GRANITE CONSTRUCTION INC - Annual Report: 2019 (Form 10-K)

 

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2019

 

OR

 

☐	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	Trading Symbol	Name of each exchange on which registered
Common stock, $0.01 par value	GVA	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 ☐ No ☒

 

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  ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐  No ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer  ☒  Accelerated filer  ☐    Non-accelerated filer  ☐    Smaller reporting company  ☐    Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ☐ No ☒ 

 

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was $2.2 billion as of June 30, 2019, 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 16, 2021, 45,676,813 shares of common stock, par value $0.01, of the registrant were outstanding. 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

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Table of Contents

 

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, strategy, activities, performance, outlook, outcomes, guidance, capital expenditures, contract backlog, committed and awarded projects, and results, that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by words such as “future,” “outlook,” “assumes,” “believes,” “expects,” “estimates,” “anticipates,” “intends,” “plans,” “appears,” “may,” “will,” “should,” “could,” “would,” “continue,” and the negatives thereof or other comparable terminology or by the context in which they are made. In addition, other written or oral statements that constitute forward-looking statements have been made and may in the future be made by or on behalf of Granite. These forward-looking statements are estimates reflecting the best judgment of senior management and reflect our current expectations regarding future events, occurrences, circumstances, strategy, activities, performance, outlook, outcomes, guidance, capital expenditures, contract backlog, committed and awarded projects, 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.

EXPLANATORY NOTE 

This Annual Report on Form 10-K for the year ended December 31, 2019 (“Form 10-K”) includes the restatement of certain of our previously issued consolidated financial statements and related disclosures (the “Restatement”). We are restating our consolidated financial statements and related disclosures for the years ended December 31, 2018 and 2017 and unaudited quarterly financial information for the first three quarters of the year ended December 31, 2019 and for each of the quarters in the year ended December 31, 2018 (the “Restated Periods”). We have also identified errors that are immaterial to the previously presented financial information that we corrected in the Restatement. 

In February 2020, the Audit/Compliance Committee (the “Audit Committee”) of the Company’s Board of Directors, assisted by independent counsel, initiated an investigation of prior-period reporting for the Heavy Civil operating group, and the extent to which these matters affect the effectiveness of the Company’s internal control over financial reporting (the “Investigation”).

The Investigation is now complete. The Audit Committee, in consultation with the Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP (“PwC”), concluded that the Company’s previously issued consolidated financial statements and related disclosures for the years ended December 31, 2018 and 2017 as well as for the first three quarters of the year ended December 31, 2019 and for each of the quarters in the year ended December 31, 2018 should no longer be relied upon.

As disclosed in Note 2 of the “Notes to the Consolidated Financial Statements” included in Part IV, Item 15(a) of this Form 10-K, we are restating the Restated Periods to correct misstatements associated with project forecasts in the Heavy Civil operating group (the “Investigation Adjustments”) discovered in connection with the Audit Committee’s independent Investigation. 

Based on the independent Investigation, the Audit Committee concluded that the Company did not consistently adhere to its standard operating procedures for forecasting and risk management and that the Company lacked sufficient basis to rely on the consistency of its forecasting process and the accuracy of its financial forecast results for Heavy Civil operating group projects during the relevant period. The Audit Committee found that forecasts were not always prepared to reflect the most probable outcome of forecast elements (including for costs, project risks and variable consideration, such as potential claims). Rather, forecasts sometimes reflected aggressive or optimistic projections, “achievable” targets, management directives or hoped-for efficiencies. The Audit Committee also found that certain employees provided incomplete and/or potentially misleading information to internal and external auditors regarding Heavy Civil operating group projects and forecasts, other reporting communication protocol failures and that, in some cases, Granite employees, including members of management, knew or should have known that forecasts incorporating directives from then-serving members of management did not comply with the Company’s standard operating procedures. Almost invariably those directives resulted in lowered forecasted costs, and/or a reduction to total current assessed project risk.

As disclosed in Item 9A, as of December 31, 2019, management has determined that the Company did not maintain effective internal control over financial reporting due to the existence of material weaknesses.  Management also concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2019 due to the existence of material weaknesses. The actions that led to the material weaknesses reflected an inappropriate tone at the top and project forecasting control failures. For additional information, see Item 9A of this Form 10-K.

We have not filed and do not intend to file amendments to (1) our Annual Reports on Form 10-K or (2) our Quarterly Reports on Form 10-Q for the Restated Periods. Accordingly, investors should rely only on the financial information and other disclosures regarding the Restated Periods in this Form 10-K or in future filings with the SEC (as applicable), and not on any previously issued or filed reports, earnings releases or similar communications relating to the Restated Periods.

The impact of the Restatement on the Restated Periods is described in Note 2 and 23 of the “Notes to the Consolidated Financial Statements” included in Part IV, Item 15(a) of this Form 10-K. 

PART I 

Item 1. BUSINESS

Introduction

Granite Construction Company was incorporated in 1922. In 1990, Granite Construction Incorporated was formed as the holding company for Granite Construction Company and its wholly owned and consolidated subsidiaries and was incorporated in Delaware. Unless otherwise indicated, the terms “we,” “us,” “our,” “Company” and “Granite” refer to Granite Construction Incorporated and its wholly owned and consolidated subsidiaries.

On June 14, 2018, we completed the $349.8 million acquisition of Layne Christensen Company (“Layne”), a U.S.-based global water management, infrastructure services and drilling company in a stock-for-stock merger which was comprised of $321.0 million in Company common stock, $28.8 million in cash to settle all outstanding stock options, restricted stock awards and unvested Layne performance shares and we assumed $191.5 million in convertible notes at fair value. On April 3, 2018, we acquired LiquiForce, a privately owned company which provides sewer lining rehabilitation services to public and private sector water and wastewater customers in both Canada and the U.S. We acquired LiquiForce for $35.9 million in cash primarily borrowed under our revolving credit facility. See Notes 3 and 16 of “Notes to the Consolidated Financial Statements” for further discussion of Layne and Liquiforce acquisitions. On May 22, 2019, we acquired certain assets and equipment of Lametti & Sons, Inc. a Minnesota-based company with expertise in cured-in-place pipe rehabilitation and trenchless renewal for $6.2 million in cash.

We deliver infrastructure solutions for public and private clients primarily in the United States. We are one of the largest diversified infrastructure companies in the United States. Within the public sector, we primarily concentrate on infrastructure projects, including the construction of streets, roads, highways, mass transit facilities, airport infrastructure, bridges, trenchless and underground utilities, power-related facilities, water-related facilities, well drilling, utilities, tunnels, dams and other infrastructure-related projects. Within the private sector, we perform site preparation, mining services, and infrastructure services for residential development, energy development, commercial and industrial sites, and other facilities, as well as provide construction management professional services.

Operating Structure

Our reportable business segments are the same as our operating segments and correspond with how our chief operating decision maker (our President) regularly reviews financial information to allocate resources and assess performance. Our reportable segments are: Transportation, Water, Specialty and Materials. See Note 22 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. In alphabetical order, our operating groups are defined as follows: (i) California; (ii) Federal, which primarily includes offices in California, Colorado, Texas and Guam; (iii) Heavy Civil, which primarily includes offices in California, Florida and Texas (the New York office was closed in January 2021); (iv) Midwest, which primarily includes offices in Illinois; (v) Northwest, which primarily includes offices in Alaska, Arizona, Nevada, Utah and Washington; and (vi) Water and Mineral Services, which includes offices across the Unites States, Canada and Mexico.

Business Strategy

Our business strategy is to consistently deliver ideas, innovations, products and services to our clients to power today’s mobile society by executing entrepreneurial market strategies that leverage the benefits of our company-wide resources and our core values. Additionally, we have a continual focus on Operational Excellence, which includes the following:

Our most fundamental objective is to increase long-term shareholder value as measured by the appreciation of the value of our common stock over a period of time, as well as dividend payouts. In alphabetical order, the following are key factors in our ability to achieve this objective:

Decentralized Profit Centers - Each of our operating groups is established as an individual profit center which encourages entrepreneurial activity while allowing the operating groups to benefit from centralized administrative, operational expertise and support functions.

Dedicated Construction Equipment - We own and lease a large fleet of well-maintained heavy construction equipment. Dedicated access to a large pool of construction equipment enables us to compete more effectively by ensuring availability and maximizing returns on investment of the equipment.

Diversification - To mitigate the risks inherent in the construction business as the result of general economic factors, we pursue projects: (i) in both the public and private sectors; (ii) in diverse end markets such as federal, rail, power, water and renewable energy markets; (iii) for a wide range of clients from the federal government to small municipalities and from large corporations to small private customers; (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.

Employee Development - We believe that our employees are the primary factor for the successful implementation of our business strategies. Significant resources are employed to attract, develop and retain extraordinary and diverse talent and fully promote each employee’s capabilities.

Performance-Based Incentives - Managers are incentivized with cash compensation and restricted stock unit equity awards, payable upon the attainment of pre-established annual financial and non-financial metrics.

Risk-Balanced Growth - We intend to grow our business by working on many types of infrastructure projects, as well as by strategically expanding into new geographic areas and end markets organically and through acquisitions. Growth opportunities are evaluated relative to their incremental impact to the execution risk and profitability profile of our operating portfolio.

Selective Bidding - We focus our resources on bidding jobs that meet our selective bidding criteria, which include analyzing the risk of a potential job relative to: (i) available personnel to estimate and prepare the proposal as well as to effectively manage and build the project; (ii) the competitive environment; (iii) our experience with the type of work and with the owner; (iv) local resources and partnerships; (v) equipment resources; and (vi) the size, complexity and expected profitability of the job.

Vertical Integration - We own and lease aggregate reserves and own processing plants and liner tube manufacturing facilities 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 and liner tubes to third parties.

Raw Materials

We purchase raw materials, including but not limited to, aggregate products, cement, diesel and gasoline fuel, liquid asphalt, natural gas, propane, resin and steel from numerous sources. Our owned and leased aggregate reserves supply a portion of the raw materials needed in our construction projects. The price and availability of raw materials may vary from year to year due to market conditions and production capacities. We do not foresee a lack of availability of any raw materials over the next twelve months from the date of this filing.

Seasonality

Our operations are typically affected more by weather conditions during the first and fourth quarters of our fiscal year which may alter our construction schedules and can create variability in our revenues, profitability and the required number of employees.

Customers

Customers in our Transportation, Water and Specialty segments are predominantly in the public sector and include certain federal agencies, state departments of transportation, local transit authorities, county and city public works departments, school districts and developers, utilities and private owners of industrial, commercial and residential sites. Customers of our 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. The majority of both our public and private customers are located in United States.

None of our customers, including both prime and subcontractor arrangements, had revenue that individually exceeded 10% of total revenue during the years ended December 31, 2019, 2018 and 2017.

Contract Backlog

Our contract backlog consists of the revenue we expect to record in the future on awarded contracts, including 100% of our consolidated joint venture contracts and our proportionate share of unconsolidated joint venture contracts. We generally include a project in our contract backlog at the time a contract is awarded and to the extent we believe contract execution and funding is probable. Certain government contracts where funding is appropriated on a periodic basis are included in contract backlog at the time of the award when it is probable the contract value will be funded and executed. Certain contracts contain contract options that are exercisable at the option of our customers without requiring us to go through an additional competitive bidding process or contain task orders related to master contracts under which we perform work only when the customer awards specific task orders to us. Awarded contracts that include unexercised contract options and unissued task orders are included in contract backlog to the extent option exercise or task order issuance is probable, respectively.

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 (see “Contract Provisions and Subcontracting”). Many projects are added to contract backlog and completed within the same fiscal year and, therefore, may not be reflected in our beginning or year-end contract backlog. Contract backlog by segment is presented in “Contract Backlog” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our contract backlog was $3.7 billion as of December 31, 2019 and did not include approximately $646.6 million in awarded construction management/general contractor and construction management at-risk projects. Our contract backlog was $3.8 billion at December 31, 2018.  Approximately $2.5 billion of the December 31, 2019 backlog was completed during 2020. 

Equipment

At December 31, 2019 and 2018, we owned the following number of construction equipment and vehicles:

Our portfolio of equipment includes backhoes, barges, bulldozers, cranes, excavators, loaders, motor graders, pavers, rollers, scrapers, trucks, special equipment for pipeline rehabilitation, drilling rigs and tunnel boring machines that are used in all of our segments. We pool certain equipment to maximize utilization. We continually monitor and adjust our fleet size so that it is consistent with the size of our business, considering both existing contract backlog and expected future work. We lease or rent equipment to supplement our portfolio of equipment in response to construction activity cycles. In 2019 and 2018, we spent $55.0 million and $58.5 million, respectively, on purchases of construction equipment and vehicles.

Human Capital Resources

Employees

We believe our employees are our most valuable resource, and our workforce possesses a strong dedication to and pride in our company. Our managerial and supervisory personnel have an average of approximately 11 years of service with Granite.

