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GRANITE CONSTRUCTION INC - Annual Report: 2014 (Form 10-K)



 
                     
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
(Exact name of registrant as specified in its charter)
Delaware
77-0239383
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
 
 
585 West Beach Street
 
Watsonville, California
95076
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code: (831) 724-1011
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $0.01 par value
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. 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 Act). Yes o No x 
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was $1.4 billion as of June 30, 2014, based upon the price at which the registrant’s Common Stock was last sold as reported on the New York Stock Exchange on such date.
At February 18, 201539,187,087 shares of Common Stock, par value $0.01, of the registrant were outstanding. 
DOCUMENTS INCORPORATED BY REFERENCE
Certain information called for by Part III is incorporated by reference to the definitive Proxy Statement for the Annual Meeting of Shareholders of Granite Construction Incorporated to be held on June 4, 2015, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2014.
 



Index
 PART I

PART II

PART III
 

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

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
 
From time to time, Granite makes certain comments and disclosures in reports and statements, including in this Annual Report on Form 10-K, or statements made by its officers or directors, that are not based on historical facts, including statements regarding future events, occurrences, circumstances, activities, performance, outcomes and results that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by words such as “future,” “outlook,” “assumes,” “believes,” “expects,” “estimates,” “anticipates,” “intends,” “plans,” “appears,” “may,” “will,” “should,” “could,” “would,” “continue,” and the negatives thereof or other comparable terminology or by the context in which they are made. In addition, other written or oral statements which constitute forward-looking statements have been made and may in the future be made by or on behalf of Granite. These forward-looking statements are estimates reflecting the best judgment of senior management and reflect our current expectations regarding future events, occurrences, circumstances, activities, performance, outcomes and results. These expectations may or may not be realized. Some of these expectations may be based on beliefs, assumptions or estimates that may prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our 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 this report under “Item 1A. Risk Factors.” Due to the inherent risks and uncertainties associated with our forward-looking statements, the reader is cautioned not to place undue reliance on them. The reader is also cautioned that the forward-looking statements contained herein speak only as of the date of this Annual Report on Form 10-K, and, except as required by law, we undertake no obligation to revise or update any forward-looking statements for any reason.

PART I
Item 1. BUSINESS 

Introduction
Granite Construction Company was originally incorporated in 1922. In 1990, Granite Construction Incorporated was formed as the holding company for Granite Construction Company and its wholly-owned subsidiaries and was incorporated in Delaware. Unless otherwise indicated, the terms “we,”  “us,”  “our,”  “Company” and “Granite” refer to Granite Construction Incorporated and its consolidated subsidiaries.
We are one of the largest diversified heavy civil contractors and construction materials producers in the United States. We operate nationwide, serving both public and private sector clients. Within the public sector, we primarily concentrate on heavy-civil infrastructure projects, including the construction of streets, roads, highways, mass transit facilities, airport infrastructure, bridges, trenchless and underground utilities, power-related facilities, utilities, tunnels, dams and other infrastructure-related projects. Within the private sector, we perform site preparation and infrastructure services for residential development, energy development, commercial and industrial sites, and other facilities, as well as provide construction management professional services.
We own and lease substantial aggregate reserves and own a number of plant facilities to produce construction materials for use in our construction business and for sale to third parties. We also have one of the largest contractor-owned heavy construction equipment fleets in the United States. We believe that the ownership of these assets enables us to compete more effectively by ensuring availability of these resources at a favorable cost.
In December 2012, we purchased 100% of the outstanding stock of Kenny Construction Company (“Kenny”), a Northbrook, Illinois-based national contractor and construction manager. Amounts associated with Kenny are included in our consolidated statements of operations and of cash flows for the years ended December 31, 2014 and 2013 and on the consolidated balance sheets as of December 31, 2014 and 2013.
Operating Structure
During 2014, our business was organized into four reportable business segments. These business segments were: Construction, Large Project Construction, Construction Materials and Real Estate. In the fourth quarter of 2014, we determined that the Real Estate segment no longer met the requirements of a reportable business segment under Accounting Standard Codification (“ASC”) 280 and have eliminated it as a segment for all periods presented. See Note 20 of “Notes to the Consolidated Financial Statements” for additional information about our reportable business segments.

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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.
Construction: Revenue from our Construction segment was $1.2 billion and $1.3 billion (52.1% and 55.2% of our total revenue) in 2014 and 2013, respectively. Revenue from our Construction segment is derived from both public and private sector clients. The Construction segment performs construction management, as well as various civil construction projects with a large portion of the work 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 and construction management projects completed within two years with a contract value of less than $75 million.
Large Project Construction: Revenue from our Large Project Construction segment was $825.0 million and $777.8 million (36.3% and 34.3% of our total revenue) in 2014 and 2013, respectively. 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 and construction management/general contractor contracts, together with various contract methods relating to Public Private Partnerships, generally with contract values in excess of $75 million.
We utilize the design-build construction management/general contract, construction management at-risk, and other alternative procurement methods of project delivery. Unlike traditional projects where owners first hire a design firm or design a project themselves and then put the project out to bid for construction, design-build projects provide the owner with a single point of responsibility and a single contact for both final design and construction. Although design-build projects carry additional risk as compared to traditional bid/build projects, the profit potential can also be higher. Under the construction management/general contract method of delivery, we contract with owners to manage the design phase of the contract with the understanding that we will negotiate a contract on the construction phase when the design nears completion. Revenue from alternative procurement method projects jointly represented 72.1% and 63.6% of Large Project Construction revenue in 2014 and 2013, respectively.
We participate in joint ventures with other construction companies mainly on projects in our Large Project Construction segment. Joint ventures are typically used for large, technically complex projects, including design-build projects, where it is necessary or desirable to share risk and resources. Joint venture partners typically provide independently prepared estimates, shared financing and equipment, and often bring local knowledge and expertise (see “Joint Ventures” section below).
Construction Materials: Revenue from our Construction Materials segment was $263.8 million and $237.9 million (11.6% and 10.5% of our total revenue) in 2014 and 2013, respectively. The Construction Materials segment mines and processes aggregates and operates plants that produce construction materials for internal use and for sale to third parties. We have significant aggregate reserves that we own or lease through long-term leases. Sales to our construction projects represented 30.5% of our gross sales during 2014, and ranged from 30.5% to 45.6% over the last five years. The remainder is sold to third parties.
During 2013 and in connection with our 2010 Enterprise Improvement Plan (“EIP”), we recorded $14.7 million in restructuring charges related to non-performing quarry sites and incurred $3.2 million in lease termination charges, both related to the Construction Materials segment. During 2014 we recorded a $1.3 million restructuring gain resulting from our release from the lease obligations. In addition, during 2013 as part of the EIP we recorded $31.1 million of non-cash impairment charges, including amounts attributable to non-controlling interests of $3.9 million, related to all of the remaining consolidated real estate assets. Separate from the EIP, we recorded $1.3 million in non-cash impairment gains and $3.2 million in non-cash impairment charges during 2014 and 2013, respectively, related to the Construction Materials segment. See Note 11 of “Notes to the Consolidated Financial Statements” and “Restructuring and Impairment (Gains) Charges, Net” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.

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Business Strategy
Our fundamental objective is to increase long-term shareholder value as measured by the appreciation of the value of our common stock over a period of time, as well as dividend payouts. A specific measure of our financial success is the achievement of a return on net assets greater than the cost of capital. The following are key factors in our ability to achieve these objectives:
Aggregate Materials - We own and lease aggregate reserves and own processing plants that are vertically integrated into our construction operations. By ensuring availability of these resources and providing quality products, we believe we have a competitive advantage in many of our markets, as well as a source of revenue and earnings from the sale of construction materials to third parties.
Controlled Growth - We intend to grow our business by working on many types of infrastructure projects, as well as by expanding into new geographic areas organically and through acquisitions. In addition, our financial strength and project experience provide us with a competitive advantage, as we focus our efforts on larger projects. 
Decentralized Profit Centers - Each of our operating groups is established as an individual profit center which encourages entrepreneurial activity while allowing the operating groups to benefit from centralized administrative and support functions.
Diversification - To mitigate the risks inherent in the construction business as the result of general economic factors, we pursue projects: (i) in both the public and private sectors; (ii) in federal, rail, power and renewable energy markets; (iii) for a wide range of customers within each sector (from the federal government to small municipalities and from large corporations to individual homeowners); (iv) in diverse geographic markets; (v) that are construction management/general contractor, design-build and bid-build; (vi) at fixed price, time and materials, cost reimbursable and fixed unit price; and (vii) of various sizes, durations and complexity. In addition to pursuing opportunities with traditional project funding, we continue to evaluate other sources of project funding (e.g., public and private partnerships).
Employee Development - We believe that our employees are key to the successful implementation of our business strategies. Significant resources are employed to attract, develop and retain extraordinary talent and fully promote each employee’s capabilities.
Core Competency Focus - A core competency is to perform the myriad tasks necessary to deliver major infrastructure projects. These projects include the building of roads, highways, bridges, dams, tunnels, mass transit facilities, airport and railroad infrastructure, underground utilities, power-related facilities, materials management, construction management, staff augmentation and site preparation. This focus allows us to most effectively utilize our specialized strengths.
Ownership of Construction Equipment - We own a large fleet of well-maintained heavy construction equipment. The ownership of construction equipment enables us to compete more effectively by ensuring availability of the equipment at a favorable cost.
Profit-based Incentives - Managers are incentivized with cash compensation and restricted equity awards, payable upon the attainment of pre-established annual financial and non-financial metrics.
Selective Bidding - We focus our resources on bidding jobs that meet our selective bidding criteria, which include analyzing the risk of a potential job relative to: (i) available personnel to estimate and prepare the proposal as well as to effectively manage and build the project; (ii) the competitive environment; (iii) our experience with the type of work and with the owner; (iv) local resources and partnerships; (v) equipment resources; and (vi) the size, complexity and expected profitability of the job.
Our operating principles include:
Accident Prevention - We believe accident prevention is a moral obligation as well as good business. By identifying and concentrating resources to address jobsite hazards, we continually strive to reduce our incident rates and the costs associated with accidents.
Quality and High Ethical Standards - We believe in the importance of performing high quality work. Additionally, we believe in maintaining high ethical standards through an established code of conduct and an effective company-wide compliance program.
Sustainability - Our focus on sustainability encompasses many aspects of how we conduct ourselves and practice our core values. We believe sustainability is important to our customers, employees, shareholders, and communities, and is also a long-term business driver. By focusing on specific initiatives that address social, environmental and economic challenges, we can minimize risk and increase our competitive advantage.

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Raw Materials
We purchase raw materials, including aggregate products, cement, diesel fuel, liquid asphalt, natural gas, propane and steel, from numerous sources. Our aggregate reserves supply a portion of the raw materials needed in our construction projects. The price and availability of raw materials may vary from year to year due to market conditions and production capacities. We do not foresee a lack of availability of any raw materials in the near term.
Seasonality
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, profitability and the required number of employees.
Customers
Customers in our Construction segment include certain federal agencies, state departments of transportation, county and city public works departments, school districts and developers, utilities and owners of industrial, commercial and residential sites. Customers of our Large Project Construction segment are predominantly in the public sector and currently include various state departments of transportation, local transit authorities, utilities and federal agencies. Customers of our Construction Materials segment include internal usage by our own construction projects, as well as third-party customers. Our third party customers include, but, are not limited to, contractors, landscapers, manufacturers of products requiring aggregate materials, retailers, homeowners, farmers and brokers.
During the years ended December 31, 2014, 2013, and 2012, our largest volume customer, including both prime and subcontractor arrangements, was the California Department of Transportation (“Caltrans”). Revenue recognized from contracts with Caltrans represented $195.4 million (8.6% of our total revenue) in 2014, of which $178.7 million (15.1% of segment revenue) was in our Construction segment and $16.8 million (2.0% of segment revenue) was in our Large Project Construction segment. Revenue from Caltrans represented $265.8 million (11.7% of total revenue) in 2013, of which $239.9 million (19.2% of segment revenue) was in our Construction segment and $25.9 million (3.3% of segment revenue) was in the Large Project Construction segment. Revenue from Caltrans represented $272.9 million (13.1% of total revenue) in 2012, of which $268.9 million (27.3% of segment revenue) was in the Construction segment and $4.1 million (0.5% of segment revenue) was in the Large Project Construction segment.
Contract Backlog
Our contract backlog consists of the remaining 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 a contract 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. Existing contracts that include unexercised contract options and unissued task orders are included in contract backlog as follows:
Contract Options: Contract options represent the monetary value of option periods under existing contracts in contract backlog, which are exercisable at the option of our customers without requiring us to go through an additional competitive bidding process and would be canceled only if a customer decided to end the project (a termination for convenience) or through a termination for default. When the options are exercised and funding is in place, the amount associated with the exercised option is recorded into contract backlog.
Task Orders: Task orders represent the expected monetary value of signed contracts under which we perform work only when the customer awards specific task orders or projects to us. When agreements for such task orders or projects are signed and funding is in place, the amount associated with the task order is recorded into contract backlog.
Substantially all of the contracts in our contract backlog, as well as unexercised contract options and unissued task orders, may be canceled or modified at the election of the customer; however, we have not been materially adversely affected by contract cancellations or modifications in the past (see “Contract Provisions and Subcontracting”). Many projects in our Construction segment are added to backlog and completed within a year and therefore may not be reflected in our beginning or year-end contract backlog. Contract backlog by segment is presented in “Contract Backlog” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our contract backlog was $2.7 billion and $2.5 billion at December 31, 2014 and 2013, respectively. Approximately $1.4 billion of the December 31, 2014 contract backlog is expected to be completed during 2015

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Equipment
At December 31, 2014 and 2013, we owned the following number of construction equipment and vehicles:
December 31,
2014
2013
Heavy construction equipment
2,506

2,534

Trucks, truck-tractors, trailers and vehicles
3,851

3,664

 
Our portfolio of equipment includes backhoes, barges, bulldozers, cranes, excavators, loaders, motor graders, pavers, rollers, scrapers, trucks and tunnel boring machines that are used in our Construction, Large Project Construction and Construction Materials segments. We believe that ownership of equipment is generally preferable to leasing because it ensures the equipment is available as needed and normally results in lower costs. We pool certain equipment for use by our Construction, Large Project Construction and Construction Materials segments to maximize utilization. We continually monitor and adjust our fleet size so that it is consistent with the size of our business, considering both existing backlog and expected future work. On a short-term basis, we lease or rent equipment to supplement existing equipment in response to construction activity peaks. In 2014 and 2013, we spent $32.3 million and $30.2 million, respectively, on purchases of construction equipment and vehicles.
Employees
On December 31, 2014, we employed approximately 1,700 salaried employees who work in management, estimating and clerical capacities, plus approximately 1,300 hourly employees. The total number of hourly personnel is subject to the volume of construction in progress and is seasonal. During 2014, the number of hourly employees ranged from approximately 1,300 to 3,600 and averaged approximately 2,900. Four of our wholly-owned subsidiaries, Granite Construction Company, Granite Construction Northeast, Inc., Granite Infrastructure Constructors, Inc., and Kenny Construction Company, are parties to craft collective bargaining agreements in many areas in which they work.
We believe our employees are our most valuable resource, and our workforce possesses a strong dedication to and pride in our company. Among salaried and non-union hourly employees, this dedication is reinforced by a 5.5% equity ownership at December 31, 2014 through our 401(k) Plan. Our managerial and supervisory personnel have an average of approximately 10 years of service with Granite.
Competition
Competitors in our Construction segment typically range from small, local construction companies to large, regional, national and international construction companies. We compete with numerous companies in individual markets; however, there are few, if any, companies which compete in all of our market areas. Many of our Construction segment competitors have the ability to perform work in either the private or public sectors. When opportunities for work in one sector are reduced, competitors tend to look for opportunities in the other sector. This migration has the potential to reduce revenue growth and/or increase pressure on gross profit margins.
The scale and complexity of jobs in the Large Project Construction segment preclude many smaller contractors from bidding such work. Consequently, our Large Project Construction segment competition typically is comprised of large, regional, national and international construction companies.
We own and/or have long-term leases on aggregate resources that we believe provide a competitive advantage in certain markets for both the Construction and Large Project Construction segments.
Competitors in our Construction Materials segment typically range from small local materials companies to large regional, national and international materials companies. We compete with numerous companies in individual markets; however, there are few, if any, companies which compete in all of our market areas. 
Factors influencing our competitiveness include price, estimating abilities, knowledge of local markets and conditions, project management, financial strength, reputation for quality, aggregate materials availability, and machinery and equipment. Historically, the construction business has not required large amounts of capital, particularly for the smaller size construction work pursued by our Construction segment, which can result in relative ease of market entry for companies possessing acceptable qualifications. Although the construction business is highly competitive, we believe we are well positioned to compete effectively in the markets in which we operate.

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Contract Provisions and Subcontracting
Our contracts with our customers are primarily “fixed unit price” or “fixed price.” Under fixed unit price contracts, we are committed to providing materials or services at fixed unit prices (for example, dollars per cubic yard of concrete placed or cubic yard of earth excavated). While the fixed unit price contract shifts the risk of estimating the quantity of units required for a particular project to the customer, any increase in our unit cost over the expected unit cost in the bid, whether due to inflation, inefficiency, errors in our estimates or other factors, is borne by us unless otherwise provided in the contract. Fixed price contracts are priced on a lump-sum basis under which we bear the risk of performing all the work for the specified amount. The percentage of fixed price contracts in our contract backlog increased to 71.0% at December 31, 2014 compared with 63.5% at December 31, 2013. The percentage of fixed unit price contracts in our contract backlog was 19.9% and 26.0% at December 31, 2014 and 2013, respectively. All other contract types represented 9.1% and 10.5% of our backlog at December 31, 2014 and 2013, respectively.
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 contract negotiation, 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.
There are a number of factors that can create variability in contract performance as compared to the original bid. Such factors can positively or negatively impact costs and profitability, may cause higher than anticipated construction costs and can create additional liability to the contract owner. The most significant of these include:
the completeness and accuracy of the original bid; 
costs associated with scope changes;
costs of labor and/or materials;
extended overhead due to owner, weather and other delays;
subcontractor performance issues;
changes in productivity expectations;
site conditions that differ from those assumed in the original bid (to the extent contract remedies are unavailable);
continuing changes from original design on design-build projects;
the availability and skill level of workers in the geographic location of the project;
a change in the availability and proximity of equipment and materials; and
our ability to fully and promptly recover on claims for additional contract costs.
The ability to realize improvements on project profitability at times is more limited than the risk of lower profitability. For example, design-build projects typically incur additional costs such as right-of-way and permit acquisition costs. In addition, design-build contracts carry additional risks such as those associated with design errors and estimating quantities and prices before the project design is completed. We manage this additional risk by adding contingencies to our bid amounts, obtaining errors and omissions insurance and obtaining indemnifications from our design consultants where possible. However, there is no guarantee that these risk management strategies will always be successful.
Most of our contracts, including those with the government, provide for termination at the convenience of the contract owner, with provisions to pay us for work performed through the date of termination. We have not been materially adversely affected by these provisions in the past. Many of our contracts contain provisions that require us to pay liquidated damages if specified completion schedule requirements are not met, and these amounts could be significant.
We act as prime contractor on most of our construction projects. We complete the majority of our projects with our own resources and subcontract specialized activities such as electrical and mechanical work. As prime contractor, we are responsible for the performance of the entire contract, including subcontract work. Thus, we may be subject to increased costs associated with the failure of one or more subcontractors to perform as anticipated. Based on our analysis of their construction and financial capabilities, among other criteria, we determine whether to require the subcontractor to furnish a bond or other type of security to guarantee their performance. Disadvantaged business enterprise regulations require us to use our good faith efforts to subcontract a specified portion of contract work done for governmental agencies to certain types of disadvantaged contractors or suppliers. As with all of our subcontractors, some may not be able to obtain surety bonds or other types of performance security.

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Joint Ventures
We participate in various construction joint ventures, partnerships and a limited liability company of which we are a limited member (“joint ventures”) in order to share expertise, risk and resources for certain highly complex projects. Generally, each construction joint venture is formed to accomplish a specific project and is jointly controlled by the joint venture partners. We select our joint venture partners based on our analysis of their construction and financial capabilities, expertise in the type of work to be performed and past working relationships, among other criteria. The joint venture agreements typically provide that our interests in any profits and assets, and our respective share in any losses and liabilities, that may result from the performance of the contract are limited to our stated percentage interest in the project.
Under each joint venture agreement, one partner is designated as the sponsor. The sponsoring partner typically provides all administrative, accounting and most of the project management support for the project and generally receives a fee from the joint venture for these services. We have been designated as the sponsoring partner in certain of our current joint venture projects and are a non-sponsoring partner in others.
We also participate in various “line item” joint venture agreements under which each partner is responsible for performing certain discrete items of the total scope of contracted work. The revenue for these discrete items is defined in the contract with the project owner and each 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 account for our portion of these contracts as project revenues and costs in our accounting system and include receivables and payables associated with our work in our consolidated financial statements.
The agreements with our joint venture partners and limited liability company members (“partner(s)”) for both construction joint ventures and line item joint ventures define each partner’s management role and financial responsibility in the project. The amount of exposure is generally limited to our stated ownership interest. Due to the joint and several nature of the performance obligations under these agreements, if one of the partners fails to perform, we and the remaining partners, if any, would be responsible for performance of the outstanding work (i.e., we provide a performance guarantee). We estimate our liability for performance guarantees and include them in accrued expenses and other current liabilities with a corresponding asset in equity in construction joint ventures on the consolidated balance sheets. We reassess our liability when and if changes in circumstances occur. The liability and corresponding asset are removed from the consolidated balance sheets upon completion and customer acceptance of the project. Circumstances that could lead to a loss under these agreements beyond our stated ownership interest include the failure of a partner to contribute additional funds to the venture in the event the project incurs a loss or additional costs that we could incur should a partner fail to provide the services and resources that it had committed to provide in the agreement. We are not able to estimate amounts that may be required beyond the remaining cost of the work to be performed. These costs could be offset by billings to the customer or by proceeds from our partners’ corporate and/or other guarantees.
At December 31, 2014, there was $5.7 billion of construction revenue to be recognized on unconsolidated and line item construction joint venture contracts, of which $1.7 billion represented our share and the remaining $4.0 billion represented our partners’ share.
Insurance and Bonding
We maintain general and excess liability, construction equipment and workers’ compensation insurance; all in amounts consistent with industry practice.
In connection with our business, we generally are required to provide various types of surety bonds that provide an additional measure of security for our performance under certain public and private sector contracts. Our ability to obtain surety bonds depends upon our capitalization, working capital, past performance, management expertise and external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of our contract backlog that we have currently bonded and their current underwriting standards, which may change from time to time. The capacity of the surety market is subject to market-based fluctuations driven primarily by the level of surety industry losses and the degree of surety market consolidation. When the surety market capacity shrinks it results in higher premiums and increased difficulty obtaining bonding, in particular for larger, more complex projects throughout the market. In order to help mitigate this risk, we employ a co-surety structure involving three sureties. Although we do not believe that fluctuations in surety market capacity have significantly affected our ability to grow our business, there is no assurance that it will not significantly affect our ability to obtain new contracts in the future (see “Item 1A. Risk Factors”).


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Environmental Regulations
Our operations are subject to various federal, state and local laws and regulations relating to the environment, including those relating to discharges to air, water and land, the handling and disposal of solid and hazardous waste, the handling of underground storage tanks and the cleanup of properties affected by hazardous substances. Certain environmental laws impose substantial penalties for non-compliance and others, such as the federal Comprehensive Environmental Response, Compensation and Liability Act, impose strict, retroactive, joint and several liability upon persons responsible for releases of hazardous substances. We continually evaluate whether we must take additional steps at our locations to ensure compliance with environmental laws. While compliance with applicable regulatory requirements has not materially adversely affected our operations in the past, there can be no assurance that these requirements will not change and that compliance will not adversely affect our operations in the future. In addition, our aggregate materials operations require operating permits granted by governmental agencies. We believe that tighter regulations for the protection of the environment and other factors will make it increasingly difficult to obtain new permits and renewal of existing permits may be subject to more restrictive conditions than currently exist.
In July 2007, the California Air Resources Board (“CARB”) approved a regulation that will require California equipment owners/operators to reduce diesel particulate and nitrogen oxide emissions from in-use off-road diesel equipment and to meet progressively more restrictive emission targets from 2010 to 2020. In December 2008, CARB approved a similar regulation for in-use on-road diesel equipment that includes more restrictive emission targets from 2010 to 2022. The emission targets will require California off-road and on-road diesel equipment owners to retrofit equipment with diesel emission control devices or replace equipment with new engine technology as it becomes available, which will result in higher equipment-related expenses. In December 2010, CARB amended both regulations to grant economic relief to affected fleets by extending initial compliance dates as well as adding additional compliance requirements. To-date, costs to prepare the Company for compliance have totaled $14.7 million and costs of compliance in 2015 are expected to be $5.6 million. We will continue to manage compliance costs; however, it is not possible to determine the total future cost of compliance.
As is the case with other companies in our industry, some of our aggregate products contain varying amounts of crystalline silica, a common mineral. Also, some of our construction and material processing operations release, as dust, crystalline silica that is in the materials being handled. Excessive, prolonged inhalation of very small-sized particles of crystalline silica has allegedly been associated with respiratory disease (including Silicosis). The Mine Safety and Health Administration and the Occupational Safety and Health Administration have established occupational thresholds for crystalline silica exposure as respirable dust. We have implemented dust control procedures to measure compliance with requisite thresholds and to verify that respiratory protective equipment is made available as necessary. We also communicate, through safety information sheets and other means, what we believe to be appropriate warnings and cautions to employees and customers about the risks associated with excessive, prolonged inhalation of mineral dust in general and crystalline silica in particular (see “Item 1A. Risk Factors”).
Website Access
Our website address is www.graniteconstruction.com. On our website we make available, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). The information on our website is not incorporated into, and is not part of, this report. These reports, and any amendments to them, are also available at the website of the SEC, www.sec.gov.

