, in some cases, by the Executive Committee of our Board of Directors. Bidding activity, contract backlog and revenue resulting from the award of new contracts may vary significantly from period to period.
Our typical construction project begins with the preparation and submission of a bid to a customer. If selected as the successful bidder, we generally enter into a contract with the customer that provides for payment upon completion of specified work or units of work as identified in the contract. We usually invoice our customers on a monthly basis. Our contracts frequently call for retention that is a specified percentage withheld from each payment until the contract is completed and the work accepted by the customer. Additionally, we generally defer recognition of profit on projects until there is sufficient information to determine the estimated profit on the project with a reasonable level of certainty (see “Gross Profit” discussion below) and our profit recognition is based on estimates that may change over time. Our revenue, gross margin and cash flows can differ significantly from period to period due to a variety of factors, including the projects’ stage of completion, the mix of early and late stage projects, our estimates of contract costs, outstanding contract change orders and claims and the payment terms of our contracts. The timing differences between our cash inflows and outflows require us to maintain adequate levels of working capital.

31
 
 
 
 




The four primary economic drivers of our business are (1) the overall health of the economy; (2) federal, state and local public funding levels; (3) population growth resulting in public and private development; and (4) 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. Greater competition can reduce our revenues and/or have a downward impact on our gross profit margins. 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. However, even these can be temporarily at risk as federal, state and local governments take actions to balance their budgets. Additionally, high 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.
In addition to business segments, we review our business by operating groups and by public and private market sectors. Our operating groups are defined as follows: (1) California; (2) Northwest, which primarily includes offices in Alaska, Arizona, Nevada, Utah and Washington; (3) Heavy Civil, which primarily includes offices in California, Florida, New York and Texas; and (4) Kenny, which primarily includes offices in Colorado and Illinois. Each of these operating groups may include financial results from our Construction 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.
Effective in the third quarter of 2013, we made certain changes to the organizational structure of the four operating groups. The most significant changes were to move our Arizona business from the Heavy Civil operating group to the Northwest operating group, and to reclassify the majority of the complex heavy-civil construction contracts to the Heavy Civil operating group. These changes were designed to improve operating efficiencies and better position the Company for long-term growth. Prior period amounts associated with these changes have been reclassified to conform to the current year presentation. These changes had no impact on our reportable business segments.



32
 
 
 
 




Current Economic Environment and Outlook

Executing on healthy backlog of $2.6 billion, our Construction and Large Project Construction segments are expected to deliver improved financial performance in 2014. The Construction business should perform aligned with the varied economic and public funding environments in the Western states and local communities we serve. Our Large Project Construction segment is building momentum with a number of new projects expected to drive improved profitability late in 2014. Revenue from the Construction Materials segment is expected to remain stable, or increase slightly, and margins are expected to improve compared to 2013.
Recent signs of recovery in the private sector largely have been offset by a continued highly competitive bidding environment. We continue to expect to grow our portfolio of new work across all segments in the next twelve months, with expected performance aligned to the economic, funding, and competitive environments where we work. Opportunities for profitable growth are expected to be driven by continued significant near and long-term bidding activity.
Strong attention is needed from Congress to provide short-term funding for the Highway Trust Fund, as well as the long-term stability of a new highway bill. Funding and financing stability ultimately remains critical to driving progress on important infrastructure investment at the federal, state and local levels. Without resolution of these issues, the near and long-term recovery and growth expectations of the construction industry are at risk. 

Results of Operations
 
Our operations are typically affected by weather conditions during the first and fourth quarters of our fiscal year which may alter our construction schedules and can create variability in our revenues and profitability. In addition, annual maintenance on our equipment and plants is typically performed during the first and fourth quarters, causing down time in many operations. Therefore, the results of operations for the three and six months of a given year are not necessarily indicative of the results to be expected for the full year.

The following table presents a financial summary on a comparative basis for the three and six months ended June 30, 2014 and 2013. Financial data included herein for the three and six months ended June 30, 2013 reflect the correction of accounting errors and reclassification adjustments to the condensed consolidated financial statements for the three and six months ended June 30, 2013 as described in Note 1 of “Notes to Condensed Consolidated Financial Statements.”
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
 
2014
 
2013 As Revised
 
2014
 
2013 As Revised
Total revenue
 
$
585,870

 
$
550,348

 
$
965,717

 
$
929,052

Gross profit
 
82,415

 
49,596

 
103,822

 
79,652

Operating income (loss)
 
34,310

 
6,113

 
7,362

 
(19,904
)
Total other expense
 
(1,819
)
 
(3,117
)
 
(4,197
)
 
(5,954
)
Amount attributable to non-controlling interests
 
(8,566
)
 
(363
)
 
(7,858
)
 
(2,518
)
Net income (loss) attributable to Granite Construction Inc.
 
