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GRANITE CONSTRUCTION INC - Quarter Report: 2020 June (Form 10-Q)

gva20190821_10q.htm
 

 



 
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  
 For the quarterly period ended June 30, 2020

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

State of Incorporation:

I.R.S. Employer Identification Number:

Delaware

77-0239383

Address of principal executive offices:

585 W. Beach Street

Watsonville, California 95076

(831) 724-1011

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.01 par value 

GVA

New York Stock Exchange

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

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

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

Large accelerated filer ☒

 Accelerated filer ☐

 Non-accelerated filer ☐

 Smaller reporting company ☐

 Emerging growth company ☐

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of February 22, 2021.

Class

 

Outstanding

Common stock, $0.01 par value

 

45,676,827

 



  

 

 

 

EXPLANATORY NOTE

As disclosed in our 2019 Annual Report on Form 10-K, in February 2020, the Audit/Compliance 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. We have restated our consolidated financial statements as of December 31, 2018, and for the years ended December 31, 2018 and 2017 and our unaudited quarterly financial information for the first three quarters in the year ended December 31, 2019 and for each of the quarters in the year ended December 31, 2018 in our Annual Report on Form 10-K for the year ended December 31, 2019 filed on February 22, 2021 to correct misstatements associated with project forecasts in the Heavy Civil operating group (the “Investigation Adjustments”) discovered in connection with the independent Investigation. In addition to the Investigation Adjustments, we corrected additional identified out-of-period and uncorrected misstatements that were not material, individually or in the aggregate, to our consolidated financial statements. We have reflected the impact of the restatement on our unaudited condensed consolidated financial information as of and for the three and six months ended June 30, 2019 herein. See Note 3 of “Notes to the Condensed Consolidated Financial Statements” for additional information.

 

 

 

 

Index

EXPLANATORY NOTE

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements (unaudited)

 

 

Condensed Consolidated Balance Sheets as of June 30, 2020, December 31, 2019 and June 30, 2019

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2020 and 2019

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019

 

 

Notes to the Condensed Consolidated Financial Statements

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

Item 4.

Controls and Procedures

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

Item 1A.

Risk Factors

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Item 4.

Mine Safety Disclosures

 

Item 6.

Exhibits

SIGNATURES

EXHIBIT 10.1

EXHIBIT 31.1

EXHIBIT 31.2

EXHIBIT 32

EXHIBIT 95

EXHIBIT 101.INS

EXHIBIT 101.SCH

EXHIBIT 101.CAL

EXHIBIT 101.DEF

EXHIBIT 101.LAB

EXHIBIT 101.PRE

EXHIBIT 104

  

  

 

PART I. FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

GRANITE CONSTRUCTION INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited - in thousands, except share and per share data)

          

As Restated

 
  

June 30, 2020

  

December 31, 2019

  

June 30, 2019

 

ASSETS

            

Current assets

            

Cash and cash equivalents ($93,500, $78,132, and $115,933 related to consolidated construction joint ventures (“CCJVs”))

 $288,922  $262,273  $144,958 

Short-term marketable securities

     27,799   41,037 

Receivables, net ($31,978, $29,564 and $31,656 related to CCJVs)

  596,922   547,417   564,543 

Contract assets ($26,075, $25,034 and $17,371 related to CCJVs)

  191,919   211,441   224,389 

Inventories

  105,023   88,885   101,686 

Equity in construction joint ventures

  183,542   193,110   220,247 

Other current assets ($14,392, $13,350 and $11,440 related to CCJVs)

  57,614   46,016   80,560 

Total current assets

  1,423,942   1,376,941   1,377,420 
Property and equipment, net ($27,256, $31,136 and $31,560 related to CCJVs)  540,053   542,297   558,378 
Long-term marketable securities  5,896   5,000   20,000 
Investments in affiliates  74,511   84,176   82,109 
Goodwill  248,690   264,279   264,107 
Right of use assets  72,244   72,534   73,439 

Deferred income taxes, net

  40,926   50,158   28,249 
Other noncurrent assets  102,392   106,703   120,915 
Total assets $2,508,654  $2,502,088  $2,524,617 
             

LIABILITIES AND EQUITY

            

Current liabilities

            
Current maturities of long-term debt $8,253  $8,244  $48,397 
Accounts payable ($56,315, $57,795 and $50,338 related to CCJVs)  358,401   400,775   302,651 
Contract liabilities ($69,688, $20,994 and $28,702 related to CCJVs)  159,818   95,737   128,443 

Accrued expenses and other current liabilities ($4,179, $2,415 and $4,311 related to CCJVs)

  363,128   337,300   360,231 
Total current liabilities  889,600   842,056   839,722 
Long-term debt  405,770   356,108   366,896 
Long-term lease liabilities  56,071   58,618   60,868 

Deferred income taxes, net

  3,335   3,754   4,680 
Other long-term liabilities  63,118   63,136   58,268 
Commitments and contingencies (Note 18)                
Equity            

Preferred stock, $0.01 par value, authorized 3,000,000 shares, none outstanding

         
Common stock, $0.01 par value, authorized 150,000,000 shares; issued and outstanding: 45,651,914 shares as of June 30, 2020, 45,503,805 shares as of December 31, 2019 and 46,838,199 shares as of June 30, 2019  458   456   468 
Additional paid-in capital  553,038   549,307   568,264 
Accumulated other comprehensive loss  (5,800)  (2,645)  (2,187)
Retained earnings  520,025   594,353   579,920 
Total Granite Construction Incorporated shareholders’ equity  1,067,721   1,141,471   1,146,465 
Non-controlling interests  23,039   36,945   47,718 
Total equity  1,090,760   1,178,416   1,194,183 
Total liabilities and equity $2,508,654  $2,502,088  $2,524,617 

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

 

 

  GRANITE CONSTRUCTION INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited - in thousands, except per share data)

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
           

As Restated

           

As Restated

 
   

2020

   

2019

   

2020

   

2019

 

Revenue

                               

Transportation

  $ 535,101     $ 481,746     $ 886,002     $ 783,710  

Water

    109,724       112,070       211,381       211,152  

Specialty

    174,914       174,629       307,953       313,753  

Materials

    96,032       97,647       146,362       139,290  

Total revenue

    915,771       866,092       1,551,698       1,447,905  

Cost of revenue

                               

Transportation

    503,904       481,247       829,436       799,559  

Water

    97,145       101,568       189,455       192,704  

Specialty

    149,634       152,874       293,392       278,700  

Materials

    76,745       83,645       127,273       129,046  

Total cost of revenue

    827,428       819,334       1,439,556       1,400,009  

Gross profit

    88,343       46,758       112,142       47,896  

Selling, general and administrative expenses

    91,682       70,998       170,063       151,153  

Acquisition and integration expenses

          9,177             11,025  
Non-cash impairment charges (See Note 4)                 24,413        

Gain on sales of property and equipment

    (1,190 )     (4,935 )     (1,813 )     (6,835 )