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Executive Officers of the Registrant
Information regarding our executive officers is set forth below.
Name
Age
Position
James H. Roberts
58
President and Chief Executive Officer
Christopher S. Miller
48
Executive Vice President and Chief Operating Officer
Laurel J. Krzeminski
60
Senior Vice President and Chief Financial Officer
Michael F. Donnino
60
Senior Vice President and Group Manager
Martin P. Matheson
53
Senior Vice President and Group Manager
James D. Richards
51
Senior Vice President and Group Manager
 
Mr. Roberts joined Granite in 1981 and has served in various capacities, including President and Chief Executive Officer since September 2010. He also served as Executive Vice President and Chief Operating Officer from September 2009 to August 2010, Senior Vice President from May 2004 to September 2009, Granite West Manager from February 2007 to September 2009, Branch Division Manager from May 2004 to February 2007, Vice President and Assistant Branch Division Manager from 1999 to 2004, and Regional Manager of Nevada and Utah Operations from 1995 to 1999. Mr. Roberts served as Chairman of The National Asphalt Pavement Association in 2006. He received a B.S.C.E. in 1979 and an M.S.C.E. in 1980 from the University of California, Berkeley, and an M.B.A. from the University of Southern California in 1981. He also completed the Stanford Executive Program in 2009.
Mr. Miller has served as Granite’s Executive Vice President and Chief Operating Officer since August 2014. From June 2006 to July 2014, he served in various executive positions with CH2M HILL, including Managing Director, Global Operations; Managing Director, United Kingdom Ministry of Defense Programs; President, Government Facilities and Infrastructure Business Group; President, CH2M HILL Constructors, Inc. and Global Business Development and Planning Director. Prior to CH2M Hill, Mr. Miller served as Director of Federal Programs for Jacobs Engineering Group. From 1989 to 1995, Mr. Miller served in the United States Air Force in the Human Systems Division, Weapons System Program Office and the Air Force Center for Environmental Excellence. He received a B.A. in Biology from the University of Louisville and an M.S. in Civil Engineering from the University of Texas at San Antonio.
Ms. Krzeminski joined Granite in 2008 and has served as Chief Financial Officer since November 2010 and Senior Vice President since January 2013. She also served as Vice President from July 2008 to December 2012, Interim Chief Financial Officer from June 2010 to October 2010 and Corporate Controller from July 2008 to May 2010. From 1993 to 2007, she served in various corporate and operational finance positions with The Gillette Company (acquired by The Procter & Gamble Company in 2005), including Finance Director for the Duracell and Braun North American business units. Ms. Krzeminski also served as the Director of Gillette’s Sarbanes-Oxley Section 404 Compliance program and as Gillette’s Director of Corporate Financial Reporting. Her experience also includes several years in public accounting with an international accounting firm. She received a Bachelor’s degree in Business Administration-Accounting from San Diego State University.
Mr. Donnino joined Granite in 1977 and has served as Senior Vice President and Group Manager since January 2010, Senior Vice President since January 2005, Manager of Granite East from February 2007 to December 2009, and Heavy Construction Division Manager from January 2005 to February 2007. He served as Vice President and Heavy Construction Division Assistant Manager during 2004, Texas Regional Manager from 2000 to 2003 and Dallas Estimating Office Area Manager from 1991 to 2000. Mr. Donnino received a B.S.C.E. in Structural, Water and Soils Engineering from the University of Minnesota in 1976.
Mr. Matheson joined Granite in 1989 and has served as Senior Vice President and Group Manager since August 2013. He also served as Washington Region Manager from February 2007 through July 2013, Branch Division Construction Manager from 2006 through February 2007, Utah Operations Area/Operations Manager from 1999 to 2006 and in other positions at Granite’s Nevada Branch between 1989 and 1997. Prior to joining Granite, he worked at Kenny Construction Company. Mr. Matheson received a B.S. in Animal Science from University of Illinois in 1983.
Mr. Richards joined Granite in January 1992 and has served as Senior Vice President and Group Manager since January 2013. He also served as Arizona Region Manager from February 2006 through December 2012, Arizona Region Chief Estimator from January 2000 through January 2006 and in other positions at Granite’s Arizona Branch between 1992 and 2000. Prior to joining Granite, he served as a U.S. Army Officer. Mr. Richards received a B.S. in Civil Engineering from New Mexico State University in 1987.


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Item 1A. RISK FACTORS
Set forth below and elsewhere in this report and in other documents we file with the SEC are various risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report or otherwise adversely affect our business.
We work in a highly competitive marketplace. We have multiple competitors in all of the areas in which we work, and some of our competitors are larger than we are and may have greater resources than we do. Government funding for public works projects is limited, thus contributing to competition for the limited number of public projects available. This increased competition may result in a decrease in new awards at acceptable profit margins. In addition, should downturns in residential and commercial construction activity occur, the competition for available public sector work would intensify, which could impact our revenue, contract backlog and profit margins.
Government contracts generally have strict regulatory requirements. Approximately 75.0% of our total revenue in 2014 was derived from contracts funded by federal, state and local government agencies and authorities. Government contracts are subject to specific procurement regulations, contract provisions and a variety of socioeconomic requirements relating to their formation, administration, performance and accounting and often include express or implied certifications of compliance. Claims for civil or criminal fraud may be brought for violations of regulations, requirements or statutes. We may also be subject to qui tam (“Whistle Blower”) litigation brought by private individuals on behalf of the government under the Federal Civil False Claims Act, which could include claims for up to treble damages. Further, if we fail to comply with any of the regulations, requirements or statutes or if we have a substantial number of accumulated Occupational Safety and Health Administration, Mine Safety and Health Administration or other workplace safety violations, our existing government contracts could be terminated and we could be suspended from government contracting or subcontracting, including federally funded projects at the state level. Should one or more of these events occur, it could have a material adverse effect on our financial position, results of operations, cash flows and liquidity.
Government contractors are subject to suspension or debarment from government contracting. Our substantial dependence on government contracts exposes us to a variety of risks that differ from those associated with private sector contracts. Various statutes to which our operations are subject, including the Davis-Bacon Act (which regulates wages and benefits), the Walsh-Healy Act (which prescribes a minimum wage and regulates overtime and working conditions), Executive Order 11246 (which establishes equal employment opportunity and affirmative action requirements) and the Drug-Free Workplace Act, provide for mandatory suspension and/or debarment of contractors in certain circumstances involving statutory violations. In addition, the Federal Acquisition Regulation and various state statutes provide for discretionary suspension and/or debarment in certain circumstances that might call into question a contractor’s willingness or ability to act responsibly, including as a result of being convicted of, or being found civilly liable for, fraud or a criminal offense in connection with obtaining, attempting to obtain or performing a public contract or subcontract. The scope and duration of any suspension or debarment may vary depending upon the facts and the statutory or regulatory grounds for debarment and could have a material adverse effect on our financial position, results of operations, cash flows and liquidity.
Our success depends on attracting and retaining qualified personnel, joint venture partners and subcontractors in a competitive environment. The success of our business is dependent on our ability to attract, develop and retain qualified personnel, joint venture partners, advisors and subcontractors. Changes in general or local economic conditions and the resulting impact on the labor market and on our joint venture partners may make it difficult to attract or retain qualified individuals in the geographic areas where we perform our work. If we are unable to provide competitive compensation packages, high-quality training programs and attractive work environments or to establish and maintain successful partnerships, our ability to profitably execute our work could be adversely impacted.
Failure to maintain safe work sites could result in significant losses. Construction and maintenance sites are potentially dangerous workplaces and often put our employees and others in close proximity with mechanized equipment, moving vehicles, chemical and manufacturing processes, and highly regulated materials.  On many sites, we are responsible for safety and, accordingly, must implement safety procedures.  If we fail to implement these procedures or if the procedures we implement are ineffective, we may suffer the loss of or injury to our employees, as well as expose ourselves to possible litigation.  Despite having invested significant resources in safety programs and being recognized as an industry leader, a serious accident may nonetheless occur on one of our worksites. As a result, our failure to maintain adequate safety standards could result in reduced profitability or the loss of projects or clients, and could have a material adverse impact on our financial position, results of operations, cash flows and liquidity.

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An inability to obtain bonding could have a negative impact on our operations and results. As more fully described in “Insurance and Bonding” under “Item 1. Business,” we generally are required to provide surety bonds securing our performance under the majority of our public and private sector contracts. Our inability to obtain reasonably priced surety bonds in the future could significantly affect our ability to be awarded new contracts, which could have a material adverse effect on our financial position, results of operations, cash flows and liquidity.
We may be unable to identify and contract with qualified Disadvantaged Business Enterprise (“DBE”) contractors to perform as subcontractors. Certain of our government agency projects contain minimum DBE participation clauses. If we subsequently fail to complete these projects with the minimum DBE participation, we may be held responsible for breach of contract, which may include restrictions on our ability to bid on future projects as well as monetary damages. To the extent we are responsible for monetary damages, the total costs of the project could exceed our original estimates, we could experience reduced profits or a loss for that project and there could be a material adverse impact to our financial position, results of operations, cash flows and liquidity.
Fixed price and fixed unit price contracts subject us to the risk of increased project cost. As more fully described in “Contract Provisions and Subcontracting” under “Item 1. Business,” the profitability of our fixed price and fixed unit price contracts can be adversely affected by a number of factors that can cause our actual costs to materially exceed the costs estimated at the time of our original bid.
Design-build contracts subject us to the risk of design errors and omissions. Design-build is increasingly being used as a method of project delivery as it provides the owner with a single point of responsibility for both design and construction. We generally subcontract design responsibility to architectural and engineering firms. However, in the event of a design error or omission causing damages, there is risk that the subcontractor or their errors and omissions insurance would not be able to absorb the liability. In this case we may be responsible, resulting in a potentially material adverse effect on our financial position, results of operations, cash flows and liquidity.
Many of our contracts have penalties for late completion. In some instances, including many of our fixed price contracts, we guarantee that we will complete a project by a certain date. If we subsequently fail to complete the project as scheduled we may be held responsible for costs resulting from the delay, generally in the form of contractually agreed-upon liquidated damages. To the extent these events occur, the total cost of the project could exceed our original estimate and we could experience reduced profits or a loss on that project.
Strikes or work stoppages could have a negative impact on our operations and results. We are party to collective bargaining agreements covering a portion of our craft workforce. Although strikes or work stoppages have not had a significant impact on our operations or results in the past, such labor actions could have a significant impact on our operations and results if they occur in the future.
Failure of our subcontractors to perform as anticipated could have a negative impact on our results. As further described in “Contract Provisions and Subcontracting” under “Item 1. Business,” we subcontract portions of many of our contracts to specialty subcontractors, but we are ultimately responsible for the successful completion of their work. Although we seek to require bonding or other forms of guarantees, we are not always successful in obtaining those bonds or guarantees from our higher-risk subcontractors. In this case we may be responsible for the failures on the part of our subcontractors to perform as anticipated, resulting in a potentially adverse impact on our cash flows and liquidity. In addition, the total costs of a project could exceed our original estimates and we could experience reduced profits or a loss for that project, which could have an adverse impact on our financial position, results of operations, cash flows and liquidity.
Our joint venture contracts subject us to joint and several liability. As further described in Note 1 of “Notes to the Consolidated Financial Statements” and under “Item 1. Business; Joint Ventures,” we participate in various construction joint venture partnerships in connection with complex construction projects. If our joint venture partners fail to perform under one of these contracts, we could be liable for completion of the entire contract. If the contract were unprofitable, this could have a material adverse effect on our financial position, results of operations, cash flows and liquidity.

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Our failure to adequately recover on claims brought by us against project owners or other project participants for additional contract costs could have a negative impact on our liquidity and future operations. In certain circumstances, we assert claims against project owners, engineers, consultants, subcontractors or others involved in a project for additional costs exceeding the contract price or for amounts not included in the original contract price. These types of claims occur due to matters such as delays or changes from the initial project scope, both of which may result in additional costs. Often, these claims can be the subject of lengthy arbitration or litigation proceedings, and it is difficult to accurately predict when and the terms upon which these claims will be fully resolved. When these types of events occur, we use working capital in projects to promptly and fully cover cost overruns pending the resolution of the relevant claims. A failure to recover on these types of claims promptly and fully could have a negative impact on our liquidity and results of operations. In addition, while clients and subcontractors may be obligated to indemnify us against certain liabilities, such third parties may refuse or be unable to pay us.
Failure to remain in compliance with covenants under our debt and credit agreements, service our indebtedness, or fund our other liquidity needs could adversely impact our business. Our debt and credit agreements and related restrictive and financial covenants are more fully described in Note 12 of “Notes to the Consolidated Financial Statements.” 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. On March 3, 2014, Granite executed amendments to the Credit Agreement and 2019 NPA (the “Amendments”), which terms include, among other things, (i) revised minimum Consolidated Tangible Net Worth; and (ii) revised maximum Consolidated Leverage Ratio. For the Credit Agreement, the Amendments were effective for our quarter ending March 31, 2013 and for the 2019 NPA, the Amendments were retroactive to December 31, 2013. If we are unable to service our debt obligations or fund our other liquidity needs, we could be forced to curtail our operations, reorganize our capital structure (including through bankruptcy proceedings) or liquidate some or all of our assets in a manner that could cause holders of our securities to experience a partial or total loss of their investment in us.
Unavailability of insurance coverage could have a negative effect on our operations and results. We maintain insurance coverage as part of our overall risk management strategy and pursuant to requirements to maintain specific coverage that are contained in our financing agreements and in most of our construction contracts. Although we have been able to obtain reasonably priced insurance coverage to meet our requirements in the past, there is no assurance that we will be able to do so in the future, and our inability to obtain such coverage could have an adverse impact on our ability to procure new work, which could have a material adverse effect on our financial position, results of operations, cash flows and liquidity.
Accounting for our revenues and costs involves significant estimates. As further described in “Critical Accounting Policies and Estimates” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” accounting for our contract-related revenues and costs, as well as other expenses, requires management to make a variety of significant estimates and assumptions. Although we believe we have sufficient experience and processes to enable us to formulate appropriate assumptions and produce reasonably dependable estimates, these assumptions and estimates may change significantly in the future and could result in the reversal of previously recognized revenue and profit. Such changes could have a material adverse effect on our financial position and results of operations.
We use certain commodity products that are subject to significant price fluctuations. Diesel fuel, liquid asphalt and other petroleum-based products are used to fuel and lubricate our equipment and fire our asphalt concrete processing plants.  In addition, they constitute a significant part of the asphalt paving materials that are used in many of our construction projects and are sold to third parties. Although we are partially protected by asphalt or fuel price escalation clauses in some of our contracts, many contracts provide no such protection. We also use steel and other commodities in our construction projects that can be subject to significant price fluctuations. We pre-purchase commodities, enter into supply agreements or enter into financial contracts to secure pricing.  We have not been significantly adversely affected by price fluctuations in the past; however, there is no guarantee that we will not be in the future.

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We are subject to environmental and other regulation. As more fully described in “Environmental Regulations” under “Item 1. Business,” we are subject to a number of federal, state and local laws and regulations relating to the environment, workplace safety and a variety of socioeconomic requirements. Noncompliance with such laws and regulations can result in substantial penalties, or termination or suspension of government contracts as well as civil and criminal liability. In addition, some environmental laws and regulations impose liability and responsibility on present and former owners, operators or users of facilities and sites for contamination at such facilities and sites, without regard to causation or knowledge of contamination. We occasionally evaluate various alternatives with respect to our facilities, including possible dispositions or closures. Investigations undertaken in connection with these activities may lead to discoveries of contamination that must be remediated, and closures of facilities may trigger compliance requirements that are not applicable to operating facilities. While compliance with these laws and regulations has not materially adversely affected our operations in the past, there can be no assurance that these requirements will not change and that compliance will not adversely affect our operations in the future. Furthermore, we cannot provide assurance that existing or future circumstances or developments with respect to contamination will not require us to make significant remediation or restoration expenditures.
Weather can significantly affect our revenues and profitability. Our ability to perform work is significantly affected by weather conditions such as precipitation and temperature. Changes in weather conditions can cause delays and otherwise significantly affect our project costs. The impact of weather conditions can result in variability in our quarterly revenues and profitability, particularly in the first and fourth quarters of the year.
Increasing restrictions on securing aggregate reserves could negatively affect our future operations and results. Tighter regulations and the finite nature of property containing suitable aggregate reserves are making it increasingly challenging and costly to secure aggregate reserves. Although we have thus far been able to secure reserves to support our business, our financial position, results of operations, cash flows and liquidity may be adversely affected by an increasingly difficult permitting process.
We may be required to contribute cash to meet our unfunded pension obligations in certain multi-employer plans. Three of our wholly-owned subsidiaries, Granite Construction Company, Granite Construction Northeast, Inc., and Kenny Construction Company, participate in various domestic multi-employer pension plans on behalf of union employees. One of our wholly-owned subsidiaries, Granite Infrastructure Constructors, Inc., participates in a Canadian multi-employer pension plan covering union employees working on a construction project in Canada. Union employee benefits generally are based on a fixed amount for each year of service. We are required to make contributions to the plans in amounts established under collective bargaining agreements.  Pension expense is recognized as contributions are made. The domestic pension plans are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”). Under ERISA, a contributor to a multi-employer plan may be liable, upon termination or withdrawal from a plan, for its proportionate share of a plan’s unfunded vested liability. While we currently have no intention of withdrawing from a plan and unfunded pension obligations have not significantly affected our operations in the past, there can be no assurance that we will not be required to make material cash contributions to one or more of these plans to satisfy certain underfunded benefit obligations in the future.
Recent healthcare legislation may increase our costs and reduce our future profitability. In 2012, the United States Supreme Court upheld the majority of the provisions in the Patient Protection and Affordable Care Act (the “Act”). The Act places requirements on employers to provide a minimum level of benefits to employees and assesses penalties on employers if the benefits do not meet the required minimum level or if the cost of coverage to employees exceeds affordability thresholds specified in the Act. The minimum benefits and affordability requirements took effect in 2015. The Act also imposes an excise tax beginning in 2018 on plans whose average cost exceeds specified amounts. Although our initial assessment indicates that the provisions in the Act will not have a material adverse impact to our financial position, results of operations, cash flows and liquidity, it is difficult to predict the financial and operational impacts due to the breadth and complexity of this legislation.
Force majeure events, including natural disasters and terrorists’ actions, could negatively impact our business, which may affect our financial condition, results of operations or cash flows. Force majeure or extraordinary events beyond the control of the contracting parties, such as natural and man-made disasters, as well as terrorist actions, could negatively impact the economies in which we operate.  We typically negotiate contract language where we are allowed certain relief from force majeure events in private client contracts and review and attempt to mitigate force majeure events in both public and private client contracts. We remain obligated to perform our services after most extraordinary events subject to relief that may be available pursuant to a force majeure clause.  If we are not able to react quickly to force majeure events, our operations may be affected significantly, which would have a negative impact on our financial position, results of operations, cash flows and liquidity.

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Changes to our outsourced software or infrastructure vendors as well as any sudden loss, breach of security, disruption or unexpected data or vendor loss associated with our information technology systems could have a material adverse effect on our business. We rely on third-party software and infrastructure to run critical accounting, project management and financial information systems.  If software or infrastructure vendors decide to discontinue further development, integration or long-term maintenance support for our information systems, or there is any system interruption, delay, breach of security, loss of data or loss of a vendor, we may need to migrate some or all of our accounting, project management and financial information to other systems. Despite business continuity plans, these disruptions could increase our operational expense as well as impact the management of our business operations, which could have a material adverse effect on our financial position, results of operations, cash flows and liquidity.
An inability to safeguard our information technology environment could result in business interruptions, remediation costs and/or legal claims. To protect confidential customer, vendor, financial and employee information, we employ information security measures that secure our information systems from cybersecurity attacks or breaches. Even with these measures, we may be subject to unauthorized access of digital data with the intent to misappropriate information, corrupt data or cause operational disruptions. If a failure of our safeguarding measures were to occur, it could have a negative impact to our business and result in business interruptions, remediation costs and/or legal claims, which could have a material adverse effect on our financial position, results of operations, cash flow and liquidity.
A change in tax laws or regulations of any federal, state or international jurisdiction in which we operate could increase our tax burden and otherwise adversely affect our financial position, results of operations, cash flows and liquidity. We continue to assess the impact of various U.S. federal, state and international legislative proposals that could result in a material increase to our U.S. federal, state and/or international taxes. We cannot predict whether any specific legislation will be enacted or the terms of any such legislation. However, if such proposals were to be enacted, or if modifications were to be made to certain existing regulations, the consequences could have a material adverse impact on us, including increasing our tax burden, increasing our cost of tax compliance or otherwise adversely affecting our financial position, results of operations, cash flows and liquidity.
Our contract backlog is subject to unexpected adjustments and cancellations and could be an uncertain indicator of our future earnings. We cannot guarantee that the revenues projected in our contract backlog will be realized or, if realized, will be profitable. Projects reflected in our contract backlog may be affected by project cancellations, scope adjustments, time extensions or other changes. Such changes may adversely affect the revenue and profit we ultimately realize on these projects.
Our strategic diversification plan includes growing our international operations in Canada and U.S. Territories, which are subject to a number of special risks. As part of our strategic diversification efforts, we may enter into more construction contracts in Canada or U.S. Territories, which may subject us to a number of special risks unique to foreign countries and/or operations. Due to the special risks associated with non-U.S. operations, our exposure to such risks may not be proportionate to the percentage of our revenues attributable to such operations.
Our real estate investments are subject to mortgage financing and may require additional funding. Granite Land Company’s (“GLC’s”) real estate investments generally utilize short-term debt financing for their development activities. Such financing is subject to the terms of the applicable debt or credit agreement and generally is secured by mortgages on the applicable real property. GLC’s failure to comply with the covenants applicable to such financing or to pay principal, interest or other amounts when due thereunder would constitute an event of default under the applicable agreement and could have the effects described in the risk factor relating to our debt and credit agreements. Due to the tightening of the credit markets, banks have required lower loan-to-value ratios often resulting in the need to pay a portion of the debt when short-term financing is renegotiated. If our real estate investment partners are unable to make their proportional share of a required repayment, GLC may elect to provide the additional funding which could affect our financial position, cash flows and liquidity. Also, if we determine we are the primary beneficiary of real estate joint ventures, as defined by the applicable accounting guidance, we may be required to consolidate additional real estate investments in our financial statements.


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As a part of our growth strategy we have made and may make future acquisitions, and acquisitions involve many risks. These risks include:
difficulties integrating the operations and personnel of the acquired companies;
diversion of management’s attention from ongoing operations;
potential difficulties and increased costs associated with completion of any assumed construction projects;
insufficient revenues to offset increased expenses associated with acquisitions and the potential loss of key employees or customers of the acquired companies;
assumption of liabilities of an acquired business, including liabilities that were unknown at the time the acquisition was negotiated;
difficulties relating to assimilating the personnel, services, and systems of an acquired business and to assimilating marketing and other operational capabilities;
Increased burdens on our staff and on our administrative, internal control and operating systems, which may hinder our legal and regulatory compliance activities;
difficulties in applying and integrating our system of internal controls to an acquired business;
acquisitions may cause us to increase our liabilities, record goodwill or other non-amortizable intangible assets that will be subject to subsequent impairment testing and potential impairment charges, as well as amortization expenses related to certain other intangible assets; and
while we often obtain indemnification rights from the sellers of acquired businesses, such rights may be difficult to enforce, the losses may exceed any dedicated escrow funds, and the indemnitors may not have the ability to financially support the indemnity.
Failure to manage and successfully integrate acquisitions could harm our financial position, results of operations, cash flows and liquidity.
In the event we issue stock as consideration for certain acquisitions we may make, we could dilute share ownership. One method of acquiring companies or otherwise funding our corporate activities is through the issuance of additional equity securities. If we issue additional equity securities, such issuances could have the effect of diluting our earnings per share as well as our existing shareholders’ individual ownership percentages in the Company.
Unfavorable economic conditions may have an adverse impact on our business. Volatility in the global financial system may have an adverse impact on our business, financial position, results of operations, cash flows and liquidity. In particular, low tax revenues, budget deficits, financing constraints and competing priorities may result in cutbacks in new infrastructure projects in the public sector and could have an adverse impact on collectibility of receivables from government agencies. In addition, levels of new commercial and residential construction projects could be adversely affected by oversupply of existing inventories of commercial and residential properties, low property values and a restrictive financing environment. A depressed demand for construction and construction materials in both the public and private sectors could result in intensified competition, which could have an adverse impact on both our revenues and profit margins and could impact growth opportunities. Although conditions are stabilizing, these factors have also had an adverse impact on the levels of activity and financial position, results of operations, cash flows and liquidity of our real estate investment and development business.
Deterioration of the United States economy could have a material adverse effect on our business, financial condition and results of operations. Congress’ inability to lower United States debt substantially could result in a decrease in government spending, which could negatively impact the ability of government agencies to fund existing or new infrastructure projects. In addition, such actions could have a material adverse effect on the financial markets and economic conditions in the United States as well as throughout the world, which may limit our ability and the ability of our customers to obtain financing and/or could impair our ability to execute our acquisition strategy. Deterioration in general economic activity and infrastructure spending or Congress’ deficit reduction measures could have a material adverse effect on our financial position, results of operations, cash flows and liquidity.
Rising inflation and/or interest rates could have an adverse effect on our business, financial condition and results of operations. Economic factors, including inflation and fluctuations in interest rates, could have a negative impact on our business. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could have a material adverse effect on our financial position, results of operations, cash flows and liquidity.
The foregoing list is not all-inclusive. There can be no assurance that we have correctly identified and appropriately assessed all factors affecting our business or that the publicly available and other information with respect to these matters is complete and correct. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect us. These developments could have material adverse effects on our business, financial condition, results of operations and liquidity. For these reasons, the reader is cautioned not to place undue reliance on our forward-looking statements.

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Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
Quarry Properties
As of December 31, 2014, we had 39 active and 29 inactive permitted quarry properties available for the extraction of sand and gravel and hard rock, all of which are located in the western United States. All of our quarries are open-pit and are primarily accessible by road. We process aggregates into construction materials for internal use and for sale to third parties. Our plant equipment is powered mostly by electricity provided by local utility companies. The following map shows the approximate locations of our permitted quarry properties as of December 31, 2014.
We estimate our permitted proven1 and probable2 aggregate reserves to be approximately 763.4 million tons with an average permitted life of approximately 78 years at present operating levels. Present operating levels are determined based on a three-year annual average aggregate production rate of 9.7 million tons. Reserve estimates were made by our geologists and engineers based primarily on drilling studies. Reserve estimates are based on various assumptions, and any material inaccuracies in these assumptions could have a material impact on the accuracy of our reserve estimates.
1Proven reserves are determined through the testing of samples obtained from closely spaced subsurface drilling and/or exposed pit faces. Proven reserves are sufficiently understood so that quantity, quality, and engineering conditions are known with sufficient accuracy to be mined without the need for any further subsurface work. Actual required spacing is based on geologic judgment about the predictability and continuity of each deposit.
2Probable reserves are determined through the testing of samples obtained from subsurface drilling but the sample points are too widely spaced to allow detailed prediction of quantity, quality, and engineering conditions. Additional subsurface work may be needed prior to mining the reserve.





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The following tables present information about our quarry properties as of December 31, 2014 (tons in millions):
 
Type
 
 
 
 
Quarry Properties
Sand & Gravel
Hard Rock
Permitted Aggregate Reserves (tons)
Unpermitted Aggregate Reserves (tons)
Three-Year Annual Average Production Rate (tons)
Average Reserve Life
Owned quarry properties
25
5
438.6
347.0
5.4
86
Leased quarry properties1
24
14
324.8
86.6
4.4
47
 
1 Our leases have expiration dates which range from month-to-month to 44 years with most including an option to renew.
 
 
Permitted Reserves
for Each Product Type (tons)
Percentage of Permitted Reserves Owned and Leased
State
Number of Properties
Sand & Gravel
Hard Rock
Owned
Leased
California
34
272.7
257.5
58
%
42
%
Non-California
34
145.4
87.8
55
%
45
%
 
Plant Properties
We operate plants at our quarry sites to process aggregates into construction materials. Some of our sites may have more than one crushing, concrete or asphalt processing plant. In an effort to continuously increase efficiencies based on external and internal demands, we sold or otherwise disposed of several plants and the associated land in California, Alaska, and Nevada during 2014, resulting in a gain of approximately $9.8 million that was recorded to gain on sales of property and equipment in the consolidated statement of operations. At December 31, 2014 and 2013, we owned the following plants:
December 31,
2014
2013
Aggregate crushing plants
33

37

Asphalt concrete plants
52

54

Cement concrete batch plants
9

16

Asphalt rubber plants
5

5

Lime slurry plants
9

9

Other Properties 
The following table provides our estimate of certain information about other properties as of December 31, 2014:
 
Land Area (acres)
Building Square Feet
Office and shop space (owned and leased)
1,249
1,336,485
Real estate held for sale and use
1,230
As of December 31, 2014, approximately 52% of our office and shop space was attributable to our Construction segment, 12% to our Large Project Construction segment and 7% to our Construction Materials segment. The remainder is primarily attributable to administration.