$
13,641

 
$
1,419

 
$
(6,913
)
 
$
(20,563
)


33
 
 
 
 




Revenue

Total revenue by segment for the three and six months ended June 30, 2014 and 2013 is as follows:
Total Revenue by Segment
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
 
2014
 
2013 As Revised
 
2014
 
2013 As Revised
Construction
 
$
269,220

 
46.0
%
 
$
308,602

 
56.1
%
 
$
426,261

 
44.1
%
 
$
485,720

 
52.3
%
Large Project Construction
 
244,328

 
41.7

 
181,557

 
33.0

 
431,663

 
44.7

 
353,271

 
38.0

Construction Materials
 
72,322

 
12.3

 
60,185

 
10.9

 
107,771

 
11.2

 
89,936

 
9.7

Real Estate
 

 

 
4

 

 
22

 

 
125

 

Total
 
$
585,870

 
100.0
%
 
$
550,348

 
100.0
%
 
$
965,717

 
100.0
%
 
$
929,052

 
100.0
%

Construction Revenue
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
 
2014
 
2013 As Revised
 
2014
 
2013 As Revised
California:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public sector
 
$
92,756

 
34.4
%
 
$
94,314

 
30.6
%
 
$
159,277

 
37.2
%
 
$
156,360

 
32.1
%
Private sector
 
18,037

 
6.7

 
18,863

 
6.1

 
35,695

 
8.4

 
33,841

 
7.0

Northwest:
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
Public sector
 
91,697

 
34.1

 
116,335

 
37.7

 
114,120

 
26.8

 
144,517

 
29.8

Private sector
 
23,677

 
8.8

 
28,746

 
9.3

 
42,899

 
10.1

 
45,660

 
9.4

Heavy Civil:
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
Public sector
 
3,004

 
1.1

 
741

 
0.2

 
5,855

 
1.4

 
1,956

 
0.4

Private sector
 

 

 
39

 

 

 

 
525

 
0.1

Kenny:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Public sector
 
30,353

 
11.3

 
17,835

 
5.8

 
45,922

 
10.8

 
29,700

 
6.1

Private sector
 
9,696

 
3.6

 
31,729

 
10.3

 
22,493

 
5.3

 
73,161

 
15.1

Total
 
$
269,220

 
100.0
%
 
$
308,602

 
100.0
%
 
$
426,261

 
100.0
%
 
$
485,720

 
100.0
%
 
Construction revenue for the three and six months ended June 30, 2014 decreased by $39.4 million, or 12.8%, and $59.5 million, or 12.2%, respectively, compared to the same periods in 2013. The decreases were primarily due to ongoing projects nearing completion while new projects were just beginning in both the Northwest and Kenny. The decreases were partially offset by increases in the Heavy Civil business due to bid successes during 2013 that allowed work to begin in 2014.

34
 
 
 
 




Large Project Construction Revenue
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
 
2014
 
2013 As Revised
 
2014
 
2013 As Revised
California1
 
$
17,571

 
7.1
%
 
$
21,680

 
12.0
%
 
$
34,808

 
8.0
%
 
$
40,011

 
11.4
%
Northwest1
 
5,555

 
2.3

 
6,076

 
3.3

 
8,457

 
2.0

 
17,986

 
5.1

Heavy Civil1
 
192,188

 
78.7

 
136,524

 
75.2

 
334,171

 
77.4

 
267,554

 
75.7

Kenny
 
 
 

 
 
 

 
 
 
 
 
 
 
 
Public sector
 
23,601

 
9.7

 
17,277

 
9.5

 
41,789

 
9.7

 
$
27,720

 
7.8

Private sector
 
5,413

 
2.2

 

 

 
12,438

 
2.9

 
$

 

Total
 
$
244,328

 
100.0
%
 
$
181,557

 
100.0
%
 
$
431,663

 
100.0
%
 
$
353,271

 
100.0
%
1For the periods presented, Large Project Construction revenue was earned from the public sector.
 
Large Project Construction revenue for the three and six months ended June 30, 2014 increased by $62.8 million, or 34.6%, and $78.4 million, or 22.2%, respectively, compared to the same periods in 2013 due to entering the 2014 year with greater backlog than 2013 and settlement of outstanding issues. The increases during the six months ended June 30, 2014 were partially offset by decreases in the California and Northwest group revenues due to ongoing projects nearing completion coupled with delayed starts on other work.