On December 31, 2019, we employed approximately 2,800 salaried employees who work in project, functional and business unit management, estimating and clerical capacities, plus approximately 2,800 hourly employees. The total number of hourly personnel is subject to the volume of construction in progress and is seasonal. During 2019, the number of hourly employees ranged from approximately 2,500 to 4,700 and averaged approximately 3,900. The majority of both our salaried and hourly personnel were located in the United States during 2019 and the employee counts do not include employees of unconsolidated construction joint ventures and non-construction unconsolidated joint ventures. As of December 31, 2019, five of our wholly-owned subsidiaries, Granite Construction Company, Granite Construction Northeast, Inc., Granite Industrial, Inc., Granite Inliner, LLC and Layne Christensen Company, were parties to craft collective bargaining agreements in many areas in which they operate.

Safety

We believe that people are our most valuable asset and their safety is our greatest responsibility. We also understand that Safety and Health are key components for achieving operational excellence, and as such, are a core value of all our operations. Our safety culture is reinforced with relationship-based training, shared knowledge, and engagement at every level of our organization while striving for zero workplace injuries.

Inclusive Diversity

Our culture is underpinned by our core values, including an unwavering commitment to inclusive diversity as exemplified by strategies that address our guiding belief that diverse backgrounds, perspectives, and experiences enhance creativity and innovation. In 2017, we implemented our GROW (Granite Resources Opportunities for Women) mentoring initiative and employee resource group, to support development opportunities for female employees. As of December 31, 2019, approximately 14% of Granite's workforce were women and 33% were racially and ethnically diverse. Granite is committed to pay equity, regardless of gender or race/ethnicity, and annually conducts an internal pay equity analysis.

Employee Development and Training

The development, attraction, and retention of employees is a critical success factor for Granite and its operating groups.  Our people are a key competitive advantage and to grow our organization we encourage every employee to actively participate in their own career growth and development. Granite offers a wide variety of training opportunities to ensure our employees are supplementing their on-the-job learning with classroom and online courses needed to promote performance and growth. Through Granite University, these training topics range from soft skills to job-specific technical skills and from formal instructor-led programs to self-guided online learning. Programs target specific employee populations including new employees, new engineers, managers, and leaders. In 2019, over 87% of our salaried employees completed trainings in Granite University. This included over 150 employees participating in a live Granite Orientation event, 98 graduating from our 12-week Foundations for Engineers program and over 200 graduating from our multi-level leadership development suite that ranges from emerging leaders through senior leaders.

Compensation and Benefits

Granite’s compensation programs are designed to align the compensation of our employees with Granite’s performance and to provide proper incentives to attract, retain, and motivate employees to achieve superior results. The company offers a comprehensive well-being program which includes opportunities for overall health improvement utilizing health education, biometric screenings, incentives for group exercise challenges, and assistance in improving an individual’s personal financial status. The structure of our compensation programs balances guaranteed base pay with incentive compensation opportunities.

Competition

Competitors in our Transportation, Water, Specialty, and Materials segments typically range from small, local companies to large, regional, national and international 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 Transportation, Water and Specialty segment competitors have the ability to perform work in either the private or public sectors. When opportunities for work in one sector are reduced, competitors tend to look for opportunities in the other sector. This migration has the potential to reduce revenue growth and/or increase pressure on gross profit margins.

We own and/or have long-term leases on aggregate resources that we believe provide a competitive advantage in certain markets for the Transportation, Water and Specialty segments.

Factors influencing our competitiveness include price, estimating abilities, knowledge of local markets and conditions, project management, financial strength, reputation for quality, aggregate materials availability, and machinery and equipment. Historically, the construction business has not required large amounts of capital for the smaller size construction work, which can result in relative ease of market entry for companies possessing acceptable qualifications. By contrast, larger size construction work typically requires large amounts of capital that may make entry into the market by future competitors more difficult. Historically, the required amount of capital has not had a significant impact on our ability to compete in the marketplace. Although the construction business is highly competitive, we believe we are well positioned to compete effectively in the markets in which we operate.

Contract Provisions and Subcontracting

Contracts with our customers are primarily “fixed unit price” or “fixed price.” Under fixed unit price contracts, we are committed to providing materials or services at fixed unit prices (for example, dollars per cubic yard of concrete placed or cubic yard of earth excavated). While the fixed unit price contract shifts the risk of estimating the quantity of units required for a particular project to the customer, any increase in our unit cost over the expected unit cost in the bid, whether due to inflation, inefficiency, incorrect estimates or other factors, is borne by us unless otherwise provided in the contract. Fixed price contracts are priced on a lump-sum basis under which we bear the risk that we may not be able to perform the work for the specified contract amount. The percentage of fixed unit price contracts in our contract backlog was 37.8% and 32.0% at December 31, 2019 and 2018, respectively. The percentage of fixed price contracts in our contract backlog was 60.6% and 64.2% at December 31, 2019 and 2018, respectively. All other contract types represented 1.6% and 3.8% of our contract backlog at December 31, 2019 and 2018, respectively.

Within our Transportation, Water and Specialty segments, we utilize several methods of project delivery including, but not limited to, bid-build, design-build, construction management/general contractor and construction management at-risk. Unlike traditional bid-build 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. Under the construction management/general contractor and construction management at-risk methods of delivery, we contract with owners to assist the owner during the design phase of the contract with construction efficiencies and risk mitigation, with the understanding that we will negotiate a contract on the construction phase when the design nears completion.

With the exception of contract change orders and affirmative claims, which are typically sole-source, our construction contracts are primarily 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, current contract backlog, available personnel, current utilization of equipment and other resources 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, bid/no bid decisions, insurance and pricing. Contracts fitting certain criteria of size and complexity are reviewed by various levels of management and, in some cases, by our Board of Directors or a committee thereof. 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 ability to realize improvements on project profitability at times is more limited than the risk of lower profitability. For example, design-build contracts carry additional risks such as those associated with design errors and estimating quantities and prices before the project design is completed. We manage this additional risk by including contingencies to our bid amounts, obtaining errors and omissions insurance and obtaining indemnifications from our design consultants where possible. However, there is no guarantee that these risk management strategies will always be successful.

Most of our contracts, including those with the government, provide for termination at the convenience of the contract owner, with provisions to pay us for work performed through the date of termination. We have not been materially adversely affected by these provisions in the past. Many of our contracts contain provisions that require us to pay liquidated damages if specified completion schedule requirements are not met, and these amounts could be significant.

We act as prime contractor on most of our construction projects. We complete the majority of our projects with our own resources and subcontract specialized activities such as electrical and mechanical work. As prime contractor, we are responsible for the performance of the entire contract, including subcontract work. Thus, we may be subject to increased costs associated with the failure of one or more subcontractors to perform as anticipated. Based on our analysis of their construction and financial capabilities, among other criteria, we typically require the subcontractor to furnish a bond or other type of security to guarantee their performance and/or we retain payments in accordance with contract terms until their performance is complete. Disadvantaged business enterprise regulations require us to use our good faith efforts to subcontract a specified portion of contract work done for governmental agencies to certain types of disadvantaged contractors or suppliers. As with all of our subcontractors, some may not be able to obtain surety bonds or other types of performance security.

Joint Ventures

We participate in various construction joint ventures with other construction companies of which we are a limited member (“joint ventures”) in order to share expertise, risk and resources typically 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. Generally, each construction joint venture is formed as a partnership or limited liability company to accomplish a specific project and is jointly controlled by the joint venture partners. We select our joint venture partners (“partner(s)”) based on our analysis of their construction and financial capabilities, expertise in the type of work to be performed and past working relationships, among other criteria. The joint venture agreements typically provide that our interests in any profits and assets, and our respective share in any losses and liabilities, that may result from the performance of the contract are limited to our stated percentage interest in the project.

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. When entering into joint venture agreements, we typically prefer to be the sponsoring partner.

We consolidate joint ventures where we have determined that through our participation we have a variable interest and are the primary beneficiary as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, and related standards. Where we have determined we are not the primary beneficiary of a joint venture but do exercise significant influence, we account for our share of the operations of unconsolidated construction joint ventures on a pro rata basis in revenue and cost of revenue in the consolidated statements of operations and in equity in construction joint ventures in the consolidated balance sheets. We account for non-construction unconsolidated joint ventures under the equity method of accounting in accordance with ASC Topic 323, Investments - Equity Method and Joint Ventures, and include our share of the operations in equity in income of affiliates in the consolidated statements of operations and in investment in affiliates in the consolidated balance sheets.

We 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 each line item joint venture partners’ discrete items of work is defined in the contract with the project owner and each joint venture partner bears the profitability risk associated only with its own work. There is not a single set of books and records for a line item joint venture. Each partner accounts for its items of work individually as it would for any self-performed contract. We account for our portion of these contracts as revenue and cost of revenue in the consolidated statements of operations and in relevant balances in the consolidated balance sheets.

The agreements with our partner(s) for both construction joint ventures and line item joint ventures define each partner’s management role and financial responsibility in the project. The amount of operational exposure is generally limited to our stated ownership interest. However, due to the joint and several nature of the performance obligations under the related owner contracts, if any of the partners fail to perform, we and the remaining partners, if any, would be responsible for performance of the outstanding work (i.e., we provide a performance guarantee). We estimate our liability for performance guarantees for our unconsolidated and line item joint ventures using estimated partner bond rates, which are Level 2 inputs, and include them in accrued expenses and other current liabilities with a corresponding increase in equity in construction joint ventures in the consolidated balance sheets. We reassess our liability when and if changes in circumstances occur. The liability and corresponding asset are removed from the consolidated balance sheets upon completion and customer acceptance of the project. Circumstances that could lead to a loss under these agreements beyond our stated ownership interest include the failure of a partner to contribute additional funds to the venture in the event the project incurs a loss or additional costs that we could incur should a partner fail to provide the services and resources that it had committed to provide in the agreement. We are not able to estimate amounts that may be required beyond the remaining cost of the work to be performed. These costs could be offset by billings to the customer or by proceeds from our partners’ corporate and/or other guarantees.

At December 31, 2019, there was $2.6 billion of construction revenue to be recognized on unconsolidated and line item construction joint venture contracts, of which $0.9 billion represented our share and is included in our contract backlog and the remaining $1.7 billion represented our partners’ share. See Note 10 of “Notes to the Consolidated Financial Statements” for more information.

Insurance and Bonding

We maintain insurance coverage and limits consistent with industry practice and in alignment with our overall risk management strategy. Policies include general and excess liability, property, pollution, professional, cyber security, executive risk, workers’ compensation and employer’s liability. Further, our policies are placed with financially stable insurers, often in a layered or quota share arrangement which reduces the likelihood of an interruption or impact to operations.

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, multi-year projects throughout the market. 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”).

Anti-corruption and Bribery

We are subject to the Foreign Corrupt Practices Act (“FCPA”), which prohibits U.S. and other business entities from making improper payments to foreign government officials, political parties or political party officials. We are also subject to the applicable anti-corruption laws in the jurisdictions in which we operate, thus potentially exposing us to liability and potential penalties in multiple jurisdictions. The anti-corruption provisions of the FCPA are enforced by the Department of Justice while other state or federal agencies may seek recourse against the Company for issues related to FCPA. In addition, the Securities and Exchange Commission (“SEC”) requires strict compliance with certain accounting and internal control standards set forth under the FCPA. Failure to comply with the FCPA and other laws can expose us and/or individual employees to potentially severe criminal and civil penalties. Such penalties may have a material adverse effect on our business, financial condition and results of operations.

We devote resources to the development, maintenance, communication and enforcement of our Code of Conduct, our anti-bribery compliance policies, our internal control processes and compliance related policies. We strive to conduct timely internal investigations of potential violations and take appropriate action depending upon the outcome of the investigation.

Environmental Regulations

Our operations are subject to various federal, state and local laws and regulations relating to the environment, including those relating to discharges to air, water and land, the handling and disposal of solid and hazardous waste, the handling of underground storage tanks and the cleanup of properties affected by hazardous substances. Certain environmental laws impose substantial penalties for non-compliance and others, such as the federal Comprehensive Environmental Response, Compensation and Liability Act, impose strict, retroactive, joint and several liability upon persons responsible for releases of hazardous substances. We continually evaluate whether we must take additional steps at our locations to ensure compliance with environmental laws. We also evaluate whether we can operate in a more sustainable manner. 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. Tighter regulations for the protection of the environment and other factors could make it increasingly difficult to obtain new permits and renewal of existing permits may be subject to more restrictive conditions than currently exist.

The California Air Resource Board requires California equipment owners/operators to reduce diesel particulate and nitrogen oxide emissions from in-use off-road diesel equipment and to meet progressively more restrictive emission targets from 2010 to 2022 by retrofitting equipment with diesel emission control devices or replacing equipment with new engine technology as it becomes available. Over the past few years we have been proactively replacing our fleet prior to the 2022 deadline to be in compliance and do not expect significant future costs above forecasted and planned expenditures. During 2019, our purchases of property and equipment in California included approximately $16.0 million in off-road construction equipment with emission reduction improvements. 