Operating loss

    (2,149 )     (28,482 )     (80,521 )     (107,447 )

Other (income) expense

                               

Interest income

    (767 )     (1,728 )     (2,058 )     (4,544 )

Interest expense

    6,549       4,158       11,543       8,172  

Equity in income of affiliates, net

    (2,016 )     (2,594 )     (2,062 )     (3,884 )

Other (income) expense, net

    (3,160 )     (759 )     2,059       (2,521 )

Total other expense (income)

    606       (923 )     9,482       (2,777 )

Loss before benefit from income taxes

    (2,755 )     (27,559 )     (90,003 )     (104,670 )

Benefit from income taxes

    (1,782 )     (5,913 )     (16,492 )     (23,263 )

Net loss

    (973 )     (21,646 )     (73,511 )     (81,407 )

Amount attributable to non-controlling interests

    4,378       (2,596 )     11,546       (5,305 )

Net income (loss) attributable to Granite Construction Incorporated

  $ 3,405     $ (24,242 )   $ (61,965 )   $ (86,712 )
                                 

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

                               

Basic

  $ 0.07     $ (0.52 )   $ (1.36 )   $ (1.85 )

Diluted

  $ 0.07     $ (0.52 )   $ (1.36 )   $ (1.85 )

Weighted average shares of common stock

                               

Basic

    45,620       46,824       45,570       46,762  

Diluted

    46,281       46,824       45,570       46,762  

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

 

  

GRANITE CONSTRUCTION INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited - in thousands)

   

Three Months Ended June 30,

   

Six Months Ended June 30,

           

As Restated

           

As Restated

   
   

2020

   

2019

   

2020

   

2019

   
Net loss   $ (973 )   $ (21,646 )   $ (73,511 )   $ (81,407 )  

Other comprehensive loss, net of tax:

                                 

Net unrealized gain (loss) on derivatives

  $ 265     $ (2,178 )   $ (3,095 )   $ (2,776 )  

Less: reclassification for net losses (gains) included in interest expense

    390       (117 )     440       (290 )  

Net change

  $ 655     $ (2,295 )   $ (2,655 )   $ (3,066 )  

Foreign currency translation adjustments, net

    83       1,179       (500 )     1,618    

Other comprehensive income (loss)

  $ 738     $ (1,116 )   $ (3,155 )   $ (1,448 )  
Comprehensive loss   $ (235 )   $ (22,762 )   $ (76,666 )   $ (82,855 )  

Non-controlling interests in comprehensive income (loss)

    4,378       (2,596 )     11,546       (5,305 )  
Comprehensive income (loss) attributable to Granite Construction Incorporated   $ 4,143     $ (25,358 )   $ (65,120 )   $ (88,160 )  

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

 

  

GRANITE CONSTRUCTION INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited - in thousands, except share data)

  

Outstanding Shares

  

Common Stock

  

Additional Paid-In Capital

  

Accumulated Other Comprehensive (Loss) Income

  

Retained Earnings

  

Total Granite Shareholders’ Equity

  

Non-controlling Interests

  

Total Equity

 

Balances at March 31, 2020

  45,592,292  $457  $551,189  $(6,538) $522,639  $1,067,747  $32,057  $1,099,804 

Net income (loss)

              3,405   3,405   (4,378)  (973)

Other comprehensive income

           738      738      738 

Purchases of common stock (1)

  (4,211)     (73)        (73)     (73)
Restricted Stock Units (“RSUs”) vested  29,305   1   (1)               

Dividends on common stock ($0.13 per share)

              (5,935)  (5,935)     (5,935)

Transactions with non-controlling interests

                    (4,640)  (4,640)
Amortized RSUs and other  34,528      1,923      (84)  1,839      1,839 

Balances at June 30, 2020

  45,651,914  $458  $553,038  $(5,800) $520,025  $1,067,721  $23,039  $1,090,760 
                                 

Balances at March 31, 2019 (As Restated)

  46,812,366  $468  $566,497  $(1,081) $610,302  $1,176,186  $48,333  $1,224,519 

Net (loss) income

              (24,242)  (24,242)  2,596   (21,646)

Other comprehensive loss

           (1,116)     (1,116)     (1,116)

Purchases of common stock (1)

  (1,987)     (81)        (81)     (81)

RSUs vested

  17,443                      

Dividends on common stock ($0.13 per share)

              (6,089)  (6,089)     (6,089)
Transactions with non-controlling interests                    (3,210)  (3,210)

Amortized RSUs and other

  10,377      1,848   10   (51)  1,807   (1)  1,806 
Balances at June 30, 2019 (As Restated)  46,838,199  $468  $568,264  $(2,187) $579,920  $1,146,465  $47,718  $1,194,183 
                                 

Balances at December 31, 2019

  45,503,805  $456  $549,307  $(2,645) $594,353  $1,141,471  $36,945  $1,178,416 

Net loss

              (61,965)  (61,965)  (11,546)  (73,511)

Other comprehensive loss

           (3,155)     (3,155)     (3,155)

Purchases of common stock (1)

  (53,921)     (727)        (727)     (727)

RSUs vested

  168,360   2   (2)               

Dividends on common stock ($0.13 per share)

              (11,862)  (11,862)     (11,862)

Effect of adopting Topic 326 (Note 2)

              (366)  (366)     (366)
Transactions with non-controlling interests                    (2,360)  (2,360)
Amortized RSUs and other  33,670      4,460      (135)  4,325      4,325 

Balances at June 30, 2020

  45,651,914  $458  $553,038  $(5,800) $520,025  $1,067,721  $23,039  $1,090,760 
                                 

Balances at December 31, 2018

  46,665,889  $467  $564,559  $(749) $679,453  $1,243,730  $45,624  $1,289,354 

Net (loss) income

              (86,712)  (86,712)  5,305   (81,407)

Other comprehensive loss

           (1,448)     (1,448)     (1,448)

Purchases of common stock (1)

  (88,091)  (1)  (3,947)        (3,948)     (3,948)

RSUs vested

  251,393   2            2      2 

Dividends on common stock ($0.13 per share)

              (12,175)  (12,175)     (12,175)

Effect of adopting Topic 842

              (539)  (539)     (539)
Transactions with non-controlling interests                    (3,209)  (3,209)

Amortized RSUs and other

  9,008      7,652   10   (107)  7,555   (2)  7,553 
Balances at June 30, 2019 (As Restated)  46,838,199  $468  $568,264  $(2,187) $579,920  $1,146,465  $47,718  $1,194,183 

(1) Represents shares purchased in connection with employee tax withholding for RSUs vested under our 2012 Equity Incentive Plan. 