Construction Materials Revenue
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
 
2014
 
2013
 
2014
 
2013
California
 
$
39,715

 
54.9
%
 
$
31,837

 
52.9
%
 
$
64,161

 
59.5
%
 
$
52,398

 
58.3
%
Northwest
 
32,607

 
45.1

 
28,348

 
47.1

 
43,610

 
40.5

 
37,537

 
41.7

Total
 
$
72,322

 
100.0
%
 
$
60,185

 
100.0
%
 
$
107,771

 
100.0
%
 
$
89,935

 
100.0
%
 
Construction Materials revenue for the three and six months ended June 30, 2014 increased by $12.1 million, or 20.2%, and $17.8 million, or 19.8%, respectively, compared to the same periods in 2013 primarily due to increased sales of asphalt concrete in both operating groups.
 
Real Estate Revenue

Real Estate revenue remained relatively unchanged during the three and six months ended June 30, 2014 compared to the same periods in 2013. As we complete our EIP, the size of our real estate portfolio is reduced and will have an impact on current and future real estate revenues.
     
Contract Backlog
 
Our contract backlog consists of the unearned revenue on awarded contracts, including 100% of our consolidated joint venture contracts and our proportionate share of unconsolidated joint venture contracts. We generally include a project in our contract backlog at the time it is awarded and funding is in place. Certain federal government contracts where funding is appropriated on a periodic basis are included in contract backlog at the time of the award. Contracts that include unexercised contract options and unissued task orders are included in contract backlog as task orders are issued or options are exercised. 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.

35
 
 
 
 




The following tables illustrate our contract backlog as of the respective dates:
Total Contract Backlog by Segment
 
  
 
 
(dollars in thousands)
 
June 30, 2014
 
March 31, 2014
 
June 30, 2013
Construction
 
$
974,986

 
38.1
%
 
$
786,458

 
30.6
%
 
$
807,686

 
28.9
%
Large Project Construction
 
1,586,879

 
61.9

 
1,783,254

 
69.4

 
1,990,201

 
71.1

Total
 
$
2,561,865

 
100.0
%
 
$
2,569,712

 
100.0
%
 
$
2,797,887

 
100.0
%

Construction Contract Backlog
 
 
 
 
(dollars in thousands)
 
June 30, 2014
 
March 31, 2014
 
June 30, 2013
California:
 
 
 
 
 
 
 
 
 
 
 
 
Public sector
 
$
352,760

 
36.1
%
 
$
369,812

 
47.0
%
 
$
365,761

 
45.3
%
Private sector
 
76,777

 
7.9

 
78,703

 
10.0

 
37,309

 
4.6

Northwest:
 
 
 
 

 
 
 
 

 
 
 
 

Public sector
 
321,748

 
33.0

 
185,714

 
23.6

 
256,484

 
31.8

Private sector
 
50,673

 
5.2

 
28,053

 
3.6

 
50,429

 
6.2

Heavy Civil:
 
 
 
 

 
 
 
 

 
 
 
 

Public sector
 
41,347

 
4.2

 
44,727

 
5.7

 
961

 
0.1

Kenny:
 
 
 
 
 
 
 
 
 
 
 
 
Public sector
 
62,890

 
6.5

 
50,388

 
6.4

 
49,902

 
6.2

Private sector
 
68,791

 
7.1

 
29,061

 
3.7

 
46,840

 
5.8

Total
 
$
974,986

 
100.0
%
 
$
786,458

 
100.0
%
 
$
807,686

 
100.0
%
 
Construction contract backlog of $975.0 million at June 30, 2014 was $188.5 million, or 24.0% higher than at March 31, 2014 and $167.3 million, or 20.7%, higher than at June 30, 2013. Significant new awards during the three months ended June 30, 2014, included a $33.8 million highway project in Arizona and a $45.2 million runway rehabilitation project in Alaska. The increase at June 30, 2014 when compared to June 30, 2013 was primarily due to improved success rates on bidding activity, partially offset by progress on existing projects, in all operating groups and sectors except the California public sector. The decrease in the California public sector was due to progress on existing projects without the offset of new awards. Not included in Construction contract backlog as of June 30, 2014 is $88.1 million associated with Kenny underground contracts that will be booked into contract backlog as additional task orders are issued by the owners, the majority of which is expected to occur during 2014.