As is the case with other companies in our industry, some of our aggregate products contain varying amounts of crystalline silica, a common mineral. Also, some of our construction and material processing operations release, as dust, crystalline silica that is in the materials being handled. Excessive, prolonged inhalation of very small-sized particles of crystalline silica has allegedly been associated with respiratory disease (including Silicosis). During 2016, the Occupational Safety and Health Administration (“OSHA”) implemented new and more stringent occupational exposure thresholds for crystalline silica exposure as respirable dust. In addition, the Mine Safety and Health Administration is expected to propose adopting a similar rule as implemented by OSHA. We have implemented dust control procedures to measure compliance with requisite thresholds and to verify that respiratory protective equipment is made available as necessary. We also communicate, through safety data sheets and other means, what we believe to be appropriate warnings and cautions to employees and customers about the risks associated with excessive, prolonged inhalation of mineral dust in general and crystalline silica in particular (see “Item 1A. Risk Factors”). The scope of new exposure limits indicates that additional engineering controls, beyond providing respirators, will be required to reduce potential exposure in response to the reduced exposure limits. The OSHA General Industry and Construction Standards were phased in during late 2017 and were fully implemented in 2018. Expenses related to this implementation were immaterial during the years ended December 31, 2019, 2018 and 2017.

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 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.

Information About Executive Officers

Information regarding our executive officers as of February 1, 2021 is set forth below.

Mr. Larkin joined Granite in 1996 and has served as President since September 2020. He also served as Executive Vice President and Chief Operating Officer from February 2020 to September 2020, Senior Vice President and Manager of Construction and Materials Operations from 2019 to 2020, Senior Vice President and Group Manager from 2017 to 2019, Vice President and Regional Manager in Nevada from 2014 to 2017 and President of Granite’s wholly owned subsidiary, Intermountain Slurry Seal, Inc. from 2011 to 2014. He served as Manager of Construction at the Reno area office from 2008 to 2011, Chief Estimator from 2004 to 2008 and Project Manager, Project Engineer and Estimator at Granite’s Nevada Branch between 1996 and 2003. Mr. Larkin holds a B.S. in Construction Management from California Polytechnic State University, San Luis Obispo and an M.B.A. from the University of Massachusetts, Amherst.

Ms. Curtis joined Granite in 2018 and has served as Executive Vice President and Chief Financial Officer since January 2021. She also served as Chief Accounting Officer from October 2020 to January 2021, Vice President of Investor Relations since 2019, and Vice President and Integration Management Officer from 2018 to 2019. Before joining Granite, Ms. Curtis served as Vice President and Chief Accounting Officer for Layne Christensen Company. She received B.S. degrees in Accounting and Finance from Texas A&M University and is a Certified Public Accountant.

Ms. Desai joined Granite in 1993 and has served as Executive Vice President and Chief Strategy Officer since January 2021. She also served as Senior Vice President and Chief Financial Officer from 2018 to 2021, Vice President of Corporate Finance, Treasurer & Assistant Financial Officer from 2013 to 2018, Vice President, Treasurer & Assistant Financial Officer from 2007 to 2013, Assistant Treasurer & Assistant Secretary from 2001 to 2007 and Treasury Manager from 1993 to 2001. Ms. Desai is a Member of the Association of Financial Professionals. Ms. Desai received a B.S. in Accounting from the University of Houston, an M.B.A. in Corporate Finance from Golden Gate University and completed Harvard Business School’s Advanced Management Program. She is a Certified Treasury Professional.

Mr. Radich first joined Granite in 1980 and rejoined the Company in 2011 where he has served as Executive Vice President and Chief Operating Officer since December 2020. He also served as Senior Vice President and Group Manager from January 2020 to December 2020, as Vice President and Coastal Region Manager from 2014 to 2019 and Vice President of the Northern California Region from 2011 to 2014. From 1993 to 2011 Mr. Radich was employed by Oldcastle Materials. Mr. Radich served Granite as Project Engineer from 1980 to 1983, Project Manager from 1985 to 1990 for the Heavy Civil and Vertical Divisions and Chief Estimator from 1990 to 1993 in the Vertical Division. He received a B.S.C.E. from Santa Clara University and is a Registered Civil Engineer.

Mr. Richards joined Granite in 1992 and has served as Senior Vice President and Group Manager since 2013, Arizona Region Manager from 2006 to 2012, Arizona Region Chief Estimator from 2000 through 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.

Mr. Tatusko joined Granite in 1991 and has served as Senior Vice President and Group Manager since January 2020. He served as Vice President and Valley Region Manager from 2014 to 2019, Northern California Area Manager from 2012 to 2014, Design Build Project Executive from 2010 to 2012, Group Construction Manager from 2007 to 2010, Arizona Operations Manager from 2005 to 2007, Arizona Construction Manager from 2001 to 2005, Plants Manager from 1999 to 2001, Estimator/Project Manager from 1995 to 1999 and Project Engineer from 1993 to 1995. Prior to joining Granite, he was employed at Oldcastle Tilcon from 1984 to 1991. Mr. Tatusko received a Construction Management degree from Southern Maine Tech.

Mr. Dowd joined Granite in 1986 and has served as Senior Vice President and California Group Manager since January 2021. He also served as Vice President and Regional Manager in Nevada from October 2017 to December 2020 and Vice President and Large Projects Business Development Manager from 2013 to 2017. He served as California Group Business Development Manager from 2012 to 2013, Sacramento Valley Region Manager from 2007 to 2012, Vice President and Director of Human Resources from 2005 to 2007, Director of Employee Development from 2000 to 2005, San Diego Area Manager from 1994 to 2000, and Project Manager, Estimator and Project Engineer at Granite's Indio and Sacramento Branches between 1986 and 1994. Mr. Dowd holds a B.S. in Civil Engineering from the University of California, Berkeley and is a Registered Engineer in the states of California and Nevada.

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.

RISKS RELATED TO THE INVESTIGATION AND RESTATEMENT

RISKS RELATED TO OUR BUSINESS

Failure to manage and successfully integrate acquisitions could harm our financial position, results of operations, cash flows and liquidity.

RISKS RELATED TO INFORMATION TECHNOLOGY

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.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

Quarry Properties

As of December 31, 2019, we had 43 active and 16 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, 2019.

As of December 31, 2019, we estimated our permitted proven⁽¹⁾ and probable⁽²⁾ aggregate reserves to be approximately 716.4 million tons with an average permitted life of approximately 53.5 years at present operating levels. Present operating levels are determined based on a three-year annual average aggregate production rate of 13.4 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. These properties are used by all of our segments.

⁽¹⁾ Proven reserves are determined through the testing of samples obtained from closely spaced subsurface drilling and/or exposed pit faces. Proven reserves are sufficiently understood so that quantity, quality, and engineering conditions are known with sufficient accuracy to be mined without the need for any further subsurface work. Actual required spacing is based on geologic judgment about the predictability and continuity of each deposit.

⁽²⁾ Probable reserves are determined through the testing of samples obtained from subsurface drilling but the sample points are too widely spaced to allow detailed prediction of quantity, quality, and engineering conditions. Additional subsurface work may be needed prior to mining the reserve.

The following tables present information about our quarry properties as of December 31, 2019 (tons in millions):

(1) Our leases have terms which range from month-to-month to 45 years with most including an option to renew and includes royalty related agreements.

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. The following table presents the number of plants we owned:

These plants are used by all of our segments.

Other Properties  

The following table provides our estimate of certain information about other properties as of December 31, 2019:

The office and shop space is used by all of our segments.

Item 3. LEGAL PROCEEDINGS

In the ordinary course of business, we and our affiliates are involved in various legal proceedings alleging, among other things, liability issues or breach of contract or tortious conduct in connection with the performance of services and/or materials provided, the various outcomes of which cannot be predicted with certainty. We and our affiliates are also subject to government inquiries in the ordinary course of business seeking information concerning our compliance with government construction contracting requirements and various laws and regulations, the outcomes which cannot be predicted with certainty.

Some of the matters in which we or our joint ventures and affiliates are involved may involve compensatory, punitive, or other claims or sanctions that, if granted, could require us to pay damages or make other expenditures in amounts that are not probable to be incurred or cannot currently be reasonably estimated. In addition, in some circumstances our government contracts could be terminated, we could be suspended, debarred or incur other administrative penalties or sanctions, or payment of our costs could be disallowed. While any of our pending legal proceedings may be subject to early resolution as a result of our ongoing efforts to resolve the proceedings, whether or when any legal proceeding will be resolved is neither predictable nor guaranteed.

Accordingly, it is possible that future developments in such proceedings and inquiries could require us to (i) adjust existing accruals, or (ii) record new accruals that we did not originally believe to be probable or that could not be reasonably estimated. Such changes could be material to our financial condition, results of operations and/or cash flows in any particular reporting period. In addition to matters that are considered probable for which the loss can be reasonably estimated, disclosure is also provided when it is reasonably possible and estimable that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the amount recorded.

Liabilities relating to legal proceedings and government inquiries, to the extent that we have concluded such liabilities are probable and the amounts of such liabilities are reasonably estimable, are recorded in the consolidated balance sheets. The aggregate liabilities recorded as of December 31, 2019 and 2018 related to these matters were immaterial. The aggregate range of possible loss related to (i) matters considered reasonably possible, and (ii) reasonably possible amounts in excess of accrued losses recorded for probable loss contingencies, including those related to liquidated damages, could have a material impact on our consolidated financial statements if they become probable and the reasonably estimable amount is determined.

On August 13, 2019, a securities class action was filed in the United States District Court for the Northern District of California against the Company, James H. Roberts, our former President and Chief Executive Officer, and Jigisha Desai, our former Senior Vice President and Chief Financial Officer and current Executive Vice President and Chief Strategy Officer. An Amended Complaint was filed on February 20, 2020 that, among other things, added Laurel Krzeminski, our former Chief Financial Officer, as a defendant. The amended complaint is brought on behalf of an alleged class of persons or entities that acquired our common stock between April 30, 2018 and October 24, 2019, and alleges claims arising under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Amended Complaint seeks damages based on allegations that in the Company’s SEC filings the defendants made false and/or misleading statements and failed to disclose material adverse facts about the Company’s business, operations and prospects. On May 20, 2020, the Court denied, in part, the Defendants’ Motion to Dismiss the Amended Complaint.  On January 21, 2021, the Court granted Plaintiff’s motion for class certification.  We are in the pretrial stages of the litigation, and we cannot predict the outcome or consequences of this case, which we intend to defend vigorously. 

On October 23, 2019, a putative class action lawsuit was filed in the Superior Court of California, County of Santa Cruz against the Company, James H. Roberts, our former President and Chief Executive Officer; Laurel Krzeminski, our former Chief Financial Officer, and the then-serving Board of Directors on behalf of persons who acquired shares of Company common stock in the Company’s June 2018 merger with Layne. The complaint asserts causes of action under the Securities Act of 1933 and alleges that the registration statement and prospectus were negligently prepared and included materially false and misleading statements and failed to disclose facts required to be disclosed. On August 10, 2020, the Court sustained our demurrer dismissing the complaint with leave to amend.  On September 16, 2020, the plaintiff filed an amended complaint asserting causes of action under the Securities Act of 1933 against the previously named defendants and PricewaterhouseCoopers LLP.  We have filed a demurrer seeking to dismiss the amended complaint. We are in the preliminary stages of the litigation and, as a result, we cannot predict the outcome or consequences of the case, which we intend to defend vigorously.

On May 6, 2020, a stockholder derivative lawsuit was filed in the United States District Court for the Northern District of California against James H. Roberts, our former President and Chief Executive Officer, Jigisha Desai, our former Senior Vice President and Chief Financial Officer and current Executive Vice President and Chief Strategy Officer, Laurel Krzeminski, our former Chief Financial Officer, and our then-current Board of Directors (collectively, the “Individual Defendants”), and the Company, as a nominal defendant, asserting claims for breach of fiduciary duty, unjust enrichment, and violations of the Securities Exchange Act of 1934 that occurred between April 30, 2018 and October 24, 2019. The lawsuit alleges that the Individual Defendants knowingly inflated the Company’s revenue, income, and margins in violation of U.S. GAAP, which caused the results during the relevant periods to be materially false and misleading. The Complaint seeks monetary damages and corporate governance reforms. The Court has ordered that the lawsuit in the derivative action be stayed until further order of the Court or until entry of a final judgment in the putative securities class action lawsuit filed in the United States District Court for the Northern District of California. We are in the preliminary stages of the litigation and, as a result, we cannot predict the outcome or consequences of this case, which we intend to defend vigorously.

As of December 31, 2019, no liability related to above matters was recorded because we have concluded such liabilities are not probable and the amounts of such liabilities are not reasonably estimable.

In connection with our disclosure of the Audit Committee’s independent Investigation, we voluntarily contacted the San Francisco office of the SEC Division of Enforcement regarding that Investigation. The SEC has issued us subpoenas for documents in connection with the independent Investigation. We have produced documents to the SEC regarding the accounting issues identified during the independent Investigation and will continue to cooperate with the SEC in its investigation.

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.

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 16, 2021, there were 45,676,813 shares of our common stock outstanding held by 711 shareholders of record. We have paid quarterly cash dividends since the second quarter of 1990, and we expect to continue to do so.