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Item 3. 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 outcomes of which cannot be predicted with certainty. We and our affiliates are also subject to government inquiries in the ordinary course of business seeking information concerning our compliance with government construction contracting requirements and various laws and regulations, the outcomes of which cannot be predicted with certainty.
Some of the matters in which we or our joint ventures and affiliates are involved may involve compensatory, punitive, or other claims or sanctions that, if granted, could require us to pay damages or make other expenditures in amounts that are not probable to be incurred or cannot currently be reasonably estimated. In addition, in some circumstances our government contracts could be terminated, we could be suspended, debarred or incur other administrative penalties or sanctions, or payment of our costs could be disallowed. While any of our pending legal proceedings may be subject to early resolution as a result of our ongoing efforts to settle, whether or when any legal proceeding will be resolved through settlement is neither predictable nor guaranteed.
Accordingly, it is possible that future developments in such proceedings and inquiries could require us to (i) adjust existing accruals, or (ii) record new accruals that we did not originally believe to be probable or that could not be reasonably estimated. Such changes could be material to our financial condition, results of operations and/or cash flows in any particular reporting period. In addition to matters that are considered probable for which the loss can be reasonably estimated, we also disclose certain matters where the loss is considered reasonably possible and is reasonably estimable.
Liabilities relating to legal proceedings and government inquiries, to the extent that we have concluded such liabilities are probable and the amounts of such liabilities are reasonably estimable, are recorded on the consolidated balance sheets. The aggregate liabilities recorded as of December 31, 2014 and 2013 related to these matters were approximately $9.7 million and $16.3 million, respectively, and were primarily included in accrued expenses and other current liabilities. The aggregate range of reasonably estimable loss related to matters considered reasonably possible was zero to approximately $4.0 million as of December 31, 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 the DOJ 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. In connection with this investigation, Granite Northeast is subject to potential civil, criminal, and/or administrative penalties or sanctions, as well as additional future DBE compliance activities and the costs associated therewith. 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 on the consolidated balance sheet as of December 31, 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. The resolution of the matters under investigation will likely be in the form of either a non-prosecution agreement or deferred prosecution agreement and could have direct or indirect consequences that could have a material adverse effect on our financial position, results of operations and/or liquidity.
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 Annual Report on Form 10-K.

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PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the New York Stock Exchange under the ticker symbol GVA.
As of February 18, 2015, there were 39,187,087 shares of our common stock outstanding held by 875 shareholders of record.
We have paid quarterly cash dividends since the second quarter of 1990, and we expect to continue to do so. However, declaration and payment of dividends is within the sole discretion of our Board of Directors, subject to limitations imposed by Delaware law and compliance with our credit agreements (which allow us to pay dividends so long as we have at least $150 million in unencumbered cash and equivalents and marketable securities on the consolidated balance sheet), and will depend on our earnings, capital requirements, financial condition and such other factors as the Board of Directors deems relevant. As of December 31, 2014, we had unencumbered cash, cash equivalents and marketable securities that exceeded the aforementioned limitations.
Market Price and Dividends of Common Stock
 
 
2014 Quarters Ended
December 31,
September 30,
June 30,
March 31,
High
$
39.09

$
37.49

$
40.52

$
40.55

Low
30.44

31.78

34.24

31.39

Dividends per share
0.13

0.13

0.13

0.13

2013 Quarters Ended
 December 31,
September 30,
June 30,
March 31,
High
$
35.32

$
32.46

$
32.16

$
37.74

Low
28.35

27.88

26.07

29.55

Dividends per share
0.13

0.13

0.13

0.13

During the three months ended December 31, 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 December 31, 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
October 1 through October 31, 2014
104

$
33.35

$
64,065,401

November 1 through November 30, 2014
115

$
36.48

$
64,065,401

December 1 through December 31, 2014
11,807

$
36.21

$
64,065,401

Total
12,026

$
36.19

 
 
1The number of shares purchased is in connection with employee tax withholding for shares 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.

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Performance Graph
The following graph compares the cumulative 5-year total return provided to shareholders on Granite Construction Incorporated’s common stock relative to the cumulative total returns of the S&P 500 index and the Dow Jones U.S. Heavy Construction index. The Dow Jones U.S. Heavy Construction index includes the following companies: AECOM Technology Corp., Chicago Bridge & Iron Co NV, EMCOR Group Inc., Fluor Corp., Jacobs Engineering Group Inc., KBR Inc., and Quanta Services Inc. Certain of these companies differ from Granite in that they derive revenue and profit from non-U.S. operations and have customers in different markets. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on December 31, 2009 and its relative performance is tracked through December 31, 2014.


December 31,
2009
2010
2011
2012
2013
2014
Granite Construction Incorporated
$
100.00

$
83.12

$
73.51

$
106.10

$
112.23

$
123.74

S&P 500
100.00

115.06

117.49

136.30

180.44

205.14

Dow Jones U.S. Heavy Construction
100.00

128.40

105.86

128.54

168.74

125.68



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Item 6. SELECTED FINANCIAL DATA
Other than contract backlog, the selected consolidated financial data set forth below have been derived from our consolidated financial statements. Refer to the consolidated financial statements for further information. These historical results are not necessarily indicative of the results of operations to be expected for any future period.
Selected Consolidated Financial Data
Years Ended December 31,
2014
2013
2012
2011
2010
Operating Summary
(In Thousands, Except Per Share Data)
Revenue
$
2,275,270

$
2,266,901

$
2,083,037

$
2,009,531

$
1,762,965

Gross profit
250,306

185,263

234,759

247,963

177,784

As a percent of revenue
11.0
%
8.2
 %
11.3
%
12.3
%
10.1
 %
Selling, general and administrative expenses
203,821

199,946

185,099

162,302

191,593

As a percent of revenue
9.0
%
8.8
 %
8.9
%
8.1
%
10.9
 %
Restructuring and impairment (gains) charges, net1
(2,643
)
52,139

(3,728
)
2,181

109,279

Net income (loss)
35,876

(44,766
)
59,920

66,085

(62,448
)
Amount attributable to non-controlling interests
(10,530
)
8,343

(14,637
)
(14,924
)
3,465

Net income (loss) attributable to Granite
25,346

(36,423
)
45,283

51,161

(58,983
)
As a percent of revenue
1.1
%
-1.6
 %
2.2
%
2.5
%
(3.3
)%
Net income (loss) per share attributable to
common shareholders:
 

 

 

 

 

Basic
$
0.65

$
(0.94
)
$
1.17

$
1.32

$
(1.56
)
Diluted
$
0.64

$
(0.94
)
$
1.15

$
1.31

$
(1.56
)
Weighted average shares of common stock:
 

 

 

 

 

Basic
39,096

38,803

38,447

38,117

37,820

Diluted
39,795

38,803

39,076

38,473

37,820

Dividends per common share
$
0.52

$
0.52

$
0.52

$
0.52

$
0.52

Consolidated Balance Sheet2
 

 

 

 

 

Total assets
$
1,620,494

$
1,617,155

$
1,729,487

$
1,547,799

$
1,535,533

Cash, cash equivalents and marketable securities
358,028

346,323

433,420

406,648

395,728

Working capital
507,352

452,633

490,785

461,254

475,079

Current maturities of long-term debt
1,247

1,247

19,060

32,173

38,119

Long-term debt
275,621

276,868

271,070

218,413

242,351

Other long-term liabilities
44,495

48,580

47,124

49,221

47,996

Granite shareholders’ equity
794,385

781,940

829,953

799,197

761,031

Book value per share
20.27

20.09

21.43

20.66

19.64

Common shares outstanding
39,186

38,918

38,731

38,683

38,746

Contract backlog
$
2,718,873

$
2,526,751

$
1,708,761

$
2,022,454

$
1,899,170

1 During 2014, we recorded restructuring gains of $1.3 million related to our 2010 Enterprise Improvement Plan (“EIP”) and $1.3 million in impairment gains related to nonperforming quarry sites. During 2013, we recorded net restructuring charges of $49.0 million related to our EIP and $3.2 million in other impairment charges related to nonperforming quarry sites. During 2012, we recorded net restructuring gains of $3.7 million and during 2011, we recorded net restructuring charges of $2.2 million (see Note 11 of the “Notes to the Consolidated Financial Statements” for additional information regarding the 2014, 2013 and 2012 amounts). During 2010, we recorded restructuring charges of $109.3 million related to our EIP.
2 Assets acquired and liabilities assumed resulting from the acquisition of Kenny Construction Company are included on the consolidated balance sheet commencing as of December 31, 2012 (see Note 21 of the “Notes to the Consolidated Financial Statements”).




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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
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 over the past four 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.
During 2014, our business was organized into four reportable business segments. These business segments were: Construction, Large Project Construction, Construction Materials and Real Estate. In the fourth quarter of 2014, we determined that the Real Estate segment no longer met the requirements of a reportable business segment under Accounting Standard Codification (“ASC”) 280 and have eliminated it as a segment for all periods presented. Prior period amounts relating to the real estate segment have been combined with the Construction Materials segment. See Note 20 of “Notes to the Consolidated Financial Statements” for additional information about our reportable business segments.
In addition to business segments, we review our business by operating groups and by public and private market sectors. 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.
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. We 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 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.

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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.
Critical Accounting Policies and Estimates
The financial statements included in “Item 8. Financial Statements and Supplementary Data” have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Our estimates, judgments and assumptions are continually evaluated based on available information and experiences; however, actual amounts could differ from those estimates.
The following are accounting policies and estimates that involve significant management judgment and can have significant effects on the Company’s reported results of operations. The Audit & Compliance Committee of our Board of Directors has reviewed our disclosure of critical accounting policies and estimates.  
Revenue and Earnings Recognition for Construction Contracts
Revenue and earnings on construction contracts, including construction joint ventures, are recognized under the percentage of completion method using the ratio of costs incurred to estimated total costs. 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 factors considered in this evaluation include the stage of design completion, the stage of construction completion, the status of outstanding subcontracts or buyouts, certainty of quantities of labor and materials, certainty of schedule and the relationship with the owner.
Revenue from affirmative contract claims is recognized when we have a signed agreement and payment is assured. Revenue from unapproved change orders is recognized to the extent the related costs have been incurred, the amount can be reliably estimated and recovery is probable, which is often when the owner has agreed to the change order in writing. Provisions are recognized in the consolidated statements of operations for the full amount of estimated losses on uncompleted contracts whenever evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue. All contract costs, including those associated with affirmative claims and unapproved change orders, are recorded as incurred and revisions to estimated total costs are reflected as soon as the obligation to perform exists. Contract costs consist of direct costs on contracts, including labor and materials, amounts payable to subcontractors, direct overhead costs and equipment expense (primarily depreciation, fuel, maintenance and repairs). All state and federal government contracts and many of our other contracts provide for termination of the contract at the convenience of the party contracting with us, with provisions to pay us for work performed through the date of termination.
The accuracy of our revenue and profit recognition in a given period is dependent on the accuracy of our estimates of the cost to complete each project. Cost estimates for all of our significant projects use a detailed “bottom up” approach and we believe our experience and process allows us to provide materially reliable estimates. However, there are a number of factors that can contribute to changes in estimates of contract cost and profitability. The most significant of these include:
the completeness and accuracy of the original bid;
costs associated with scope changes where final price negotiations are not complete;
costs of labor and/or materials;
extended overhead and other costs due to owner, weather and other delays;
subcontractor performance issues;
changes in productivity expectations;
site conditions that differ from those assumed in the original bid (to the extent contract remedies are unavailable);
continuing changes from original design on design-build projects;
the availability and skill level of workers in the geographic location of the project;
a change in the availability and proximity of equipment and materials; and
our ability to fully and promptly recover on claims for additional contract costs.

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The foregoing factors as well as the stage of completion of contracts in process and the mix of contracts at different margins may cause fluctuations in gross profit between periods. Significant changes in cost estimates, particularly in our larger, more complex projects, have had, and can in future periods have, a significant effect on our profitability.
Our contracts with our customers are primarily either “fixed unit price” or “fixed price.” Under fixed unit price contracts, we are committed to provide materials or services required by a project at fixed unit prices (for example, dollars per cubic yard of concrete placed or cubic yards of earth excavated). While the fixed unit price contract shifts the risk of estimating the quantity of units required for a particular project to the customer, any increase in our unit cost over the expected unit cost in the bid, whether due to inflation, inefficiency, faulty estimates or other factors, is borne by us unless otherwise provided in the contract. Fixed price contracts are priced on a lump-sum basis under which we bear the risk that we may not be able to perform all the work profitably for the specified contract amount. The percentage of fixed price contracts in our contract backlog increased to 71.0% at December 31, 2014 from 63.5% at December 31, 2013. The percentage of fixed unit price contracts in our contract backlog was 19.9% and 26.0% at December 31, 2014 and 2013, respectively. All other types of contracts represented 9.1% and 10.5% of our contract backlog at December 31, 2014 and 2013, respectively.
Goodwill
As of December 31, 2014, we had four reporting units in which goodwill was recorded as follows:
Kenny Group Construction
Kenny Group Large Project Construction
Northwest Group Construction
Northwest Group Construction Materials
The most significant goodwill balances reside in the reporting units associated with the Kenny Group.
We perform impairment tests annually and more frequently when events and circumstances occur that indicate a possible impairment of goodwill. We have historically performed goodwill impairment testing on an annual basis as of December 31. However, in 2014 we changed the annual goodwill impairment testing date to November 1, which we believe is preferable as the new testing date better aligns with our financial planning and budgeting cycle. In addition, we evaluate goodwill for impairment if events or circumstances change between annual tests indicating a possible impairment.  Examples of such events or circumstances include the following: 
a significant adverse change in legal factors or in the business climate; 
an adverse action or assessment by a regulator; 
a more likely than not expectation that a segment or a significant portion thereof will be sold; or 
the testing for recoverability of a significant asset group within the segment. 
In performing step one of the goodwill impairment tests, we calculate the estimated fair value of the reporting unit in which the goodwill is recorded using the discounted cash flows and market multiple methods.  Judgments inherent in these methods include the determination of appropriate discount rates, the amount and timing of expected future cash flows and growth rates, and appropriate benchmark companies. The cash flows used in our 2014 discounted cash flow model were based on five-year financial forecasts, which in turn were based on the 2015-2017 operating plan developed internally by management adjusted for market participant-based assumptions. Our discount rate assumptions are based on an assessment of the equity cost of capital and appropriate capital structure for our reporting units. In assessing the reasonableness of our determined fair values of our reporting units, we evaluate the reasonableness of our results against our current market capitalization. 
After calculating the estimated fair value, we compare the resulting fair value to the net book value of the reporting unit, including goodwill. If the net book value of a reporting unit exceeds its fair value, we measure and record the amount of the impairment loss by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.
The results of our annual goodwill impairment tests, performed in accordance with ASC 350, indicated that the estimated fair values of our reporting units exceeded their net book values (i.e., cushion) by at least 50% for the four reporting units with goodwill. The Kenny Large Project Construction business is susceptible to fluctuations in results depending on awarded work given the size and frequency of awards. While we believe the current cushion is adequate to absorb these fluctuations, a significant decline in job win rates could have a significant impact to this reporting unit’s estimated fair value.
 


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Long-lived Assets
We review property and equipment and amortizable intangible assets for impairment whenever events or changes in circumstances indicate the net book value of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their net book values to the future undiscounted cash flows the assets are expected to generate. If the assets are considered to be impaired, an impairment charge will be recognized equal to the amount by which the net book value of the asset exceeds fair value. We group plant equipment assets at a regional level, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets. When an individual asset or group of assets are determined to no longer contribute to the vertically integrated asset group, it is assessed for impairment independently.
During 2013 and in connection with our EIP, we recorded $14.7 million in restructuring charges related to non-performing quarry sites and incurred $3.2 million in lease termination charges, both related to the Construction Materials segment. During 2014 we recorded a $1.3 million restructuring gain resulting from our release from the lease obligations. In addition, during 2013 as part of the EIP we recorded $31.1 million of non-cash impairment charges, including amounts attributable to non-controlling interests of $3.9 million, related to all of the remaining consolidated real estate assets. Separate from the EIP, we recorded $1.3 million in non-cash impairment gains and $3.2 million in non-cash impairment charges during 2014 and 2013, respectively, related to the Construction Materials segment. See Note 11 of “Notes to the Consolidated Financial Statements” and “Restructuring and Impairment (Gains) Charges, Net” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
Insurance Estimates
We carry insurance policies to cover various risks, primarily general liability, automobile liability and workers compensation, under which we are liable to reimburse the insurance company for a portion of each claim paid. Payment for general liability and workers compensation claim amounts generally range from the first $0.5 million to $1.0 million per occurrence. We accrue for probable losses, both reported and unreported, that are reasonably estimable using actuarial methods based on historic trends, modified, if necessary, by recent events. Changes in our loss assumptions caused by changes in actual experience would affect our assessment of the ultimate liability and could have an effect on our operating results and financial position up to $1.0 million per occurrence.
Asset Retirement and Reclamation Obligations
We account for the costs related to legal obligations to reclaim aggregate mining sites and other facilities by recording our estimated reclamation liability at fair value, capitalizing the estimated liability as part of the related asset’s carrying amount and allocating it to expense over the asset’s useful life. To determine the fair value of the obligation, we estimate the cost for a third-party to perform the legally required reclamation including a reasonable profit margin. This cost is then increased for future estimated inflation based on the estimated years to complete and discounted to fair value using present value techniques with a credit-adjusted, risk-free rate. In estimating the settlement date, we evaluate the current facts and conditions to determine the most likely settlement date.
We review reclamation obligations at least annually for a revision to the cost or a change in the estimated settlement date. Additionally, reclamation obligations are reviewed in the period that a triggering event occurs that would result in either a revision to the cost or a change in the estimated settlement date.
Contingencies
Loss contingency provisions are recorded if the potential loss from any asserted or unasserted claim or legal proceeding is considered probable and the amount can be reasonably estimated. If a potential loss is considered probable but only a range of loss can be determined, the low-end of the range is recorded. These accruals represent management’s best estimate of probable loss. Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the amount recorded. Significant judgment is required in both the determination of probability of loss and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to claims and litigation and may revise our estimates. See Note 19 of “Notes to the Consolidated Financial Statements” and “Item 3. Legal Proceedings” for additional information.


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Current Economic Environment and Outlook for 2015
At more than $2.7 billion at the end of 2014, total company backlog continues to provide Granite with opportunities to grow. Financing from the Transportation Infrastructure Financing and Innovation Act has been a key driver for large projects across the country. However, dedicated federal funding remains a concern. The two-year federal highway bill, Moving Ahead for Progress in the 21st Century, expired in September 2014 and the current short-term extension runs out in May. Congress must act swiftly to ensure long-term funding and continued federal financing are achieved in the next highway bill. A clear commitment to federal infrastructure investment is overdue and is necessary to give state and local leaders the confidence to plan beyond the end of the next short-term patchwork funding.
Despite increased tax revenues, without long-term federal funding commitments, capital budgets for many of our traditional Western markets have remained flat or gone negative over the past few years. Though generally stable, the volume of available work and the bidding environment in these traditional markets remains highly competitive. We remain encouraged by continued signs of recovery in the private sector, and we continue to expect growing revenue and profit synergies from our diversified markets including power, tunnel and underground.
The markets for projects within our Large Project Construction segment remain strong. Granite is a a highly desired partner for all types of work, including Public, Private Partnerships. We continue to pursue significant bidding opportunities for our Large Project Construction segment, which include teaming arrangements with partners to bid on more than $15 billion over the next several years.
Results of Operations
Comparative Financial Summary
 
 
 
 
 
 
Years Ended December 31,
 
2014
 
2013
 
2012
(in thousands)
 
 
 
 
 
 
Total revenue
 
$
2,275,270

 
$
2,266,901

 
$
2,083,037

Gross profit
 
250,306

 
185,263

 
234,759

Restructuring and impairment (gains) charges, net
 
(2,643
)
 
52,139

 
(3,728
)
Operating income (loss)
 
65,100

 
(54,692
)
 
80,835

Total other expense (income)
 
9,503

 
9,337

 
(194
)
Amount attributable to non-controlling interests
 
(10,530
)
 
8,343

 
(14,637
)
Net income (loss) attributable to Granite Construction Incorporated
 
25,346

 
(36,423
)
 
45,283



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Revenue
Total Revenue by Segment
 
 
 
 
 
 
 
 
 
 
Years Ended December 31,
2014
2013
 
2012
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
Construction
$
1,186,445

 
52.1
%
$
1,251,197

 
55.2
%
 
$
984,106

 
47.2
%
Large Project Construction
825,044

 
36.3

777,811

 
34.3

 
863,217

 
41.5

Construction Materials
263,781

 
11.6

237,893

 
10.5

 
235,714

 
11.3

Total
$
2,275,270

 
100.0
%
$
2,266,901

 
100.0
%
 
$
2,083,037

 
100.0
%
Construction Revenue
 
 
 
 
 
 
 
 
 
 
Years Ended December 31,
2014
2013
 
2012
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
California:
 
 
 
 
 
 
 
 
 
 
Public sector
$
388,049

 
32.7
%
$
386,050

 
31.0
%
 
$
434,570

 
44.1
%
Private sector
103,791

 
8.7

85,219

 
6.8

 
53,886

 
5.5

Northwest:
 
 
 
 
 
 

 
 
 
 
Public sector
396,919

 
33.5

442,089

 
35.3

 
371,917

 
37.8

Private sector
133,271

 
11.2

132,907

 
10.6

 
114,851

 
11.7

Heavy Civil:
 
 
 
 
 
 

 
 
 
 
Public sector
19,642

 
1.7

4,093

 
0.3

 
8,798

 
0.9

Private sector

 

528

 

 
84

 

Kenny:
 
 
 
 
 
 
 
 
 
 
Public sector
93,291

 
7.9

77,953

 
6.2

 

 

Private sector
51,482

 
4.3

122,358

 
9.8

 

 

Total
$
1,186,445

 
100.0
%
$
1,251,197

 
100.0
%
 
$
984,106

 
100.0
%
Construction revenue for the year ended December 31, 2014 decreased by $64.8 million, or 5.2%, compared to the year ended December 31, 2013 primarily due to lower volumes from entering the year with less backlog, as well as the timing of new awards in the Northwest public and Kenny private sector. The decreases were partially offset by an improved success rate on bidding activity in the California private sector and entering the year with higher backlog in the Heavy Civil and Kenny public sectors from bid successes during 2013.

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Large Project Construction Revenue
 
 
 
 
 
 
 
 
 
 
 
 
Years Ended December 31,
 
2014
 
2013
 
2012
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
California1
 
$
57,229

 
6.9
%
 
$
73,486


9.5
%
 
$
73,359

 
8.5
%
Northwest1
 
13,883

 
1.7

 
24,085

 
3.1

 
175,595

 
20.3

Heavy Civil1
 
633,063

 
76.7

 
623,166

 
80.1

 
614,263

 
71.2

Kenny:
 
 
 

 
 
 

 
 
 

Public sector
 
103,828

 
12.6

 
55,174

 
7.1

 

 

Private sector
 
17,041

 
2.1

 
1,900

 
0.2

 

 

Total
 
$
825,044

 
100.0
%
 
$
777,811

 
100.0
%
 
$
863,217

 
100.0
%
1For the periods presented, Large Project Construction revenue was earned from the public sector.
Large Project Construction revenue for the year ended December 31, 2014 increased by $47.2 million, or 6.1%, compared to the year ended December 31, 2013, primarily due to increases in Kenny and Heavy Civil operating groups from entering the year with greater backlog than 2013 and the settlement of outstanding claims. Decreases in the California and Northwest groups were from ongoing projects nearing completion coupled with delayed starts on new work.
Construction Materials Revenue
 
 
 
 
 
 
 
 
 
 
 
 
Years Ended December 31,
 
2014
 
2013
 
2012
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
California
 
$
152,959

 
58.0
%
 
$
134,697

 
56.6
%
 
$
143,315

 
60.8
%
Northwest
 
110,822

 
42.0

 
103,196

 
43.4

 
92,399

 
39.2

Total
 
$
263,781

 
100.0
%
 
$
237,893

 
100.0
%
 
$
235,714

 
100.0
%
 
Construction Materials revenue for the year ended December 31, 2014 increased $25.9 million, or 10.9%, when compared to the year ended December 31, 2013 primarily due to increased volume and pricing. The increased volume and pricing was due to more aggressive sales efforts coupled with increased demand in most Western states.


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Contract Backlog
Our contract backlog consists of the remaining 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. Existing contracts that include unexercised contract options and unissued task orders under existing contracts are included in contract backlog as task orders are issued or options are exercised as further described in “Contract Backlog” under “Item 1. Business”. 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. 
The following tables illustrate our contract backlog as of the respective dates:
Total Contract Backlog by Segment
 
  
December 31,
 
2014
 
2013
(dollars in thousands)
 
 
 
 
 
 
 
 
Construction
 
$
712,967

 
26.2
%
 
$
681,415

 
27.0
%
Large Project Construction
 
2,005,906

 
73.8

 
1,845,336

 
73.0

Total
 
$
2,718,873

 
100.0
%
 
$
2,526,751

 
100.0
%
Construction Contract Backlog
 
 
 
 
December 31,
 
2014
 
2013
(dollars in thousands)
 
 
 
 
 
 
 
 
California:
 
 
 
 
 
 
 
 
Public sector
 
$
285,230

 
40.0
%
 
$
387,251

 
56.9
%
Private sector
 
60,490

 
8.5

 
33,365

 
4.9

Northwest:
 
 
 
 

 
 

 
 

Public sector
 
185,987

 
26.1

 
118,123

 
17.3

Private sector
 
35,444

 
5.0

 
21,418

 
3.1

Heavy Civil:
 
 
 
 

 
 

 
 

Public sector
 
27,557

 
3.8

 
46,972

 
6.9

Private sector
 

 

 

 

Kenny:
 
 
 
 
 
 
 
 
Public sector
 
44,927

 
6.3

 
46,956

 
6.9

Private sector
 
73,332

 
10.3

 
27,330

 
4.0

Total
 
$
712,967

 
100.0
%
 
$
681,415

 
100.0
%
Construction contract backlog of $713.0 million at December 31, 2014 was $31.6 million, or 4.6%, higher than at December 31, 2013. The increase was primarily due to an improved success rate on bidding activity in the Northwest and Kenny operating groups, partially offset by progress on existing projects in the California and Heavy Civil operating groups. Not included in Construction contract backlog as of December 31, 2014 is $76.8 million associated with Kenny underground contracts, the majority of which is expected to be booked into contract backlog as additional releases are issued by the owner in 2015.

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Large Project Construction Contract Backlog
 
  
 
   
December 31,
 
2014
 
2013
(dollars in thousands)
 
 
 
 
 
 
 
 
Heavy Civil1
 
$
1,682,047

 
83.9
%
 
$
1,445,849

 
78.4
%
California1
 
19,066

 
1.0

 
55,593

 
3.0

Northwest1
 
38,463

 
1.8

 
6,860

 
0.4

Kenny:
 
 
 
 
 
 
 
 
Public sector2
 
156,010

 
7.8

 
161,361

 
8.7

Private sector
 
110,320

 
5.5

 
175,673

 
9.5

Total
 
$
2,005,906

 
100.0
%
 
$
1,845,336

 
100.0
%
1For the periods presented, all Large Project Construction contract backlog is related to contracts with public agencies.
2As of December 31, 2014 and 2013, $35.0 million and $58.4 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 $2.0 billion at December 31, 2014 was $160.6 million, or 8.7%, higher than at December 31, 2013. The increase from December 31, 2013 was primarily due to the award of a $696.6 million design-build highway improvement project in Florida for our Heavy Civil operating group, partially offset by progress on existing projects. Not included in Large Project Construction contract backlog as of December 31, 2014 is $359.6 million associated with our share of the Rapid Bridge replacement project in Pennsylvania that will be booked into contract backlog when funding is approved.
Non-controlling partners’ share of Large Project Construction contract backlog as of December 31, 2014 and 2013 was $26.8 million and $59.2 million, respectively.
Large Project Construction contracts with forecasted losses represented $32.1 million, or 1.6%, and $127.8 million, or 6.9%, respectively, of Large Project Construction contract backlog at December 31, 2014 and 2013. Provisions are recognized in the consolidated statements of operations for the full amount of estimated losses on uncompleted contracts whenever evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue. Future revisions to these estimated losses will be recorded in the periods in which the revisions are made.