36
 
 
 
 




Large Project Construction Contract Backlog
 
   
 
   
(dollars in thousands)
 
June 30, 2014
 
March 31, 2014
 
June 30, 2013
California1
 
$
35,183

 
2.2
%
 
$
46,923

 
2.6
%
 
$
58,969

 
3.0
%
Northwest1
 
1,667

 
0.1

 
4,010

 
0.2

 
12,285

 
0.6

Heavy Civil1
 
1,262,349

 
79.6

 
1,422,246

 
79.8

 
1,728,913

 
86.9

Kenny:
 
 
 


 
 
 


 
 
 


Public sector2
 
198,046

 
12.5

 
141,427

 
7.9

 
190,034

 
9.5

Private sector
 
89,634

 
5.6

 
168,648

 
9.5

 

 

Total
 
$
1,586,879

 
100.0
%
 
$
1,783,254

 
100.0
%
 
$
1,990,201

 
100.0
%
1For all dates presented, Large Project Construction contract backlog was related to contracts in the Public sector.
2As of June 30, 2014, March 31, 2014 and June 30, 2013, $44.2 million, $53.9 million and $69.5 million, respectively, of Kenny public sector contract backlog was translated from Canadian dollars to U.S. dollars at the spot rate in effect at the date of reporting.
 
Large Project Construction contract backlog of $1.6 billion as of June 30, 2014 was $196.4 million, or 11.0%, lower than at March 31, 2014 and $403.3 million, or 20.3%, lower than at June 30, 2013. The decreases were primarily due to progress on existing projects with the decrease since June 30, 2013 partially offset by new awards during the period. During the six months ended June 30, 2014, the Granite joint venture team was selected to design and build a highway improvement project in Florida. We will book our 30 percent share of the $2.3 billion project into contract backlog once funding is in place, which is expected to occur in the third quarter of 2014.
Non-controlling partners’ share of Large Project Construction contract backlog as of June 30, 2014March 31, 2014, and June 30, 2013 was $36.5 million, $48.6 million and $82.3 million, respectively.


37
 
 
 
 




Gross Profit (Loss)
 
The following table presents gross profit (loss) by business segment for the respective periods:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
 
2014
 
2013 As Revised
 
2014
 
2013 As Revised
Construction
 
$
24,827

 
$
24,070

 
$
33,972

 
$
37,269

Percent of  segment revenue
 
9.2
 %
 
7.8
%
 
8.0
%
 
7.7
 %
Large Project Construction
 
50,792

 
21,571

 
66,583

 
44,292

Percent of segment revenue
 
20.8

 
11.9

 
15.4

 
12.5

Construction Materials
 
6,798

 
3,954

 
3,245

 
(2,021
)
Percent of segment revenue
 
9.4

 
6.6

 
3.0

 
(2.2
)
Real Estate
 
(2
)
 
1

 
22

 
112

Percent of segment revenue
 
(100.0
)
 
25.0

 
100.0

 
89.6

Total gross profit
 
$
82,415

 
$
49,596

 
$
103,822

 
$
79,652

Percent of total revenue
 
14.1
 %
 
9.0
%
 
10.8
%
 
8.6
 %
 
For the majority of our contracts, revenue in an amount equal to cost incurred is recognized until there is sufficient information to determine the estimated profit on the project with a reasonable level of certainty. Gross profit can vary significantly in periods when deferred profit is recognized on one or more projects or, conversely, in periods where contract backlog is growing rapidly and a higher percentage of projects are in their early stages with no associated gross profit recognition.

The following table presents revenue from projects that have not yet recognized profit:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Construction
 
$
38,512

 
$
37,144

 
$
46,494

 
$
41,194

Large Project Construction
 
42,563

 
12,728

 
75,416

 
12,777

Total revenue from contracts with deferred profit
$
81,075

 
$
49,872

 
$
121,910

 
$
53,971




38
 
 
 
 




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 three and six months ended June 30, 2014 and 2013, we did not identify any material amounts that should have been recorded in a prior period.
Construction gross profit for the three and six months ended June 30, 2014 increased by $0.8 million, or 3.1%, and decreased $3.3 million, or 8.8%, respectively, compared to the same periods in 2013. Construction gross profit as a percentage of segment revenue for the three months ended June 30, 2014 increased to 9.2% from 7.8% and to 8.0% from 7.7% during the six months ended June 30, 2014 when compared to the same periods in 2013. The increases were primarily due to improved cost efficiencies across all operating groups.
Large Project Construction gross profit for the three months ended June 30, 2014 increased by $29.2 million, or 135.5%, and increased $22.3 million, or 50.3%, for the six months ended June 30, 2014 when compared to the same periods in 2013 due to an increase in the impact from initial gross profit recognition, partially offset by our completion of projects in the Heavy Civil group.
Construction Materials gross profit for the three and six months ended June 30, 2014 increased by $2.8 million, or 71.9%, and $5.3 million, respectively, compared to the same periods in 2013. The increases were primarily due to sales volume increases attributable to improved bidding and execution, as well as operating cost reductions in both the California and Northwest groups.