The following table sets forth information regarding the repurchase of shares of our common stock during the three months ended December 31, 2019:

(1) Includes 53, 117 and 1,855 shares purchased during October 2019, November 2019 and December 2019, respectively, in connection with employee tax withholding for units vested under our 2012 Equity Incentive Plan.

(2) As announced on April 29, 2016, on April 7, 2016, the Board of Directors authorized us to purchase up to $200.0 million of our common stock at management’s discretion. As part of this authorization we have established a share repurchase program to facilitate common stock repurchases. During the fourth quarter of 2019, we purchased approximately 1.26 million shares at an average price of $23.75 per share for $29.9 million in connection with the issuance of our 2.75% Convertible Notes. The specific timing and amount of any future purchases will vary based on market conditions, securities law limitations and other factors.

Performance Graph

The following graph compares the cumulative 5-year total return provided to Granite Construction Incorporated’s common stock holders relative to the cumulative total returns of the S&P 500 index and the Dow Jones U.S. Heavy Construction index. The Dow Jones U.S. Heavy Construction index includes the following companies: AECOM, Emcor Group Inc., Fluor Corp, Jacobs Engineering Group Inc., Mastec Inc., Quanta Services Inc. and Valmont Industries Inc. Certain of these companies differ from Granite in that they derive more revenue and profit from non-U.S. operations and have customers in different markets. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from December 31, 2014 through December 31, 2019.

Item 6. SELECTED FINANCIAL DATA

The following table presents Granite’s selected consolidated financial data on or as of the dates and for the periods indicated. The selected consolidated financial data presented below should be read together with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements including the notes thereto included elsewhere in this Form 10-K. These historical results are not necessarily indicative of the results of operations to be expected for any future period. Certain prior period amounts have been restated for the correction of misstatements as explained in detail in the Explanatory Note above as well as in Note 2 of “Notes to the Consolidated Financial Statements.”

⁽¹⁾ The operating summary information for the years ended December 31, 2019 and 2018 and the consolidated balance sheets as of December 31, 2019 and 2018 include results, assets acquired and liabilities assumed from the acquisitions of Layne and LiquiForce (see Note 3 of the “Notes to the Consolidated Financial Statements”).

⁽²⁾ During the years ended December 31, 2019 and 2018, we incurred $15.3 million and $61.5 million, respectively, in acquisition and integration costs that were primarily in connection with acquisitions of Layne and LiquiForce. See Note 3 of “Notes to the Consolidated Financial Statements.”

⁽³⁾ During the year ended December 31, 2019, we adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases, and subsequently issued additional related ASUs and during the year ended December 31, 2018, we adopted ASC Topic 606, Revenue from Contracts with Customers, and subsequently issued related ASUs which were both applied using modified retrospective method with no prior period adjustments. 

⁽⁴⁾ During the year ended December 31, 2019, we restated our consolidated financial statements for the years ended December 31, 2018 and 2017. See Explanatory Note above and Note 2 of “Notes to the Consolidated Financial Statements” for additional information. The unaudited adjustments for the years ended December 31, 2016 and 2015 are reflected in the above table and are similar in nature to those discussed in Explanatory Note above as well as in Note 2 of “Notes to the Consolidated Financial Statements.”

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Restatement

As described in the Explanatory Note above and in Note 2 of “Notes to the Consolidated Financial Statements,” we have restated our consolidated financial statements for the years ended December 31, 2018 and 2017. 

General

On June 14, 2018, we completed the $349.8 million acquisition of Layne Christensen Company (“Layne”), a U.S.-based global water management, infrastructure services and drilling company in a stock-for-stock merger which was comprised of $321.0 million in Company common stock, $28.8 million in cash to settle all outstanding stock options, restricted stock awards and unvested Layne performance shares and we assumed $191.5 million in convertible notes at fair value. On April 3, 2018, we acquired LiquiForce, a privately owned company which provides sewer lining rehabilitation services to public and private sector water and wastewater customers in both Canada and the U.S. We acquired LiquiForce for $35.9 million in cash primarily borrowed under our revolving credit facility. See Notes 3 and 15 of “Notes to the Consolidated Financial Statements” for further discussion of Layne and Liquiforce acquisitions. On May 22, 2019, we acquired certain assets and equipment of Lametti & Sons, Inc. a Minnesota-based company with expertise in cured-in-place pipe rehabilitation and trenchless renewal for $6.2 million in cash.

We deliver infrastructure solutions for public and private clients primarily in the United States. We are one of the largest diversified infrastructure companies in the United States. Within the public sector, we primarily concentrate on heavy-civil infrastructure projects, including the construction of streets, roads, highways, mass transit facilities, airport infrastructure, bridges, trenchless and underground utilities, power-related facilities, water-related facilities, well drilling, utilities, tunnels, dams and other infrastructure-related projects. Within the private sector, we perform site preparation, mining services and infrastructure services for residential development, energy development, commercial and industrial sites, and other facilities, as well as provide construction management professional services.

Our reportable business segments are the same as our operating segments and correspond with how our chief operating decision maker (our President) regularly reviews financial information to allocate resources and assess performance. Our reportable business segments are: Transportation, Water, Specialty and Materials. See Note 22 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. In alphabetical order, our operating groups are defined as follows: (i) California; (ii) Federal, which primarily includes offices in California, Colorado, Texas and Guam; (iii) Heavy Civil, which primarily includes offices in California, Florida and Texas (the New York office was closed in January 2021); (iv) Midwest, which primarily includes offices in Illinois; (v) Northwest, which primarily includes offices in Alaska, Arizona, Nevada, Utah and Washington; and (vi) Water and Mineral Services, which includes offices across the United States, Canada and Mexico. 

The five primary economic drivers of our business are (i) the overall health of the U.S. economy; (ii) federal, state and local public funding levels; (iii) population growth resulting in public and private development; (iv) the need to build, replace or repair aging infrastructure; and (v) the pricing of certain commodity related products. A stagnant or declining economy will generally result in reduced demand for construction and construction materials in the private sector. This reduced demand increases competition for private sector projects and will ultimately also increase competition in the public sector as companies migrate from bidding on scarce private sector work to projects in the public sector. In addition, a stagnant or declining economy tends to produce less tax revenue for public agencies, thereby decreasing a source of funds available for spending on public infrastructure improvements. Some funding sources that have been specifically earmarked for infrastructure spending, such as diesel and gasoline taxes, are not as directly affected by a stagnant or declining economy, unless actual consumption is reduced or gasoline sales tax revenues decline consistent with fuel prices. However, even these can be temporarily at risk as federal, state and local governments take actions to balance their budgets. Additionally, fuel prices and more fuel efficient vehicles can have a dampening effect on consumption, resulting in overall lower tax revenue. Conversely, increased levels of public funding as well as an expanding or robust economy will generally increase demand for our services and provide opportunities for revenue growth and margin improvement.

Critical Accounting Policies and Estimates

The financial statements included in “Item 8. Financial Statements and Supplementary Data” have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Our estimates and related judgments and assumptions are continually evaluated based on available information and experiences; however, actual amounts could differ from those estimates.

The following are accounting policies and estimates that involve significant management judgment and can have significant effects on the Company’s reported results of operations. The Audit/Compliance Committee of our Board of Directors has reviewed our disclosure of critical accounting policies and estimates.  

Revenue Recognition

Our revenue is primarily derived from construction contracts that can span several quarters or years in our Transportation, Water and Specialty segments and from sales of construction related materials in our Materials segment. We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, and subsequently issued additional related ASUs (“Topic 606”), which we adopted on January 1, 2018. Topic 606 provides for a five-step model for recognizing revenue from contracts with customers as follows:

Generally, our contracts contain one performance obligation. Contracts with customers in our Materials segment are typically defined by our customary business practices and are valued at the contractual selling price per unit. Our customary business practices are for the delivery of a separately identifiable good at a point in time which is typically when delivery to the customer occurs. Contracts in our Transportation, Water and Specialty segments may contain multiple distinct promises or multiple contracts within a master agreement (e.g. contracts that cross multiple locations/geographies and task orders), which we review at contract inception to determine if they represent multiple performance obligations or multiple separate contracts. This review consists of determining if promises or groups of promises are distinct within the context of the contract, including whether contracts are physically contiguous, contain task orders, purchase or sales orders, termination clauses and/or elements not related to design and/or build.

The transaction price is the amount of consideration to which we expect to be entitled in exchange for transferring goods and services to the customer. The contractual consideration from customers of our Transportation, Water and Specialty segments may include both fixed amounts and variable amounts (e.g. bonuses/incentives or penalties/liquidated damages) to the extent that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved (i.e., probable and estimable). When a contract has a single performance obligation, the entire transaction price is attributed to that performance obligation. When a contract has more than one performance obligation, the transaction price is allocated to each performance obligation based on estimated relative standalone selling prices of the goods or services at the inception of the contract, which typically is determined using cost plus an appropriate margin.

Subsequent to the inception of a contract in our Transportation, Water and Specialty segments, the transaction price could change for various reasons, including executed or unapproved change orders and unresolved contract modifications and/or affirmative claims. Changes that are accounted for as an adjustment to existing performance obligations are allocated on the same basis at contract inception. Otherwise, changes are accounted for as separate performance obligation(s) and the separate transaction price is allocated as discussed above.

Changes are made to the transaction price from unapproved change orders to the extent the amount can be reasonably estimated and recovery is probable.

On certain projects we have submitted and have pending unresolved contract modifications and/or affirmative claims (“affirmative claims”) to recover additional costs and the associated profit, if applicable, to which the Company believes it is entitled under the terms of contracts with customers, subcontractors, vendors or others. The owners or their authorized representatives and/or other third parties may be in partial or full agreement with the modifications or affirmative claims, or may have rejected or disagree entirely or partially as to such entitlement.

Changes are made to the transaction price from affirmative claims with customers to the extent that additional revenue on a claim settlement with a customer is probable and estimable. A reduction to costs related to affirmative claims with non-customers with whom we have a contractual arrangement (“back charges”) is recognized when the estimated recovery is probable and estimable. Recognizing affirmative claims and back charge recoveries requires significant judgments of certain factors including, but not limited to, dispute resolution developments and outcomes, anticipated negotiation results, and the cost of resolving such matters.

Certain construction contracts in our Transportation, Water and Specialty segments include retention provisions to provide assurance to our customers that we will perform in accordance with the contract terms and are not considered a financing benefit. The balances billed but not paid by customers pursuant to these provisions generally become due upon completion and acceptance of the project work or products by the customer. We have determined there are no significant financing components in our contracts during the years ended December 31, 2019 and 2018.

Typically, performance obligations related to contracts in our Transportation, Water and Specialty segments are satisfied over time because our performance typically creates or enhances an asset that the customer controls as the asset is created or enhanced. We recognize revenue as performance obligations are satisfied and control of the promised good and/or service is transferred to the customer. Revenue in our Transportation, Water and Specialty segments is ordinarily recognized over time as control is transferred to the customers by measuring the progress toward complete satisfaction of the performance obligation(s) using an input (i.e., “cost to cost”) method. Under the cost to cost method, costs incurred to-date are generally the best depiction of transfer of control.

All contract costs, including those associated with affirmative claims, change orders and back charges, are recorded as incurred and revisions to estimated total costs are reflected as soon as the obligation to perform is determined. Contract costs consist of direct costs on contracts, including labor and materials, amounts payable to subcontractors, direct overhead costs and equipment expense (primarily depreciation, fuel, maintenance and repairs).

The accuracy of our revenue and profit recognition in a given period depends on the accuracy of our estimates of the forecasted revenue and cost to complete each project. Cost estimates for all of our significant projects use a detailed “bottom up” approach. 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 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 and gross profit margin from period to period. Significant changes in revenue and cost estimates, particularly in our larger, more complex, multi-year projects have had, and can in future periods have, a significant effect on our profitability.  

All state and federal government contracts and many of our other contracts provide for termination of the contract at the convenience of the party contracting with us, with provisions to pay us for work performed through the date of termination including demobilization cost.

Costs to obtain our contracts (“pre-bid costs”) that are not expected to be recovered from the customer are expensed as incurred and included in selling, general and administrative expenses on our consolidated statements of operations. Although unusual, pre-bid costs that are explicitly chargeable to the customer even if the contract is not obtained are included in accounts receivable on our consolidated balance sheets when we are notified that we are not the low bidder with a corresponding reduction to selling, general and administrative expenses on our consolidated statements of operations.

Goodwill

As of December 31, 2019 and 2018, we had eight reporting units in which goodwill was recorded as follows:

The three reporting units related to the Water and Mineral Services Group were primarily derived from the Layne and LiquiForce acquisitions in 2018.

We perform our goodwill impairment tests annually as of November 1 and more frequently when events and circumstances occur that indicate a possible impairment of goodwill. Examples of such events or circumstances include, but are not limited to, the following: 

In accordance with U.S. GAAP, we can elect to perform a qualitative assessment to test a reporting unit’s goodwill for impairment or perform a quantitative impairment test. Based on a qualitative assessment, if we determine that the fair value of a reporting unit is more likely than not to be less than its carrying amount, the quantitative impairment test will be performed.