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

 

  

GRANITE CONSTRUCTION INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited - in thousands)

      

As Restated

 

Six Months Ended June 30,

 

2020

  

2019

 

Operating activities

        
Net loss $(73,511) $(81,407)

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

        

Depreciation, depletion and amortization

  57,269   61,747 

Amortization related to the 2.75% Convertible Notes (See Note 14)

  4,255    

Gain on sales of property and equipment, net

  (1,813)  (6,835)

Stock-based compensation

  3,936   7,221 

Equity in net loss from unconsolidated joint ventures

  30,506   72,835 

Net income from affiliates

  (2,062)  (3,884)
Non-cash impairment charges (See Note 4)  24,413    

Other non-cash adjustments

  1,832   4,627 

Changes in assets and liabilities:

        

Receivables

  (35,486)  (79,090)

Contract assets, net

  83,065   (20,426)

Inventories

  (16,138)  (12,329)

Contributions to unconsolidated construction joint ventures and affiliates

  (24,223)  (45,500)

Distributions from unconsolidated construction joint ventures and affiliates

  7,146   830 

Other assets, net

  (14,603)  (32,785)

Accounts payable

  (44,103)  42,477 

Accrued expenses and other current liabilities, net

  12,000   (996)

Net cash provided by (used in) operating activities

  12,483   (93,515)

Investing activities

        
Purchases of marketable securities  (4,996)   
Proceeds from called marketable securities  20,000    

Maturities of marketable securities

  10,000   5,000 

Purchases of property and equipment

  (52,236)  (54,354)

Proceeds from sales of property and equipment

  7,278   7,870 

Cash paid to purchase businesses, net of cash and restricted cash acquired

     (6,227)

Other investing activities, net

  (1,453)  (215)
Net cash used in investing activities  (21,407)  (47,926)

Financing activities

        

Proceeds from debt

  50,000   75,499 

Debt principal repayments

  (4,212)  (43,842)

Cash dividends paid

  (11,842)  (12,152)

Repurchases of common stock

  (728)  (3,948)

Contributions from non-controlling partners

  5,500    
Distributions to non-controlling partners  (7,860)  (3,200)

Other financing activities, net

  392   1,238 

Net cash provided by financing activities

  31,250   13,595 
Net increase (decrease) in cash, cash equivalents and restricted cash  22,326   (127,846)

Cash, cash equivalents and $5,835 and $5,825 restricted cash at beginning of period

  268,108   278,629 
Cash, cash equivalents and $1,512 and $5,825 restricted cash at end of period $290,434  $150,783 

Supplementary Information

        

Right of use assets obtained in exchange for lease obligations

 $8,804  $9,835 

Cash paid for operating lease liabilities

  10,601   8,811 

Cash paid during the period for:

        

Interest

 $8,874  $8,381 

Income taxes

  937   11,463 

Non-cash investing and financing activities:

        

RSUs issued, net of forfeitures

 $4,834  $8,541 

Accrued cash dividends

  5,935   6,089 

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

 

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation

The condensed consolidated financial statements included herein have been prepared by Granite Construction Incorporated (“we,” “us,” “our,” “the Company” or “Granite”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), are unaudited and should be read in conjunction with our Annual Report on Form 10-K for the year ended  December 31, 2019. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. Further, the condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to state fairly our financial position at  June 30, 2020 and 2019 and the results of our operations and cash flows for the periods presented. The  December 31, 2019 condensed consolidated balance sheet data included herein was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP.

Our operations are typically affected more by weather conditions during the first and fourth quarters of our fiscal year which may alter our construction schedules and can create variability in our revenues and profitability. Therefore, the results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the full year.

We prepared the accompanying condensed consolidated financial statements on the same basis as our annual consolidated financial statements, except for the adoption during the three months ended March 31, 2020 of Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement and ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, neither of which had a material impact on our condensed consolidated financial statements. In addition, effective January 1, 2020, we adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and ASU No. 2019-05, Credit Losses (Topic 326): Targeted Transition Relief, the impact of which is described in Note 2.

Cash, Cash Equivalents and Restricted Cash: The table below presents changes in cash, cash equivalents and restricted cash on the condensed consolidated statements of cash flows and a reconciliation to the amounts reported in the condensed consolidated balance sheets (in thousands):

Six months ended June 30,

 

2020

  

2019

 

Cash, cash equivalents and restricted cash, beginning of period

 $268,108  $278,629 

End of the period

        

Cash and cash equivalents

  288,922   144,958 

Restricted cash

  1,512   5,825 

Total cash, cash equivalents and restricted cash, end of period

  290,434   150,783 

Net increase (decrease) in cash, cash equivalents and restricted cash

 $22,326  $(127,846)

 

9

 

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

2. Recently Issued and Adopted Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments resulting in accounting for convertible debt instruments as a single liability measured at its amortized cost. This change will also reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules. In addition, the ASU requires the application of the if-converted method for calculating diluted earnings per share and eliminates the treasury stock method. The ASU is effective commencing with our quarter ended March 31, 2022, with early adoption permitted. We are currently evaluating the impact of ASU 2020-06 on our condensed consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for the effects of the transition away from LIBOR and other reference rates. This ASU was effective commencing with our quarter ended March 31, 2020 through December 31, 2022 and we expect to adopt in 2021. We do not expect the adoption of this ASU to have an impact on our condensed consolidated financial statements as our Credit Agreement (as defined in Note 14 below) uses the secured overnight financing rate as an alternative to LIBOR.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and in May 2019 issued ASU No. 2019-05, Credit Losses (Topic 326): Targeted Transition Relief (collectively referred to as “Topic 326”). Topic 326 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. We adopted Topic 326 effective January 1, 2020, recognizing a net cumulative decrease to retained earnings of approximately $0.5 million. Topic 326 was applicable to the following financial assets: short and long-term marketable securities, receivables, contract assets and long-term notes receivables included in other noncurrent assets in our condensed consolidated balance sheets. We elected to estimate the expected credit losses using a loss rate method that was applied to groups of assets categorized based on similar risk characteristics. The loss rate was based on historical losses and other information available to management. To account for the measurement of expected credit losses an allowance for credit losses was required for receivables and contract assets and was not required for any other applicable financial asset. As of June 30, 2020, $1.8 million was deducted primarily from receivables to present the net amount expected to be collected. 

In connection with the adoption of Topic 326, we implemented the following accounting policy as of January 1, 2020:

Allowance for Credit Losses: Financial assets, which potentially subject us to credit losses, consist primarily of short and long-term marketable securities, receivables, contract assets and long-term notes receivables included in other noncurrent assets in our consolidated balance sheets. We measure expected credit losses of financial assets based on historical loss and other information available to management using a loss rate method applied to asset groups with categorically similar risk characteristics. These expected credit losses are recorded to an allowance for credit losses valuation account that is deducted from receivables and contract assets to present the net amount expected to be collected on the financial asset on the consolidated balance sheet.