39
 
 
 
 




Selling, General and Administrative Expenses

The following table presents the components of selling, general and administrative expenses for the respective periods:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
 
2014
 
2013 As Revised
 
2014
 
2013 As Revised
Selling
 
 

 
 

 
 

 
 

Salaries and related expenses
 
$
10,274

 
$
9,703

 
$
21,463

 
$
21,240

Other selling expenses
 
2,857

 
73

 
4,005

 
2,112

Total selling
 
13,131

 
9,776

 
25,468

 
23,352

General and administrative
 
 

 
 

 
 

 
 

Salaries and related expenses
 
15,436

 
15,700

 
32,512

 
32,502

Restricted stock amortization
 
2,390

 
2,679

 
7,880

 
9,639

Other general and administrative expenses
 
20,141

 
18,634

 
34,486

 
38,457

Total general and administrative
 
37,967

 
37,013

 
74,878

 
80,598

Total selling, general and administrative
 
$
51,098

 
$
46,789

 
$
100,346

 
$
103,950

Percent of revenue
 
8.7
%
 
8.5
%
 
10.4
%
 
11.2
%
 
Selling, general and administrative expenses for the three and six months ended June 30, 2014 increased $4.3 million, or 9.2% and decreased $3.6 million, or 3.5%, respectively, compared to the same periods in 2013.
Selling Expenses
Selling expenses include the costs for materials facility permits, business development, estimating and bidding. Selling expenses can vary depending on the volume of projects in process and the number of employees assigned to estimating and bidding activities. As projects are completed or the volume of work slows down, we temporarily redeploy project employees to bid on new projects, moving their salaries and related costs from cost of revenue to selling expenses. Selling expenses during the three and six months ended June 30, 2014 increased $3.4 million, or 34.3%, and $2.1 million, or 9.1%, respectively, compared to the same periods in 2013 primarily due to an increase in costs related to increased bidding activity during the 2014 periods.
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. These costs include variable cash and restricted stock performance-based incentives for select management personnel on which our compensation strategy heavily relies. 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.
General and administrative expenses for the three months ended June 30, 2014 remained relatively unchanged and decreased $5.7 million, or 7.1% for the six months ended June 30, 2014 compared to the same periods in 2013 due to a decrease in Kenny integration costs and timing of stock amortization and incentive compensation.

40
 
 
 
 




Other Income (Expense)
 
The following table presents the components of other income (expense) for the respective periods:
 

Three Months Ended June 30,

Six Months Ended June 30,
(in thousands)

2014

2013

2014

2013
Interest income

$
413


$
380


$
893


$
508

Interest expense

(4,339
)

(3,700
)

(7,937
)

(7,345
)
Equity in income of affiliates

410


698


1,202


275

Other income (expense), net

1,697


(495
)

1,645


608

Total other expense

$
(1,819
)

$
(3,117
)

$
(4,197
)

$
(5,954
)
 
Other income (expense), net for the three and six months ended June 30, 2014 improved $2.2 million and $1.0 million, or 170.6%, respectively, compared to the same periods in 2013. The improvement was primarily due to changes in the fair market values of our interest rate swap and Non-Qualified Deferred Compensation plan assets.

Income Taxes
 
The following table presents the provision for (benefit from) income taxes for the respective periods:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
 
2014
 
2013 As Revised
 
2014
 
2013 As Revised
Provision for (benefit from) income taxes
 
$
10,284

 
$
1,214

 
$
2,220

 
$
(7,813
)
Effective tax rate
 
31.7
%
 
40.5
%
 
70.1
%
 
30.2
%
 
We calculate our income tax provision at the end of each interim period by estimating our annual effective tax rate and applying that rate to our year-to-date ordinary earnings. The effect of changes in enacted tax laws, tax rates or tax status is recognized in the interim period in which the change occurs.

Our effective tax rate decreased to 31.7% from 40.5% for the three months ended June 30, 2014 primarily due to adjusting the effective tax rate to the current estimate of our annual effective tax rate. Our effective tax rate increased to 70.1% from 30.2% for the six months ended June 30, 2014 due to the low income before provision for income taxes relative to the effect of state tax laws which were enacted during the three months ended March 31, 2014.
  