In performing the quantitative goodwill impairment tests, we calculate the estimated fair value of the reporting unit in which the goodwill is recorded using the discounted cash flows and market multiple methods. Judgments inherent in these methods include the determination of appropriate discount rates, the amount and timing of expected future cash flows, revenue and margin growth rates, and appropriate benchmark companies. The cash flows used in our 2019 discounted cash flow model were based on five-year financial forecasts developed internally by management adjusted for market participant-based assumptions. Our discount rate assumptions are based on an assessment of the equity cost of capital and appropriate capital structure for our reporting units. To assess for reasonableness we compare the estimated fair values of the reporting units to our current market capitalization.   

The estimated fair value is compared to the net book value of the reporting unit, including goodwill. If the fair value of the reporting unit exceeds its net book value, goodwill of the reporting unit is considered not impaired. If the fair value of the reporting unit is less than its net book value, goodwill is impaired and the excess of the reporting unit’s net book value over the fair value is recognized as a non-cash impairment charge.

For our 2019 annual goodwill impairment test, we conducted quantitative impairment tests for the Midwest Group Specialty and Water and Mineral Services Group Water, Specialty and Materials reporting units, and concluded that goodwill was not impaired since the estimated fair value for each of our reporting units exceeded their respective net book values. The assessment for the Midwest Group Specialty and Water and Mineral Services Group Specialty reporting units indicated that their estimated fair values exceeded their net book values (i.e., headroom) by over 30%. The Midwest Group Specialty reporting unit is susceptible to fluctuations in results depending on awarded work given the large size and limited frequency of awards. The assessment for the Water and Mineral Services Group Water and Water and Mineral Services Group Materials reporting units indicated that their estimated fair value exceeded their net book value by under 20%, as the estimated fair values align with the recent purchase prices of the reporting units to which these assets are assigned. While we believe the current headroom is adequate to absorb fluctuations, a material decline in job win rates or insufficient business growth could have a material impact to these reporting units’ estimated fair values.

After assessing the totality of events and circumstances, we determined that it is more likely than not that the fair value of Midwest Group Transportation, Northwest Group Transportation, Northwest Group Materials and California Group Transportation reporting units were greater than the carrying amounts; therefore, we elected to perform a qualitative analysis and a quantitative goodwill impairment test was not performed for these reporting units. Factors we considered were macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy, changes in customers, changes in the composition or carrying amount of a reporting segments’ net assets, and changes in our stock price. 

Insurance Estimates

We carry insurance policies to cover various risks, primarily general liability, automobile liability, workers compensation and employee medical expenses under which we are liable to reimburse the insurance company for a portion of each claim paid. The amounts for which we are liable for general liability and workers compensation generally range from the first $0.5 million to $1.0 million per occurrence. We accrue for probable losses, both reported and unreported, that are reasonably estimable using actuarial methods based on historic trends, modified, if necessary, by recent events. Changes in our loss assumptions caused by changes in actual experience would affect our assessment of the ultimate liability and could have an effect on our operating results and financial position up to $1.0 million per occurrence for general liability and workers compensation or $0.3 million for medical insurance.

Current Economic Environment and Outlook 

Impact of COVID-19 on Our Business

The COVID-19 pandemic has resulted, and is likely to continue to result, in substantial economic disruption for the foreseeable future. While there is optimism that the pandemic will come to an end with the prevalence of vaccines, significant uncertainty continues to exist with the resurgence of cases and the economic restrictions in many states.    

With regard to the COVID-19 pandemic, our first priority is to continue to do everything we can to ensure the safety, health and hygiene of our employees, customers, suppliers and others with whom we partner in our business activities. Subject to that and with appropriate risk mitigation and safety practices, we are doing everything we can to carry on our operations in this unprecedented business environment in which we find ourselves.  

Work on most of our projects continues as the Company performs services that are categorized under one or more of the “Essential Critical Infrastructure Sectors,” as defined by federal and state law. However, our operations in Mexico and Canada have been impacted with local COVID-19 work restrictions and travel bans, and we have experienced temporary suspensions or reduced project activities as a result of COVID-19 contributing in some cases to employee and subcontractor absences. This disruption has been most impactful to our Water and Mineral Services Group and certain operations located in Washington and Arizona.     

In the face of rapidly changing market conditions, we are continually monitoring the status of our balance sheet and access to liquidity. Despite the ongoing pandemic, our balance sheet has strengthened in response to the efforts of our teams across the country. Given the uncertain market environment including the uncertain impact of reduced state and local tax receipts due to the pandemic, Granite continues to be focused on our liquidity through maximizing the return on capital investments and minimizing travel and related expenditures.

Granite’s backlog continues to be strong. This year we are seeing increased interest in best-value or alternative delivery procurement work by the state Department of Transportations, such as California and Utah, along with other state agencies. This shift will create a delay in certain project bookings in the short term, but we believe will give us the opportunity for larger future work with historically higher margins. 

Funding for our public work projects, which is around 75% of our portfolio, is dependent on federal, state, regional and local revenues. At the federal level, Congress on September 30, 2020 approved the one-year extension of the Fixing America’s Surface Transportation (“FAST”) Act with flat funding levels as well as a $13.6 billion infusion to the Highway Trust Fund from the general fund, providing state and local governments the visibility needed to plan for 2021 construction programs. In late December 2020, Congress approved a $10 billion relief spending bill for state departments of transportation as part of the Coronavirus Response and Relief Act to help offset pandemic-induced revenue declines. Based on estimates provided by The Federal Highway Administration, over $1.5 billion of the relief fund is apportioned to Granite Construction’s vertically-integrated states. While a permanent revenue solution for the Highway Trust Fund is not yet in place, it continues to remain a stabilizing force for transportation markets. We are optimistic that Congress and the Administration will jointly move forward in 2021 to pass a bipartisan Federal Infrastructure Bill, which we believe will meaningfully improve the programming visibility for state and local governments, starting with the 2022 construction season.

At state, regional and local levels, voter-approved state and local transportation measures continue to support infrastructure spending. In the November 2020 elections, voters in 18 states approved 94% of state and local ballot initiatives that will provide an additional $14 billion in one-time and recurring revenue for transportation improvements. In California, our top revenue-generating state, a significant part of the state infrastructure spend is funded through Senate Bill 1 (SB-1), the Road Repair and Accountability Act of 2017, which is a 10-year, $54.2 billion program. Revenue collected through SB-1 is on track to increase over the next 5 years. While we are encouraged by these funding supports, some of our core states are nevertheless experiencing financial headwinds from the pandemic, which may negatively impact transportation infrastructure spending during the first nine months of 2021. We closely monitor these funding trends and manage our pursuit pipeline accordingly.

While funding uncertainties caused by the COVID-19 pandemic disrupted the normal cadence of project bids in our water-related construction, water resources and wastewater rehabilitation businesses, market demand and local funding opportunities remain resilient. Across the Water segment’s end markets, states and municipal water authorities are weighing options for overdue water and wastewater infrastructure investment. For our wastewater rehabilitation business, this includes potential awards for infrastructure improvements mandated through consent decrees. At the federal level, Congress approved the Water Resources Development Act of 2020 and authorized spending $9.9 billion for 46 new flood control, harbor, ecosystem and lock and dam projects on waterways across the nation. This legislation unlocked the roughly $10 billion balance in the Harbor Maintenance Trust Fund including allowing access to $500 million in appropriations to the Army Corps.

For a further discussion of the uncertainties and business risks associated with the COVID-19 pandemic, see the section entitled “Risk Factors” in this Quarterly Report.

Heavy Civil Strategic Review

Through this challenging time, the Company has not lost sight of its strategic review initiatives related to the Heavy Civil operating group to reduce enterprise exposure to large, complex projects where risks are difficult to mitigate. The Company concluded that historical industry pricing and associated risk for this type of work does not align with the Company’s stakeholder expectations. Under a new management team, we have narrowed the footprint of our Heavy Civil operating group, including the closure of our New York office in January 2021. Our focus is to pursue opportunities in markets where Granite’s presence, capabilities and resources provide strategic advantages, with strong margin expectations. 

Impact of Independent Audit/Compliance Committee Investigation

As a result of our delay in filing our 2019 Annual Report on Form 10-K, there are jurisdictions across the country where we were unable to bid on public projects due to various financial statement filing requirements. This has mainly impacted certain public agency bidding opportunities. Granite teams across the country have continued to work with the various public agencies on these challenges. Through the work of Granite teams, the inability to bid in certain jurisdictions has not had a significant impact to Granite’s liquidity or results of operations.

Results of Operations

Our operations are typically affected more by weather conditions during the first and fourth quarters of our fiscal year which may alter our construction schedules and can create variability in our revenues and profitability. 

Revenue

Total Revenue by Segment

Transportation Revenue

Transportation revenue in 2019 decreased $54.6 million, or 2.8%, compared to 2018 primarily due to a decrease from net negative revisions in estimates of approximately $73.5 million primarily in the Heavy Civil operating group related to increased project completion costs, schedule delays, lower productivity than originally anticipated, performance of a significant amount of unresolved disputed work and an unfavorable court ruling on a designer back charge claim (see Note 4 of “Notes to the Consolidated Financial Statements” for more information). The revenue decline was also due to a decrease in the California operating group from unfavorable weather during the first half of 2019 and was partially offset by increased activity levels in the Northwest operating group from beginning the year with higher contract backlog as well as from new awards in 2019. During 2019 and 2018, the predominant source of revenue earned in the Transportation segment was from the public sector.

Water Revenue

Water revenue in 2019 increased $122.9 million, or 35.5%, compared to 2018 primarily due to the Water and Mineral Services operating group 2019 revenue including full year results from the Layne and LiquiForce acquisitions both of which occurred in the second quarter of 2018. The increases were partially offset by decreases in the California operating group from unfavorable weather conditions during the first half of 2019 and from emergency work performed in early 2018 that was not repeated in 2019. During 2019 and 2018, the predominant source of revenue earned in the Water segment was from the public sector.

Specialty Revenue

Specialty revenue in 2019 increased $101.9 million, or 16.3%, when compared to 2018 due to increased activity levels in the Northwest operating group which began the year with higher contract backlog and made progress on existing projects, in the California and Federal operating groups from new awards in 2019 and in the Water and Mineral Services operating group from the acquisition of Layne in the second quarter of 2018. These increases were partially offset by decreases in the Midwest operating group which began the year with lower contract backlog. During 2019 and 2018, revenue in the Specialty segment was from both the public and private sectors.

Materials Revenue

Materials revenue in 2019 decreased $11.6 million, or 3.1%, when compared to 2018 resulting from decreases in the California and Water and Mineral Services operating groups from reduced volume due to unfavorable weather conditions in the first half of 2019, partially offset by increases in the Northwest operating group.

Contract Backlog

Our contract backlog consists of the revenue we expect to record in the future on awarded contracts, including 100% of our consolidated joint venture contracts and our proportionate share of unconsolidated joint venture contracts. We generally include a project in our contract backlog at the time a contract is awarded and to the extent we believe contract execution and funding is probable. Certain government contracts where funding is appropriated on a periodic basis are included in contract backlog at the time of the award when it is probable the contract value will be funded and executed.  Awarded contracts that include unexercised contract options or unissued task orders are included in contract backlog to the extent option exercise or task order issuance is probable, respectively, and are identified as other awards in the tables below. Contract options and task orders are included in unearned revenue when exercised or issued, respectively. Substantially all of the contracts in our contract backlog may be canceled or modified at the election of the customer; however, we have not been materially adversely affected by contract cancellations or modifications in the past.

Total Contract Backlog by Segment

Transportation Contract Backlog

(1) Other awards include contract awards to the extent we believe contract execution and funding is probable.

Transportation contract backlog of $2.8 billion at December 31, 2019 was $98.3 million, or 3.4%, lower than 2018 primarily due to progress on existing projects in our Heavy Civil operating group reflecting the wind down of projects that began several years ago partially offset by increases from new awards. Significant new awards during the fourth quarter of 2019 included a $347 million highway improvement project in Utah, a $32 million highway reconstruction project in Central California and a $16 million interstate rehabilitation project in Illinois.

Non-controlling partners’ share of Transportation contract backlog as of December 31, 2019 and 2018 was $310.2 million and $218.5 million, respectively.   

At December 31, 2019, four contracts in our Transportation segment had total forecasted losses with remaining revenue of $263.6 million, or 9.4%, of Transportation contract backlog. At December 31, 2018, three contracts in our Transportation segment had forecasted losses with remaining revenue of $462.2 million, or 15.9%, of Transportation contract backlog. 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.

Water Contract Backlog

(1) Other awards include contract awards to the extent we believe contract execution and funding is probable.

Water contract backlog of $226.0 million as of December 31, 2019 was $104.1 million, or 31.5%, lower than at December 31, 2018 due to progress on existing projects in the Water and Mineral Services operating group partially offset by increases in the Heavy Civil and California operating groups due to increased success rate on bidding activity.