10

  

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

3.  Restatement

Restatement Background

As disclosed in our 2019 Annual Report on Form 10-K, in February 2020, the Audit/Compliance 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. We have restated our consolidated financial statements as of December 31, 2018, and for the years ended December 31, 2018 and 2017 and our unaudited quarterly financial information for the first three quarters in the year ended December 31, 2019 and for each of the quarters in the year ended December 31, 2018 in our Annual Report on Form 10-K for the year ended December 31, 2019 to correct misstatements associated with project forecasts in the Heavy Civil operating group (the “Investigation Adjustments”) discovered in connection with the independent Investigation. In addition to the Investigation Adjustments, we corrected additional identified out-of-period and uncorrected misstatements that were not material, individually or in the aggregate, to our consolidated financial statements (the “Other Adjustments”). We have reflected the impact of the restatement on our unaudited condensed consolidated financial information as of and for the three and six months ended June 30, 2019 herein.

Description of Restatement Tables

We have presented below a reconciliation from the previously reported to the restated values as of and for the three and six months ended June 30, 2019. The previously reported values were derived from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 filed on August 6, 2019 and are labeled as “As Previously Reported” in the following tables. The account balances labeled as “Investigation Adjustments” represent effects of adjustments resulting from the Investigation. The account balances labeled as “Other Adjustments” represent the effects of other adjustments, which related to revisions in estimates in projects primarily impacting revenue and cost of revenue in the Transportation segment as a result of out-of-period or uncorrected misstatements in previously filed financial statements that were not material, individually or in the aggregate, to those previously filed financial statements, balance sheet reclassifications and other immaterial adjustments.

The impacts to the condensed consolidated statements of shareholders’ equity and comprehensive (loss) income as a result of the restatement were due to the changes in net income for the three and six months ended June 30, 2019. In addition, there was no impact to net cash used in investing and financing activities for the six months ended June 30, 2019 as a result of the restatement.

The effects of the prior-period misstatements on our consolidated financial statements are as follows (in thousands, except per share data):

Consolidated Balance Sheet

June 30, 2019

 

As Previously Reported

  

Investigation Adjustments

  

Other Adjustments

  

As Restated

 

ASSETS

                

Current assets

                

Cash and cash equivalents

 $144,958  $  $  $144,958 

Short-term marketable securities

  41,037         41,037 

Receivables, net

  551,958   10,567   2,018   564,543 

Contract assets

  257,650   (30,286)  (2,975)  224,389 

Inventories

  102,163      (477)  101,686 

Equity in construction joint ventures

  241,786   (18,401)  (3,138)  220,247 

Other current assets

  63,056   16,919   585   80,560 

Total current assets

  1,402,608   (21,201)  (3,987)  1,377,420 

Property and equipment, net

  557,118      1,260   558,378 

Long-term marketable securities

  20,000         20,000 

Investments in affiliates

  82,109         82,109 

Goodwill

  264,107         264,107 

Right of use assets

  73,439         73,439 

Deferred income taxes, net

  36,055   (8,580)  774   28,249 

Other noncurrent assets

  122,705      (1,790)  120,915 

Total assets

 $2,558,141  $(29,781) $(3,743) $2,524,617 
                 

LIABILITIES AND EQUITY

                

Current liabilities

                

Current maturities of long-term debt

 $48,397  $  $  $48,397 

Accounts payable

  303,128      (477)  302,651 

Contract liabilities

  119,289   9,154      128,443 

Accrued expenses and other current liabilities

  339,047   21,184      360,231 

Total current liabilities

  809,861   30,338   (477)  839,722 

Long-term debt

  366,896         366,896 

Long-term lease liabilities

  60,868         60,868 

Deferred income taxes, net

  4,680         4,680 

Other long-term liabilities

  58,268         58,268 

Commitments and contingencies

                    

Equity

                

Preferred stock, $0.01 par value, authorized 3,000,000 shares, none outstanding

            

Common stock, $0.01 par value, authorized 150,000,000 shares; issued and outstanding: 46,838,199 shares as of June 30, 2019

  468         468 

Additional paid-in capital

  568,264         568,264 

Accumulated other comprehensive (loss) income

  (3,448)     1,261   (2,187)

Retained earnings

  642,124   (58,719)  (3,485)  579,920 

Total Granite Construction Incorporated shareholders’ equity

  1,207,408   (58,719)  (2,224)  1,146,465 

Non-controlling interests

  50,160   (1,400)  (1,042)  47,718 

Total equity

  1,257,568   (60,119)  (3,266)  1,194,183 

Total liabilities and equity

 $2,558,141  $(29,781) $(3,743) $2,524,617 

Consolidated Statement of Operations

  

Three Months Ended June 30, 2019

  

Six Months Ended June 30, 2019

 
  

As Previously Reported

  

Investigation Adjustments

  

Other Adjustments

  

As Restated

  

As Reported

  

Investigation Adjustments

  

Other Adjustments

  

As Restated

 

Revenue

                                

Transportation

 $403,978  $76,255  $1,513  $481,746  $742,188  $48,233  $(6,711) $783,710 

Water

  112,831   (728)  (33)  112,070   212,086   (898)  (36)  211,152 

Specialty

  175,084      (455)  174,629   315,777      (2,024)  313,753 

Materials

  97,647         97,647   139,290         139,290 

Total revenue

  789,540   75,527   1,025   866,092   1,409,341   47,335   (8,771)  1,447,905 

Cost of revenue

                                

Transportation

  503,857   (22,610)     481,247   820,817   (16,402)  (4,856)  799,559 

Water

  101,568         101,568   192,704         192,704 

Specialty

  152,874         152,874   278,700         278,700 

Materials

  83,645         83,645   129,046         129,046 

Total cost of revenue

  841,944   (22,610)     819,334   1,421,267   (16,402)  (4,856)  1,400,009 

Gross (loss) profit

  (52,404)  98,137   1,025   46,758   (11,926)  63,737   (3,915)  47,896 

Selling, general and administrative expenses

  69,998      1,000   70,998   151,153         151,153 

Acquisition and integration expenses

  9,177         9,177   12,500      (1,475)  11,025 

Gain on sales of property and equipment

  (4,935)        (4,935)  (6,835)        (6,835)

Operating loss

  (126,644)  98,137   25   (28,482)  (168,744)  63,737   (2,440)  (107,447)

Other (income) expense

                                

Interest income

  (1,728)        (1,728)  (4,544)        (4,544)

Interest expense

  4,158         4,158   8,172         8,172 

Equity in income of affiliates, net

  (2,594)        (2,594)  (3,884)        (3,884)

Other income, net

  (759)        (759)  (2,521)        (2,521)

Total other income

  (923)        (923)  (2,777)        (2,777)

Loss before benefit from income taxes

  (125,721)  98,137   25   (27,559)  (165,967)  63,737   (2,440)  (104,670)

Benefit from income taxes

  (31,760)  25,874   (27)  (5,913)  (40,925)  18,247   (585)  (23,263)

Net loss

  (93,961)  72,263   52   (21,646)  (125,042)  45,490   (1,855)  (81,407)

Amount attributable to non-controlling interests

  (3,875)  1,341   (62)  (2,596)  (7,368)  1,400   663   (5,305)