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Gross Profit
The following table presents gross profit by business segment for the respective periods:
Years Ended December 31,
 
2014
 
2013
 
2012
(dollars in thousands)
 
 
 
 
 
 
Construction
 
$
118,834

 
$
106,374

 
$
77,963

Percent of segment revenue
 
10.0
%
 
8.5
%
 
7.9
%
Large Project Construction
 
112,601

 
71,808

 
148,418

Percent of segment revenue
 
13.6

 
9.2

 
17.2

Construction Materials
 
18,871

 
7,081

 
8,378

Percent of segment revenue
 
7.2

 
3.0

 
3.6

Total gross profit
 
$
250,306

 
$
185,263

 
$
234,759

Percent of total revenue
 
11.0
%
 
8.2
%
 
11.3
%
Construction gross profit in 2014 increased $12.5 million, or 11.8%, compared to 2013. Construction gross margin as a percentage of segment revenue for 2014 increased to 10.0% from 8.5% in 2013. Improved project efficiency resulting from better utilization of vertically integrated construction materials partially offset the decline in revenue volume.
Large Project Construction gross profit in 2014 increased $40.8 million, or 56.8%, compared to 2013. Large Project Construction gross margin as a percentage of segment revenue for 2014 increased to 13.6% from 9.2% in 2013. The increases were due to increased revenue volume, claims settlements and an increase in the timing of recognition of deferred profit.
Construction Materials gross profit in 2014 increased $11.8 million, or 166.6%, compared to 2013. Construction Materials gross margin as a percentage of segment revenue for 2014 increased to 7.2% from 3.0% in 2013. The increases were primarily due to operating cost reductions in both the California and Northwest groups enhanced by improved sales volumes and pricing.
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 where previously deferred profit is recognized on one or more projects or, conversely, if we have outstanding claims that are not resolved or executed, in periods where contract backlog is growing rapidly and/or 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:
Years Ended December 31,
 
2014
 
2013
 
2012
(in thousands)
 
 
 
 
 
 
Construction
 
$
13,124

 
$
16,761

 
$
22,110

Large Project Construction
 
33,238

 
145,038

 
16,982

Total revenue from contracts with deferred profit
 
$
46,362

 
$
161,799

 
$
39,092

When we experience significant changes in our estimates of costs to complete, we undergo a process that includes reviewing the nature of the changes to ensure that there are no material amounts that should have been recorded in a prior period rather than as revisions in estimates for the current period. In our review of these changes for the years ended December 31, 2014, 2013 and 2012, we did not identify any material amounts that should have been recorded in a prior period.
Unresolved contract modifications and claims to recover additional compensation for unanticipated additional costs to which the Company believes it is entitled under the terms of the projects’ contracts are pending or have been submitted on certain projects. The projects’ owners or their authorized representatives and/or other third parties may be in partial or full agreement with the request or proposed modification, or may have rejected or disagree entirely as to such entitlement. The potential gross profit impact of recoveries for contract modifications and claims may be material in future periods when claims, or a portion of such claims, against customers become probable and estimable or when claims against other third parties are settled. In addition, the Company may incur additional costs when pursuing such potential recoveries.

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Selling, General and Administrative Expenses
The following table presents the components of selling, general and administrative expenses for the respective periods:
Years Ended December 31,
 
2014
 
2013
 
2012
(dollars in thousands)
 
 
 
 
 
 
Selling
 
 

 
 

 
 

Salaries and related expenses
 
$
40,704

 
$
38,410

 
$
35,051

Other selling expenses
 
9,561

 
6,901

 
13,321

Total selling
 
50,265

 
45,311

 
48,372

General and administrative
 
 

 
 

 
 

Salaries and related expenses
 
61,394

 
65,482

 
57,583

Incentive compensation
 
11,749

 
9,376

 
11,543

Restricted stock amortization
 
12,273

 
14,770

 
10,909

Other general and administrative expenses
 
68,140

 
65,007

 
56,692

Total general and administrative
 
153,556

 
154,635

 
136,727

Total selling, general and administrative
 
$
203,821

 
$
199,946

 
$
185,099

Percent of revenue
 
9.0
%
 
8.8
%
 
8.9
%
Selling, general and administrative expenses for 2014 increased $3.9 million, or 1.9%, compared to 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 for 2014 increased $5.0 million, or 10.9%, compared to 2013. The increases were primarily due to increased bidding activity.
General and Administrative Expenses
General and administrative expenses include costs related to our operational offices that are not allocated to direct contract costs and expenses related to our corporate functions. These costs include variable cash and restricted stock performance-based incentives for select management personnel on which our compensation strategy heavily relies. The cash portion of these incentives is expensed when earned while the restricted stock portion is expensed as earned over the vesting period of the restricted stock award (generally three years). Other general and administrative expenses include travel and entertainment, outside services, information technology, depreciation, occupancy, training, office supplies, changes in the fair market value of our Non-Qualified Deferred Compensation plan liability and other miscellaneous expenses, none of which individually exceeded 10% of total general and administrative expenses. Total general and administrative expenses for 2014 remained relatively flat compared to 2013.

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Table of Contents

Restructuring and Impairment (Gains) Charges, Net
The following table presents the components of restructuring and impairment (gains) charges, net during the respective periods (in thousands):
Years ended December 31,
2014
2013
2012
Impairment losses (gains) associated with our real estate investments, net
$

$
31,090

$
(3,093
)
Impairment charges on quarry assets

14,651


Lease termination (gains) costs, net of estimated sublease income
(1,283
)
3,234

(635
)
Total restructuring (gains) charges
(1,283
)
48,975

(3,728
)
Other impairment (gains) charges
(1,360
)
3,164


Total restructuring and impairment (gains) charges, net
$
(2,643
)
$
52,139

$
(3,728
)
In 2010, we announced our EIP, which included actions to reduce our cost structure, enhance operating efficiencies and strengthen our business to achieve long-term profitable growth. The majority of restructuring charges associated with the EIP were recorded in 2010.
In 2011, development activities were curtailed for the majority of our real estate development projects as divestiture efforts increased, and we recorded $1.5 million in additional restructuring charges associated with the sale or other disposition of three separate projects located in California.
During 2012, we recorded a restructuring gain of $3.1 million associated with the sale or other disposition of three separate, previously impaired real estate investments located in California, Oregon and Washington.
During 2013 and pursuant to the EIP, management approved a plan to sell or otherwise dispose of all of the remaining consolidated real estate assets, as well as certain assets in our Construction Materials segment. These actions resulted in restructuring charges of $49.0 million in 2013, including amounts attributable to non-controlling interests of $3.9 million. Restructuring charges consisted of the non-cash impairment of certain real estate and quarry assets and the accrual of lease termination costs. The carrying values of the impaired assets were adjusted to their expected fair values, which were estimated by a variety of factors including, but not limited to, comparative market data, historical sales prices, broker quotes and third-party valuations.
Restructuring charges in 2013 associated with the Company’s consolidated real estate assets resulted in $31.1 million of non-cash impairment charges, including amounts attributable to non-controlling interests of $3.9 million.
Restructuring charges in 2013 associated with the Company’s Construction Materials segment included $14.7 million of non-cash impairment charges related to non-performing quarry assets, and in connection with the impairment of these quarry assets, we recorded lease termination charges of $3.2 million. In 2014, we recorded a restructuring gain of $1.3 million resulting from our release from lease obligations.
Separate from the EIP but related to our process of continually optimizing our assets, we identified a quarry asset within our Construction Materials segment that no longer had strategic value to our vertically integrated business. Therefore, during 2013, management approved a plan to sell or otherwise dispose of this asset. We determined that the asset’s carrying value was not recoverable and recorded a $3.2 million non-cash impairment charge. In 2014, this asset was sold, resulting in a $1.3 million impairment gain.
We completed the majority of our EIP during 2013. As the remaining assets are sold, we may recognize additional restructuring charges or gains; however, we do not expect these charges or gains to be material.


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Gain on Sales of Property and Equipment
The following table presents the gain on sales of property and equipment for the respective periods:
Years Ended December 31,
 
2014
 
2013
 
2012
(in thousands)
 
 
 
 
 
 
Gain on sales of property and equipment
 
(15,972
)
 
(12,130
)
 
(27,447
)
Gain on sales of property and equipment for 2014 increased $3.8 million, or 31.7%, compared to 2013, primarily due to the sale of underutilized quarry properties associated with our efforts to continuously optimize the asset base of our Construction Materials segment.
Other Expense (Income)
The following table presents the components of other expense (income) for the respective periods:
Years Ended December 31,
 
2014
 
2013
 
2012
(in thousands)
 
 
 
 
 
 
Interest income
 
$
(1,872
)
 
$
(1,785
)
 
$
(2,626
)
Interest expense
 
14,159

 
14,386

 
10,603

Equity in income of affiliates
 
(901
)
 
(1,304
)
 
(1,988
)
Other income, net
 
(1,883
)
 
(1,960
)
 
(6,183
)
Total other expense (income)
 
$
9,503

 
$
9,337

 
$
(194
)
Total other expense for 2014 remained relatively unchanged when compared to 2013.
Income Taxes
The following table presents the provision for (benefit from) income taxes for the respective periods:
Years Ended December 31,
 
2014

2013

2012
(dollars in thousands)
 
 
 
 
 
 
Provision for (benefit from) income taxes
 
$
19,721

 
$
(19,263
)
 
$
21,109

Effective tax rate
 
35.5
%
 
30.1
%
 
26.1
%
Our 2014 tax rate increased by 5.4% from 30.1% to 35.5% when compared to 2013. The 5.4% increase included a 9.9% increase related to state taxes, offset by a 4.5% decrease related to non-controlling interests and all other permanent differences. The increase related to state taxes was driven by a state tax law change resulting in a revaluation of our net deferred tax assets in that jurisdiction in 2014. In addition, there was a change in state apportionment that resulted in an abnormally low state rate in 2013 relative to 2014.
Amount Attributable to Non-controlling Interests
The following table presents the amount attributable to non-controlling interests in consolidated subsidiaries for the respective periods:
Years Ended December 31,
 
2014
 
2013
 
2012
(in thousands)
 
 
 
 
 
 
Amount attributable to non-controlling interests
 
$
(10,530
)
 
$
8,343

 
$
(14,637
)
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 during 2014 was primarily due to the settlement of outstanding claims with contract owners in 2014 partially offset by certain profitable projects nearing completion in 2013, both within our Large Projects Construction segment. In addition, losses incurred in 2013 from the real estate investment restructuring charges did not occur in 2014.


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Table of Contents

Prior Years
Revenue: Construction revenue for the year ended December 31, 2013 increased by $267.1 million, or 27.1%, compared to the year ended December 31, 2012, primarily due to the acquisition of Kenny in December 2012. The remaining increase resulted from increases in the Northwest public and private sectors, as well as in California private sector revenues, offset by decreases in California public sector revenue due to fluctuations in bidding success and resulting awards.
Large Project Construction revenue for the year ended December 31, 2013 decreased by $85.4 million, or 9.9%, compared to the year ended December 31, 2012. The decrease was primarily due to ongoing projects nearing completion, a lack of Large Project Construction awards during 2012 and new projects in the early stage of completion. These decreases were partially offset by increases from the acquisition of Kenny in December 2012.
Construction Materials revenue for the year ended December 31, 2013 increased $2.2 million, or 0.9%, when compared to the year ended December 31, 2012 primarily due to increased sales volumes to meet demand for new projects within the Northwest group. The Northwest group increases were partially offset by a decrease in the California group due to continued weakness in the commercial and residential development markets.
Contract Backlog: Construction contract backlog of $681.4 million at December 31, 2013 was $49.0 million, or 7.7%, higher than at December 31, 2012. The increase was primarily due to an improved success rate on bidding activity in the California and Heavy Civil operating groups, partially offset by progress on existing projects in the Northwest and Kenny operating groups.
Large Project Construction contract backlog of $1.8 billion at December 31, 2013 was $769.0 million, or 71.4%, higher than at December 31, 2012. The increase was primarily due to new awards in the Kenny and Heavy Civil operating groups, offset by jobs completing or nearing completion in the California and Northwest operating groups.
Gross Profit: Construction gross profit in 2013 increased $28.4 million compared to 2012. Construction gross margin as a percentage of segment revenue for 2013 increased to 8.5% from 7.9% in 2012. The increase was due to improved project execution, increase in project volumes and the addition of gross profit from Kenny operations.
Large Project Construction gross profit in 2013 decreased $76.6 million compared to 2012. Large Project Construction gross margin as a percentage of segment revenue for 2013 decreased to 9.2% from 17.2% in 2012. The decreases were due to several projects that were completed or were nearing completion as well as projects that had not yet reached profit recognition, primarily in the Heavy Civil operating group. The decreases during 2013 were also attributable to a net increase of $25.5 million from revisions in estimates in 2013, down from a net increase of $64.6 million in 2012.
Construction Materials gross profit in 2013 decreased $1.3 million compared to 2012. Construction Materials gross margin as a percentage of segment revenue for 2013 decreased to 3.0% from 3.6% in 2012. The decreases were primarily due to the continued competitive environment in the commercial and public markets in general.

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Selling, General and Administrative Expenses: Selling, general and administrative expenses for 2013 increased $14.8 million, or 8.0%, compared to 2012. Total selling expenses for 2013 decreased $3.1 million, or 6.3%, compared to 2012 primarily due to lower pre-bid costs within the Heavy Civil operating group partially offset by additional salary and related expenses associated with Kenny of $4.2 million. Total general and administrative expenses for 2013 increased $17.9 million, or 13.1%, compared to 2012 primarily due to the addition of expenses associated with Kenny of $23.1 million. This included $9.7 million of salaries and related expenses, $3.7 million of restricted stock amortization and incentive compensation, $6.6 million of other general and administrative expenses and $3.1 million in integration costs. These increases were partially offset by a decrease in salaries and related expenses as part of our ongoing efforts to reduce our cost structure, as well as a decrease in incentive compensation expense due to our net loss during 2013.
Restructuring and Impairment Charges (Gains), Net: During 2013, we recorded net restructuring charges of $52.1 million, and in 2012 we recorded a net restructuring gain of $3.7 million. The restructuring gains and charges recorded in 2013 and 2012 were primarily the result of executing our EIP.
Gain on Sales of Property and Equipment: Gain on sales of property and equipment for 2013 decreased $15.3 million, or 55.8%, compared to 2012, primarily due to an $18.0 million gain from the sale of an underutilized quarry asset during 2012 with no corresponding sale in 2013.
Other Expense (Income): Interest expense during 2013 increased $3.8 million compared to 2012 primarily due to increased borrowings under Granite’s existing revolving credit facility related to the acquisition of Kenny in 2012. Other income, net in 2012 included a $7.4 million gain from the sale of gold, a by-product of aggregate production, partially offset by a $2.8 million non-cash impairment charge from the write-off of our cost method investment in the preferred stock of a corporation that designs and manufactures solar power generation equipment.
Provision for Income Taxes: Our effective tax rate increased to 30.1% in 2013 from 26.1% in 2012. The most significant change was due to the effect of non-controlling interests as a percentage of net (loss) income, as non-controlling interests are not subject to income taxes on a standalone basis. Additionally, included in the tax rate for the year ended December 31, 2012, is the release of a state valuation allowance.
Amount Attributable to Non-controlling Interests: The change in non-controlling interests during 2013 was primarily due to a consolidated construction joint venture project nearing completion thereby realizing less income when compared to 2012. Additionally, the change was from losses incurred due to a project write down from revisions in profitability estimates on a highway project in Washington State and from the 2013 restructuring charges.

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Liquidity and Capital Resources
We believe our cash and cash equivalents, short-term investments, available borrowing capacity and cash expected to be generated from operations will be sufficient to meet our expected working capital needs, capital expenditures, financial commitments, cash dividend payments, and other liquidity requirements associated with our existing operations for the next twelve months. We maintain a collateralized revolving credit facility of $215.0 million, of which $134.8 million was available at December 31, 2014, primarily to provide capital needs to fund growth opportunities, either internal or generated through acquisitions (see Credit Agreement discussion 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. However, we have the ability and intent to draw on this credit facility or obtain another source of financing during 2015 to re-pay $40.0 million of maturing 2019 Notes (defined in Senior Notes Payable section below). 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:
December 31,
 
2014
 
2013
(in thousands)
 
 
 
 
Cash and cash equivalents excluding consolidated joint ventures
 
$
194,685

 
$
190,321

Consolidated construction joint venture cash and cash equivalents1
 
61,276

 
38,800

Total consolidated cash and cash equivalents
 
255,961

 
229,121

Short-term and long-term marketable securities2
 
102,067

 
117,202

Total cash, cash equivalents and marketable securities
 
$
358,028

 
$
346,323

 
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 3 of “Notes to the 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 access our credit facility, issue and sell equity, debt or hybrid securities or engage in other capital markets transactions.
Our cash and cash equivalents consisted of deposits and money market funds held with established national financial institutions. Marketable securities consist of U.S. Government and agency obligations and commercial paper.
Consolidated joint ventures were responsible for $22.5 million, or 83.8%, of the $26.8 million increase in cash and cash equivalents during 2014. Granite’s portion of consolidated joint venture cash and cash equivalents was $38.6 million and $23.8 million as of December 31, 2014 and 2013, respectively. Granite’s portion of unconsolidated joint venture cash and cash equivalents was $80.2 million and $112.9 million as of December 31, 2014 and December 31, 2013, respectively. Cash and cash equivalents held by our 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.
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 $100.0 million which matures in June 2018 to convert the interest rate of our 2019 Notes (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. LIBOR floating rate is variable and subject to market changes over the life of the swap with no guarantees to settle as forecasted. The interest rate swap is reported at fair value using Level 2 inputs, with any gain or loss recorded in other (income) expense, net in our consolidated statements of operations and was a net gain of $1.4 million during 2014.
In March 2014, we entered into two diesel commodity swaps covering the periods from May 2014 to October 2014 and from May 2015 to October 2015 which represented roughly 25% of our forecasted purchases of diesel during these periods.  In May 2014, we entered into two natural gas commodity swaps covering the periods from June 2014 to October 2014 and from May 2015 to October 2015 representing roughly 25% of our forecasted purchases of natural gas during these periods.  The commodity swaps are reported at fair value using Level 2 inputs, with any gain or loss recorded in other (income) expense, net in our consolidated statements of operations and was a net loss of $2.0 million during 2014.

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Cash Flows
Years Ended December 31,
 
2014
 
2013
 
2012
(in thousands)
 
 
 
 
 
 
Net cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
43,142

 
$
5,380

 
$
91,790

Investing activities
 
780

 
(31,648
)
 
(42,554
)
Financing activities
 
(17,082
)
 
(66,601
)
 
15,764

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 seasonal cycles, as well as the cycles primarily associated with winning, performing and closing projects. Additionally, operating cash flows are impacted by the timing related to funding construction joint ventures and the resolution of uncertainties inherent in the complex nature of the work that we perform.
Cash provided by operating activities of $43.1 million during 2014 increased $37.8 million when compared to 2013. The increase was primarily attributable to an $80.6 million increase in net income after adjusting for non-cash items, offset by a $39.4 million decrease in net distributions from unconsolidated joint ventures and a $3.4 million decrease in cash from working capital.
Cash provided by investing activities of $0.8 million during 2014 represents a $32.4 million change from the amount of cash used in investing activities in 2013. The change was primarily due to a $21.3 million increase in net proceeds and maturities of marketable securities driven by the Company’s cash flow requirements and/or the maturities of investments, an increase in proceeds, net of additions, from sales of property and equipment of $3.1 million and an $8.4 million decrease in payments associated with the acquisition of Kenny.
Cash used in financing activities of $17.1 million during 2014 represents a $49.5 million increase when compared to 2013. The increase was primarily due to a $37.3 million decrease in net distributions to non-controlling partners related to consolidated construction joint ventures and a $10.9 million decrease in long-term debt principal payments.
Capital Expenditures
During the year ended December 31, 2014, we had capital expenditures of $43.4 million compared to $43.7 million 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 2015.

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Debt and Contractual Obligations 
The following table summarizes our significant obligations outstanding as of December 31, 2014:
 
Payments Due by Period
(in thousands)
Total
Less than 1 year
1-3 years
3-5 years
More than 5 years
Long-term debt – principal1
$
276,868

$
1,248

$
195,564

$
80,056

$

Long-term debt – interest2
41,958

14,395

20,225

7,338


Operating leases3
36,633

8,439

12,127

8,714

7,353

Other purchase obligations4
2,610

2,610




Deferred compensation obligations5
21,797

3,223

3,718

2,311

12,545

Asset retirement obligations6
27,441

6,553

4,243

2,298

14,347

Total
$
407,307

$
36,468

$
235,877

$
100,717

$
34,245

 

1 Included in the “1 - 3 years” category in the table above is $40.0 million related to the first installment of the 2019 Notes (defined in Senior Notes Payable section below) that we have the intent and ability to refinance using our revolving credit facility or other source of financing.
2 Included in the total is $0.4 million related to mortgages, the terms of which include a 6.00% variable interest rate at December 31, 2014. Also included in this balance is $4.8 million interest related to borrowings under our revolving credit facility, the terms of which include a variable interest rate that was 2.76% at December 31, 2014 using LIBOR. In addition, included in the total is $36.7 million in interest related to borrowings under our senior notes, respectively, the terms of which include a 6.11% per annum interest rate. The future payments were calculated using rates in effect as of December 31, 2014 and may differ from actual results. See Note 12 of “Notes to the Consolidated Financial Statements.”
These obligations represent the minimum rental commitments and minimum royalty requirements under all noncancellable operating leases. See Note 18 of “Notes to the Consolidated Financial Statements.”
These obligations represent firm purchase commitments for equipment and other goods and services not connected with our construction contract backlog which are individually greater than $10,000 and have an expected fulfillment date after December 31, 2014.
5The timing of expected payment of deferred compensation is based on estimated dates of retirement. Actual dates of retirement could be different and could cause the timing of payments to change.
6Asset retirement obligations represent reclamation and other related costs associated with our owned and leased quarry properties, the majority of which have an estimated settlement date beyond five years (see Note 8 of “Notes to the Consolidated Financial Statements”).
 
In addition to the significant obligations described above, as of December 31, 2014, we had approximately $1.1 million associated with uncertain tax positions filed on our tax returns which were excluded because we cannot make a reasonably reliable estimate of the timing of potential payments relative to such reserves.



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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 $134.8 million was available at December 31, 2014. At December 31, 2014 and 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 the consolidated balance sheets. In addition, as of December 31, 2014, there were standby letters of credit totaling $10.3 million. The letters of credit will expire between June 2015 and December 2017.
Borrowings under the Credit Agreement bear interest at LIBOR or a base rate (at our option), plus an applicable margin based on certain financial ratios calculated quarterly. LIBOR varies based on the applicable loan term, market conditions and other external factors. The applicable margin was 2.50% for loans bearing interest based on LIBOR and 1.50% for loans bearing interest at the base rate at December 31, 2014. Accordingly, the effective interest rate was between 2.76% and 4.75% at December 31, 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 six months. 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 subsequent to exercising the option, our Consolidated Fixed Charge Coverage Ratio is less than 1.25 or our Consolidated Leverage Ratio is greater than 2.50, then we 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 December 31, 2014, the conditions for the exercise of the unsecured option were not satisfied.
Senior Notes Payable
As of December 31, 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”). In March 2014, we entered into an interest rate swap to convert the interest rate from a fixed rate of 6.11% to a floating rate of 4.15% plus six-month LIBOR (see Liquidity and Capital Resources section above for further discussion). The first installment of the 2019 Notes is included in long-term debt on the consolidated balance sheet as of December 31, 2014 as we have the ability and intent to pay this installment using borrowings under the Credit Agreement (defined in Credit Agreement section above) or by obtaining another source of financing.
Our obligations under the note purchase agreement governing the 2019 Notes (the “2019 NPA”) are guaranteed by certain of our subsidiaries and are collateralized on an equivalent basis with the Credit Agreement 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 December 31, 2014, approximately $2.3 billion of our contract backlog was bonded. Performance bonds do not have stated expiration dates; rather, we are generally released from the bonds after the owner accepts the work performed under contract. The ability to maintain bonding capacity to support our current and future level of contracting requires that we maintain cash and working capital balances satisfactory to our sureties.
Our real estate held for development and sale is subject to mortgage indebtedness. This indebtedness is non-recourse to Granite but is recourse to the real estate entity. The terms of this indebtedness are typically renegotiated to reflect the evolving nature of the real estate project as it progresses through acquisition, entitlement and development. Modification of these terms may include changes in loan-to-value ratios requiring the real estate entity to repay portions of the debt. As of December 31, 2014, the principal amount of debt of our consolidated real estate entity secured by a mortgage was $6.7 million, of which approximately $1.2 million was included in current liabilities and approximately $5.5 million was included in long-term liabilities on the consolidated balance sheets.

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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.
As of December 31, 2014 and pursuant to the definitions in the agreements, our Consolidated Tangible Net Worth was $766.3 million, which exceeded the minimum of $622.7 million, our Consolidated Leverage Ratio was 2.77 which did not exceed the maximum of 3.00 and our Consolidated Interest Coverage Ratio was 6.93 which exceeded the minimum of 4.00.
As of December 31, 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 December 31, 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. The specific timing and amount of any future 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.
Recently Issued and Adopted Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the threshold for reporting discontinued operations and adds new disclosures. The new guidance defines a discontinued operation as a disposal of a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” For disposals of individually significant components that do not qualify as discontinued operations, an entity must disclose pre-tax earnings of the disposed component. This ASU will be effective for all disposals (or classifications as held for sale) of components of an entity that occur during our year ended December 31, 2015 and interim periods within the year. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued 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.



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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We maintain an investment portfolio of various holdings, types and maturities. We purchase instruments that meet high credit quality standards, as specified in our investment policy. This policy prohibits investments in auction rate and asset-backed securities. It also limits the amount of credit exposure to any one issue, issuer or type of instrument. The portfolio is limited to an average maturity of no more than one year from the date of purchase. On an ongoing basis we monitor credit ratings, financial condition and other factors that could affect the carrying amount of our investment portfolio.  
Marketable securities, consisting of U.S. government and agency obligations and commercial paper, are classified as held-to-maturity and are stated at cost, adjusted for amortization of premiums and discounts to maturity.
We are exposed to financial market risks due largely to changes in interest rates, which we have managed primarily by managing the maturities in our investment portfolio. We do not have any material business transactions in foreign currencies.
The fair value of our short-term held-to-maturity investment portfolio and related income would not be significantly affected by changes in interest rates since the investment maturities are short and the interest rates are primarily fixed. The fair value of our long-term held-to-maturity investment portfolio may be affected by changes in interest rates.
Given the short-term nature of certain investments, our investment income is subject to the general level of interest rates in the United States at the time of maturity and reinvestment.
We are exposed to various commodity price risks, including, but not limited to, diesel fuel, natural gas, propane, steel, cement and liquid asphalt arising from transactions that are entered into in the normal course of business. In order to manage or reduce commodity price risk, we monitor the costs of these commodities at the time of bid and price them into our contracts accordingly. Additionally, some of our contracts include commodity price escalation clauses which partially protect us from increasing prices. At times we enter into supply agreements or pre-purchase commodities to secure pricing and use financial contracts to further manage price risk. In 2014, we entered into commodity swaps to protect us from diesel and natural gas market price escalations. Specifically, in March 2014, we entered into two diesel commodity swaps covering May 2014 to October 2014 and May 2015 to October 2015 which represented roughly 25% of our forecasted purchases for diesel. In addition, in May 2014, we entered into two natural gas commodity swaps covering June 2014 to October 2014 and May 2015 to October 2015 representing roughly 25% of our forecasted purchases of natural gas. Each $0.50 decrease in the diesel unit market price when compared to the fixed price of the swaps would result in an additional $0.7 million of annual expense and each $0.50 decrease in the natural gas unit market price when compared to the fixed price of the swaps would result in an additional $0.1 million of annual expense.