Specialty Contract Backlog

(1) Other awards include contract awards to the extent we believe contract execution and funding is probable.

Specialty contract backlog of $696.6 million as of December 31, 2019 was $149.4 million, or 27.3%, higher than at December 31, 2018 primarily due to increases in the Heavy Civil and California operating groups from increased success rate on bidding activity partially offset by decreases in the Northwest and Midwest operating groups from progress on existing projects. 

Non-controlling partners’ share of Specialty contract backlog as of December 31, 2019 and 2018 was $89.1 million and $119.4 million, respectively.

Gross Profit

The following table presents gross profit by business segment for the respective periods:

Transportation gross profit for the year ended December 31, 2019 decreased by $82.1 million, or 59.9%, when compared to 2018 and segment gross profit as a percentage of segment revenue for 2019 decreased to 2.9% from 7.0% in 2018. The decreases were primarily due to an increase in the net negative impact from revisions in estimates of approximately $84.4 million in the Heavy Civil operating group (see Note 4 of “Notes to the Consolidated Financial Statements”). 

Water gross profit for the year ended December 31, 2019 decreased by $29.4 million, or 49.7%, when compared to 2018 and segment gross profit as a percentage of segment revenue for 2019 decreased to 6.4% from 17.1% in 2018. The decreases were primarily a result of decreased revenue in our California operating group due to unfavorable weather in early 2019 and from emergency work performed in early 2018 that was not repeated in 2019 as well as from an increase in the negative net impact from revisions in estimates (See Note 4 of “Notes to the Consolidated Financial Statements”).

Specialty gross profit for the year ended December 31, 2019 decreased by $3.2 million, or 3.6%, when compared to 2018 and segment gross profit as a percentage of segment revenue for 2019 decreased to 11.9% from 14.4% in 2018. The decreases were primarily due to an increase in negative net impact from revisions in estimates (See Note 4 of “Notes to the Consolidated Financial Statements”).

Materials gross profit for the year ended December 31, 2019 increased by $1.5 million, or 3.1%, when compared to 2018 and segment gross profit as a percentage of segment revenue for 2019 increased to 14.0% from 13.2% in 2018 driven by cost reductions.

Selling, General and Administrative Expenses

The following table presents the components of selling, general and administrative expenses for the respective periods:

Selling Expenses

Selling expenses include the costs for estimating and bidding, including offsetting customer reimbursements for portions of our selling/bid submission expenses (i.e. stipends), business development and materials facility permits. Selling expenses can vary depending on the volume of projects in process and the number of employees assigned to estimating and bidding activities. As projects are completed or the volume of work slows down, we temporarily redeploy project employees to bid on new projects, moving their salaries and related costs from cost of revenue to selling expenses. Selling expenses for 2019 increased $2.1 million, or 2.8%, compared to 2018, primarily due to an increase in salaries and related expenses as a result of our acquisitions of Layne and LiquiForce in the second quarter of 2018.

General and Administrative Expenses

General and administrative expenses include costs related to our operational offices that are not allocated to direct contract costs and expenses related to our corporate functions. Other general and administrative expenses include travel and entertainment, outside services, information technology, depreciation, occupancy, training, office supplies, changes in the fair market value of our Non-Qualified Deferred Compensation plan liability and other miscellaneous expenses, none of which individually exceeded 10% of total general and administrative expenses. Total general and administrative expenses for 2019 increased $33.1 million, or 16.9%, compared to 2018 due to an increase in other general and administrative expenses primarily related to a change in the fair market value of our Non-Qualified Deferred Compensation plan liability, which is offset in other income, net, as well as increases in salaries and other general and administrative expenses primarily as a result of our acquisitions of Layne and LiquiForce in the second quarter of 2018.

Acquisition and Integration expenses

Acquisition and integration expenses were $15.3 million and $61.5 million during the years ended December 31, 2019 and 2018, respectively, and were primarily related to the acquisition and integration of LiquiForce and Layne. The decrease during the year ended December 31, 2019 when compared to 2018 was due to a reduction in acquisition expenses as 2019 expenses are primarily related to integration.

Other Income

The following table presents the components of other income for the respective periods:

Interest income for 2019 increased $1.4 million when compared to 2018 primarily due to an increase in interest rates associated with our marketable securities and cash equivalents. Interest expense for 2019 increased $3.8 million when compared to 2018 primarily due to draws under our Credit Agreement during 2019 and higher average debt in 2019 reflecting the acquisition of Layne and Liquiforce. Equity in income of affiliates for 2019 increased $4.5 million when compared to 2018 primarily due to an increase in income from foreign affiliates as a result of our acquisition of Layne in the second quarter of 2018. Other income, net for 2019 increased $3.6 million primarily due to changes in the fair market values of our Non-Qualified Deferred Compensation plan assets.

Income Taxes

The following table presents the (benefit from) provision for income taxes for the respective periods:

Our tax rate increased by 64.9% from (38.5)% to 26.4% when compared to 2018 primarily due to the relative impact of one-time adjustments to provisional amounts recorded in 2018 related to the impact of the U.S. Tax Cuts and Jobs Act of 2017 enacted in December 2017 and non-controlling interest recorded in 2018 which is partially offset by one-time nondeductible acquisition and integration expenses incurred in 2018, which net to a tax benefit, relative to the insignificant income before benefit from income taxes.

Amount Attributable to Non-controlling Interests

The following table presents the income amount attributable to non-controlling interests in consolidated subsidiaries for the respective periods:

The increase for 2019 when compared to 2018 was primarily due to income from consolidated construction joint ventures awarded in the third quarter of 2017 winding down.

Prior Years

Revenue: Transportation revenue in 2018 increased $34.7 million, or 1.8%, compared to 2017 due to entering the year with greater contract backlog in the Heavy Civil, California and Midwest operating groups as well as improved success rate on bidding activity in the California and Midwest groups. The increases were partially offset by a decrease in the Northwest operating group due to beginning the year with lower contract backlog.

Water revenue in 2018 increased $212.9 million, or over 100%, compared to 2017 primarily due to increases in the Water and Mineral Services operating group from the Layne and LiquiForce acquisitions. See Note 3 of “Notes to the Consolidated Financial Statements” for further discussion of acquisitions.

Specialty revenue in 2018 increased $5.0 million, or 0.8%, when compared to 2017 due to increases in the Northwest operating group from new awards and in the Federal operating group from entering the year with greater contract backlog in addition to an increase in Water and Mineral Services operating group from the acquisitions of Layne and LiquiForce. The increases were partially offset by decreases in the Midwest and California operating groups from beginning the year with lower contract backlog.

Materials revenue in 2018 increased $76.0 million, or 26.0%, when compared to 2017. In addition to increases in the Water and Mineral services operating group from the acquisition of Layne, increases in the California and Northwest operating groups were due to increases in aggregate and asphalt pricing and volume.

Gross Profit: Transportation gross profit for the year ended December 31, 2018 increased by $7.2 million, or 5.6%, when compared to 2017 primarily resulting from increased revenue volume and margin improvement in our California operating group due to an increase in highway rehabilitation work partially offset by a decline in our Northwest operating group from reduced revenue volume and in our Heavy Civil operating group from a net negative impact from revisions in estimates (see Note 4 of “Notes to the Consolidated Financial Statements” for more information). Transportation gross margin as a percentage of segment revenue for 2018 increased to 7.0% from 6.8% in 2017.

Water gross profit for the year ended December 31, 2018 increased by $47.6 million, or over 100%, when compared to 2017 primarily due to increased revenue volume and margin improvement from the acquisition of Layne and LiquiForce.

Specialty gross profit for the year ended December 31, 2018 decreased by $2.3 million, or 2.5%, when compared to 2017. The increases were primarily due to increased revenue volume and margin improvement from the acquisition of Layne partially offset by a decline in our Midwest operating group from reduced revenue volume.

Selling, General and Administrative Expenses: Selling, general and administrative expenses for 2018 increased $52.4 million, or 23.8%, compared to 2017. Selling, general and administrative expenses as a percentage of revenue increased to 8.3% in 2018 from 7.5% in 2017. Selling expenses for 2018 increased $17.1 million, or 28.3%, compared to 2017, primarily due to the addition of Layne and LiquiForce expenses as well as salaries and related expenses and pre-bid costs from increased bidding activities. Total general and administrative expenses for 2018 increased $35.3 million, or 22.0%, compared to 2017 primarily due to increases in other general and administrative expenses primarily from the addition of Layne and LiquiForce as well as an increase in salaries and related expenses from an increase in employee benefits and compensation.

Other Expense (Income): Interest income for 2018 increased $1.3 million when compared to 2017 primarily due to an increase in interest rates associated with our marketable securities and cash equivalents. Interest expense for 2018 increased $3.8 million when compared to 2017 primarily due to draws under our revolving credit facility to fund the acquisitions of LiquiForce and Layne. Other income, net for 2018 decreased $3.0 million primarily due to changes in the fair market values of our Non-Qualified Deferred Compensation plan assets.

Provision for Income Taxes: Our 2018 tax rate decreased by 76.3% from 37.8% to (38.5)% when compared to 2017 primarily due to the relative impact of one-time adjustments to provisional amounts recorded in 2018 related to the impact of the U.S. Tax Cuts and Jobs Act of 2017 enacted in December 2017 and non-controlling interest recorded in 2018 which is partially offset by one-time nondeductible acquisition and integration expenses incurred in 2018, which net to a tax benefit, relative to the insignificant income before benefit from income taxes.

Amount Attributable to Non-controlling Interests: The increase for 2018 when compared to 2017 was primarily due to income from consolidated construction joint ventures awarded in the third quarter of 2017.

Liquidity and Capital Resources

Our primary sources of liquidity are cash and cash equivalents, short-term investments, available borrowing capacity and cash expected to be generated from operations. We may also from time to time access our revolving credit facility, issue and sell equity, debt or hybrid securities or engage in other capital markets transactions. Additionally, in November 2019, we issued $230 million of our 2.75% convertible senior notes due 2024. See Note 15 of “Notes to the Consolidated Financial Statements” for further discussion regarding the convertible notes. As of December 31, 2019, our cash and cash equivalents consisted of deposits and money market funds held with established national financial institutions and marketable securities consisted of U.S. Government and agency obligations. Our credit facility consists of a term loan and a revolving credit facility. Of the $350.0 million revolving credit facility, $293.1 million was available for borrowing at December 31, 2019. See Note 15 of “Notes to the Consolidated Financial Statements” for further discussion regarding the revolving credit facility.

Our principal uses of liquidity are paying the costs and expenses associated with our operations, servicing outstanding indebtedness, making capital expenditures and paying dividends on our capital stock. We may also from time to time prepay or repurchase outstanding indebtedness and acquire assets or businesses that are complementary to our operations. We believe 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. There can be no assurance that sufficient capital will continue to be available in the future or that it will be available on terms acceptable to us.

In evaluating our liquidity position and needs, we also consider cash and cash equivalents held by our consolidated construction joint ventures (“CCJVs”). The following table presents our cash, cash equivalents and marketable securities, including amounts from our CCJVs, as of the respective dates:

(1) The volume and stage of completion of contracts from our CCJVs may cause fluctuations in joint venture cash and cash equivalents between periods. The assets of each consolidated and unconsolidated construction joint venture relate solely to that joint venture. The decision to distribute joint venture assets must generally be made jointly by a majority of the members and, accordingly, these assets, including those associated with estimated cost recovery of customer affirmative claims and back charge claims, are generally not available for the working capital needs of Granite until distributed.

(2) All marketable securities were classified as held-to-maturity and consisted of U.S. and agency obligations as of all periods presented.

Granite’s portion of CCJV cash and cash equivalents was $44.3 million and $75.5 million as of December 31, 2019 and 2018, respectively. Excluded from the table above is Granite’s portion of unconsolidated construction joint venture cash and cash equivalents of $60.4 million and $68.3 million as of December 31, 2019 and 2018, respectively.
 

Cash Flows

Operating activities

Cash provided by operating activities of $111.4 million during 2019 represents a $25.0 million increase when compared to 2018. The change was primarily a result of a $41.6 million increase in cash provided in working capital primarily due to an increase cash provided by accounts payable from payment timing differences as well as an increase from CCJVs, and a $22.7 million decrease in net contributions to unconsolidated joint ventures and affiliates partially offset by a $39.2 million decrease in cash provided by net loss after adjusting for non-cash items.

Investing activities

Cash used in investing activities of $40.3 million during 2019 remained relatively unchanged when compared to 2018.

Financing activities

Cash used in financing activities of $81.6 million during 2019 represents a $79.8 million increase when compared to 2018. The change was due to an increase in cash paid for the purchase of an equity derivative instrument in connection with the offering of our 2.75% Convertible Notes and repurchases of common stock as part of the repurchase program approved by our Board of Directors. These changes were partially offset by proceeds from the issuance of our 2.75% Convertible Notes and warrants, net of fees. See Note 15 of “Notes to the Consolidated Financial Statements” for further discussion regarding the 2.75% Convertible Notes and warrants.