Net loss attributable to Granite Construction Incorporated

 $(97,836) $73,604  $(10) $(24,242) $(132,410) $46,890  $(1,192) $(86,712)
                                 

Net loss per share attributable to common shareholders

                                

Basic

 $(2.09) $1.57  $(0.00) $(0.52) $(2.83) $1.00  $(0.03) $(1.85)

Diluted

 $(2.09) $1.57  $(0.00) $(0.52) $(2.83) $1.00  $(0.03) $(1.85)

Weighted average shares of common stock

                                

Basic

  46,824   46,824   46,824   46,824   46,762   46,762   46,762   46,762 

Diluted

  46,824   46,824   46,824   46,824   46,762   46,762   46,762   46,762 

Consolidated Statement of Cash Flows

Six Months Ended June 30, 2019

 

As Previously Reported

  

Investigation Adjustments

  

Other Adjustments

  

As Restated

 

Operating activities

                

Net loss

 $(125,042) $45,490  $(1,855) $(81,407)

Adjustments to reconcile net loss to net cash used in operating activities:

                

Depreciation, depletion and amortization

  61,747         61,747 

Gain on sales of property and equipment, net

  (6,835)        (6,835)

Deferred income taxes

  (35,192)  35,189      (3)

Stock-based compensation

  7,221         7,221 

Equity in net loss from unconsolidated joint ventures

  105,834   (60,073)  27,074   72,835 

Net income from affiliates

  (3,884)        (3,884)

Other non-cash adjustments

  4,630         4,630 

Changes in assets and liabilities:

                

Receivables

  (78,081)     (1,009)  (79,090)

Contract assets, net

  (23,775)  (3,687)  7,036   (20,426)

Inventories

  (12,905)     576   (12,329)

Contributions to unconsolidated construction joint ventures

  (45,500)        (45,500)

Distributions from unconsolidated construction joint ventures

  830         830 

Other assets, net

  (15,361)  (16,919)  (505)  (32,785)

Accounts payable

  48,230      (5,753)  42,477 

Accrued expenses and other current liabilities, net

  24,568      (25,564)  (996)

Net cash used in operating activities

 $(93,515) $  $  $(93,515)
 

4.  Impairment Charges

Goodwill

We performed an interim goodwill impairment test on the March 31, 2020 balances of our Water and Mineral Services Group Materials and Specialty reporting units due to an adverse change in the business climate for these reporting units, including a modified relationship with a business partner, increased competition and market consolidation during the three months ended March 31, 2020, exasperated by economic disruption and market conditions associated with the COVID-19 pandemic. These factors led to reductions in the revenue and margin growth rates used in our quantitative goodwill tests. The goodwill impairment test resulted in a $14.8 million impairment charge during the three months ended March 31, 2020 associated with our Water and Mineral Services Group Materials reporting unit and no impairment charge associated with our Water and Minerals Services Group Specialty reporting unit as its estimated fair value exceeded its net book value (i.e., cushion) by over 15%. Interim goodwill impairment tests were not performed on our remaining reporting units as there was no indication of a possible goodwill impairment nor were interim goodwill impairment tests performed on the June 30, 2020 balances as there were no indicators of possible goodwill impairment.

Consistent with our annual impairment test, we calculated the estimated fair values of the Water and Mineral Services Group Materials and Water and Mineral Services Group Specialty reporting units using the discounted cash flows and market multiple methods. Judgments inherent in these methods included 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 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 were based on an assessment of the equity cost of capital and appropriate capital structure for our reporting units. 

Future developments that we are unable to anticipate may require us to further revise the estimated future cash flows, which could adversely affect the fair value of our reporting units in future periods and result in additional impairment charges. The assumptions used in the goodwill impairment tests are classified as Level 3 inputs.

Subsequent Goodwill Impairment Charges

We performed a second interim goodwill impairment test on the September 30, 2020 balances of our Midwest Group Specialty, Water and Mineral Services Group Water and Water and Mineral Services Group Materials reporting units due to the continued impact from an adverse change in the business climate, including reduced market share due to loss of strategic personnel during the three months ended September 30, 2020. These factors led to reductions in the revenue and margin growth rates, and delays in the timing of future cash flows used in our quantitative goodwill tests. The goodwill impairment test resulted in a non-cash impairment charge of an additional $117.9 million and $14.4 million associated with our Water and Mineral Services Group Water and Water and Mineral Services Group Materials reporting units, respectively, during the three months ended September 30, 2020. The goodwill impairment tests for the Midwest Group Specialty reporting unit indicated that their estimated fair values exceeded their net book value (i.e., headroom) by nearly 15%; therefore, no impairment charge was recorded. Interim goodwill impairment tests were not performed on our remaining reporting units as there was no indication of a possible goodwill impairment. We completed our 2020 annual goodwill impairment tests during the quarter ended December 31, 2020 and no additional impairment charge was recorded.

Investment in Affiliates

During the six months ended June 30, 2020, operating costs increased in certain of our foreign entity investments in affiliates which resulted in price increases and therefore a decrease in demand. The effect of this change in business climate on certain investments’ expected future operating cash flows resulted in other than temporary decline in fair value below the carrying value. Therefore, we recorded a non-cash impairment charge of $9.6 million during the six months ended June 30, 2020. The remaining carrying value of the investments of $74.5 million at June 30, 2020 represents the fair value recorded on a nonrecurring basis and is a Level 3 fair value measurement.

 

5.Revisions in Estimates

Our profit recognition related to construction contracts is based on estimates of transaction price and costs to complete each project. These estimates can vary significantly in the normal course of business as projects progress, circumstances develop and evolve, and uncertainties are resolved. Changes in estimates of transaction price and costs to complete may result in the reversal of previously recognized revenue if the current estimate adversely differs from the previous estimate. When we experience significant changes in our estimates, we undergo a process that includes reviewing the nature of the changes to ensure that there are no material amounts that should have been recorded in a prior period rather than as revisions in estimates for the current period. For revisions in estimates, generally we use the cumulative catch-up method for changes to the transaction price that are part of a single performance obligation. Under this method, revisions in estimates are accounted for in their entirety in the period of change. There can be no assurance that we will not experience further changes in circumstances or otherwise be required to revise our estimates in the future. Other than those identified in the 2019 Annual Report on Form 10-K, we did not identify any material amounts that should have been recorded in a prior period for the three and six months ended June 30, 2019. In our review of these changes for the three and six months ended  June 30, 2020, we did not identify any material amounts that should have been recorded in a prior period.

In the normal course of business, we have revisions in estimates, including estimated costs some of which are associated with unresolved affirmative claims and back charges. The estimated or actual recovery related to these estimated costs may be recorded in future periods or may be at values below the associated cost, which can cause fluctuations in the gross profit impact from revisions in estimates.

There was one project with an increase from revisions in estimates which individually had an impact of $5.0 million on gross profit in our Transportation segment during the three months ended June 30, 2019 due to estimated cost recovery from affirmative claims. There were no increases from revisions in estimates, which individually had an impact of $5.0 million or more on gross profit, for the remaining periods presented.