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At December 31, 2014, senior notes payable in the amount of $200.0 million were due to a group of institutional holders in five equal installments beginning in 2015 and bear interest at 6.11% per annum. 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 from a fixed rate of 6.11% to a floating rate of 4.15% plus six-month LIBOR. LIBOR floating rate is variable and subject to market changes over the life of the swap with no guarantees to settle as forecasted. Once LIBOR increases over 2.50%, each 25 basis point increase would result in an additional $0.3 million of annual interest expense.
At December 31, 2014 and 2013, there was $70.0 million in revolving loans outstanding under the Credit Agreement related to financing the Kenny acquisition, which is included in long-term debt on the consolidated balance sheets. These borrowings bear interest at LIBOR or a base rate (at our option), plus an applicable margin based on certain financial ratios calculated quarterly. The applicable margin was 2.50% for loans bearing interest based on LIBOR and 1.50% for loans bearing interest at the base rate at December 31, 2014. Accordingly, the effective interest rate was between 2.76% and 4.75% at December 31, 2014. Each 25 basis point increase in LIBOR would result in an additional $0.2 million of annual interest expense.
The table below presents principal amounts due by year and related weighted average interest rates for our cash and cash equivalents, held-to-maturity investments and significant debt obligations as of December 31, 2014 (dollars in thousands):
 
2015
2016
2017
2018
2019
Thereafter
Total
Assets
 
 
 
 
 
 
 
Cash, cash equivalents, held-to-maturity investments
$
281,465

$
20,113

$
26,450

$
30,000

$

$

$
358,028

Weighted average interest rate
0.33
%
0.65
%
1.02
%
1.42
%
%
%
0.33
%
Liabilities
 
 
 
 
 
 
 
Fixed rate debt
 
 
 
 
 
 
 
Senior notes payable1
$

$
40,000

$
40,000

$
40,000

$
40,000

$

$
160,000

Weighted average interest rate
6.11
%
6.11
%
6.11
%
6.11
%
6.11
%
%
6.11
%
Variable rate debt
 
 
 
 
 
 
 
Credit Agreement loan1
$

$
110,000

$

$

$

$

$
110,000

Weighted average interest rate3
2.58
%
2.58
%
%
%
%
%
2.58
%
1As of December 31, 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. We have the intent and ability to refinance $40.0 million related to the first installment using our revolving credit facility or other source of financing; therefore, it is included in the Credit Agreement amount.
2The weighted average interest rate was calculated using LIBOR rates and the applicable margin in effect as of December 31, 2014 and may differ from actual results.

The estimated fair value of our cash, cash equivalents and short-term held-to-maturity investments approximates the principal amounts reflected above based on the generally short maturities of these financial instruments. Based on the fixed borrowing rates currently available to us for bank loans with similar terms and average maturities, the fair value of the senior notes payable was approximately $220.2 million as of December 31, 2014 and $225.9 million as of December 31, 2013. The fair value of the Credit Agreement loan was approximately $70.2 million as of December 31, 2014 and $69.6 million as of December 31, 2013.

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Granite, the supplementary data and the independent registered public accounting firm’s report are incorporated by reference from Part IV, Item 15(1) and (2):
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - At December 31, 2014 and 2013
Consolidated Statements of Operations - Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Shareholders’ Equity - Years Ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows - Years Ended December 31, 2014, 2013 and 2012
Notes to the Consolidated Financial Statements
Quarterly Financial Data (unaudited)
Schedule II - Schedule of Valuation and Qualifying Accounts

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.

Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures: Our management carried out, as of December 31, 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 that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 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 under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting: During the quarter ended December 31, 2014, there were no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting: Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d -15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2014.
Independent Registered Public Accounting Firm Report: PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this Annual Report on Form 10-K, has issued a report on the Company’s internal control over financial reporting as of December 31, 2014. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014, is included in “Item 15. Exhibits and Financial Statement Schedules” under the heading “Report of Independent Registered Public Accounting Firm.”
Item 9B. OTHER INFORMATION
Not Applicable.

45
 
 
 
 



Table of Contents

PART III
Certain information required by Part III is omitted from this report. We will file our definitive proxy statement for our Annual Meeting of Shareholders to be held on June 4, 2015 (the “Proxy Statement”) pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report, and certain information included therein is incorporated herein by reference.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
For information regarding our Directors and compliance with Section 16(a) of the Securities Exchange Act of 1934, we direct you to the sections entitled “Proposal 1 - Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance,” respectively, in the Proxy Statement. For information regarding our Audit/Compliance Committee and our Audit/Compliance Committee’s financial expert, we direct you to the section entitled “Information about the Board of Directors and Corporate Governance - Committees of the Board - Audit/Compliance Committee” in the Proxy Statement. For information regarding our Code of Conduct, we direct you to the section entitled “Information about the Board of Directors and Corporate Governance - Code of Conduct” in the Proxy Statement. Information regarding our executive officers is contained in the section entitled “Executive Officers of the Registrant,” in Part I, Item I of this report. This information is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
For information regarding our Executive Compensation, we direct you to the section captioned “Executive and Director Compensation and Other Matters” in the Proxy Statement. This information is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
This information is located in the sections captioned “Stock Ownership of Beneficial Owners and Certain Management” and “Equity Compensation Plan Information” in the Proxy Statement. This information is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
You will find this information in the sections captioned “Transactions with Related Persons” and “Information about the Board of Directors and Corporate Governance - Director Independence” in the Proxy Statement. This information is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
You will find this information in the section captioned “Independent Registered Public Accountants - Principal Accountant Fees and Services” in the Proxy Statement. This information is incorporated herein by reference.

46
 
 
 
 



Table of Contents

PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
1. Financial Statements. The following consolidated financial statements and related documents are filed as part of this report:
Financial Statements
Page
Report of Independent Registered Public Accounting Firm
F-1
Consolidated Balance Sheets at December 31, 2014 and 2013
F-2
Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012
F-3
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2014, 2013 and 2012
F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012
F-5 to F-6
Notes to the Consolidated Financial Statements
F-7 to F-44
Quarterly Financial Data
F-45
2. Financial Statement Schedule. The following financial statement schedule of Granite for the years ended December 31, 2014, 2013 and 2012 is filed as part of this report and should be read in conjunction with the consolidated financial statements of Granite.
Schedule
Page
Schedule II - Schedule of Valuation and Qualifying Accounts
S-1
Schedules not listed above have been omitted because the required information is either not material, not applicable or is shown in the consolidated financial statements or notes thereto.
3. Exhibits. The Exhibits listed in the accompanying Exhibit Index, which is incorporated herein by reference, are filed or incorporated by reference as part of, or furnished with, this report.


47
 
 
 
 



Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Granite Construction Incorporated:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(1) present fairly, in all material respects, the financial position of Granite Construction Incorporated and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/PricewaterhouseCoopers LLP
San Francisco, California
February 27, 2015


F- 1
 
 
 
 



Table of Contents

GRANITE CONSTRUCTION INCORPORATED
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share data)
 
 
 
 
 
 
December 31,
 
2014
 
2013
 
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents ($61,276 and $38,800 related to consolidated construction joint ventures (“CCJV”))
 
$
255,961

 
$
229,121

 
Short-term marketable securities
 
25,504

 
49,968

 
Receivables, net ($36,781 and $38,372 related to CCJVs)
 
310,934

 
313,598

 
Costs and estimated earnings in excess of billings
 
36,411

 
33,306

 
Inventories
 
68,920

 
62,474

 
Real estate held for development and sale
 
11,609

 
12,478

 
Deferred income taxes
 
53,231

 
55,874

 
Equity in construction joint ventures
 
184,575

 
162,673

 
Other current assets
 
23,033

 
30,711

 
Total current assets
 
970,178

 
950,203

 
Property and equipment, net ($11,969 and $22,216 related to CCJVs)
 
409,653

 
436,859

 
Long-term marketable securities
 
76,563

 
67,234

 
Investments in affiliates
 
32,361

 
32,480

 
Goodwill
 
53,799

 
53,799

 
Other noncurrent assets
 
77,940

 
76,580

 
Total assets
 
$
1,620,494

 
$
1,617,155

 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 

 
 

 
Current liabilities
 
 

 
 

 
Current maturities of long-term debt
 
$
21

 
$
21

 
Current maturities of non-recourse debt
 
1,226

 
1,226

 
Accounts payable ($18,009 and $16,937 related to CCJVs)
 
151,935

 
160,706

 
Billings in excess of costs and estimated earnings ($32,830 and $60,185 related to CCJVs)
 
108,992

 
138,375

 
Accrued expenses and other current liabilities ($2,714 and $11,299 related to CCJVs)
 
200,652

 
197,242

 
Total current liabilities
 
462,826

 
497,570

 
Long-term debt
 
270,105

 
270,127

 
Long-term non-recourse debt
 
5,516

 
6,741

 
Other long-term liabilities
 
44,495

 
48,580

 
Deferred income taxes
 
20,446

 
7,793

 
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 39,186,386 shares as of December 31, 2014 and 38,917,728 shares as of December 31, 2013
 
392

 
389

 
Additional paid-in capital
 
134,177

 
126,449

 
Retained earnings
 
659,816

 
655,102

 
Total Granite Construction Incorporated shareholders’ equity
 
794,385

 
781,940

 
Non-controlling interests
 
22,721

 
4,404

 
Total equity
 
817,106

 
786,344

 
Total liabilities and equity
 
$
1,620,494

 
$
1,617,155

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


F- 2
 
 
 
 



Table of Contents

GRANITE CONSTRUCTION INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
 
 
 
 
 
 
Years Ended December 31,
 
2014
 
2013
 
2012
Revenue
 
 
 
 
 
 
Construction
 
$
1,186,445

 
$
1,251,197

 
$
984,106

Large Project Construction
 
825,044

 
777,811

 
863,217

Construction Materials
 
263,781

 
237,893

 
235,714

Total revenue
 
2,275,270

 
2,266,901

 
2,083,037

Cost of revenue
 
 

 
 
 
 
Construction
 
1,067,611

 
1,144,823

 
906,143

Large Project Construction
 
712,443

 
706,003

 
714,799

Construction Materials
 
244,910

 
230,812

 
227,336

Total cost of revenue
 
2,024,964

 
2,081,638

 
1,848,278

Gross profit
 
250,306

 
185,263

 
234,759

Selling, general and administrative expenses
 
203,821

 
199,946

 
185,099

Restructuring and impairment (gains) charges, net
 
(2,643
)
 
52,139

 
(3,728
)
Gain on sales of property and equipment
 
(15,972
)
 
(12,130
)
 
(27,447
)
Operating income (loss)
 
65,100

 
(54,692
)
 
80,835

Other expense (income)
 
 

 
 
 
 
Interest income
 
(1,872
)
 
(1,785
)
 
(2,626
)
Interest expense
 
14,159

 
14,386

 
10,603

Equity in income of affiliates
 
(901
)
 
(1,304
)
 
(1,988
)
Other income, net
 
(1,883
)
 
(1,960
)
 
(6,183
)
Total other expense (income)
 
9,503

 
9,337

 
(194
)
Income (loss) before provision for (benefit from) income taxes
 
55,597

 
(64,029
)
 
81,029

Provision for (benefit from) income taxes
 
19,721

 
(19,263
)
 
21,109

Net income (loss)
 
35,876

 
(44,766
)
 
59,920

Amount attributable to non-controlling interests
 
(10,530
)
 
8,343

 
(14,637
)
Net income (loss) attributable to Granite Construction Incorporated
 
$
25,346

 
$
(36,423
)
 
$
45,283

 
 
 
 
 
 
 
Net income (loss) per share attributable to common shareholders (see Note 16)
 
 

 
 
 
 
Basic
 
$
0.65

 
$
(0.94
)
 
$
1.17

Diluted
 
$
0.64

 
$
(0.94
)
 
$
1.15

Weighted average shares of common stock
 
 

 
 
 
 
Basic
 
39,096

 
38,803

 
38,447

Diluted
 
39,795

 
38,803

 
39,076

Dividends per common share
 
$
0.52

 
$
0.52

 
$
0.52

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

F- 3
 
 
 
 



Table of Contents

GRANITE CONSTRUCTION INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share data)
 
 
 
 
 
 
 
 
 
Outstanding Shares
Common Stock
Additional Paid-in Capital
Retained Earnings
Total Granite Shareholders’ Equity
Non-controlling Interests
Total Equity
Balances at December 31, 2011
38,682,771

$
387

$
111,514

$
687,296

$
799,197

$
28,466

$
827,663

Net income



45,283

45,283

14,637

59,920

Stock units vested
191,285

2

(1
)

1


1

Amortized restricted stock


11,475


11,475


11,475

Purchase of common stock
(161,080
)
(2
)
(4,852
)

(4,854
)

(4,854
)
Cash dividends on common stock



(20,117
)
(20,117
)

(20,117
)
Net tax on stock-based compensation  


(1,573
)

(1,573
)

(1,573
)
Non-controlling interest from acquisition





14,788

14,788

Transactions with non-controlling interests, net 





(15,986
)
(15,986
)
Stock options exercised and other
17,689


859

(318
)
541


541

Balances at December 31, 2012
38,730,665

387

117,422

712,144

829,953

41,905

871,858

Net loss



(36,423
)
(36,423
)
(8,343
)
(44,766
)
Stock units vested
359,941

4

(4
)




Amortized restricted stock


13,443


13,443


13,443

Purchase of common stock
(197,313
)
(2
)
(5,900
)

(5,902
)

(5,902
)
Cash dividends on common stock



(20,210
)
(20,210
)

(20,210
)
Net tax on stock-based compensation  


419


419


419

Transactions with non-controlling interests, net 





(29,158
)
(29,158
)
Employee Stock Purchase Plan and other
24,435


1,069

(409
)
660


660

Balances at December 31, 2013
38,917,728

389

126,449

655,102

781,940

4,404

786,344

Net income



25,346

25,346

10,530

35,876

Stock units vested
378,027

4



4


4

Amortized restricted stock


11,160


11,160


11,160

Purchase of common stock
(135,028
)
(1
)
(5,186
)

(5,187
)

(5,187
)
Cash dividends on common stock



(20,354
)
(20,354
)

(20,354
)
Net tax on stock-based compensation


1,080


1,080


1,080

Transactions with non-controlling interests, net 





7,787

7,787

Employee Stock Purchase Plan and other
25,659


674

(278
)
396


396

Balances at December 31, 2014
39,186,386

$
392

$
134,177

$
659,816

$
794,385

$
22,721

$
817,106

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



F- 4
 
 
 
 



Table of Contents

GRANITE CONSTRUCTION INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
 
 
 
 
 
Years Ended December 31,
 
2014
 
2013
 
2012
Operating activities
 
 
 
 
 
 
Net income (loss)
 
$
35,876

 
$
(44,766
)
 
$
59,920

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 

 
 
Non-cash restructuring and impairment (gains) charges, net
 
(2,643
)
 
44,734

 
145

Depreciation, depletion and amortization
 
68,252

 
72,899

 
56,101

Gain on sales of property and equipment
 
(15,972
)
 
(12,130
)
 
(27,447
)
Change in deferred income taxes
 
14,907

 
(19,557
)
 
6,013

Stock-based compensation
 
11,160

 
13,443

 
11,475

Equity in net income from unconsolidated joint ventures
 
(49,168
)
 
(72,764
)
 
(101,747
)
Changes in assets and liabilities, net of the effects of acquisition in 2012:
 

 


 


Receivables
 
3,549

 
12,236

 
9,415

Costs and estimated earnings in excess of billings, net
 
(13,856
)
 
(507
)
 
2,780

Inventories
 
(6,446
)
 
(2,689
)
 
(8,079
)
Contributions to unconsolidated construction joint ventures
 
(37,097
)
 
(40,758
)
 
(4,986
)
Distributions from unconsolidated construction joint ventures
 
67,255

 
110,347

 
92,474

Other assets, net
 
4,618

 
3,961

 
8,898

Accounts payable
 
(12,669
)
 
(34,048
)
 
(9,472
)
Accrued expenses and other current liabilities, net
 
(24,624
)
 
(25,021
)
 
(3,700
)
Net cash provided by operating activities
 
43,142

 
5,380

 
91,790

Investing activities
 
 

 
 

 
 
Purchases of marketable securities
 
(64,975
)
 
(74,924
)
 
(124,596
)
Maturities of marketable securities
 
45,000

 
63,650

 
90,100

Proceeds from called marketable securities
 
35,000

 
5,000

 
75,000

Purchases of property and equipment
 
(43,428
)
 
(43,682
)
 
(37,622
)
Proceeds from sales of property and equipment
 
28,614

 
25,759

 
34,392

Acquisition of Kenny, net of cash acquired
 

 
(8,382
)
 
(79,640
)
Other investing activities, net
 
569

 
931

 
(188
)
Net cash provided by (used in) investing activities
 
780

 
(31,648
)
 
(42,554
)
Financing activities
 
 

 
 

 
 
Proceeds from long-term debt
 

 

 
70,495

Long-term debt principal payments
 
(1,226
)
 
(12,148
)
 
(11,751
)
Cash dividends paid
 
(20,319
)
 
(20,210
)
 
(20,117
)
Purchase of common stock
 
(5,124
)
 
(5,896
)
 
(4,854
)
Contributions from non-controlling partners
 
15,835

 
5,117

 
107

Distributions to non-controlling partners
 
(8,066
)
 
(34,600
)
 
(16,093
)
Other financing activities, net
 
1,818

 
1,136

 
(2,023
)
Net cash (used in) provided by financing activities
 
(17,082
)
 
(66,601
)
 
15,764

Increase (decrease) in cash and cash equivalents
 
26,840

 
(92,869
)
 
65,000

Cash and cash equivalents at beginning of year
 
229,121

 
321,990

 
256,990

Cash and cash equivalents at end of year
 
$
255,961

 
$
229,121

 
$
321,990

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


F- 5
 
 
 
 



Table of Contents

GRANITE CONSTRUCTION INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(in thousands)
 
 
 
 
 
 
 
Years Ended December 31,
 
2014
 
2013
 
2012
Supplementary Information
 
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
 
Interest
 
$
14,666

 
$
14,622

 
$
11,484

Income taxes
 
2,326

 
4,119

 
24,616

Other non-cash activities:
 
 
 
 
 
 
Performance guarantees
 
21,332

 
(23,765
)
 
6,528

Non-cash investing and financing activities:
 
 
 
 
 
 
Restricted stock/units issued, net of forfeitures (See Note 14)
 
$
6,514

 
$
13,775

 
$
14,175

Accrued cash dividends
 
5,094

 
5,059

 
5,035

Debt payments out of escrow from sale of assets
 

 

 
1,109

Debt extinguishment from joint venture interest assignment
 

 

 
18,612

Debt payment from refinance
 

 

 
1,150

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

F- 6
 
 
 
 



Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


1. Summary of Significant Accounting Policies
Description of Business: Granite Construction Incorporated is 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 have permanent offices located in Alaska, Arizona, California, Colorado, Florida, Illinois, Nevada, New York, Texas, Utah and Washington. Unless otherwise indicated, the terms “we,” “us,” “our,” “Company” and “Granite” refer to Granite Construction Incorporated and its consolidated subsidiaries.
Principles of Consolidation: The consolidated financial statements include the accounts of Granite Construction Incorporated and its wholly owned and majority owned subsidiaries. All material inter-company transactions and accounts have been eliminated. We use the equity method of accounting for affiliated companies where we have the ability to exercise significant influence, but not control. Additionally, we participate in various joint ventures, partnerships and a limited liability company of which we are a member (“joint ventures” or “ventures”). We have consolidated these ventures where we have determined that through our participation we have a variable interest and are the primary beneficiary as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, and related standards. The factors we use to determine the primary beneficiary of a variable interest entity (“VIE”) include the decision authority of each partner, which partner manages the day-to-day operations of the project and the amount of our equity investment in relation to that of our partners.
Where we have determined we are not the primary beneficiary of a venture but do exercise significant influence, we account for our share of the operations of jointly controlled construction joint ventures on a pro rata basis in the consolidated statements of operations and as a single line item on the consolidated balance sheets, and we account for non-construction ventures under the equity method of accounting, as a single line item in both the consolidated statements of operations and on the consolidated balance sheets.
If we determine that the power to direct the significant activities is shared equally by two or more joint venture parties, then there is no primary beneficiary and no party consolidates the VIE.
Use of Estimates in the Preparation of Financial Statements: The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).  The preparation of these financial statements requires management to make estimates that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Our estimates and related judgments and assumptions are continually evaluated based on available information and experiences; however, actual amounts could differ from those estimates. 
Revenue Recognition - Construction Contracts: Revenue and earnings on construction contracts, including construction joint ventures, are recognized under the percentage of completion method using the ratio of costs incurred to estimated total costs. 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 factors considered in this evaluation include the stage of design completion, the stage of construction completion, the status of outstanding subcontracts or buyouts, certainty of quantities of labor and materials, certainty of schedule and the relationship with the owner.
Revenue from affirmative contract claims is recognized when we have a signed agreement and payment is assured. Revenue from unapproved change orders is recognized to the extent the related costs have been incurred, the amount can be reliably estimated and recovery is probable, which is often when the owner has agreed to the change order in writing.
Provisions are recognized in the consolidated statements of operations for the full amount of estimated losses on uncompleted contracts whenever evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue. All contract costs, including those associated with affirmative claims and change orders, are recorded as incurred and revisions to estimated total costs are reflected as soon as the obligation to perform is determined. Contract costs consist of direct costs on contracts, including labor and materials, amounts payable to subcontractors, direct overhead costs and equipment expense (primarily depreciation, fuel, maintenance and repairs). All state and federal government contracts and many of our other contracts provide for termination of the contract at the convenience of the party contracting with us, with provisions to pay us for work performed through the date of termination. Pre-contract costs are expensed as incurred.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The accuracy of our revenue and profit recognition in a given period depends on the accuracy of our estimates of the cost to complete each project. Cost estimates for all of our significant projects use a detailed “bottom up” approach, and we believe our experience allows us to create materially reliable estimates. There are a number of factors that can contribute to changes in estimates of contract cost and profitability. The most significant of these include:
the completeness and accuracy of the original bid;
costs associated with scope changes;
costs of labor and/or materials;
extended overhead and other costs due to owner, weather and other delays;
subcontractor performance issues;
changes in productivity expectations;
site conditions that differ from those assumed in the original bid (to the extent contract remedies are unavailable);
continuing changes from original design on design-build projects;
the availability and skill level of workers in the geographic location of the project;
a change in the availability and proximity of equipment and materials; and
our ability to fully and promptly recover on claims for additional contract costs.
The foregoing factors, as well as the stage of completion of contracts in process and the mix of contracts at different margins may cause fluctuations in gross profit between periods. Significant changes in cost estimates, particularly in our larger, more complex projects have had, and can in future periods have, a significant effect on our profitability.
Revenue Recognition - Materials: Revenue from the sale of materials is recognized when delivery occurs and risk of ownership passes to the customer.
Balance Sheet Classifications: Amounts receivable and payable under construction contracts (principally retentions) that may extend beyond one year are included in current assets and liabilities. Additionally, the cost of property purchased for development and sale is included in current assets. A one-year time period is used as the basis for classifying all other current assets and liabilities.
Cash and Cash Equivalents: Cash equivalents are securities having maturities of three months or less from the date of purchase. Included in cash and cash equivalents on the consolidated balance sheets as of December 31, 2014 and 2013, was $61.3 million and $38.8 million, respectively, related to our consolidated joint ventures. Our access to joint venture cash may be limited by the provisions of the venture agreements.
Costs and Estimated Earnings in Excess of Billings: Costs and estimated earnings in excess of billings represent unbilled amounts earned and reimbursable under contracts. These amounts become billable according to the contract terms, which usually consider the passage of time, achievement of milestones or completion of the project. Generally, such unbilled amounts will be billed and collected over the next twelve months. Based on our historical experience, we generally consider the collection risk related to these amounts to be low. When events or conditions indicate that the amounts outstanding may become uncollectible, an allowance is estimated and recorded.
Marketable Securities: We determine the classification of our marketable securities at the time of purchase and re-evaluate these determinations at each balance sheet date. Debt securities are classified as held-to-maturity when we have the positive intent and ability to hold the securities to maturity. Held-to-maturity investments are stated at amortized cost and are periodically assessed for other-than-temporary impairment. Amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, and is included in interest income. Realized gains and losses are included in other expense (income), net. The cost of securities sold or called is based on the specific identification method.
Financial Instruments: The carrying value of marketable securities approximates their fair value as determined by market quotes. Rates currently available to us for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. The carrying value of receivables and other amounts arising out of normal contract activities, including retentions, which may be settled beyond one year, is estimated to approximate fair value. 

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GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Derivative Instruments: We are exposed to various commodity price risks, including, but not limited to, diesel fuel, natural gas, propane, steel, cement and liquid asphalt arising from transactions that are entered into in the normal course of business. At times we manage this risk through supply agreements or we pre-purchase commodities to secure pricing and use financial contracts to further manage price risk. All derivative instruments are recorded on the balance sheet at fair value.  We do not enter into derivative instruments for speculative or trading purposes.
Fair Value of Financial Assets and Liabilities: We measure and disclose certain financial assets and liabilities at fair value. ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
We utilize the active market approach to measure fair value for our financial assets and liabilities. We report separately each class of assets and liabilities measured at fair value on a recurring basis and include assets and liabilities that are disclosed but not recorded at fair value in the fair value hierarchy.
Concentrations of Credit Risk and Other Risks: Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash and cash equivalents, short-term and long-term marketable securities, and accounts receivable. We maintain our cash and cash equivalents and our marketable securities with several financial institutions. We invest with high credit quality financial institutions and, by policy, limit the amount of credit exposure to any one financial institution.
Our receivables are from customers concentrated in the United States, and we have no material receivables from foreign operations as of December 31, 2014. We perform ongoing credit evaluations of our customers and generally do not require collateral, although the law provides us the ability to file mechanics’ liens on real property improved for private customers in the event of non-payment by such customers. We maintain an allowance for doubtful accounts which has historically been within management’s estimates.
Inventories: Inventories consist primarily of quarry products valued at the lower of average cost or market. We write down the inventories based on estimated quantities of materials on hand in excess of estimated foreseeable use. At December 31, 2014, inventory also included materials specifically related to a project in our Kenny Large Project Construction operating group and was valued at cost.
Real Estate Held for Development and Sale: Real estate held for development and sale is stated at cost, unless the carrying value is determined not to be recoverable, in which case it is written down to fair value. The carrying amount of each consolidated real estate development project is reviewed on a quarterly basis in accordance with ASC Topic 360, Property, Plant, and Equipment, and each real estate development project accounted for under the equity method of accounting is reviewed in accordance with ASC Topic 323, Investments - Equity Method and Joint Ventures. The review of each consolidated project includes an evaluation to determine if events or changes in circumstances indicate that a consolidated project’s carrying amount may not be recoverable. If events or changes in circumstances indicate that a consolidated project’s carrying amount may not be recoverable, the future undiscounted cash flows are estimated and compared to the project’s carrying amount. In the event that the project’s estimated future undiscounted cash flows or investment’s fair value are not sufficient to recover the carrying amounts, it is written down to its estimated fair value. The projects accounted for under the equity method are evaluated for impairment using the other-than-temporary impairment model, which requires an impairment charge to be recognized if our investment’s carrying amount exceeds its fair value, and the decline in fair value is deemed to be other than temporary.

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GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Events or changes in circumstances, which would cause us to review undiscounted future cash flows include, but are not limited to:
significant decreases in the market price of the asset;
significant adverse changes in legal factors or the business climate;
significant changes to the development or business plans of a project;
accumulation of costs significantly in excess of the amount originally expected for the acquisition, development or construction of the asset; and
current period cash flow or operating losses combined with a history of losses, or a forecast of continuing losses associated with the use of the asset.