Prior Year

Cash provided by operating activities of $86.4 million during 2018 represents a $59.8 million decrease when compared to 2017. The decrease was primarily due to a $110.4 million increase in net contributions to unconsolidated joint ventures and an $18.3 million increase in cash used by working capital partially offset by a $32.3 million increase in net income after adjusting for non-cash items.

Cash used in investing activities of $39.6 million during 2018 represents a $19.6 million decrease when compared to 2017. The change was primarily due to an increase in maturities, net of purchases, of marketable securities and proceeds from the sale of certain non-core assets and the associated liabilities related to the water delivery business within our Water and Mineral Services operating group partially offset by cash used to fund the acquisitions of Layne and LiquiForce and an increase in purchases, net of sales proceeds, of property and equipment (see Capital Expenditures discussion below).

Cash used in financing activities of $1.9 million during 2018 represents a $40.8 million decrease when compared to 2017. The change was primarily due to increase in proceeds, net of principal repayments from debt partially offset by an increase in repurchases of common stock related to shares surrendered to pay taxes for vested restricted stock units as well as shares repurchased as part of the repurchase program approved by our Board of Directors and an increase in net distributions to non-controlling partners related to CCJVs.

Capital Expenditures

During the year ended December 31, 2019, we had capital expenditures of $106.8 million compared to $111.1 million during 2018. Major capital expenditures are typically for aggregate and asphalt production facilities, aggregate reserves, construction equipment, buildings and leasehold improvements and investments in our information technology systems. The timing and amount of such expenditures can vary based on the progress of planned capital projects, the type and size of construction projects, changes in business outlook and other factors. During the year ended December 31, 2020, capital expenditures were approximately $90.0 million.

Derivatives

We recognize derivative instruments as either assets or liabilities in the consolidated balance sheets at fair value using Level 2 inputs. See Note 9 to “Notes to the Consolidated Financial Statements” for further information. The hedge option and warrant derivative transactions related to the 2.75% Convertible Notes were recorded to equity on our consolidated balance sheets based on the cash proceeds. See Note 15 to “Notes to the Consolidated Financial Statements” for further information.

Debt and Contractual Obligations  

The following table summarizes our significant obligations outstanding as of December 31, 2019:

(1) Debt issuance costs are excluded from the table. Included in the table is $36.3 million of unamortized debt discount related to the 2.75% Convertible Notes (as defined in Note 15 to “Notes to the Consolidated Financial Statements”).

(2) Included in the table are future interest payments related to borrowings under our Credit Agreement for both the term loan and revolving credit facility. Interest for the term loan was calculated using the fixed rate associated with the cash flow hedge of 2.76% plus the applicable margin and interest for the revolving credit facility was calculated using one-month LIBOR plus the applicable margin. Borrowings were subject to a 75bp LIBOR floor from March 26, 2020. As forecasted LIBOR was below 75bps for all future periods after June 30, 2020, the 75bp LIBOR floor was utilized thereafter. Future interest payments may differ from actual results. Also included in the table is $31.6 million in interest related to borrowings under our 2.75% Convertible Notes. See Note 15 of “Notes to the Consolidated Financial Statements.”

(3) These obligations represent the minimum rental and equipment lease commitments and minimum royalty requirements under all noncancellable agreements. See Note 16 of “Notes to the Consolidated Financial Statements.”

(4) These obligations represent firm purchase commitments for equipment and other goods and services not directly connected with our construction contract backlog which are individually greater than $10,000 and have an expected fulfillment date after December 31, 2019.

(5) The timing of expected payment of deferred compensation is based on estimated dates of retirement. Actual dates of retirement could be different and could cause the timing of payments to change.

(6) Asset retirement obligations represent reclamation and other related costs associated with our owned and leased quarry properties, the majority of which have an estimated settlement date beyond five years. See Note 12 of “Notes to the Consolidated Financial Statements.”

In addition to the significant obligations described above, as of December 31, 2019, we had approximately $18.8 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.

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, 2019, approximately $3.5 billion of our contract backlog was bonded. Performance bonds do not have stated expiration dates; rather, we are generally released from the bonds after the owner accepts the work performed under contract. The ability to maintain bonding capacity to support our current and future level of contracting requires that we maintain cash and working capital balances satisfactory to our sureties.

Our investments in real estate affiliates are subject to mortgage indebtedness. This indebtedness is non-recourse to Granite but is recourse to the real estate entities. The terms of this indebtedness are typically renegotiated to reflect the evolving nature of the real estate projects as they progress through acquisition, entitlement and development. Modification of these terms may include changes in loan-to-value ratios requiring the real estate entity to repay portions of the debt. Our unconsolidated investments in our foreign affiliates are subject to local bank debt primarily for equipment purchases and working capital. This debt is non-recourse to Granite, but it is recourse to the affiliates. The debt associated with our unconsolidated non-construction entities is included in Note 11 of “Notes to the Consolidated Financial Statements.”

Covenants and Events of Default

Our Credit Agreement requires us to comply with various affirmative, restrictive and financial covenants, including the financial covenants described below. Our failure to comply with these covenants would constitute an event of default under the Credit Agreement. Additionally, our failure to pay principal, interest or other amounts when due or within the relevant grace period on our 2.75% Convertible Notes or our Credit Agreement would constitute an event of default under the indenture governing our 2.75% Convertible Notes or the Credit Agreement. A default under our Credit Agreement could result in (i) us no longer being entitled to borrow under such facility; (ii) termination of such facility; (iii) the requirement that any letters of credit under such facility be cash collateralized; (iv) acceleration of amounts owed under the Credit Agreement; and/or (v) foreclosure on any lien securing the obligations under such facility. A default under the indenture governing our 2.75% Convertible Notes could result in acceleration of the maturity of the notes.

The most significant financial covenants under the terms of our Credit Agreement require the maintenance of a minimum Consolidated Interest Coverage Ratio and a maximum Consolidated Leverage Ratio. As of December 31, 2019, the Consolidated Leverage Ratio was 1.72, which did not exceed the maximum of 3.25. Our Consolidated Interest Coverage Ratio was 10.95, which exceeded the minimum of 4.00. To accommodate the delays in filing our financial statements, we entered into amendments with our lenders to extend the deadline for filing the 2019 Form 10-K and all of our 2020 Quarterly Reports on Form 10-Qs to February 28, 2021. 

Share Purchase Program

As announced on April 29, 2016, on April 7, 2016, the Board of Directors authorized us to repurchase up to $200.0 million of our common stock at management’s discretion. As part of this authorization we have established a plan to facilitate common stock repurchases. During the third quarter of 2019, we purchased approximately 100,000 shares at an average price of $29.10 per share for $2.9 million. During the fourth quarter of 2019, we purchased approximately 1.26 million shares at an average price of $23.75 per share for $29.9 million in connection with the issuance of our 2.75% Convertible Notes. As of December 31, 2019, $157.2 million of the authorization remained available. The specific timing and amount of any future repurchases will vary based on market conditions, securities law limitations and other factors.

Recently Issued and Adopted Accounting Pronouncements

See Note 1 of “Notes to the Consolidated Financial Statements” under the captions Recently Issued Accounting Pronouncements and Recently Adopted Accounting Pronouncements.

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. Our investment policy also limits the amount of credit exposure to any one issue, issuer or type of instrument. The portfolio and accompanying cash balances are targeted to an average maturity of no more than one year from the date the purchase is settled. On an ongoing basis we monitor credit ratings, financial condition and other factors that could affect the carrying amount of our investment portfolio. 

Marketable securities, consisting of U.S. government and agency obligations, are classified as held-to-maturity and are stated at cost, adjusted for amortization of premiums and discounts to maturity.

Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of cash and cash equivalents, marketable securities, and accounts receivable. We maintain our cash and cash equivalents and our marketable securities with several financial institutions.

Given the short-term nature of certain investments, the related income is subject to the general level of interest rates in the United States at the time of maturity and reinvestment. We have managed the financial market risks due largely to changes in interest rates primarily by managing the maturities in our investment portfolio. 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. The fair value of our long-term held-to-maturity investment portfolio may be affected by changes in interest rates.

Operating in international markets involves exposure to possible volatile movements in currency exchange rates. Our Water and Mineral Services operating group has international operations in Mexico and Canada. We also have affiliates that operate in Latin America (see Note 11 of “Notes to the Consolidated Financial Statements”). The majority of the customer contracts in Mexico are U.S. dollar-based, reducing the exposure to currency fluctuations. As of December 31, 2019, we do not have any outstanding foreign currency option contracts. If the volume of our international operations increases and foreign currency exchange rates change, the impact to our consolidated statements of operations could be significant and may affect year-to-year comparability of operating results. The impact from foreign currency transactions during 2019 was immaterial.

In November 2019, we issued a principal amount of $230.0 million in convertible senior notes that bear interest at 2.75% per annum and are payable semiannually in arrears on May 1 and November 1 of each year, beginning on May 1, 2020, with a maturity date of November 1, 2024 (the “2.75% Convertible Notes”). As of December 31, 2019, $188.3 million of the 2.75% Convertible Notes was included in long-term debt in our consolidated balance sheets net of debt issuance costs and $36.3 million unamortized debt discount.

As of December 31, 2019, a $138.8 million term loan was outstanding under the Credit Agreement that had a variable interest rate of LIBOR plus an applicable margin, that we converted under a swap arrangement to a fixed rate of 2.76% plus the same applicable margin. The applicable margin is based on certain financial ratios calculated quarterly and can vary in future periods. The additional annual interest expense for each 25 basis point increase in the applicable margin would be immaterial.

As of December 31, 2019, $25.0 million had been drawn and was outstanding under the revolving portion of the Credit Agreement that had an effective interest rate of 3.80% using one-month LIBOR and the applicable margin in effect as of December 31, 2019. We had the option of electing LIBOR or the base rate and we elected to use LIBOR. LIBOR is a variable rate subject to market changes over the life of the loan with no guarantees to fix as forecasted. The additional annual interest expense for each 25 basis point increase in one-month LIBOR or in the applicable margin of the loan would be immaterial.

See Note 15 of “Notes to the Consolidated Financial Statements” for further discussion on the 2.75% Convertible Notes and Credit Agreement.

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 excluding debt issuance costs as of December 31, 2019 (dollars in thousands):

(1) Debt issuance costs are excluded from the table. Included in the table is $36.3 million of unamortized debt discount related to the 2.75% Convertible Notes (as defined in Note 15 to “Notes to the Consolidated Financial Statements”). Upon conversion of the 2.75% Convertible Notes, we intend to pay cash or deliver shares of common stock or a combination of both at our election. 

(2) The effective interest rate was calculated using the fixed rate associated with the cash flow hedge of 2.76% plus the applicable margin, subject to a 75bp LIBOR floor from March 26, 2020. Future interest payments may differ from actual results.

(3) The effective interest rate was calculated using one-month LIBOR plus the applicable margin, subject to a 75bp LIBOR floor from March 26, 2020. As forecasted LIBOR was below 75bps for all future periods after June 30, 2020, the 75bp LIBOR floor was utilized thereafter. Future interest payments 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. The fair value of the term loan under the Credit Agreement was approximately $139.0 million and $147.1 million as of December 31, 2019 and 2018, respectively. The fair value of the revolving credit facility under the Credit Agreement was approximately $25.0 million and $197.9 million as of December 31, 2019 and 2018, respectively. The fair value of 2.75% Convertible Notes was approximately $250.0 million as of December 31, 2019. 

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 

Consolidated Statements of Operations 

Consolidated Statements of Comprehensive (Loss) Income 

Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Cash Flows 

Notes to the Consolidated Financial Statements

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

Item 9A. CONTROLS AND PROCEDURES 

In February 2020, the Audit Committee of the Company’s Board of Directors, assisted by independent counsel, initiated an investigation of prior-period reporting for the Heavy Civil operating group, and the extent to which these matters affect the effectiveness of the Company’s internal control over financial reporting (the “Investigation”).

As disclosed in the Explanatory Note and in Note 2 of the “Notes to the Consolidated Financial Statements” included in Part IV, Item 15(a) of this Form 10-K, we are restating our consolidated financial statements and related disclosures for the years ended December 31, 2018 and 2017 and unaudited quarterly financial information for the first three quarters of the year ended December 31, 2019 and for each of the quarters in the year ended December 31, 2018 to correct misstatements associated with project forecasts in the Heavy Civil operating group discovered in connection with the Audit Committee’s independent Investigation. For additional information on the independent Investigation and the Audit Committee’s findings, see the Explanatory Note.

Evaluation of Disclosure Controls and Procedures 

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”)) are designed to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management, including our principal executive and principal financial officers, have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report and, based on their evaluation, our principal executive and principal financial officers have concluded our disclosure controls and procedures were not effective as of December 31, 2019, due to the material weaknesses in our internal control over financial reporting, as further described below.

Management nonetheless believes that the consolidated financial statements and related financial information included in this Annual Report on Form 10-K fairly present in all material respects our financial condition, results of operations and cash flows as of the dates presented, and for the periods ended on such dates, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Management’s belief is based on a number of factors, including, but not limited to:

Management’s Report on Internal Control Over Financial Reporting

Our management, including our principal executive and principal financial officers, is responsible for establishing and maintaining adequate internal control over financial reporting as described in Exchange Act Rules 13a-15(f) and 15d -15(f). Internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.