Non-controlling Interests
 
The following table presents the amount attributable to non-controlling interests in consolidated subsidiaries for the respective periods:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
 
2014
 
2013 As Revised
 
2014
 
2013 As Revised
Amount attributable to non-controlling interests
 
$
(8,566
)
 
$
(363
)
 
$
(7,858
)
 
$
(2,518
)
 
The amount attributable to non-controlling interests represents the non-controlling owners’ share of the income or loss of our consolidated construction joint ventures and real estate entities. The change for the three and six months ended June 30, 2014 was primarily due to certain profitable projects nearing completion and the settlement of outstanding issues with contract owners in the 2014 periods.



41
 
 
 
 




Certain Legal Proceedings

As discussed in Note 14 of “Notes to the Condensed Consolidated Financial Statements,” under certain circumstances the resolution of certain legal proceedings to which we are subject could have direct or indirect consequences that could have a material adverse effect on our financial position, results of operations, cash flows and/or liquidity.

Liquidity and Capital Resources
 
We believe our cash and cash equivalents, short-term investments and cash 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 through the next twelve months. We maintain a collateralized revolving credit facility of $215.0 million, of which $134.3 million was available at June 30, 2014, primarily to provide capital needs to fund growth opportunities, generated either internally or through acquisitions (see “Credit Agreement” section below for further information). We do not anticipate that this credit facility will be required to fund future working capital needs associated with our existing operations within the next twelve months. If we experience a prolonged change in our business operating results or make a significant acquisition, we may need to acquire additional sources of financing, which, if available, may be limited by the terms of our existing debt covenants, or may require the amendment of our existing debt agreements. There can be no assurance that sufficient capital will continue to be available in the future or that it will be available on terms acceptable to us.
The following table presents our cash, cash equivalents and marketable securities, including amounts from our consolidated joint ventures, as of the respective dates:
(in thousands)

June 30,
2014

December 31,
2013

June 30,
2013
Cash and cash equivalents excluding consolidated joint ventures

$
117,349


$
190,321


$
184,027

Consolidated construction joint venture cash and cash equivalents1

29,109


38,800


63,806

Total consolidated cash and cash equivalents

146,458


229,121


247,833

Short-term and long-term marketable securities2

112,132


117,202


76,496

Total cash, cash equivalents and marketable securities

$
258,590


$
346,323


$
324,329

 
1The volume and stage of completion of contracts from our consolidated construction joint ventures 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.
2See Note 4 of “Notes to the Condensed Consolidated Financial Statements” for the composition of our marketable securities.

Our primary sources of liquidity are cash and cash equivalents and marketable securities. We may also from time to time 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, with the June 30, 2013 balance including municipal bonds as well. Cash and cash equivalents held by our consolidated joint ventures are primarily used to fulfill the working capital needs of each joint venture’s project, and generally cannot be distributed to any of the venture partners without the consent of the majority of the venture partners. Consolidated joint ventures were responsible for $9.7 million, or 11.7%, of the $82.7 million decrease in cash and cash equivalents during the six months ended June 30, 2014.
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, such as with the acquisition of Kenny in December 2012.
In March 2014, we entered into an interest rate swap with a notional amount of $100 million which matures in June 2018 to convert the interest rate of our 2019 Notes (as defined in “Senior Notes Payable” section below) from a fixed rate of 6.11% to a floating rate of 4.15% plus six-month LIBOR. The interest rate swap is reported at fair value. During the three and six months ended June 30, 2014, we recorded $1.2 million and $0.9 million of income related to this interest rate swap in other (expense) income, net in our condensed consolidated statement of operations.


42
 
 
 
 




Cash Flows
 
Six Months Ended June 30,
(in thousands)
 
2014
 
2013 As Revised
Net cash (used in) provided by:
 
 
 
 
Operating activities
 
$
(72,388
)
 
$
(51,648
)
Investing activities
 
(9,197
)
 
17,626

Financing activities
 
(1,078
)
 
(40,135
)
 
Cash flows from operating activities result primarily from our earnings or losses, and are also impacted by changes in operating assets and liabilities. As a large construction and heavy civil contractor and construction materials producer, our operating cash flows are subject to the cycles associated with winning, performing and closing projects, including the timing related to funding construction joint ventures and the resolution of uncertainties inherent in the complex nature of the work that we perform.
Cash used in operating activities of $72.4 million for the six months ended June 30, 2014 represents a $20.7 million increase from the amount of cash used in operating activities during the same period in 2013. The unfavorable change was mainly attributable to a $23.5 million decrease in net cash from distributions from unconsolidated joint ventures and an $18.7 million decrease in net cash from working capital, partially offset by a $21.5 million increase in net income after adjusting for non-cash adjustments.
Cash used in investing activities of $9.2 million for the six months ended June 30, 2014 represents a $26.8 million change from the $17.6 million of cash provided by investing activities during the same period in 2013. The change in net cash related to investing activities was primarily due to a decrease in net proceeds from marketable securities driven by the Company’s cash flow requirements and/or the maturities of investments.
Cash used in financing activities of $1.1 million for the six months ended June 30, 2014 decreased $39.1 million compared to the same period in 2013. The favorable change was primarily driven by a decrease in net distributions to non-controlling partners related to consolidated construction joint ventures and a $10.0 million decrease in long-term debt principal payments.
 