Future undiscounted cash flows and fair value assessments are estimated based on entitlement status, market conditions, cost of construction, debt load, development schedules, status of joint venture partners and other factors applicable to the specific project. Fair value is estimated based on the expected future cash flows attributable to the asset or group of assets and on other assumptions that market participants would use in determining fair value, such as market discount rates, transaction prices for other comparable assets, and other market data. Our estimates of cash flows may differ from actual cash flows due to, among other things, fluctuations in interest rates, decisions made by jurisdictional agencies, economic conditions, or changes to our business operations.
The operations of our real estate investments 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. 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.
As of December 31, 2014 and 2013, real estate held for development and sale associated with our consolidated real estate entity included on the consolidated balance sheets was $11.6 million and $12.5 million, respectively. Non-recourse debt, including current maturities, associated with this entity was $6.7 million and $8.0 million as of December 31, 2014 and 2013, respectively. Residential real estate held for development and sale in Washington State was $11.6 million, as of both December 31, 2014 and 2013. See Note 7 for details on real estate development project accounted for under the equity method of accounting.
Property and Equipment: Property and equipment are stated at cost. Depreciation for construction and other equipment is primarily provided using accelerated methods over lives ranging from three to seven years, and the straight-line method over lives from three to twenty years for the remaining depreciable assets. We believe that accelerated methods best approximate the service provided by the construction and other equipment. Depletion of quarry property is based on the usage of depletable reserves. We frequently sell property and equipment that has reached the end of its useful life or no longer meets our needs, including depleted quarry property. At the time that an asset or an asset group meets the held-for-sale criteria as defined by ASC Topic 360, Property, Plant, and Equipment, we write it down to fair value, if the fair value is below the carrying value. Fair value is estimated by a variety of factors including, but not limited to, market comparative data, historical sales prices, broker quotes and third party valuations. If material, such property is separately disclosed, otherwise it is held in property and equipment until sold. The cost and accumulated depreciation or depletion of property sold or retired is removed from the balance sheet and the resulting gains or losses, if any, are reflected in operating income (loss) for the period. In the case that we abandon an asset, an amount equal to the carrying amount of the asset, less salvage value, if any, will be recognized as expense in the period that the asset was abandoned. Repairs and maintenance are charged to operations as incurred.
Costs related to the development of internal-use software during the preliminary project and post-implementation stages are expensed as incurred. Costs incurred during the application development stage are capitalized. These costs consist primarily of software, hardware and consulting fees, as well as salaries and related costs. Amounts capitalized are reported as a component of office furniture and equipment within property and equipment. Capitalized software costs are depreciated using the straight-line method over the estimated useful life of the related software, which range from three to five years. During the years ended December 31, 2014, 2013 and 2012, we capitalized $4.1 million, $2.5 million and $10.9 million, respectively, of internal-use software development and related hardware costs.

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GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Long-lived Assets: We review property and equipment and amortizable intangible assets for impairment whenever events or changes in circumstances indicate the net book value of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their net book values to the future undiscounted cash flows the assets are expected to generate. If the assets are considered to be impaired, an impairment charge will be recognized equal to the amount by which the net book value of the asset exceeds its fair value. We group plant equipment assets at a regional level, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets. When an individual asset or group of assets are determined to no longer contribute to the vertically integrated asset group, it is assessed for impairment independently.
Amortizable intangible assets include covenants not to compete, acquired backlog, permits, trade names and customer lists which are being amortized on a straight-line basis over terms from one to thirty years.
Capitalized Interest: Interest, to the extent it is incurred in connection with the construction of certain self-constructed assets and real estate development projects, is capitalized and recorded as part of the asset to which it relates. Capitalized interest on self-constructed assets is amortized over their estimated useful lives and is expensed on real estate projects as they are sold.
Goodwill: As of December 31, 2014, we had four reporting units in which goodwill was recorded as follows:
Kenny Group Construction
Kenny Group Large Project Construction
Northwest Group Construction
Northwest Group Construction Materials
The most significant goodwill balances reside in the reporting units associated with the Kenny Group.
We perform impairment tests annually and more frequently when events and circumstances occur that indicate a possible impairment of goodwill. We have historically performed goodwill impairment testing on an annual basis as of December 31. However, in 2014 we changed the annual goodwill impairment testing date to November 1, which we believe is preferable as the new testing date better aligns with our financial planning and budgeting cycle. In addition, we evaluate goodwill for impairment if events or circumstances change between annual tests indicating a possible impairment.  Examples of such events or circumstances include the following: 
a significant adverse change in legal factors or in the business climate; 
an adverse action or assessment by a regulator; 
a more likely than not expectation that a segment or a significant portion thereof will be sold; or 
the testing for recoverability of a significant asset group within the segment. 
In performing step one of the goodwill impairment tests, we calculate the estimated fair value of the reporting unit in which the goodwill is recorded using the discounted cash flows and market multiple methods.  Judgments inherent in these methods include the determination of appropriate discount rates, the amount and timing of expected future cash flows and growth rates, and appropriate benchmark companies. The cash flows used in our 2014 discounted cash flow model were based on five-year financial forecasts, which in turn were based on the 2015-2017 operating plan developed internally by management adjusted for market participant based assumptions. Our discount rate assumptions are based on an assessment of equity cost of capital and appropriate capital structure for our reporting units. In assessing the reasonableness of our determined fair values of our reporting units, we evaluate our results against our current market capitalization. 
After calculating the estimated fair value, we compare the resulting fair value to the net book value of the reporting unit, including goodwill. If the net book value of a reporting unit exceeds its fair value, we measure and record the amount of the impairment loss by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.
The results of our annual goodwill impairment tests, performed in accordance with ASC 350, indicated that the estimated fair values of our reporting units exceeded their net book values (i.e., cushion) by at least 50% for the four reporting units with material amounts of goodwill. The Kenny Large Project Construction business is susceptible to fluctuations in results depending on awarded work given the size and frequency of awards. While we believe the current cushion is adequate to absorb these fluctuations, a significant decline in job win rates could have a significant impact to this reporting unit’s estimated fair value.

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GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Billings in Excess of Costs and Estimated Earnings: Billings in excess of costs and estimated earnings is comprised of cash collected from customers and billings to customers on contracts in advance of work performed, including advance payments negotiated as a contract condition. Generally, unearned project-related costs will be earned over the next twelve months.
Asset Retirement and Reclamation Obligations: We account for the costs related to legal obligations to reclaim aggregate mining sites and other facilities by recording our estimated reclamation liability when incurred, capitalizing the estimated liability as part of the related asset’s carrying amount and allocating it to expense over the asset’s useful life.
Warranties: Many of our construction contracts contain warranty provisions covering defects in equipment, materials, design or workmanship that generally run from six months to one year after our customer accepts the contract. Because of the nature of our projects, including contract owner inspections of the work both during construction and prior to acceptance, we have not experienced material warranty costs for these short-term warranties and, therefore, do not believe an accrual for these costs is necessary. Certain construction contracts carry longer warranty periods, ranging from two to ten years, for which we have accrued an estimate of warranty cost. The warranty cost is estimated based on our experience with the type of work and any known risks relative to the project and was not material during the years ended December 31, 20142013 and 2012
Accrued Insurance Costs: We carry insurance policies to cover various risks, primarily general liability, automobile liability and workers compensation, under which we are liable to reimburse the insurance company for a portion of each claim paid. The amounts for which we are liable for general liability and workers compensation generally range from the first $0.5 million to $1.0 million per occurrence. We accrue for the estimated ultimate liability for incurred losses, both reported and unreported, using actuarial methods based on historic trends modified, if necessary, by recent events. Changes in our loss assumptions caused by changes in actual experience would affect our assessment of the ultimate liability and could have an effect on our operating results and financial position up to $1.0 million per occurrence.
Performance Guarantees: Agreements with our joint venture partners and limited liability company members (“partner(s)”) for both construction joint ventures and line item joint ventures define each partner’s management role and financial responsibility in the project. The amount of operational exposure is generally limited to our stated ownership interest. However, due to the joint and several nature of the performance obligations under the related owner contracts, if one of the partners fails to perform, we and the remaining partners would be responsible for performance of the outstanding work (i.e., performance guarantee). We estimate our liability for performance guarantees using estimated partner bond rates and include them in accrued expenses and other current liabilities (see Note 10) with a corresponding asset in equity in construction joint ventures on the consolidated balance sheets. We reassess our liability when and if changes in circumstances occur. The liability and corresponding asset are removed from the consolidated balance sheets upon customer acceptance of the project.
Circumstances that could lead to a loss under these agreements beyond our stated ownership interest include the failure of a partner to contribute additional funds to the venture in the event the project incurs a loss or additional costs that we could incur should a partner fail to provide the services and resources that it had committed to provide in the agreement.
At December 31, 2014, there was $5.7 billion of construction revenue to be recognized on unconsolidated and line item construction joint venture contracts, of which $1.7 billion represented our share and the remaining $4.0 billion represented our partners’ share. We are not able to estimate amounts that may be required beyond the remaining cost of the work to be performed. These costs could be offset by billings to the customer or by proceeds from our partners’ corporate and/or other guarantees. See Note 10 for disclosure of the amounts recorded on the consolidated balance sheets.

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GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Contingencies: We are currently involved in various claims and legal proceedings. Loss contingency provisions are recorded if the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount can be reasonably estimated. If a potential loss is considered probable but only a range of loss can be determined, the low-end of the range is recorded. These accruals represent management’s best estimate of probable loss. Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the amount recorded. Significant judgment is required in both the determination of probability of loss and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to claims and litigation and may revise our estimates.
Stock-Based Compensation: We measure and recognize compensation expense, net of estimated forfeitures, over the requisite vesting periods for all stock-based payment awards made. Stock-based compensation is included in selling, general and administrative expenses on our consolidated statements of operations.
Restructuring and Impairment (Gains) Charges: Pursuant to an approved plan, we record severance costs when an employee has been notified, unless the employee provides future service, in which case severance costs are expensed ratably over the future service period. Other restructuring costs are recognized when the liability is incurred. Costs associated with terminating a lease contract are recorded at the contract termination date, in accordance with contract terms, or on the cease-use date, net of estimated sublease income, if applicable. In determining the amount related to termination of a lease, various assumptions are used including the time period over which facilities will be vacant, expected sublease term and sublease rates. These assumptions may be adjusted upon the occurrence of future events. Asset impairment analyses resulting from restructuring events are performed in accordance with ASC subtopic 360-10, Property, Plant and Equipment. See the Property and Equipment and Long-lived Assets accounting policies above for further information on asset impairment charges. During the years ended December 31, 2014 and 2012, we recorded net restructuring gains of $2.6 million and $3.7 million, respectively, and during the year ended December 31, 2013, we recorded net restructuring and impairment charges of $52.1 million (see Note 11).
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.
Income Taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities on the consolidated financial statements and their respective tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in other expense (income) in the consolidated statements of operations.

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GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Computation of Earnings Per Share: Basic and diluted earnings per share are computed using the two-class method. Under the two-class method, awards that accrue cash dividends (whether paid or unpaid) and those dividends that do not need to be returned to the entity if the employee forfeits the award are considered participating securities. Our unvested restricted stock issued under the Amended and Restated 1999 Equity Incentive Plan carries nonforfeitable dividend rights and are considered participating securities.
In applying the two-class method, earnings are allocated to both common shares and the participating securities, except when in a net loss position.  Diluted earnings per share is computed by giving effect to all potential dilutive shares that were outstanding during the period.
Recently Issued and Adopted Accounting Pronouncements:
In April 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the threshold for reporting discontinued operations and adds new disclosures. The new guidance defines a discontinued operation as a disposal of a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” For disposals of individually significant components that do not qualify as discontinued operations, an entity must disclose pre-tax earnings of the disposed component. This ASU will be effective for all disposals (or classifications as held for sale) of components of an entity that occur during our year ended December 31, 2015 and interim periods within the year. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued 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.

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GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


2. 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, which is often when the owner has agreed to the change order in writing. We recognize costs associated 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.
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 initial profit recognition is not included in the tables below. During the years ended December 31, 2014, 2013, and 2012, the gross profit impact from projects reaching initial profit recognition was $74.7 million, $9.1 million, and $16.4 million, respectively.
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 $7.3 million, $1.7 million and $18.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. The projects are summarized as follows (dollars in millions):
Increases
Years Ended December 31,
 
 
2014
 
 
2013
 
 
2012
Number of projects with upward estimate changes
 
 
7

 
 
6

 
 
6

Range of increase in gross profit from each project, net
 
$
1.0 - 1.8

 
$
1.1 - 3.7

 
$
1.0 - 1.7

Increase on project profitability
 
$
9.2

 
$
16.1

 
$
8.1

The increases during the year ended December 31, 2014 were due to owner-directed scope changes and lower costs than anticipated. The 2013 increases were due to owner-directed scope changes and production at a higher rate than anticipated, and the 2012 increases were due to lower than anticipated costs and the settlement of outstanding issues with contract owners.
Decreases
Years Ended December 31,
 
 
2014
 
 
2013
 
 
2012
Number of projects with downward estimate changes
 
 
6

 
 
5

 
 
9

Range of reduction in gross profit from each project, net
 
$
1.6 - 4.1

 
$
1.2 - 7.4

 
$
1.0 - 6.6

Decrease on project profitability
 
$
16.5

 
$
17.8

 
$
26.2

The decreases during the year ended December 31, 2014 were due to higher costs than originally anticipated and outstanding claims and change orders. Five of the projects that had downward estimate changes were complete or substantially complete at December 31, 2014. The other project was 56.8% complete and constituted 2.4% of Construction contract backlog as of December 31, 2014. The 2013 decreases were due to lower productivity than originally anticipated. The 2012 decreases were due to lower productivity than anticipated and unanticipated rework costs.

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GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


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 $46.9 million, $25.5 million and $64.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. Amounts attributable to non-controlling interests were $9.5 million, $5.6 million and $3.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. The projects are summarized as follows (dollars in millions):
Increases
Years Ended December 31,
 
 
2014
 
 
2013
 
 
2012
Number of projects with upward estimate changes
 
 
12

 
 
7

 
 
10

Range of increase in gross profit from each project, net
 
$
1.0 - 15.2

 
$
2.6 - 41.3

 
$
1.1 - 24.5

Increase on project profitability
 
$
66.8

 
$
77.5

 
$
92.0

The increases during the year ended December 31, 2014 were due to higher productivity than originally anticipated, owner-directed scope changes and the settlement of outstanding claims with contract owners. The increases during the year ended December 31, 2013 were due to the settlement of outstanding issues with a contract owner and owner-directed scope changes. The increases during the year ended December 31, 2012 were due to owner-directed scope changes and lower than anticipated construction costs.
Decreases
Years Ended December 31,
 
 
2014
 
 
2013
 
 
2012
Number of projects with downward estimate changes
 
 
3

 
 
5

 
 
1

Range of reduction in gross profit from each project, net
 
$
1.1 - 16.8

 
$
1.9 - 26.8

 
$
27.4

Decrease on project profitability
 
$
19.9

 
$
52.0

 
$
27.4

The decreases during the years ended December 31, 2014, 2013 and 2012 were primarily due to additional costs, lower productivity than originally anticipated and outstanding claims and change orders.

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Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


3. 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):
December 31,
 
2014
 
2013
U.S. Government and agency obligations
 
$
10,511

 
$
10,000

Commercial paper 
 
14,993

 
39,968

Total short-term marketable securities
 
25,504

 
49,968

U.S. Government and agency obligations
 
76,563

 
67,234

Total long-term marketable securities
 
76,563

 
67,234

Total marketable securities
 
$
102,067

 
$
117,202

Scheduled maturities of held-to-maturity investments were as follows (in thousands):
December 31, 2014
 
Due within one year
$
25,504

Due in one to five years
76,563

Total
$
102,067


4. Fair Value Measurement
The following tables summarize assets and liabilities measured at fair value on the consolidated balance sheets on a recurring basis for each of the fair value levels (in thousands):
 
 
Fair Value Measurement at Reporting Date Using
December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
 
 

 
 

 
 

 
 

Money market funds
 
$
60,618

 
$

 
$

 
$
60,618

Total assets
 
$
60,618

 
$

 
$

 
$
60,618

 
 
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


A reconciliation of cash equivalents to consolidated cash and cash equivalents is as follows (in thousands):
December 31,
 
2014
 
2013
Cash equivalents
 
$
60,618

 
$
89,336

Cash
 
195,343

 
139,785

Total cash and cash equivalents
 
$
255,961

 
$
229,121

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 12) 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, with any gain or loss recorded in other expense (income), net in our consolidated statements of operations and was a net gain of $1.4 million during 2014. The associated balance is recorded in other current assets on the consolidated balance sheets and was $0.3 million as of December 31, 2014.

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Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


In March 2014, we entered into two diesel commodity swaps covering the periods from May 2014 to October 2014 and from May 2015 to October 2015 which represented roughly 25% of our forecasted purchases for diesel during these periods.  In May 2014, we entered into two natural gas commodity swaps covering the periods from June 2014 to October 2014 and from May 2015 to October 2015 representing roughly 25% of our forecasted purchases of natural gas during these periods.  The commodity swaps are reported at fair value using Level 2 inputs, with any gain or loss recorded in other expense (income), net in our consolidated statements of operations and was a net loss of $2.0 million during 2014. The associated balance is recorded in accrued expenses and other current liabilities on the consolidated balance sheets and was $1.7 million as of December 31, 2014.
The carrying values and estimated fair values of our financial instruments that are not required to be recorded at fair value on the consolidated balance sheets are as follows (in thousands): 
December 31,
 
 
 
2014
 
2013
 
 
Fair Value Hierarchy
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets:
 
 
 
 

 
 

 
 
 
 
Held-to-maturity marketable securities
 
Level 1
 
$
102,067

 
$
101,808

 
$
117,202

 
$
116,915

Liabilities (including current maturities):
 
 
 
 
 
 
Senior notes payable1
 
Level 3
 
$
200,000

 
$
220,226

 
$
200,000

 
$
225,865

Credit Agreement loan1
 
Level 3
 
70,000

 
70,153

 
70,000

 
69,601

1The fair values of the senior notes payable and borrowings under the Credit Agreement (as defined under “Credit Agreement” in Note 12) 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.
We measure certain nonfinancial assets and liabilities at fair value on a nonrecurring basis. As of December 31, 2014 and 2013, the nonfinancial assets and liabilities included our asset retirement and reclamation obligations as well as assets and corresponding liabilities associated with performance guarantees. As of December 31, 2013, the nonfinancial assets and liabilities also included assets and liabilities that were adjusted to fair value in connection with our EIP and a non-performing quarry asset separate from our EIP.
Fair value for the assets retirement and reclamation obligations as well as the assets and liabilities associated with the EIP were measured using Level 3 inputs and those associated with performance guarantees were measured using Level 2 inputs. Asset retirement and reclamation obligations were initially measured using internal discounted cash flow calculations based upon our estimates of future retirement costs - see Note 8 for details of the asset retirement balances and Note 1 for further discussion on fair value measurements. Fair values of the assets related to our EIP as well as the non-performing quarry site were determined based on a variety of factors that are further described in Note 1 under the Property and Equipment and Long-lived Assets sections. Performance guarantees were measured using estimated partner bond rates - see Note 10 for the liability balances and Note 1 for further discussion on performance guarantees.

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Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


During the years ended December 31, 2014, 2013 and 2012, fair value adjustments to our nonfinancial assets and liabilities were related to our asset retirement and reclamation obligations, restructuring charges associated with our EIP and non-cash impairment charges separate from our EIP, and are detailed as follows:
Asset retirement obligations adjustments were $3.0 million, $2.3 million and $2.8 million, respectively. See Note 8 for further information.
Restructuring gains associated with our EIP were $2.6 million during the year ended December 31, 2014, of which $1.3 million was attributable to release of our lease obligation associated with a quarry asset in California and $1.3 million was associated with the sale or other disposition of a quarry asset in California. During the year ended December 31, 2013, we recorded restructuring charges of $49.0 million, of which $31.1 million, including $3.9 million attributable to non-controlling interests, related to real estate assets, $14.7 million related to non-performing quarry sites and $3.2 million related to lease termination charges. During the year ended December 31, 2012, we recorded a $3.7 million restructuring gain primarily related to real estate assets. See Note 11 for further information.
Non-cash impairment gains were $1.3 million during 2014 and non-cash impairment charges were $3.2 million during both 2013 and 2012. During 2014 and 2013, the non-cash impairment gains and charges were associated with the write-down and subsequent sale of a nonperforming quarry site (see Note 11). During 2012, the non-cash impairment charges were related to the write-off of our cost method investment in the preferred stock of a corporation that designs and manufactures power generation equipment (see Note 7).

5. Receivables, net (in thousands)
December 31,
 
2014
 
2013
Construction contracts:
 
 
 
 
Completed and in progress
 
$
191,094

 
$
193,538

Retentions
 
84,760

 
73,103

Total construction contracts
 
275,854

 
266,641

Construction material sales
 
28,549

 
36,813

Other
 
6,822

 
12,657

Total gross receivables
 
311,225

 
316,111

Less: allowance for doubtful accounts
 
291

 
2,513

Total net receivables
 
$
310,934

 
$
313,598

Receivables include amounts billed and billable to clients for services provided as of the end of the applicable period and do not bear interest. To the extent the related costs have not been billed, the contract balance is included in costs and estimated earnings in excess of billings on the consolidated balance sheets. Included in other receivables at December 31, 2014 and 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.
Revenue earned by Construction and Large Project Construction from federal, state and local government agencies was $1.7 billion (75.0% of our total revenue) in 2014, $1.7 billion (74.4% of our total revenue) in 2013 and $1.7 billion (80.6% of our total revenue) in 2012. During the years ended December 31, 2014, 2013, and 2012, our largest volume customer, including both prime and subcontractor arrangements, was the California Department of Transportation (“Caltrans”). Revenue recognized from contracts with Caltrans represented $195.4 million (8.6% of our total revenue) in 2014, of which $178.7 million (15.1% of segment revenue) was in our Construction segment and $16.8 million (2.0% of segment revenue) was in our Large Project Construction segment. Revenue from Caltrans represented $265.8 million (11.7% of total revenue) in 2013, of which $239.9 million (19.2% of segment revenue) was in our Construction segment and $25.9 million (3.3% of segment revenue) was in the Large Project Construction segment. Revenue from Caltrans represented $272.9 million (13.1% of total revenue) in 2012, of which $268.9 million (27.3% of segment revenue) was in the Construction segment and $4.1 million (0.5% of segment revenue) was in the Large Project Construction segment.

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Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Financing receivables consisted of retentions receivable and were included in receivables, net on the consolidated balance sheets as of December 31, 2014 and 2013. 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 retention receivable individually exceeded 10% of total net receivables at any of the presented dates. As of December 31, 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):
December 31,
 
2014
 
2013
Escrow
 
$
28,692

 
$
25,124

Non-escrow
 
56,068

 
47,979

Total retention receivables
 
$
84,760

 
$
73,103

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.
As of December 31, 2014, the non-escrow retention receivables were evaluated for collectibility 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 low; however, we have experienced occasional delays in payment as some local agencies have struggled to deal 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.

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. As of December 31, 2014 and 2013, the non-escrow retention receivables aged over 90 days were $8.6 million and $7.0 million, respectively, and primarily resulted from one government agency with delays caused by paperwork processing and / or obtaining final agency approvals, rather than from a lack of funds. In addition, our allowance for doubtful accounts contained no material provision related to non-escrow retention receivables as we determined there were no significant collectability issues at any of the presented dates.

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Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


6. Construction and Line Item Joint Ventures

We participate in various construction joint ventures, partnerships and a limited liability company of which we are a limited member (“joint ventures”). We also participate in various “line item” joint venture agreements under which each member is responsible for performing certain discrete items of the total scope of contracted work.
Due to the joint and several nature of the performance obligations under the related owner contracts, if one of the members fails to perform, we and the remaining members, if any, would be responsible for performance of the outstanding work. At December 31, 2014, there was approximately $5.7 billion of construction revenue to be recognized on unconsolidated and line item construction joint venture contracts of which $1.7 billion represented our share and the remaining $4.0 billion represented the other members’ share. We are not able to estimate amounts that may be required beyond the remaining cost of the work to be performed. These costs could be offset by billings to the customer or by proceeds from our partners’ corporate and/or other guarantees. See Note 10 for disclosure of the amounts recorded on the consolidated balance sheets and Note 1 for additional discussion.
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 venture. 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 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 years ended December 31, 2014, 2013 and 2012, we determined no changes to our consolidation conclusions were required for existing construction joint ventures.


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Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Consolidated Construction Joint Ventures
The carrying amounts and classification of assets and liabilities of construction joint ventures we are required to consolidate are included on the consolidated balance sheets as follows (in thousands):
December 31,
 
2014
 
2013
Cash and cash equivalents1 
 
$
61,276

 
$
38,800

Receivables, net
 
36,781

 
38,372

Other current assets 
 
1,746

 
4,778

Total current assets
 
99,803

 
81,950

Property and equipment, net
 
11,969

 
22,216

Total assets2
 
$
111,772

 
$
104,166

 
 
 
 
 
Accounts payable 
 
$
18,009

 
$
16,937

Billings in excess of costs and estimated earnings
 
32,830

 
60,185

Accrued expenses and other current liabilities 
 
2,714

 
11,299

Total liabilities2
 
$
53,553

 
$
88,421

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 costs in excess of billings 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 December 31, 2014, we were engaged in three active consolidated construction joint venture projects with total contract values ranging from $32.7 million to $364.4 million. The total estimated revenue remaining to be recognized on these consolidated joint ventures ranged from $0.2 million to $70.2 million. Our proportionate share of the equity in these joint ventures was between 55.0% and 65.0%. During the years ended December 31, 2014, 2013 and 2012, total revenue from consolidated construction joint ventures was $155.1 million, $170.0 million and $222.3 million, respectively. Total cash provided by consolidated construction joint venture operations was $22.5 million, $10.9 million and $25.2 million during the years ended December 31, 2014, 2013 and 2012 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 consolidated statements of operations and as a single line item on the consolidated balance sheets. As of December 31, 2014, these unconsolidated joint ventures were engaged in ten active projects with total contract values ranging from $72.8 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 December 31, 2014, our share of the revenue remaining to be recognized on these unconsolidated joint ventures ranged from $10.7 million to $683.8 million.
As of December 31, 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 applicable monthly reporting period for the results of operations. The associated foreign currency translation adjustments did not have a material impact on the consolidated financial statements for any of the dates or periods presented.


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Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Following is summary financial information related to unconsolidated construction joint ventures (in thousands):
December 31,
 
2014
 
2013
Assets:
 
 
 
 
Cash and cash equivalents1
 
$
264,263

 
$
385,094

Other assets
 
573,898

 
523,827

Less partners’ interest
 
546,907

 
612,530

Granite’s interest
 
291,254

 
296,391

Liabilities:
 
 
 

Accounts payable
 
146,198

 
155,985

Billings in excess of costs and estimated earnings1
 
156,604

 
245,341

Other liabilities
 
55,289

 
104,152

Less partners’ interest
 
251,412

 
371,760

Granite’s interest
 
106,679

 
133,718

Equity in construction joint ventures
 
$
184,575

 
$
162,673

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.
Years Ended December 31,
 
2014
 
2013
 
2012
Revenue:
 
 
 
 
 
 
Total
 
$
1,501,894

 
$
1,391,190

 
$
1,042,209

Less partners’ interest and adjustments1
 
1,048,514

 
982,734

 
665,782

Granite’s interest
 
453,380

 
408,456

 
376,427

Cost of revenue:
 
 
 
 
 
 
Total
 
1,386,577

 
1,107,533

 
785,079

Less partners’ interest and adjustments1
 
984,062

 
772,670

 
511,840

Granite’s interest
 
402,515

 
334,863

 
273,239

Granite’s interest in gross profit
 
$
50,865

 
$
73,593

 
$
103,188

 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 years ended December 31, 2014, 2013 and 2012, unconsolidated construction joint venture net income was $116.8 million, $283.2 million and $256.9 million, respectively, of which our share was $49.2 million, $72.8 million and $101.7 million, respectively. These net income amounts exclude our corporate overhead required to manage the joint ventures.
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 consolidated financial statements. As of December 31, 2014, we had three active line item joint venture construction projects with total contract values ranging from $42.7 million to $86.0 million of which our portion ranged from $28.9 million to $63.6 million. As of December 31, 2014, our share of revenue remaining to be recognized on these line item joint ventures ranged from $2.3 million to $23.4 million.