The projects with decreases from revisions in estimates, which individually had an impact of $5.0 million or more on gross profit are summarized as follows (dollars in millions except per share data):

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
      

As Restated

      

As Restated

 
  

2020

  

2019

  

2020

  

2019

 

Number of projects with downward estimate changes

  3   4   5   5 

Range of reduction in gross profit from each project, net

 $5.8 - 16.1  $6.4 - 37.0  $7.4 - 19.8  $7.7 - 37.0 
Decrease to project profitability $30.9  $58.1  $69.8  $93.5 
Increase to net loss $22.9  $44.6  $51.8  $71.8 
Increase to net loss per diluted share $0.50  $0.95  $1.14  $1.53 

Other than one project in our Specialty segment during the three and six months ended June 30, 2020, all decreases were in our Transportation segment and were due to additional costs and lower productivity than originally anticipated as well as weather related costs. The decreases during the three and six months ended June 30, 2019 were in our Transportation segment and were due to increased project completion costs, schedule delays, execution of a significant amount of disputed work as well as an unfavorable court ruling on a designer back charge claim partially offset by an increase in estimated recovery from customer affirmative claims.

 

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

6. Disaggregation of Revenue

The following tables present our disaggregated revenue (in thousands): 

Three Months Ended June 30,

2020

 

Transportation

  

Water

  

Specialty

  

Materials

  

Total

 

California

 $159,022   8,215  $50,965  $52,229  $270,431 

Federal

  1,768   587   23,504      25,859 

Heavy Civil

  187,103   11,173   11,577      209,853 

Midwest

  34,942   152   38,648      73,742 

Northwest

  152,266   2,243   36,787   40,685   231,981 

Water and Mineral Services

     87,354   13,433   3,118   103,905 

Total

 $535,101  $109,724  $174,914  $96,032  $915,771 

 

2019 (As Restated)

 

Transportation

  

Water

  

Specialty

  

Materials

  

Total

 

California

 $138,411  $2,634  $42,982  $50,962  $234,989 

Federal

  50   371   18,523      18,944 

Heavy Civil

  153,760   2,620         156,380 

Midwest

  28,135      39,126      67,261 

Northwest

  161,390   1,349   48,675   40,846   252,260 

Water and Mineral Services

     105,096   25,323   5,839   136,258 

Total

 $481,746  $112,070  $174,629  $97,647  $866,092 

Six Months Ended June 30,

2020

 

Transportation

  

Water

  

Specialty

  

Materials

  

Total

 

California

 $253,954  $13,727  $95,453  $85,496  $448,630 

Federal

  2,166   968   49,995      53,129 

Heavy Civil

  354,529   18,275   15,071      387,875 

Midwest

  59,185   152   50,151      109,488 

Northwest

  216,168   3,900   68,400   55,138   343,606 

Water and Mineral Services

     174,359   28,883   5,728   208,970 

Total

 $886,002  $211,381  $307,953  $146,362  $1,551,698 

 

2019 (As Restated)

 

Transportation

  

Water

  

Specialty

  

Materials

  

Total

 

California

 $207,924  $4,000  $75,137  $74,027  $361,088 

Federal

  77   879   33,725      34,681 

Heavy Civil

  313,502   6,981         320,483 

Midwest

  46,196   84   73,447      119,727 

Northwest

  216,011   2,580   80,867   55,378   354,836 

Water and Mineral Services

     196,628   50,577   9,885   257,090 

Total

 $783,710  $211,152  $313,753  $139,290  $1,447,905 

 

12

  

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

7. Unearned Revenue

The following tables present our unearned revenue as of the respective periods (in thousands):

June 30, 2020

 

Transportation

  

Water

  

Specialty

  

Total

 

California

 $636,385  $61,151  $122,989  $820,525 

Federal

  16,464   861   123,169   140,494 

Heavy Civil

  1,188,587   34,961   233,069   1,456,617 

Midwest

  214,016      112,298   326,314 

Northwest

  571,068   330   89,730   661,128 

Water and Mineral Services

     130,561      130,561 

Total

 $2,626,520  $227,864  $681,255  $3,535,639 

 

March 31, 2020

            

California

 $527,971  $52,136  $94,006  $674,113 

Federal

  18,152   957   131,569   150,678 

Heavy Civil

  1,321,443   41,511   240,060   1,603,014 

Midwest

  208,872   150   140,461   349,483 

Northwest

  614,653   2,868   61,680   679,201 

Water and Mineral Services

     143,539      143,539 

Total

 $2,691,091  $241,161  $667,776  $3,600,028 

 

June 30, 2019 (As Restated)

                

California

 $590,641  $14,382  $119,152  $724,175 

Federal

  80   1,350   146,516   147,946 

Heavy Civil

  1,805,917   14,244      1,820,161 

Midwest

  204,749   110   161,353   366,212 

Northwest

  374,148   710   93,411   468,269 

Water and Mineral Services

     224,720      224,720 

Total

 $2,975,535  $255,516  $520,432  $3,751,483 

 

13

  

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

8. Contract Assets and Liabilities

During the three and six months ended June 30, 2020, we recognized revenue of $18.2 million and $114.0 million, respectively, that was included in the contract liability balances at December 31, 2019. During the three and six months ended June 30, 2019, we recognized revenue of $17.5 million and $114.6 million, respectively, that was included in the contract liability balance at  December 31, 2018.

As a result of changes in contract transaction price related to performance obligations that were satisfied or partially satisfied prior to the end of the periods, we recognized revenue of $70.8 million and $114.7 million during the three and six months ended June 30, 2020, respectively, and $58.6 million and $97.5 million during the three and six months ended June 30, 2019, respectively. The changes in contract transaction price were from items such as executed or estimated change orders and unresolved contract modifications and claims.

As of  June 30, 2020, December 31, 2019 and June 30, 2019, the aggregate claim recovery estimates included in contract asset and liability balances were $60.0 million, $71.1 million and $61.0 million, respectively.

The components of the contract asset balances as of the respective dates were as follows (in thousands):

        As Restated 
  

June 30, 2020

  

December 31, 2019

  

June 30, 2019

 

Costs in excess of billings and estimated earnings

 $73,745  $100,761  $128,239 

Contract retention

  118,174   110,680   96,150 

Total contract assets

 $191,919  $211,441  $224,389 

As of  June 30, 2020, December 31, 2019 and June 30, 2019, no contract retention individually exceeded 10% of total net receivables at any of the presented dates. The majority of the contract retention balance is expected to be collected within one year.