Capital Expenditures
 
During the six months ended June 30, 2014, we had capital expenditures of $20.1 million compared to $19.4 million during the same period in 2013. Major capital expenditures are typically for aggregate and asphalt production facilities, aggregate reserves, construction equipment, buildings and leasehold improvements and investments in our information technology systems. The timing and amount of such expenditures can vary based on the progress of planned capital projects, the type and size of construction projects, changes in business outlook and other factors. We currently anticipate investing between $40.0 million and $60.0 million in capital expenditures during 2014. During the year ended December 31, 2013, we had capital expenditures of $43.7 million.


43
 
 
 
 




Credit Agreement
 
We have a $215.0 million committed revolving credit facility, with a sublimit for letters of credit of $100.0 million (the “Credit Agreement”), which expires on October 11, 2016, of which $134.3 million was available at June 30, 2014. At June 30, 2014, December 31, 2013 and June 30, 2013, there was a revolving loan of $70.0 million outstanding under the Credit Agreement related to financing the Kenny acquisition, which is included in long-term debt on our condensed consolidated balance sheets. In addition, there were standby letters of credit totaling approximately $10.8 million as of June 30, 2014. The letters of credit will expire between August 2014 and December 2016.
Borrowings under the Credit Agreement bear interest at LIBOR or a base rate (at our option), plus an applicable margin based on certain financial ratios calculated quarterly. LIBOR varies based on the applicable loan term, market conditions and other external factors. The applicable margin was 2.25% for loans bearing interest based on LIBOR and 1.25% for loans bearing interest at the base rate at June 30, 2014. Accordingly, the effective interest rate was between 2.48% and 4.50% at June 30, 2014. Borrowings at the base rate have no designated term and may be repaid without penalty any time prior to the Credit Agreement’s maturity date. Borrowings at a LIBOR rate have a term no less than one month and no greater than one year. Typically, at the end of such term, such borrowings may be paid off or rolled over at our discretion into either a borrowing at the base rate or a borrowing at a LIBOR rate with similar terms, not to exceed the maturity date of the Credit Agreement. On a periodic basis, we assess the timing of payment depending on facts and circumstances that exist at the time of our assessment. 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 below) by first priority liens (subject only to other liens permitted under the Credit Agreement) on substantially all of the assets of the Company and our subsidiaries that are 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 subsequently our Consolidated Fixed Charge Coverage Ratio is less than 1.25 or our Consolidated Leverage Ratio is greater than 2.50, then we will be required to promptly re-pledge substantially all of the assets of the Company and our subsidiaries that are guarantors or borrowers under the Credit Agreement. As of June 30, 2014, the conditions for the exercise of this option were not satisfied.

Senior Notes Payable
 
As of June 30, 2014, senior notes payable in the amount of $200.0 million were due to a group of institutional holders in five equal annual installments beginning in 2015 and bear interest at 6.11% per annum (“2019 Notes”).

Our obligations under the note purchase agreements 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 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.

Surety Bonds and Real Estate Mortgages
 
We are generally required to provide various types of surety bonds that provide an additional measure of security under certain public and private sector contracts. At June 30, 2014, approximately $1.8 billion of our contract backlog was bonded. Performance bonds do not have stated expiration dates; rather, we are generally released from the bonds after the owner accepts the work performed under contract. The ability to maintain bonding capacity to support our current and future level of contracting requires that we maintain cash and working capital balances satisfactory to our sureties.
 
A significant portion of our real estate held for development and sale is subject to mortgage indebtedness. All of this indebtedness is non-recourse to Granite but is recourse to the real estate entities that incurred the indebtedness. 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 entities to repay portions of the debt. As of June 30, 2014, the principal amount of debt of our consolidated real estate entities secured by mortgages was $7.3 million, of which approximately $1.2 million was included in current liabilities and approximately $6.1 million was included in long-term liabilities on our condensed consolidated balance sheets.