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Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


7. Investments in Affiliates
Our investments in affiliates balance is related to our investments in unconsolidated non-construction entities that we account for using the equity method of accounting, including investments in real estate entities and a non-real estate entity. The real estate entities were formed to accomplish specific real estate development projects that our wholly-owned subsidiary, GLC, participates in with third-party partners. The non-real estate entity was a 50% interest in a limited liability company which owns and operates an asphalt terminal and operates an emulsion plant in Nevada.
We have determined that the real estate entities are not consolidated because they are VIEs, and we are not the primary beneficiary. We have determined that the non-real estate entity is not consolidated because it is not a VIE, and we do not hold the majority voting interest. As such, this entity is accounted for using the equity method. We account for our share of the operating results of the equity method investments in other income in the consolidated statements of operations and as a single line item on the consolidated balance sheets as investments in affiliates.
Our investments in affiliates balance consists of the following (in thousands):
December 31,
 
2014
 
2013
Equity method investments in real estate affiliates
 
$
22,623

 
$
21,392

Equity method investments in other affiliates
 
9,738

 
11,088

Total investments in affiliates
 
$
32,361

 
$
32,480

The following table provides summarized balance sheet information for our affiliates accounted for under the equity method on a combined basis (in thousands):
December 31,
 
2014
 
2013
Current assets
 
$
28,891

 
$
25,807

Long-term assets
 
141,283

 
148,181

Total assets
 
170,174

 
173,988

Current liabilities
 
5,827

 
6,000

Long-term liabilities1
 
66,708

 
68,544

Total Liabilities
 
72,535

 
74,544

Net assets
 
$
97,639

 
$
99,444

Granite’s share of net assets
 
$
32,361

 
$
32,480

1The balance primarily relates to debt associated with our real estate investments. See Note 12 for further discussion.

The equity method investments in real estate affiliates included $16.5 million and $14.9 million in residential real estate in Texas as of December 31, 2014 and 2013, respectively. The remaining balances were in commercial real estate in Texas. Of the $170.2 million in total assets as of December 31, 2014, real estate entities had total assets ranging from $1.5 million to $59.3 million and the non-real estate entity had total assets of $20.3 million.
During the year ended December 31, 2012, it was determined that the carrying amount of our cost method investment in a power generation equipment manufacturer exceeded its fair value, which required us to recognize a non-cash impairment charge of $2.8 million that was included in other expense (income), net on the consolidated statement of operations.
The following table provides summarized statement of operations information for our affiliates accounted for under the equity method on a combined basis (in thousands):
Years Ended December 31,
2014
2013
2012
Revenue 
$
46,597

$
42,563

$
52,342

Gross profit 
10,315

3,487

13,254

Income (loss) before taxes 
3,647

(686
)
1,318

Net income (loss)  
3,647

(686
)
1,318

Granite’s interest in affiliates’ net income
901

1,304

1,988


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Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


8. Property and Equipment, net
Balances of major classes of assets and allowances for depreciation and depletion are included in property and equipment, net on the consolidated balance sheets as follows (in thousands):
December 31,
 
2014
 
2013
Equipment and vehicles
 
$
767,313

 
$
765,971

Quarry property
 
172,081

 
170,442

Land and land improvements
 
110,235

 
119,917

Buildings and leasehold improvements
 
82,655

 
83,494

Office furniture and equipment
 
70,820

 
70,156

Property and equipment
 
1,203,104

 
1,209,980

Less: accumulated depreciation and depletion
 
793,451

 
773,121

Property and equipment, net
 
$
409,653

 
$
436,859


Depreciation and depletion expense included in our consolidated statements of operations for the years ended December 31, 2014, 2013 and 2012 was $64.9 million, $62.7 million and $51.8 million, respectively and was primarily included in cost of revenue in our consolidated statements of operations. We capitalized interest costs of $0.7 million, $0.9 million and $2.3 million in 2014, 2013 and 2012, respectively, related to certain self-constructed assets, of which $0.4 million, $0.6 million and $2.1 million, respectively, were included in real estate held for development and sale and $0.3 million, $0.3 million and $0.2 million, respectively, were included in property and equipment on the consolidated balance sheets.
During the year ended December 31, 2013, we recorded non-cash impairment charges of $17.8 million, all of which related to non-performing quarry assets. Of this amount, $14.7 million was restructuring charges in connection with our EIP and the remaining charges were related to a quarry asset and our process of continually optimizing our assets separate from the EIP. In 2014, the related quarry asset was sold, resulting in a $1.3 million restructuring gain. Refer to Note 11 for details.
We have recorded liabilities associated with our legally required obligations to reclaim owned and leased quarry property and related facilities. As of December 31, 2014 and 2013, $6.5 million and $9.8 million, respectively, of our asset retirement obligations are included in accrued expenses and other current liabilities and $20.9 million and $19.3 million, respectively, are included in other long-term liabilities on the consolidated balance sheets.
The following is a reconciliation of these asset retirement obligations (in thousands):
Years Ended December 31,
2014
2013
Beginning balance
$
29,138

$
26,576

Revisions to estimates
2,969

2,265

Liabilities incurred

83

Liabilities settled
(5,678
)
(976
)
Accretion
1,012

1,190

Ending balance
$
27,441

$
29,138


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Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


9. 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 the consolidated balance sheets as of December 31, 2014 and 2013.

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

 
$
29,260

Large Project Construction
 
22,593

 
22,593

Construction Materials
 
1,946

 
1,946

Total goodwill
 
$
53,799

 
$
53,799


Amortized Intangible Assets
The following is the breakdown of our amortized intangible assets that are included in other noncurrent assets on the consolidated balance sheets (in thousands):
 
 
 
 
Accumulated
 
 
December 31, 2014
 
Gross Value
 
Amortization
 
Net Value
Permits
 
$
29,713

 
$
(13,115
)
 
$
16,598

Acquired backlog
 
7,900

 
(7,263
)
 
637

Customer lists
 
4,398

 
(2,785
)
 
1,613

Trade name
 
4,100

 
(863
)
 
3,237

Covenants not to compete and other
 
2,459

 
(2,428
)
 
31

Total amortized intangible assets
 
$
48,570

 
$
(26,454
)
 
$
22,116

 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
Permits
 
$
29,713

 
$
(11,992
)
 
$
17,721

Acquired backlog
 
7,900

 
(6,835
)
 
1,065

Customer lists
 
4,398

 
(2,491
)
 
1,907

Trade name
 
4,100

 
(432
)
 
3,668

Covenants not to compete and other
 
2,459

 
(2,408
)
 
51

Total amortized intangible assets
 
$
48,570

 
$
(24,158
)
 
$
24,412

Amortization expense related to amortized intangible assets for the years ended December 31, 2014, 2013 and 2012 was $2.3 million, $8.8 million and $3.7 million, respectively and was primarily included in selling, general and administrative expenses in our consolidated statements of operations. Based on the amortized intangible assets balance at December 31, 2014, amortization expense expected to be recorded in the future is as follows: $2.5 million in 2015; $1.8 million in 2016; $1.7 million in 2017; $1.7 million in 2018; $1.7 million in 2019; and $12.7 million thereafter.


F- 26
 
 
 
 



Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


10. Accrued Expenses and Other Current Liabilities (in thousands):
December 31,
2014
2013
Payroll and related employee benefits
$
36,888

$
34,676

Accrued insurance
44,585

49,073

Performance guarantees (see Note 18)
75,820

54,488

Loss job reserves
5,784

12,130

Other
37,575

46,875

Total 
$
200,652

$
197,242

Other includes dividends payable, accrued legal, warranty reserves, reclamation reserves, remediation reserves and other miscellaneous accruals, none of which are greater than 5% of total current liabilities.

11. Restructuring and Impairment (Gains) Charges, Net
The following table presents the components of restructuring and impairment (gains) charges, net during the respective periods (in thousands):
Years ended December 31,
2014
2013
2012
Impairment losses (gains) associated with our real estate investments, net
$

$
31,090

$
(3,093
)
Impairment charges on assets

14,651


Lease termination (gains) costs, net of estimated sublease income
(1,283
)
3,234

(635
)
Total restructuring (gains) charges
(1,283
)
48,975

(3,728
)
Other impairment (gains) charges
(1,360
)
3,164


Total restructuring and impairment (gains) charges, net
$
(2,643
)
$
52,139

$
(3,728
)
In 2010, we announced our EIP, which included actions to reduce our cost structure, enhance operating efficiencies and strengthen our business to achieve long-term profitable growth. The majority of restructuring charges associated with the EIP were recorded in 2010.
In 2011, development activities were curtailed for the majority of our real estate development projects as divestiture efforts increased, and we recorded $1.5 million in additional restructuring charges associated with the sale or other disposition of three separate projects located in California.
During 2012, we recorded a restructuring gain of $3.1 million associated with the sale or other disposition of three separate, previously impaired real estate investments located in California, Oregon and Washington.
During 2013 and pursuant to the EIP, management approved a plan to sell or otherwise dispose of all of the remaining consolidated real estate investments in our real estate investment business, as well as certain assets in our Construction Materials segment. These actions resulted in restructuring charges of $49.0 million in 2013, including amounts attributable to non-controlling interests of $3.9 million. These restructuring charges consisted of the non-cash impairment of certain real estate and quarry assets and the accrual of lease termination costs. The carrying values of the impaired assets were adjusted to their expected fair values, which were estimated by a variety of factors including, but not limited to, comparative market data, historical sales prices, broker quotes and third-party valuations.

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Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Restructuring charges in 2013 associated with our real estate investment business included $31.1 million of non-cash impairment charges related to all of the remaining consolidated real estate assets, including amounts attributable to non-controlling interests of $3.9 million. The impaired assets consisted primarily of our consolidated residential and retail development projects which had a carrying value of $44.6 million prior to the impairment.
Restructuring charges in 2013 associated with the Company’s Construction Materials segment resulted in $14.7 million of non-cash impairment charges related to non-performing quarry assets which had an aggregate carrying value of $17.1 million prior to the impairment. In connection with the impairment of these quarry assets, we recorded lease termination charges of $3.2 million. In 2014, we recorded a restructuring gain of $1.3 million resulting from our release from lease obligations.
We concluded the majority of our 2010 EIP during 2013. As the impaired assets are sold, we may recognize additional restructuring charges or gains; however, we do not expect these charges or gains to be material.
Separate from the EIP but related to our process of continually optimizing our assets, we identified a quarry asset within our Construction Materials segment that no longer had strategic value to our vertically integrated business. Therefore, during 2013, management approved a plan to sell or otherwise dispose of this asset. We determined that the asset’s carrying value was not recoverable and recorded a $3.2 million non-cash impairment charge. In 2014, this asset was sold, resulting in a $1.3 million restructuring impairment gain.

12. Long-Term Debt and Credit Arrangements (in thousands):
December 31,
2014
2013
Senior notes payable
$
200,000

$
200,000

Credit Agreement loan
70,000

70,000

Mortgages payable
6,742

7,967

Other notes payable
126

148

Total debt
276,868

278,115

Less current maturities
1,247

1,247

Total long-term debt
$
275,621

$
276,868

The aggregate minimum principal maturities of long-term debt for each of the five years following December 31, 2014, after considering our intent and ability to pay the 2019 Notes (defined below) using another source of financing as disclosed below, are as follows: 2015 - $1.2 million; 2016 - $155.5 million; 2017 - $40.0 million; 2018 - $40.0 million; and 2019 - $40.0 million
Senior Notes Payable
As of December 31, 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”). In March 2014, we entered into an interest rate swap to convert the interest rate from a fixed rate of 6.11% to a floating rate of 4.15% plus six-month LIBOR (see Note 4 for details). The first installment of the 2019 Notes is included in long-term debt on the consolidated balance sheet as of December 31, 2014 as we have the ability and intent to pay this installment using borrowings under the Credit Agreement (defined below) or by obtaining other sources of financing.
Our obligations under the note purchase agreement governing the 2019 Notes (the “2019 NPA”) are guaranteed by certain of our subsidiaries and are collateralized on an equivalent basis with the Credit Agreement 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 described below.

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Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


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 $134.8 million was available at December 31, 2014. At December 31, 2014 and 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 the consolidated balance sheets. In addition, as of December 31, 2014 there were standby letters of credit totaling $10.3 million. The letters of credit will expire between June 2015 and December 2017.
Borrowings under the Credit Agreement bear interest at LIBOR or a base rate (at our option), plus an applicable margin based on certain financial ratios calculated quarterly. LIBOR varies based on the applicable loan term, market conditions and other external factors. The applicable margin was 2.50% for loans bearing interest based on LIBOR and 1.50% for loans bearing interest at the base rate at December 31, 2014. Accordingly, the effective interest rate was between 2.76% and 4.75% at December 31, 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 six months. 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 above) 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 subsequent to exercising the option, our Consolidated Fixed Charge Coverage Ratio is less than 1.50 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 December 31, 2014, the conditions for the exercise of the unsecured option were not satisfied.
Real Estate Indebtedness
Our consolidated and unconsolidated real estate held for development and sale is subject to indebtedness. This indebtedness is non-recourse to Granite, but is recourse to the real estate. The terms of this indebtedness are typically renegotiated to reflect the evolving nature of the real estate project as it progresses through acquisition, entitlement and development. Modification of these terms may include changes in loan-to-value ratios requiring the real estate entity to repay portions of the debt. As of December 31, 2014, the principal amount of debt of our consolidated real estate entity secured by a mortgage was $6.7 million, of which approximately $1.2 million was included in current liabilities and approximately $5.5 million was included in long-term liabilities on the consolidated balance sheets. The debt associated with our unconsolidated real estate ventures is disclosed in Note 7.

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Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


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.
As of December 31, 2014 and pursuant to the definitions in the agreements, our Consolidated Tangible Net Worth was $766.3 million, which exceeded the minimum of $622.7 million, the Consolidated Leverage Ratio was 2.77 which did not exceed the maximum of 3.00 and the Consolidated Interest Coverage Ratio was 6.93 which exceeded the minimum of 4.00.
As of December 31, 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.

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Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


13. Employee Benefit Plans
Profit Sharing and 401(k) Plan: The Profit Sharing and 401(k) Plan (the “401(k) Plan”) is a defined contribution plan covering all employees except employees covered by collective bargaining agreements and employees of our consolidated construction joint ventures. Each employee’s combined before-tax and Roth 401(k) after- tax contributions cannot exceed 50% of their eligible pay or the 2014 IRS annual contribution limit of $17,500. Our 401(k) matching contributions can be up to 6% of an employee’s gross pay and are available at the discretion of the Board of Directors.
Profit sharing contributions from the Company may be made to the 401(k) Plan in an amount determined by the Board of Directors. We made no profit sharing contributions during the years ended December 31, 2014, 2013 and 2012. Our 401(k) matching contributions to the 401(k) Plan for the years ended December 31, 2014, 2013 and 2012 were $5.0 million, $4.1 million and $2.8 million, respectively. During the year ended December 31, 2013, eligible Kenny employees that had at least 1,000 hours of service as of March 1, 2013 and were actively employed on March 28, 2013 received a one-time profit sharing contribution of approximately $0.1 million in total, which was equivalent to the Company match during the period they were unable to contribute to the Plan.
Non-Qualified Deferred Compensation Plan: We offer a Non-Qualified Deferred Compensation Plan (“NQDC Plan”) to a select group of our highly compensated employees. The NQDC Plan provides participants the opportunity to defer payment of certain compensation as defined in the NQDC Plan. In October 2008, a Rabbi Trust was established to fund our NQDC Plan obligation and was fully funded as of December 31, 2014. The assets held by the Rabbi Trust at December 31, 2014 and 2013 are substantially in the form of Company-owned life insurance and are included in other noncurrent assets on the consolidated balance sheets. As of December 31, 2014, there were 52 active participants in the NQDC Plan. NQDC Plan obligations were $21.7 million and $23.6 million as of December 31, 2014 and 2013, respectively.
Multi-employer Pension Plans: Four of our wholly-owned subsidiaries, Granite Construction Company, Granite Construction Northeast, Inc., Granite Infrastructure Constructors, Inc., and Kenny Construction Company contribute to various multi-employer pension plans on behalf of union employees. The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects:
Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers.
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
If we chose to stop participating in some of the multi-employer plans, we may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.

F- 31
 
 
 
 



Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The following table presents our participation in these plans (dollars in thousands):
 
Pension Plan Employer Identification Number
Pension Protection Act (“PPA”) Certified Zone Status1
FIP / RP Status Pending / Implemented2
Contributions
Surcharge Imposed
Expiration Date of Collective Bargaining Agreement3
Pension Trust Fund
2014
2013
2014
2013
2012
Locals 302 and 612 Operating Engineers-Employers Retirement Fund
91-6028571
Green
Green
No
$
3,043

$
3,260

$
2,368

No
5/31/2015
12/31/2015
12/31/2016
Operating Engineers Pension Trust Fund
95-6032478
Red
Red
Yes
3,001

2,768

2,285

No
6/30/2016
Pension Trust Fund for Operating Engineers Pension Plan
94-6090764
Red
Orange
Yes
9,590

8,193

8,030

No
6/15/2015
6/30/2015
10/31/2015
6/30/2016
9/30/2016
5/15/2017
6/30/2017
1/31/2018
Laborers Pension Trust Fund for Northern California
94-6277608
Yellow
Yellow
Yes
2,682

2,500

2,320

No
6/30/2019
Laborers Pension Fund
36-2514514
Green
Green
No
2,230

1,608


No
5/31/2017
All other funds (49)
 
 
 
 
8,876

8,836

7,720

 
 
 
 
 
Total Contributions:
$
29,422

$
27,165

$
22,723

 
 
1The most recent PPA zone status available in 2014 and 2013 is for the plan’s year-end during 2013 and 2012, respectively. The zone status is based on information that we received from the plan and is certified by the plan’s actuary. Among other factors, plans in the red zone are generally less than 65 percent funded, plans in the orange zone are less than 80 percent funded and have an Accumulated Funding Deficiency in the current year or projected into the next six years, plans in the yellow zone are less than 80 percent funded, and plans in the green zone are at least 80 percent funded.
2The “FIP/RP Status Pending/Implemented” column indicates plans for which a financial improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented.
3Lists the expiration date(s) of the collective-bargaining agreement(s) to which the plans are subject. Pension trust funds with a range of expiration dates have various collective bargaining agreements.

We currently have no intention of withdrawing from any of the multi-employer pension plans in which we participate that would result in a significant withdrawal liability.

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Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


14. Shareholders’ Equity
Stock-based Compensation: The 2012 Equity Incentive Plan provides for the issuance of restricted stock, restricted stock units (“RSUs”) and stock options to eligible employees and to members of our Board of Directors. A total of 2,224,907 shares of our common stock have been reserved for issuance of which 1,599,963 remained available as of December 31, 2014.
Stock Options: In 2014, no stock options were granted. As of December 31, 2014, there were 18,620 stock options outstanding all of which were fully vested as of June 30, 2013.
Restricted Stock Units and Restricted Stock: RSUs and restricted stock are issued for services to be rendered and may not be sold, transferred or pledged for such a period as determined by our Compensation Committee. RSU and restricted stock compensation cost is measured at our common stock’s fair value based on the market price at the date of grant. We recognize compensation cost only for RSUs and restricted stock that we estimate will ultimately vest. We estimate the number of shares that will ultimately vest at each grant date based on our historical experience and adjust compensation cost based on changes in those estimates over time.
RSU and restricted stock compensation cost is recognized ratably over the shorter of the vesting period (generally three years) or the period from grant date to the first maturity date after the holder reaches age 62 and has completed certain specified years of service, when all restricted stock becomes fully vested. Vesting of restricted stock is not subject to any market or performance conditions and vesting provisions are at the discretion of the Compensation Committee. An employee may not sell or otherwise transfer unvested units or stock and, in the event employment is terminated prior to the end of the vesting period, any unvested units or stock are surrendered to us. We have no obligation to purchase these restricted stock units or restricted stock that are surrendered to us.
As of December 31, 2014 and 2013 there was no restricted stock outstanding as all outstanding shares had either been forfeited or vested. As of December 31, 2012 there were 174,000 shares of restricted stock outstanding. Compensation cost related to restricted stock was $0.5 million ($0.3 million net of effective tax rate) and $3.8 million ($2.8 million net of effective tax rate) for the years ended December 31, 2013 and 2012, respectively. The grant date fair value of restricted stock vested during the years ended December 31, 2013 and 2012 was $5.1 million and $12.2 million, respectively.
A summary of the changes in our RSUs during the years ended December 31, 2014, 2013 and 2012 is as follows (shares in thousands):
Years Ended December 31,
2014
2013
2012
 
RSUs
Weighted-Average Grant-Date Fair Value per RSU
RSUs
Weighted-Average Grant-Date Fair Value per RSU
RSUs
Weighted-Average Grant-Date Fair Value per RSU
Outstanding, beginning balance
769

$
29.49

665

$
27.74

346

$
25.64

Granted
212

37.94

506

31.12

533

28.99

Vested
(365
)
30.15

(337
)
28.52

(175
)
26.87

Forfeited
(51
)
31.97

(65
)
29.97

(39
)
27.95

Outstanding, ending balance
565

$
31.38

769

$
29.49

665

$
27.74

Compensation cost related to RSUs was $11.2 million ($7.2 million net of effective tax rate), $13.0 million ($9.1 million net of effective tax rate), and $7.6 million ($5.6 million net of effective tax rate) for the years ended December 31, 2014, 2013 and 2012, respectively. The grant date fair value of RSUs vested during the years ended December 31, 20142013 and 2012 was $11.7 million, $9.6 million and $4.7 million, respectively. As of December 31, 2014, there was $9.1 million of unrecognized compensation cost related to RSUs which will be recognized over a remaining weighted-average period of approximately 1.0 year.


F- 33
 
 
 
 



Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


401(k) Plan: As of December 31, 2014, the 401(k) Plan owned 2,163,995 shares of our common stock. Dividends on shares held by the 401(k) Plan are charged to retained earnings and all shares held by the 401(k) Plan are treated as outstanding in computing our earnings per share.
Employee Stock Purchase Plan: Our Employee Stock Purchase Plan (“ESPP”) allows qualifying employees to purchase shares of our common stock through payroll deductions of up to 15% of their compensation, subject to Internal Revenue Code limitations, at a price of 95% of the fair market value as of the end of each of the six-month offering periods, which commence on May 15 and November 15 of each year. During the years ended December 31, 2014, 2013 and 2012, proceeds from the ESPP were $0.7 million, $0.7 million and $0.5 million for 21,433, 23,557 and 21,446 shares, respectively.
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. At December 31, 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. The specific timing and amount of any future 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. 

15. Weighted Average Shares Outstanding
A reconciliation of the weighted average shares outstanding used in calculating basic and diluted net income (loss) per share in the accompanying consolidated statements of operations is as follows (in thousands):
Years Ended December 31,
 
2014
 
2013
 
2012
Weighted average shares outstanding:
 
 
 
 
 
 
Weighted average common stock outstanding
 
39,096

 
38,803

 
38,689

Less: weighted average unvested restricted stock outstanding
 

 

 
242

Total basic weighted average shares outstanding
 
39,096

 
38,803

 
38,447

Diluted weighted average shares outstanding:
 
 
 
 
 
 
Weighted average common stock outstanding, basic
 
39,096

 
38,803

 
38,447

Effect of dilutive securities:
 

 

 

Common stock options and restricted stock units1
 
699

 

 
629

Total weighted average shares outstanding assuming dilution
 
39,795

 
38,803

 
39,076

1Due to the net loss for the year ended December 31, 2013, restricted stock units and common stock options representing approximately 862,000 have been excluded from the number of shares used in calculating diluted net loss per share, as their inclusion would be antidilutive.


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Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


16. 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. The following is a reconciliation of net income (loss) attributable to Granite and related weighted average shares of common stock outstanding for purposes of calculating basic and diluted net income (loss) per share using the two-class method (in thousands except per share amounts):
Years Ended December 31,
 
2014
 
2013
 
2012
Basic
 
 
 
 

 
 
Numerator:
 
 
 
 

 
 
Net income (loss) attributable to Granite
 
$
25,346

 
$
(36,423
)
 
$
45,283

Less: net income allocated to participating securities
 

 

 
283

Net income (loss) allocated to common shareholders for basic calculation
 
$
25,346

 
$
(36,423
)
 
$
45,000

Denominator:
 
 
 
 

 
 
Weighted average common shares outstanding, basic 
 
39,096

 
38,803

 
38,447

Net income (loss) per share, basic
 
$
0.65

 
$
(0.94
)
 
$
1.17

 
 
 
 
 
 
 
Diluted
 
 
 
 

 
 
Numerator:
 
 
 
 

 
 
Net income (loss) attributable to Granite
 
$
25,346

 
$
(36,423
)
 
$
45,283

Less: net income allocated to participating securities
 

 

 
279

Net income (loss) allocated to common shareholders for diluted calculation
 
$
25,346

 
$
(36,423
)
 
$
45,004

 
 
 
 
 
 
 
Denominator:
 
 
 
 

 
 
Weighted average common shares outstanding, diluted
 
39,795

 
38,803

 
39,076

Net income (loss) per share, diluted
 
$
0.64

 
$
(0.94
)
 
$
1.15



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Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


17. Income Taxes
Following is a summary of the provision for (benefit from) income taxes (in thousands):
Years Ended December 31,
2014
2013
2012
Federal:
 
 
 
Current
$
2,529

$
(1,298
)
$
10,410

Deferred
11,142

(18,606
)
9,518

Total federal 
13,671

(19,904
)
19,928

State:
 

 
 
Current
1,897

1,592

4,689

Deferred
4,153

(951
)
(3,508
)
Total state 
6,050

641

1,181

Total provision for (benefit from) income taxes
$
19,721

$
(19,263
)
$
21,109

Following is a reconciliation of our provision for (benefit from) income taxes based on the Federal statutory tax rate to our effective tax rate (dollars in thousands):
Years Ended December 31,
2014
2013
2012
Federal statutory tax
$
19,459

35.0
 %
$
(22,411
)
35.0
 %
$
28,360

35.0
 %
State taxes, net of federal tax benefit
5,420

9.7

101

(0.2
)
5,299

6.5

Valuation allowance release




(5,803
)
(7.2
)
Percentage depletion deduction
(1,217
)
(2.2
)
(787
)
1.2

(1,422
)
(1.8
)
Domestic production deduction 
(2
)

(27
)
0.1

(1,367
)
(1.7
)
Non-controlling interests
(3,686
)
(6.6
)
2,920

(4.6
)
(5,124
)
(6.3
)
Nondeductible expenses
275

0.5

2,384

(3.7
)
1,918

2.4

Other
(528
)
(0.9
)
(1,443
)
2.3

(752
)
(0.8
)
Total
$
19,721

35.5
 %
$
(19,263
)
30.1
 %
$
21,109

26.1
 %
Included in the 2014 State taxes, net of federal benefit above, is the effect of state tax laws which were enacted in 2014 resulting in the revaluation of a deferred tax asset.


F- 36
 
 
 
 



Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Following is a summary of the deferred tax assets and liabilities (in thousands):
December 31,
2014
2013
Deferred tax assets:
 

 
Receivables
$
306

$
2,870

Inventory
3,579

4,637

Insurance
11,534

10,813

Deferred compensation
12,479

13,372

Other accrued liabilities
4,801

6,739

Contract income recognition
5,592

11,503

Impairments on real estate investments 
11,329

14,313

Accrued compensation
7,524

7,206

Other 
2,107

420

Net operating loss carryforward
8,665

4,439

Valuation allowance
(1,185
)
(3,731
)
Total deferred tax assets 
66,731

72,581

Deferred tax liabilities:
 
 
Property and equipment
33,946

24,500

Total deferred tax liabilities 
33,946

24,500

Net deferred tax assets 
$
32,785

$
48,081


The above amounts are reflected on the accompanying consolidated balance sheets as follows (in thousands): 
December 31,
2014
2013
Current deferred tax assets, net
$
53,231

$
55,874

Long-term deferred tax liabilities, net 
20,446

7,793

Net deferred tax assets 
$
32,785

$
48,081

The deferred tax asset for other accrued liabilities relates to various items including accrued compensation, accrued rent and accrued reclamation costs, which are realizable in future periods. Our deferred tax asset for net operating loss carryforward relates to state and local net operating loss carryforwards which expire beginning in 2026 and federal net operating loss carryforwards which expire in 2034. We have provided a valuation allowance on the net deferred tax assets for certain state and local jurisdictions because we do not believe their realizability is more likely than not.