The components of the contract liability balances as of the respective dates were as follows (in thousands):

          As Restated 
  

June 30, 2020

  

December 31, 2019

  

June 30, 2019

 

Billings in excess of costs and estimated earnings, net of retention

 $148,050  $86,736  $119,881 

Provisions for losses

  11,768   9,001   8,562 

Total contract liabilities

 $159,818  $95,737  $128,443 
 

9.  Receivables, net 

Receivables include billed and unbilled amounts for services provided to clients for which we have an unconditional right to payment as of the end of the applicable period and do not bear interest. The following table presents major categories of receivables (in thousands):

        

As Restated

 
   June 30, 2020   December 31, 2019  June 30, 2019 

Contracts completed and in progress:

            

Billed

 $311,550  $299,633  $313,185 

Unbilled

  163,815   149,696   163,950 

Total contracts completed and in progress

  475,365   449,329   477,135 

Material sales

  58,514   42,936   61,204 

Other

  65,462   55,526   26,845 

Total gross receivables

  599,341   547,791   565,184 

Less: allowance for credit losses

  2,419   374   641 

Total net receivables

 $596,922  $547,417  $564,543 

Included in other receivables at  June 30, 2020, December 31, 2019 and June 30, 2019, were items such as estimated recovery from back charge claims, notes receivable, fuel tax refunds and income tax refunds. No such receivables individually exceeded 10% of total net receivables at any of these dates.

14

  

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

10. Fair Value Measurement

The following tables summarize significant assets and liabilities measured at fair value in the condensed consolidated balance sheets on a recurring basis for each of the fair value levels (in thousands):

  

Fair Value Measurement at Reporting Date Using

 

June 30, 2020

 

Level 1

  

Level 2

  

Level 3

  

Total

 

Cash equivalents

                

Money market funds

 $104,704  $  $  $104,704 
Other current assets                
Commodity swap     598      598 

Other noncurrent assets

                

Restricted cash

  1,512         1,512 

Total assets

 $106,216  $598  $  $106,814 

Accrued and other current liabilities

                

Interest rate swap

 $  $9,058  $  $9,058 

Total liabilities

 $  $9,058  $  $9,058 

 

December 31, 2019

                

Cash equivalents

                

Money market funds

 $94,696  $  $  $94,696 

Other noncurrent assets

                

Restricted cash

  5,835         5,835 

Total assets

 $100,531  $  $  $100,531 

Accrued and other current liabilities

                

Interest rate swap

 $  $4,603  $  $4,603 

Total liabilities

 $  $4,603  $  $4,603 

 

June 30, 2019

                

Cash equivalents

                

Money market funds

 $17,790  $  $  $17,790 

Other noncurrent assets

                

Restricted cash

  5,825         5,825 

Total assets

 $23,615  $  $  $23,615 

Accrued and other current liabilities

                

Interest rate swap

 $  $4,985  $  $4,985 

Total liabilities

 $  $4,985  $  $4,985 

 

15

 

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Interest Rate Swaps

In connection with the Third Amended and Restated Credit Agreement (as discussed further in Note 14) we entered into two interest rate swaps designated as cash flow hedges with an effective date of May 2018. The two cash flow hedges had a combined initial notional amount of $150.0 million and mature in May 2023. The interest rate swaps are designed to convert the interest rate on the term loan from a variable interest rate of LIBOR plus an applicable margin to a fixed rate of 2.76% plus the same applicable margin. The interest rate swap is measured at fair value on the consolidated balance sheets using the income approach, which discounts the future net cash settlements expected under the derivative contracts to a present value. These valuations primarily utilize indirectly observable inputs, including contractual terms, interest rates and yield curves observable at commonly quoted intervals.

Other Assets and Liabilities

The carrying values and estimated fair values of financial instruments that are not required to be recorded at fair value in the condensed consolidated balance sheets were as follows:

   

June 30, 2020

  

December 31, 2019

  

June 30, 2019

 

(in thousands)

Fair Value Hierarchy

 

Carrying Value

  

Fair Value

  

Carrying Value

  

Fair Value

  

Carrying Value

  

Fair Value

 

Assets:

                         

Held-to-maturity marketable securities (1)

Level 1

 $5,896  $5,896  $32,799  $32,792  $61,037  $60,887 

Liabilities (including current maturities):

                         

2.75% Convertible Notes (2),(3)

Level 2

 $196,946  $184,554  $193,696  $249,895  $  $ 

Credit Agreement - term loan (2)

Level 3

  135,000   137,116   138,750   139,042   142,500   143,109 

Credit Agreement - revolving credit facility (2)

Level 3

  75,000   76,291   25,000   25,043   220,000   220,597 

2019 Notes (2)

Level 3

              40,000   40,571 

(1) All marketable securities were classified as held-to-maturity and consisted of U.S. Government and agency obligations as of June 30, 2020 and  December 31, 2019, and included corporate bonds as of June 30, 2019.

(2) The fair values of the 2019 Notes, Credit Agreement term loan and revolving credit facility are based on borrowing rates available to us for long-term loans with similar terms, average maturities, and credit risk. The fair value of the 2.75% Convertible Notes is based on the median price of the notes in an active market as of  June 30, 2020 and December 31, 2019. See Note 14 for definitions of, and more information about, the 2019 Notes, Credit Agreement and 2.75% Convertible Notes.

(3) Excluded from the carrying value is $33.1 and $36.3 million debt discount of as of June 30, 2020 and December 31, 2019, respectively, related to the 2.75% Convertible Notes (See note 14).

As disclosed in Note 4, we recorded fair value adjustments related to nonfinancial assets measured at fair value on a nonrecurring basis during the six months ended June 30, 2020. During the three months ended June 30, 2020, we did not record any fair value adjustments related to nonfinancial assets and liabilities measured at fair value on a nonrecurring basis. During the three and six months ended June 30, 2019, we did not record any fair value adjustments related to nonfinancial assets and liabilities measured at fair value on a nonrecurring basis.

 

11. Construction Joint Ventures

We participate in various construction joint ventures. We have determined that certain of these joint ventures are consolidated because they are variable interest entities (“VIEs”) and we are the primary beneficiary. We continually evaluate whether there are changes in the status of the VIEs or changes to the primary beneficiary designation of the VIE. Based on our assessments during the three and six months ended June 30, 2020, we determined no change was required for existing joint ventures.

Due to the joint and several nature of the performance obligations under the related owner contracts, if any of the partners fail to perform, we and the remaining partners, if any, would be responsible for performance of the outstanding work (i.e., we provide a performance guarantee). At  June 30, 2020, there was approximately $2.1 billion of construction revenue to be recognized on unconsolidated and line item construction joint venture contracts of which $0.8 billion represented our share and the remaining $1.3 billion represented our partners’ share. We are not able to estimate amounts that may be required beyond the remaining cost of the work to be performed. These costs could be offset by billings to the customer or by proceeds from our partners’ corporate and/or other guarantees.

Consolidated Construction Joint Ventures (“CCJVs”)

At  June 30, 2020, we were engaged in seven active CCJV projects with total contract values ranging from $0.7 million to $413.8 million and a combined total of $1.6 billion of which our share was $928.5 million. Our share of revenue remaining to be recognized on these CCJVs was $457.5 million and ranged between less than $0.1 million to $188.9 million. Our proportionate share of the equity in these joint ventures was between 50.0% and 65.0%. During the three and six months ended June 30, 2020 total revenue from CCJVs was $86.0 million and $140.7 million, respectively, and during the three and six months ended June 30, 2019, total revenue from CCJVs was $76.5 million and $139.5 million, respectively. During the six months ended June 30, 2020 and 2019, CCJVs provided $19.8 million and used $5.3 million of operating cash flows, respectively.