Our management, under the supervision and with the participation of our principal executive and principal financial officers, has conducted an evaluation of the effectiveness of our internal control over financial reporting, using the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Based on this evaluation, management determined, based upon the existence of the material weaknesses described below, that we did not maintain effective internal control over financial reporting as of December 31, 2019.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

We have identified control deficiencies that constitute material weaknesses, either individually or in the aggregate. We identified that we did not maintain an effective control environment. Specifically, certain members of management did not sufficiently promote, monitor or enforce adherence to the Company’s Code of Conduct and accounting policies and procedures. In addition, certain of these members of management applied pressure on individuals charged with operational finance responsibilities in the Heavy Civil operating group, which resulted in management directives to produce forecasts of revenues and costs that were overly optimistic and not in compliance with the Company’s standard operating procedures. These actions reflected an inappropriate tone at the top and violated our Code of Conduct and accounting policies and procedures and contributed to our ineffective control environment. The ineffective control environment further contributed to the failure in the Heavy Civil operating group’s project forecasting controls. We did not maintain and follow internal policies and procedures in project forecasting in the Heavy Civil operating group, which led to the failure to timely record adjustments to quarterly forecasts (such as adjustments for estimates of costs, project risks and variable consideration, such as potential claims).

The material weaknesses resulted in the restatement of the Company's consolidated financial statements and related disclosures for the years ended December 31, 2018 and 2017 and unaudited quarterly financial information for the first three quarters of the year ended December 31, 2019 and for each of the quarters in the year ended December 31, 2018. Additionally, these material weaknesses could result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

PricewaterhouseCoopers LLP, our independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2019. The report is included in “Item 15. Exhibits and Financial Statement Schedules” under the heading “Report of Independent Registered Public Accounting Firm.”

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the quarter ended December 31, 2019. 

Remediation Plan and Status

Beginning in 2020, Company management, with the assistance of outside consultants has been reviewing and revising our internal control over financial reporting in response to the Audit Committee’s independent Investigation.  Management is committed to implementing changes to our internal control over financial reporting to ensure that the control deficiencies that contributed to the material weaknesses are remediated. We are currently evaluating the impact of the material weaknesses and have taken or are in the process of taking the following actions:

While we believe that these actions will remediate the material weaknesses, we have not completed all the corrective processes, procedures and related evaluation or remediation that we believe are necessary. As we continue to evaluate and work to remediate the material weaknesses, we may take additional measures to address the control deficiencies.

Until the remediation steps set forth above, including the efforts to implement the necessary control activities we identify, are fully implemented and concluded to be operating effectively, the material weaknesses described above will not be considered fully remediated.

Item 9B. OTHER INFORMATION

On February 19, 2021, the Company entered into the Limited Waiver and Amendment No. 6 to the Third Amended and Restated Credit Agreement (the “6th Amendment”) by and among Granite Construction Incorporated, Granite Construction Company, GILC Incorporated, each of the guarantors party thereto and Bank of America, N.A., as administrative agent. The 6th Amendment waives any defaults or events of defaults that may have arisen in connection with the Company’s Restatement during the periods covered by the Restatement, the failure to comply with a financial covenant and any right of the lenders to collect interest at the default rate with respect to the waived defaults and events of default.

PART III

Item 10. DIRECTORS,  EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The following table sets forth certain information about our directors as of February 1, 2021. For information regarding our executive officers, see Item 1. Business - Information About Executive Officers.

(1) Independent directors pursuant to the listing standards of the NYSE.

(2) Director retiring at the 2020 annual meeting. However, we were unable to hold our 2020 annual meeting due to the delay in filing this Form 10-K. As a result, while the director was originally set to retire at the 2020 annual meeting, the director will retire at the next annual meeting at which directors are elected, which is expected to be held in 2021.

(3) Continuing directors with terms expiring at the 2021 annual meeting.

(4) Member of the Audit/Compliance Committee.

(5) Member of the Compensation Committee.

(6) Continuing directors with terms expiring at the 2020 annual meeting. However, we were unable to hold our 2020 annual meeting due to the delay in filing this Form 10-K. As a result, while these directors terms were originally set to expire at the 2020 annual meeting, these directors will come up for election at the next annual meeting at which directors are elected, which is expected to be held in 2021.

(7) Continuing directors with terms expiring at the 2022 annual meeting.

(8) Member of the Nominating and Corporate Governance Committee.

(9) Member of the Risk Committee.

Director Biographies

INFORMATION ABOUT THE BOARD OF DIRECTORS AND CORPORATE GOVERNANCE MATTERS

COMMITTEES OF THE BOARD OF DIRECTORS

Audit/Compliance Committee

All members of the Audit/Compliance Committee (“Audit Committee”) are non-employee directors who are determined by the Board of Directors to be independent under the listing standards of the NYSE. Each member also satisfies the independence requirements for audit committee members of public companies established by the SEC. The Board of Directors has determined that Mr. Kelsey meets the criteria as an audit committee financial expert as defined by SEC rules. The Board of Directors has also determined that all members of the Audit Committee are financially literate as required by the listing standards of the NYSE. The Audit Committee has direct responsibility for risk oversight related to accounting matters, financial reporting, and enterprise, legal and compliance risks. A more complete description of the risk responsibility, functions and activities of the Audit Committee can be found under “Board of Directors Leadership Structure and its Role in Risk Oversight” and in “Report of the Audit Committee” as well as in the Audit Committee charter. The Audit Committee charter is available on Granite's website www.graniteconstruction.com.

Compensation Committee

All members of the Compensation Committee are non-employee directors who are determined by the Board of Directors to be independent under the listing standards of the NYSE. The Compensation Committee reviews and approves all aspects of compensation for our directors, our Chief Executive Officer (“CEO”) and our other executive officers. In addition, the Compensation Committee is responsible for risks related to employment policies and our compensation and benefit systems, including consideration of whether any risks associated with such policies and systems are likely to have a material adverse effect on Granite. The Compensation Committee also reviews our overall compensation plans and strategies and makes recommendations to the Board of Directors for their consideration and approval. The CEO attends Compensation Committee meetings and recommends annual salary levels, incentive compensation and payouts for other executive officers for the Compensation Committee’s approval. The Compensation Committee also administers the 2012 Equity Incentive Plan with respect to persons subject to Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Compensation Committee may delegate any of its responsibilities to a subcommittee composed of one or more members of the Committee. The Compensation Committee charter is available on Granite's website www.graniteconstruction.com.

Nominating and Corporate Governance Committee

All members of the Nominating and Corporate Governance Committee are non-employee directors who are determined by the Board of Directors to be independent under the listing standards of the NYSE. The Nominating and Corporate Governance Committee recommends and nominates persons to serve on the Board of Directors. The Nominating and Corporate Governance Committee also develops and recommends corporate governance principles and practices to the Board of Directors and oversees the annual evaluations of the Board of Directors and certain senior executive officers of the Company. Additionally, the Nominating and Corporate Governance Committee oversees risks associated with our Corporate Governance Guidelines and Policies and Code of Conduct. The Nominating and Corporate Governance Committee's policy for considering director candidates, including shareholder recommendations, is discussed in more detail below under the heading “Board of Directors' Nomination Policy.” This policy and the Nominating and Corporate Governance Committee charter are available on Granite's website www.graniteconstruction.com. 

Executive Committee

The Board of Directors dissolved the Executive Committee on June 11, 2020. Prior to being dissolved, the Executive Committee's responsibility was to carry out the powers and authority of the Board of Directors in the management of Granite's business within limits set by the Board of Directors. The Executive Committee also met regularly to consider the approval of certain large project bidding decisions, as well as to assess and monitor ongoing risks and contingencies related to large projects. The scope of the Executive Committee's authority was determined in accordance with the “Delegation of Authority and Policy” as adopted and revised from time to time by the Board of Directors.

Risk Committee

As discussed further below under “Board of Directors Leadership Structure and Its Role in Risk Oversight,” the Board of Directors formed the Risk Committee on June 11, 2020. The Risk Committee is responsible for overseeing the Company’s strategic, operational and health, safety and environmental compliance risks. All members of the Risk Committee are non-employee directors who are determined by the Board of Directors to be independent under the listing standards of the NYSE. The Risk Committee charter is available on Granite's website www.graniteconstruction.com.

Role of the Compensation Consultant

The Compensation Committee directly retained the services of Frederic W. Cook & Co., Inc. (“FW Cook”) to provide advice and recommendations to the Compensation Committee on executive officer and Board of Director compensation programs.

During 2019, FW Cook provided the following services to the Compensation Committee related to executive officer compensation:

Based in part on the policies and procedures FW Cook and the Compensation Committee have in place, the Compensation Committee believes that the advice it receives from the executive compensation consultant, a FW Cook representative, is objective and not influenced by FW Cook’s or its affiliates' relationships with Granite. These policies and procedures include:

In retaining FW Cook, the Compensation Committee considered the six factors set forth in Exchange Act Rule 10C-1(b)(4)(i) through (vi) and concluded that no conflict of interest existed that would prevent FW Cook from serving as an independent compensation consultant to the Compensation Committee.

While it is necessary for the executive compensation consultant to interact with management to gather information, the Compensation Committee has adopted protocols governing if and when the executive compensation consultant's advice and recommendations can be shared with management. These protocols are included in the Compensation Committee’s engagement letters with FW Cook. The Compensation Committee also determines the appropriate forum for receiving the executive compensation consultant's recommendations. Where appropriate, management invitees are present to provide context for the recommendations.

The Lead Director and Executive Sessions

Our bylaws provide that in the event the Chairman of the Board does not meet the independence requirements of the rules and regulations of the SEC and the listing standards of the NYSE, the directors shall elect a Lead Director to serve for a two-year term or until such time, if earlier, at which an independent Chairman is elected. Because Claes G. Bjork, the current Chairman of the Board, is an independent director, we currently do not have a Lead Director. In his capacity as Chairman, Mr. Bjork chairs all Board of Directors meetings and presides over all executive sessions of the non-employee members of the Board of Directors. As Mr. Bjork will retire at the next annual meeting of shareholders, the Board of Directors elected Mr. Michael F. McNally Chairman of the Board effective as of the next annual shareholder meeting.

Board of Directors Leadership Structure and Its Role in Risk Oversight

The Board of Directors has determined that having an independent director serve as the Chairman of the Board is in the best interest of Granite and its shareholders at this time. The Board of Directors believes that having a strong independent director serve as Chairman promotes greater oversight of Granite by the independent directors and provides for greater management accountability. The structure ensures more active participation by the independent directors in setting the Board of Directors' agenda and establishing the Board of Directors' priorities. However, the Board of Directors, in accordance with its Corporate Governance Guidelines and Policies, retains the flexibility to decide, as new circumstances arise, whether or not to combine or separate the position of Chairman and Chief Executive Officer.

As with all companies, we face a variety of risks in our business. Our Board of Directors is responsible for oversight of our Company's risks, and effective risk management is a top priority of the Board of Directors and management.

In connection with the election of a new Chairman of the Board of Directors, the Nominating and Corporate Governance Committee evaluated the structure, composition and operations of Granite’s Board of Directors committees, including each committee’s respective role in risk oversight and whether a new committee dedicated to risk oversight would bolster the Board of Directors’ risk oversight function. The Board of Directors and Nominating and Corporate Governance Committee completed their review of the Board of Directors’ risk oversight function and on June 11, 2020, formed a Risk Committee that is responsible for overseeing the Company’s strategic, operational and health, safety and environmental compliance risks and dissolved the Executive Committee. The Board of Directors and Nominating and Corporate Governance Committee also focused on enhancing CEO succession planning and on further developing cybersecurity expertise of the Board of Directors through continuing director education programs.

Additionally, the Board of Directors has delegated other risk management oversight responsibilities as follows:

The Audit Committee has direct responsibility for risk oversight relating to accounting matters, financial reporting, and enterprise, legal and compliance risks. Our Chief Financial Officer (who is responsible for managing the risk management function), General Counsel (who serves as our Corporate Compliance Officer), Vice President of Internal Audit, and independent registered public accounting firm, PricewaterhouseCoopers LLP, all report directly to, and meet with, the Audit Committee on a regular basis. The Audit Committee and the Board of Directors also meet periodically with management to review Granite's major financial risk exposures and the steps that management has taken to monitor and control such exposures, which include Granite's risk assessment and risk management policies.

The Compensation Committee is responsible for overseeing the management of risks which are mitigated by our employment policies and our compensation and benefits systems, and the Nominating and Corporate Governance Committee oversees the management of risks which are mitigated by our Corporate Governance Guidelines and Policies and Code of Conduct, including compliance with listing standards for independent directors and committee assignments. The committee chairs report on risk related matters to the full Board of Directors from time to time as appropriate.

The Board of Directors believes that having a system in place for risk management and implementing strategies responsive to our risk profile and exposures will adequately identify our material risks in a timely manner.

Evaluation Criteria and Procedures