44
 
 
 
 




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 (1) us no longer being entitled to borrow under the agreements; (2) termination of the agreements; (3) the requirement that any letters of credit under the agreements be cash collateralized; (4) acceleration of the maturity of outstanding indebtedness under the agreements and/or (5) foreclosure on any collateral securing the obligations under the agreements.
The most significant financial covenants under the terms of our Credit Agreement and 2019 NPA require the maintenance of a minimum Consolidated Tangible Net Worth, a minimum Consolidated Interest Coverage Ratio and a maximum Consolidated Leverage Ratio. The calculations and terms of such financial covenants are defined in the amendments to the Credit Agreement and 2019 NPA, which were filed as Exhibits 10.31 and 10.32, respectively, to our Form 10-K filed March 3, 2014. The terms include, among other things: (i) a minimum Consolidated Tangible Net Worth of $600.0 million; (ii) a maximum Consolidated Leverage Ratio of 3.50; and (iii) a minimum Consolidated Interest Coverage Ratio of 4.00. The maximum Consolidated Leverage Ratio decreases to 3.25 in the quarter ending September 30, 2014, and to 3.00 thereafter. As of June 30, 2014, the Consolidated Tangible Net Worth was $741.3 million, the Consolidated Leverage Ratio was 2.28, and the Consolidated Interest Coverage Ratio was 8.02.
As of June 30, 2014, we were in compliance with all covenants contained in the Credit Agreement and 2019 NPA, as amended, and the debt agreements related to our consolidated real estate entities. 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
 
In 2007, our Board of Directors authorized us to purchase up to $200.0 million of our common stock at management’s discretion. As of June 30, 2014, $64.1 million remained available under this authorization. We did not purchase shares under the share purchase program in any of the periods presented.

Website Access
 
Our website address is www.graniteconstruction.com. On our website we make available, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). The information on our website is not incorporated into, and is not part of, this report. These reports, and any amendments to them, are also available at the website of the SEC, www.sec.gov.


45
 
 
 
 




Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
There has been no significant change in our exposure to market risks since December 31, 2013.
 
Item 4.
CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management carried out, as of June 30, 2014, with the participation of our Chief Executive Officer and our Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2014, our disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. 
During quarter ended June 30, 2014, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


46
 
 
 
 




PART II. OTHER INFORMATION

Item 1.
LEGAL PROCEEDINGS

The description of the matters set forth in Part I, Item 1 of this Report under “Note 13 - Legal Proceedings” is incorporated herein by reference.
         
Item 1A. RISK FACTORS

There have been no material changes in the risk factors previously disclosed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
During the three months ended June 30, 2014, we did not sell any of our equity securities that were not registered under the Securities Act of 1933, as amended. The following table sets forth information regarding the repurchase of shares of our common stock during the three months ended June 30, 2014:
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
 
April 1, 2014 through April 30, 2014
 
1,776

 
$
39.91

 

 
$
64,065,401

 
May 1, 2014 through May 31, 2014
 
230

 
$
34.87

 

 
$
64,065,401

 
June 1, 2014 through June 30, 2014
 
318

 
$
35.45

 

 
$
64,065,401

 
 
 
2,324

 
$
38.80

 

 
 
 
1The number of shares purchased is in connection with employee tax withholding for shares/units vested under our Amended and Restated 1999 Equity Incentive Plan.
2In October 2007, our Board of Directors authorized us to purchase, at management’s discretion, up to $200.0 million of our common stock. Under this purchase program, the Company may purchase shares from time to time on the open market or in private transactions. The specific timing and amount of purchases will vary based on market conditions, securities law limitations and other factors. Purchases under the share purchase program may be commenced, suspended or discontinued at any time and from time to time without prior notice. 

Item 3.
DEFAULTS UPON SENIOR SECURITIES

None.
 
Item 4.
MINE SAFETY DISCLOSURES

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17CFR 229.104) is included in Exhibit 95 to this Quarterly Report on Form 10-Q.

Item 5.
OTHER INFORMATION

Not Applicable.


47
 
 
 
 




Item 6. EXHIBITS
 
††
101.INS 
XBRL Instance Document
101.SCH 
XBRL Taxonomy Extension Schema
101.CAL 
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB 
XBRL Taxonomy Extension Label Linkbase
101.PRE 
XBRL Taxonomy Extension Presentation Linkbase
 
 
 
 
Filed herewith
 
††
Furnished herewith

48
 
 
 
 




SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
GRANITE CONSTRUCTION INCORPORATED
 
 
 
 
 
Date:
August 1, 2014
 
By:  
/s/ Laurel J. Krzeminski
 
 
 
 
Laurel J. Krzeminski
 
 
 
 
Senior Vice President and Chief Financial Officer
 
 
 
 
(Principal Financial and Accounting Officer)

49