F- 37
 
 
 
 



Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The following is a summary of the change in valuation allowance (in thousands):
December 31,
2014
2013
2012
Beginning balance
$
3,731

$
5,242

$
10,668

Deductions, net
(2,546
)
(1,511
)
(5,426
)
Ending balance
$
1,185

$
3,731

$
5,242

The deductions to the valuation allowance are related to deferred tax asset utilization and the revaluation of our net deferred tax assets related to various state and local jurisdictions during the year ended December 31, 2014. Additions to the valuation allowance are insignificant for the year ended December 31, 2014.
Uncertain tax positions: We file income tax returns in the U.S. and various state and local jurisdictions. We are currently under examination by various state taxing authorities for various tax years. We do not anticipate that any of these audits will result in a material change in our financial position. We are no longer subject to U.S. federal examinations by tax authorities for years before 2011. With few exceptions, as of December 31, 2014, we are no longer subject to state examinations by taxing authorities for years before 2009.
We had approximately $0.9 million and $2.2 million of total gross unrecognized tax benefits as of December 31, 2014 and 2013, respectively. There were approximately $0.5 million and $1.3 million of unrecognized tax benefits that would affect the effective tax rate in any future period at December 31, 2014 and 2013, respectively. We believe that it is reasonably possible that approximately $0.2 million of our currently remaining unrecognized tax benefits, each of which are individually insignificant, may be recognized by the end of 2015 as a result of a lapse of the statute of limitations.
The following is a tabular reconciliation of unrecognized tax benefits (in thousands), the balance of which is included in other long-term liabilities on the consolidated balance sheets:
December 31,
2014
2013
2012
Beginning balance
$
2,231

$
2,315

$
2,339

Gross increases – current period tax positions

363

1,017

Gross decreases – current period tax positions
(282
)
(638
)
(800
)
Gross increases – prior period tax positions

508

4

Gross decreases – prior period tax positions
(2
)
(2
)
(245
)
Settlements with taxing authorities/lapse of statute of limitations
(1,060
)
(315
)

Ending balance
$
887

$
2,231

$
2,315

We record interest on uncertain tax positions as interest expense in our consolidated statements of operations. During the years ended December 31, 2014, 2013 and 2012, we recognized approximately $0.9 million of interest income, $0.1 million of interest expense and $0.1 million of interest expense, respectively. Approximately $0.2 million and $1.0 million of accrued interest were included in our uncertain tax position liability on the consolidated balance sheets at December 31, 2014 and 2013, respectively.

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Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


18. Commitments, Contingencies and Guarantees
Leases: Minimum rental commitments and minimum royalty requirements under all noncancellable operating leases, primarily quarry property, in effect at December 31, 2014 were (in thousands):
Years Ending December 31,
 

2015
$
8,439

2016
6,888

2017
5,239

2018
3,752

2019
4,962

Later years (through 2099)
7,353

Total
$
36,633

Operating lease rental expense was $10.6 million, $11.4 million and $9.8 million in 2014, 2013 and 2012, respectively. 
Performance Guarantees
We participate in various joint ventures and line item joint ventures under which each partner is responsible for performing certain discrete items of the total scope of contracted work. See Note 1, Note 6 and Note 8 for further details.
Surety Bonds
We are generally required to provide various types of surety bonds that provide an additional measure of security under certain public and private sector contracts. At December 31, 2014, $2.3 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.



F- 39
 
 
 
 



Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


19. 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.
Some of the matters in which we or our joint ventures and affiliates are involved may involve compensatory, punitive, or other claims or sanctions that, if granted, could require us to pay damages or make other expenditures in amounts that are not probable to be incurred or cannot currently be reasonably estimated. In addition, in some circumstances our government contracts could be terminated, we could be suspended, debarred or incur other administrative penalties or sanctions, or payment of our costs could be disallowed. While any of our pending legal proceedings may be subject to early resolution as a result of our ongoing efforts to settle, whether or when any legal proceeding will be resolved through settlement is neither predictable nor guaranteed.
Accordingly, it is possible that future developments in such proceedings and inquiries could require us to (i) adjust existing accruals, or (ii) record new accruals that we did not originally believe to be probable or that could not be reasonably estimated. Such changes could be material to our financial condition, results of operations and/or cash flows in any particular reporting period. In addition to matters that are considered probable for which the loss can be reasonably estimated, we also disclose certain matters where the loss is considered reasonably possible and is reasonably estimable.
Liabilities relating to legal proceedings and government inquiries, to the extent that we have concluded such liabilities are probable and the amounts of such liabilities are reasonably estimable, are recorded on the consolidated balance sheets. The aggregate liabilities recorded as of December 31, 2014 and 2013 related to these matters were approximately $9.7 million and $16.3 million, respectively, and were primarily included in accrued expenses and other current liabilities. The aggregate range of possible loss related to matters considered reasonably possible was zero to approximately $4.0 million as of December 31, 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 the DOJ 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. In connection with this investigation, Granite Northeast is subject to potential civil, criminal, and/or administrative penalties or sanctions, as well as additional future DBE compliance activities and the costs associated therewith. 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 on the consolidated balance sheet as of December 31, 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. The resolution of the matters under investigation will likely be in the form of either a non-prosecution agreement or deferred prosecution agreement and could have direct or indirect consequences that could have a material adverse effect on our financial position, results of operations and/or liquidity.

F- 40
 
 
 
 



Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


20. Business Segment Information
Prior to 2014, our business was organized into four reportable business segments. These business segments were: Construction, Large Project Construction, Construction Materials and Real Estate. In the fourth quarter of 2014, we determined that the Real Estate segment no longer met the requirements of a reportable business segment under ASC 280 and have eliminated it as a segment for all periods presented.
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, together with 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. In addition, the Construction Materials segment includes real estate investment activity that was not material for any of the periods presented. See the real estate investment balances as of each of the years presented in Note 1.
The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (see Note 1). We evaluate segment performance based on gross profit or loss, and do not include selling, general and administrative expenses or non-operating income or expense. Segment assets include property and equipment, intangibles, goodwill, inventory and equity in construction joint ventures.

F- 41
 
 
 
 



Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Summarized segment information is as follows (in thousands):
Years Ended December 31,
 
Construction
 
Large Project Construction
 
Construction Materials
 
Total
2014
 
 
 
 

 
 
 
 

Total revenue from reportable segments
 
$
1,186,445

 
$
825,044

 
$
385,392

 
$
2,396,881

Elimination of intersegment revenue
 

 

 
(121,611
)
 
(121,611
)
Revenue from external customers
 
1,186,445

 
825,044

 
263,781

 
2,275,270

Gross profit
 
118,834

 
112,601

 
18,871

 
250,306

Depreciation, depletion and amortization
 
19,141

 
16,197

 
21,976

 
57,314

Segment assets
 
149,018

 
248,464

 
307,229

 
704,711

2013
 
 
 
 

 
 
 
 
Total revenue from reportable segments
 
$
1,251,197

 
$
777,811

 
$
372,282

 
$
2,401,290

Elimination of intersegment revenue
 

 

 
(134,389
)
 
(134,389
)
Revenue from external customers
 
1,251,197

 
777,811

 
237,893

 
2,266,901

Gross profit
 
106,374

 
71,808

 
7,081

 
185,263

Depreciation, depletion and amortization
 
26,228

 
11,679

 
22,945

 
60,852

Segment assets
 
148,459

 
222,584

 
326,056

 
697,099

2012
 
 
 
 
 
 
 
 

Total revenue from reportable segments
 
$
984,106

 
$
863,217

 
$
415,105

 
$
2,262,428

Elimination of intersegment revenue
 

 

 
(179,391
)
 
(179,391
)
Revenue from external customers
 
984,106

 
863,217

 
235,714

 
2,083,037

Gross profit
 
77,963

 
148,418

 
8,378

 
234,759

Depreciation, depletion and amortization
 
13,225

 
4,527

 
28,490

 
46,242

Segment assets
 
163,287

 
173,142

 
398,092

 
734,521

A reconciliation of segment gross profit to consolidated income (loss) before provision for (benefit from) income taxes is as follows (in thousands):
Years Ended December 31,
 
2014
 
2013
 
2012
Total gross profit from reportable segments
 
$
250,306

 
$
185,263

 
$
234,759

Selling, general and administrative expenses 
 
203,821

 
199,946

 
185,099

Restructuring and impairment (gains) charges, net
 
(2,643
)
 
52,139

 
(3,728
)
Gain on sales of property and equipment
 
(15,972
)
 
(12,130
)
 
(27,447
)
Other expense (income), net
 
9,503

 
9,337

 
(194
)
Income (loss) before provision for (benefit from) income taxes
 
$
55,597

 
$
(64,029
)
 
$
81,029

A reconciliation of segment assets to consolidated total assets is as follows (in thousands):
December 31,
 
2014
 
2013
 
2012
Total assets for reportable segments
 
$
704,711

 
$
697,099

 
$
734,521

Assets not allocated to segments:
 
 
 
 
 
 
  Cash and cash equivalents
 
255,961

 
229,121

 
321,990

  Short-term and long-term marketable securities
 
102,067

 
117,202

 
111,430

  Receivables, net
 
310,934

 
313,598

 
325,529

  Deferred income taxes
 
53,231

 
55,874

 
36,687

  Other current assets
 
60,615

 
65,674

 
67,726

  Property and equipment, net
 
45,188

 
54,330

 
50,857

  Other noncurrent assets
 
87,787

 
84,257

 
80,747

Consolidated total assets
 
$
1,620,494

 
$
1,617,155

 
$
1,729,487


F- 42
 
 
 
 



Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


21. Acquisition
On December 28, 2012, we signed a definitive agreement to acquire 100% of the outstanding shares of Kenny, a national contractor and construction manager based in Northbrook, Illinois for $141.1 million. The acquisition was effective December 31, 2012 and was funded through cash on hand and $70.0 million of proceeds from borrowings under Granite’s existing revolving credit facility - see Note 12 for further discussion of the borrowings. In accordance with the terms of the agreement, we paid post-closing adjustments of $8.4 million during 2013. These post-closing adjustments are reflected in the purchase price above. The purchase price included $13.0 million held in escrow for indemnification liabilities (as defined by the definitive agreement) that was released by the end of the quarter ended September 30, 2014.

The acquired business operates under the name Kenny Construction Company as a wholly owned subsidiary of Granite Construction Incorporated. Kenny operates in the tunneling, electrical power, underground and civil businesses. The underground business utilizes cutting-edge trenchless construction technologies and processes. This acquisition expanded our presence in these markets and has enabled us to leverage our capabilities and geographic footprint. We accounted for this transaction in accordance with ASC Topic 805, Business Combinations (“ASC 805”).

Purchase Price Allocation
In accordance with ASC 805, a preliminary allocation of the purchase price was made to the net tangible and identifiable intangible assets based on their estimated fair values as of December 31, 2012. During the year ended December 31, 2013, we adjusted the preliminary values assigned to certain assets and liabilities to reflect additional information obtained by $0.4 million. The following table presents the final adjusted purchase price allocation (in thousands):
Cash and cash equivalents
 
$
53,185

 
Receivables
 
88,725

 
Costs and estimated earnings in excess of billings
 
444

 
Inventories
 
731

 
Equity in construction joint ventures
 
7,803

 
Other current assets
 
6,039

 
Property and equipment, net
 
51,909

 
Identifiable intangible assets:
 
 
 
Acquired backlog
 
7,900

 
Customer relationships
 
2,200

 
Trade name
 
4,100

 
Total amount allocated to identifiable intangible assets
 
14,200

 
Accounts payable
 
43,591

 
Billings in excess of costs and estimated earnings
 
50,098

 
Accrued expenses and other current liabilities
 
16,806

 
Non-controlling interests
 
15,326

 
Total identifiable net assets acquired
 
97,215

 
Goodwill
 
43,899

 
Total purchase price
 
$
141,114

 

F- 43
 
 
 
 



Table of Contents
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Intangible assets
Acquired intangible assets included backlog, customer relationships and trade name. We amortize the fair value of backlog intangible assets based on the associated project’s percent complete, and use the straight-line method over the assets’ estimated useful lives for other intangible assets. The estimated useful lives for backlog and customer relationships range from 1 to 8 years and represent existing contracts and the underlying customer relationships. The estimated useful life of the trade names is 10 years. The identifiable intangible assets are deductible for income tax purposes. We recorded amortization expense associated with the acquired intangible assets as follows (in thousands):
Year Ended December 31,
2014
 
2013
Cost of revenue - Construction
$

 
$
6,400

Cost of revenue - Large Project Construction
428

 
435

Selling, general and administrative expenses
725

 
725

Total
$
1,153

 
$
7,560


Goodwill
Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and intangible assets. The factors that contributed to the recognition of goodwill from the acquisition of Kenny include acquiring a workforce with capabilities in the power, tunnel and underground markets, cost savings opportunities and the significant synergies expected to arise. The $43.9 million of goodwill that resulted from this acquisition is included in our Construction and Large Project Construction segments - see Note 9. The goodwill is expected to be deductible for income tax purposes.
In connection with the acquisition, Kenny became a guarantor of our obligations under the Credit Agreement (as defined in Note 12) and outstanding senior notes and pledged substantially all of its assets to collateralize such obligations, in each case on substantially the same terms as our other subsidiaries that are guarantors of such obligations.
Pro Forma Financial Information (unaudited)
The financial information in the table below summarizes the combined results of operations of Granite and Kenny, on a pro forma basis, as though the companies had been combined as of the beginning of 2012 (in thousands, except per share amounts). The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of 2012.
Years Ended December 31,
2012
Revenue
$
2,388,790

Net income including non-controlling interests
82,914

Net income attributable to Granite
58,225

Basic net income per share
1.50

Diluted net income per share
1.48


These amounts have been calculated after applying Granite’s accounting policies and adjusting the results of Kenny to reflect the additional depreciation and amortization that would have been recorded assuming the fair value adjustments to property and equipment and intangible assets had been applied starting on January 1, 2011. The income tax expense related to Kenny for the year ended December 31, 2012 was minimal due to its status as an S Corporation for income tax purposes.  For purposes of this pro forma financial information, the statutory tax rate of 39% was adjusted for estimated permanent items to arrive at 36%.

In 2013, Granite incurred $3.1 million of integration-related costs and in 2012 incurred $4.4 million of acquisition-related costs. These expenses are included in selling, general and administrative expenses in the consolidated statement of operations for the years ended December 31, 2013 and 2012.


F- 44
 
 
 
 



Table of Contents

Quarterly Financial Data
The following table sets forth selected unaudited quarterly financial information for the years ended December 31, 2014 and 2013. This information has been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, contains all adjustments necessary for a fair statement thereof. Net income (loss) per share calculations are based on the weighted average common shares outstanding for each period presented. Accordingly, the sum of the quarterly net income (loss) per share amounts may not equal the per share amount reported for the year.
QUARTERLY FINANCIAL DATA
 

 

 

(unaudited - dollars in thousands, except per share data)
 

 

 

 

2014 Quarters Ended
December 31,
September 30,
June 30,
March 31,
Revenue
$
589,789

$
719,764

$
585,870

$
379,847

Gross profit
79,791

66,692

82,415

21,408

As a percent of revenue
13.5
%
9.3
%
14.1
%
5.6
 %
Net income (loss)
$
20,825

$
14,105

$
22,207

$
(21,261
)
As a percent of revenue
3.5
%
2.0
%
3.8
%
(5.6
)%
Net income (loss) attributable to Granite
$
16,976

$
15,282

$
13,641

$
(20,553
)
As a percent of revenue
2.9
%
2.1
%
2.3
%
(5.4
)%
Net income (loss) per share attributable to
common shareholders:
 
 
 
 
Basic
$
0.43

$
0.39

$
0.35

$
(0.53
)
Diluted
$
0.43

$
0.38

$
0.34

$
(0.53
)
2013 Quarters Ended
December 31,
September 30,
June 30,
March 31,
Revenue
$
598,099

$
739,752

$
550,348

$
378,704

Gross profit
49,751

55,860

49,596

30,058

As a percent of revenue
8.3
 %
7.6
%
9.0
%
7.9
 %
Net income (loss)
$
(33,255
)
$
6,532

$
1,782

$
(19,826
)
As a percent of revenue  
(5.6
)%
0.9
%
0.3
%
(5.2
)%
Net income (loss) attributable to Granite
$
(28,898
)
$
13,037

$
1,419

$
(21,982
)
As a percent of revenue
(4.8
)%
1.8
%
0.3
%
(5.8
)%
Net income (loss) per share attributable to
common shareholders:
 
 
 
 
Basic
$
(0.74
)
$
0.34

$
0.04

$
(0.57
)
Diluted
$
(0.74
)
$
0.33

$
0.04

$
(0.57
)
Included in our net loss for the quarter ended December 31, 2013 and in connection with out EIP were restructuring charges of $49.0 million related to the non-cash impairment of certain real estate development projects and certain non-performing quarry assets within the Construction Materials segment. These restructuring charges included lease termination charges of $3.2 million. In the fourth quarter of 2014, we were released from the lease obligation and recorded a $1.3 million restructuring gain. Also included in the 2013 fourth quarter was a $3.2 million non-cash impairment charge related to our process of continually optimizing our assets separate from the EIP. In the fourth quarter of 2014, this asset was sold resulting in a $1.3 million impairment gain.


F- 45
 
 
 
 



Table of Contents

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
GRANITE CONSTRUCTION INCORPORATED
 
 
 
 
By: /s/ Laurel J. Krzeminski
 
 
Laurel J. Krzeminski
 
 
Senior Vice President and Chief Financial Officer
 
(Principal Financial and Accounting Officer)

 
Date: February 27, 2015
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 27, 2015, by the following persons on behalf of the Registrant in the capacities indicated.
 /s/ James H. Roberts                
 
James H. Roberts, President and Chief Executive Officer
 
 
 
/s/ William H. Powell                
 
William H. Powell, Chairman of the Board and Director      
 
 
 
/s/ Claes G. Bjork                    
 
Claes G. Bjork, Director
 
 
 
/s/ James W. Bradford              
 
James W. Bradford, Director
 
 
 
/s/ Gary M. Cusumano             
 
Gary M. Cusumano, Director
 
 
 
/s/ William G. Dorey                 
 
William G. Dorey, Director
 
 
 
/s/ David H. Kelsey                  
 
David H. Kelsey, Director
 
 
 
/s/ Rebecca A. McDonald        
 
Rebecca A. McDonald, Director
 
 
 
/s/ Gaddi Vasquez             
 
Gaddi Vasquez, Director
 
 
 



Table of Contents

SCHEDULE II
GRANITE CONSTRUCTION INCORPORATED
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Description
Balance at Beginning of Year
Charged to Expenses or Other Accounts, Net
Deductions and Adjustments1
Balance at End of Year
YEAR ENDED DECEMBER 31, 2014
 
 
 
 
Allowance for doubtful accounts
2,513

97

(2,319
)
291

YEAR ENDED DECEMBER 31, 2013
 
 
 
 
Allowance for doubtful accounts
2,749

944

(1,180
)
2,513

YEAR ENDED DECEMBER 31, 2012
 
 
 
 
Allowance for doubtful accounts
2,880

135

(266
)
2,749

1 Deductions and adjustments for the allowances primarily relate to accounts written off.

S-1

Table of Contents

 INDEX TO 10-K EXHIBITS
 
Exhibit No.
 
Exhibit Description
2.1
*
Stock Purchase Agreement, dated December 28, 2012, by and between Granite Construction Incorporated and Kenny Industries, Inc. [Exhibit 2.1 to the Company’s Form 8-K filed on January 4, 2013]
3.1
Certificate of Incorporation of Granite Construction Incorporated, as amended [Exhibit 3.1.b to the Company’s Form 10-Q for quarter ended June 30, 2006]
3.2 
*
Amended Bylaws of Granite Construction Incorporated [Exhibit 3.1 to the Company’s Form 8-K filed on November 15, 2011]
10.1
*
**
Key Management Deferred Compensation Plan II, as amended and restated [Exhibit 10.1 to the Company’s Form 10-Q for quarter ended March 31, 2010]
10.2
*
**
Granite Construction Incorporated Amended and Restated 1999 Equity Incentive Plan as Amended and Restated [Exhibit 10.1 to the Company’s Form 10-Q for quarter ended June 30, 2009]
10.2.a     
*
**
Amendment No. 1 to the Granite Construction Incorporated Amended and Restated 1999 Equity Incentive Plan [Exhibit 10.2.a to the Company’s Form 10-K for year ended December 31, 2009]
10.3
*
Amended and Restated Credit Agreement, dated October 11, 2012, by and among Granite Construction Incorporated, Granite Construction Company, GILC Incorporated, the lenders party thereto and Bank of America, N.A., as Administrative Agent, Collateral Agent, Swing Line Lender and L/C Issuer. [Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended September 30, 2012]

10.3.a
*
Amended and Restated Security Agreement, dated October 11, 2012, by and among Granite Construction Incorporated, Granite Construction Company, GILC Incorporated, the guarantors party thereto and Bank of America, N.A., as Collateral Agent. [Exhibit 10.2 to the Company’s Form 8-K filed on October 16, 2012]

10.4
*
Amended and Restated Securities Pledge Agreement, dated October 11, 2012, by and among Granite Construction Incorporated, Granite Construction Company, GILC Incorporated, the guarantors party thereto and Bank of America, N.A., as Collateral Agent. [Exhibit 10.3 to the Company’s Form 8-K filed on October 16, 2012]

10.5
*
Amended and Restated Guaranty Agreement, dated October 11, 2012, by and among Granite Construction Incorporated, the guarantors party thereto and Bank of America, N.A., as Administrative Agent. [Exhibit 10.4 to the Company’s Form 8-K filed on October 16, 2012]

10.6
*
 
Intercreditor and Collateral Agency Agreement, dated October 11, 2012, by and among Granite Construction Incorporated, for itself and on behalf of certain of its subsidiaries, Bank of America, N.A., as Collateral Agent and the secured creditors party thereto. [Exhibit 10.5 to the Company’s Form 8-K filed on October 16, 2012]

10.7
Note Purchase Agreement between Granite Construction Incorporated and Certain Purchasers dated December 12, 2007 [Exhibit 10.1 to the Company’s Form 8-K filed January 31, 2008]
10.8
*
First Amendment to the Note Purchase Agreement, dated October 11, 2012, between Granite Construction Incorporated and the holders of the 2019 Notes party thereto. [Exhibit 10.7 to the Company’s Form 10-Q for the quarter ended September 30, 2012]

10.9
*
 
Subsidiary Guaranty Agreement from the Subsidiaries of Granite Construction Incorporated as Guarantors of the Guaranty of Notes and Note Agreement and the Guaranty of Payment and Performance dated December 12, 2007 [Exhibit 10.10 to the Company’s Form 10-K for year ended December 31, 2007]
10.10
*
 
International Swap Dealers Association, Inc. Master Agreement between BNP Paribas and Granite Construction Incorporated dated as of February 10, 2003 [Exhibit 10.5 to the Company’s Form 10-Q for quarter ended June 30, 2003]
 
10.11
*
International Swap Dealers Association, Inc. Master Agreement between BP Products North America Inc. and Granite Construction Incorporated dated as of May 15, 2009 [Exhibit 10.3 to the Company’s Form 10-Q for quarter ended September 30, 2009]
 
10.12
International Swap Dealers Association, Inc. Master Agreement between Wells Fargo Bank, N.A. and Granite Construction Incorporated dated as of May 22, 2009 [Exhibit 10.4 to the Company’s Form 10-Q for quarter ended September 30, 2009]
 


Table of Contents

Exhibit No.
 
Exhibit Description
10.13
International Swap Dealers Association, Inc. Master Agreement between Merrill Lynch Commodities, Inc. and Granite Construction Incorporated dated as of May June 2, 2009 [Exhibit 10.5 to the Company’s Form 10-Q for quarter ended September 30, 2009]
 
10.14
International Swap Dealers Association, Inc. Master Agreement and Credit Support Annex between Shell Energy north America (US), L.P. and Granite Construction Incorporated dated as of March 16, 2010 [Exhibit 10.3 to the Company’s Form 10-Q for the quarter ended June 30, 2010]
 
10.15
*
**
 
Form of Amended and Restated Director and Officer Indemnification Agreement [Exhibit 10.10 to the Company’s Form 10-K for year ended December 31, 2002]
10.16
*
**
 
Executive Retention and Severance Plan II effective as of March 9, 2011 [Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended March 31, 2011]
10.17
*
**
 
Form of Restricted Stock Agreement effective March 2010 [Exhibit 10.18 to the Company’s Form 10-K for the year ended December 31, 2010]
 
10.18
*
**
 
Form of Non-employee Director Stock Option Agreement as amended and effective April 7, 2006 [Exhibit 10.19 to the Company’s Form 10-K for the year ended December 31, 2010]
 
10.19
*
**
 
Form of Restricted Stock Units Agreement effective January 1, 2010 [Exhibit 10.20 to the Company’s Form 10-K for the year ended December 31, 2010]
 
10.20
*
**
 
Form of Non-employee Director Restricted Stock Units Agreement effective January 1, 2010 [Exhibit 10.21 to the Company’s Form 10-K for the year ended December 31, 2010]
 
10.21
*
**
Granite Construction Incorporated Annual Incentive Plan effective January 1, 2010, as amended [Exhibit 10.25 to the Company’s Form 10-K for the year ended December 31, 2011]
10.22
*
**
Amendment No. 2 to the Granite Construction Incorporated Annual Incentive Plan effective January 1, 2012 [Exhibit 10.25 to the Company’s Form 10-K for the year ended December 31, 2011]
10.23
*
**
Granite Construction Incorporated Long Term Incentive Plan effective January 1, 2010, as amended [Exhibit 10.25 to the Company’s Form 10-K for the year ended December 31, 2011]
10.24
*
**
Amendment No. 2 to the Granite Construction Incorporated Long Term Incentive Plan effective January 1, 2012 [Exhibit 10.25 to the Company’s Form 10-K for the year ended December 31, 2011]
10.25
*
**
Granite Construction Incorporated 2012 Equity Incentive Plan [Exhibit 10.1 to the Company’s Form 8-K filed on May 25, 2012]

10.26
*
**
Form of Non-Employee Director Restricted Stock Unit Agreement effective May 22, 2012 [Exhibit 10.2 to the Company’s Form 8-K filed on May 25, 2012]

10.27
*
**
Granite Construction Incorporated NEO LTIP Awards Form of Restricted Stock Unit Agreement (Vesting on Date of Grant) [Exhibit 10.30 to the Company's Form 10-K for the year ended December 31, 2012]
10.28
*
**
Granite Construction Incorporated NEO LTIP Awards Form of Restricted Stock Unit Agreement (3 Year Vesting Schedule) [Exhibit 10.31 to the Company's Form 10-K for the year ended December 31, 2012]
10.31
*
Amendment No. 2 and Waiver to Amended and Restated Credit Agreement, dated as of March 3, 2014 [Exhibit 10.31 to the Company's Form 10-K for the year ended December 31, 2013]
10.32
*
Second Amendment to Note Purchase Agreement, dated as of March 3, 2014 [Exhibit 10.32 to the Company's Form 10-K for the year ended December 31, 2013]
21
23.1
31.1
31.2


Table of Contents

Exhibit No.
 
Exhibit Description
32
††
95
101.INS 
XBRL Instance Document 
101.SCH 
XBRL Taxonomy Extension Schema 
101.CAL 
XBRL Taxonomy Extension Calculation Linkbase 
101.DEF 
XBRL Taxonomy Extension Definition Linkbase  
101.LAB 
XBRL Taxonomy Extension Label Linkbase 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase 
 
*    Incorporated by reference
**  Compensatory plan or management contract
†    Filed herewith
††  Furnished herewith