16

 

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Unconsolidated Construction Joint Ventures

As of  June 30, 2020, we were engaged in ten active unconsolidated joint venture projects with total contract values ranging from $12.1 million to $3.8 billion for a combined total of $11.5 billion of which our share was $3.4 billion. Our proportionate share of the equity in these unconsolidated construction joint ventures ranged from 20.0% to 50.0%. As of  June 30, 2020, our share of the revenue remaining to be recognized on these unconsolidated construction joint ventures was $618.6 million and ranged from $1.2 million to $168.2 million.

The following is summary financial information related to unconsolidated construction joint ventures:

          

As Restated

 

(in thousands)

 

June 30, 2020

  

December 31, 2019

  

June 30, 2019

 

Assets

            

Cash, cash equivalents and marketable securities

 $213,285  $179,049  $225,163 

Other current assets (1)

  948,103   972,840   960,406 

Noncurrent assets

  185,866   207,584   214,238 

Less partners’ interest

  908,274   904,565   929,332 

Granite’s interest (1),(2)

  438,980   454,908   470,475 

Liabilities

            

Current liabilities

  515,113   581,199   530,654 

Less partners’ interest and adjustments (3)

  182,035   243,202   200,517 

Granite’s interest

  333,078   337,997   330,137 

Equity in construction joint ventures (4)

 $105,902  $116,911  $140,338 

(1) Included in this balance and in accrued expenses and other current liabilities on the condensed consolidated balance sheets was $82.3 million, $81.9 million and $88.7 million related to performance guarantees as of June 30, 2020, December 31, 2019 and June 30, 2019, respectively.

(2) Included in this balance as of June 30, 2020, December 31, 2019 and June 30, 2019, was $80.9 million, $116.8 million and $114.1 million, respectively, related to Granite’s share of estimated cost recovery of customer affirmative claims. In addition, this balance included $18.0 million, $15.9 million and $15.1 million related to Granite’s share of estimated recovery of back charge claims as of  June 30, 2020, December 31, 2019 and June 30, 2019, respectively.

(3) Partners’ interest and adjustments includes amounts to reconcile total net assets as reported by our partners to Granite’s interest adjusted to reflect our accounting policies and estimates primarily related to contract forecast differences.
(4) Included in this balance and in accrued expenses and other current liabilities on our condensed consolidated balance sheets was $77.6 million, $76.2 million and $79.9 million, respectively, related to deficits in unconsolidated construction joint ventures, which includes provisions for losses, as of  June 30, 2020, December 31, 2019 and June 30, 2019.
 
  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
      

As Restated

     

As Restated

 
(in thousands)  2020  2019   2020  2019 

Revenue

                

Total

 $384,461  $436,071  $446,491  $852,005 

Less partners’ interest and adjustments (1)

  287,639   334,500   265,967   639,918 

Granite’s interest

  96,822   101,571   180,524   212,087 

Cost of revenue

                

Total

  356,755   456,484   585,215   867,969 

Less partners’ interest and adjustments (1)

  241,560   302,604   374,303   583,031 

Granite’s interest

  115,195   153,880   210,912   284,938 

Granite’s interest in gross loss

 $(18,373) $(52,309) $(30,388) $(72,851)

(1) Partners’ interest and adjustments includes amounts to reconcile total revenue and total cost of revenue as reported by our partners to Granite’s interest adjusted to reflect our accounting policies and estimates primarily related to contract forecast differences.

During the three and six months ended June 30, 2020, unconsolidated construction joint venture net income/(loss) was $27.5 million and $(138.5) million, respectively, of which our share was net loss of $(18.7) million and $(30.5) million, respectively. During the three and six months ended June 30, 2019, unconsolidated net loss was $(18.9) million and $(13.7) million, respectively, of which our share was net loss of $(52.5) million and $(72.8) million, respectively. The differences between our share of the joint venture net loss when compared to the joint venture net income/(loss) primarily resulted from differences between our estimated total revenue and cost of revenue when compared to that of our partners’ on five and four projects during 2020 and 2019, respectively. The differences are due to timing differences from varying accounting policies and in public company quarterly reporting requirements. These joint venture net income/(loss) amounts exclude our corporate overhead required to manage the joint ventures and include taxes only to the extent the applicable states have joint venture level taxes.

Line Item Joint Ventures

As of  June 30, 2020, we had four active line item joint venture construction projects with a total contract value of $327.8 million of which our portion was $182.8 million. As of  June 30, 2020, our share of revenue remaining to be recognized on these line item joint ventures was $133.1 million. During the three and six months ended June 30, 2020, our portion of revenue from line item joint ventures was $18.4 million and $31.2 million, respectively. During the three and six months ended June 30, 2019, our portion of revenue from line item joint ventures was $11.8 million and $12.2 million, respectively.

  

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

12. Investments in Affiliates

Our investments in affiliates balance consists of equity method investments in the following types of entities:

(in thousands)

 

June 30, 2020

  

December 31, 2019

  

June 30, 2019

 

Foreign

 $45,487  $55,335  $55,563 

Real estate

  16,578   17,229   17,781 

Asphalt terminal

  12,446   11,612   8,765 

Total investments in affiliates

 $74,511  $84,176  $82,109 

The following table provides summarized balance sheet information for our affiliates accounted for under the equity method on a combined basis:

(in thousands)

 

June 30, 2020

  

December 31, 2019

  

June 30, 2019

 

Current assets

 $122,608  $122,348  $138,564 

Noncurrent assets

  163,790   165,331   182,561 

Total assets

  286,398   287,679   321,125 

Current liabilities

  54,044   48,322   70,435 

Long-term liabilities (1)

  60,714   61,078   70,381 

Total liabilities

  114,758   109,400   140,816 

Net assets

  171,640   178,279   180,309 

Granite’s share of net assets

 $74,511  $84,176  $82,109 

(1)The balance primarily related to local bank debt for equipment purchases and working capital in our foreign affiliates and debt associated with our real estate investments.

Of the $286.4 million of total affiliate assets as of June 30, 2020, we had investments in thirteen foreign entities with total assets ranging from $0.2 million to $72.2 million, three real estate entities with total assets ranging from $8.1 million to $35.1 million and the asphalt terminal entity had total assets of $28.6 million. We have direct and indirect investments in the foreign entities and our percent ownership ranged from 25% to 50% as of June 30, 2020. During the six months ended  June 30, 2020 we recorded an $9.6 million impairment charge related to our investment in foreign affiliates. See Note 4 for further discussion of the impairment charge. The equity method investments in real estate affiliates included $13.2 million, $13.6 million and $14.2 million in residential real estate in Texas as of  June 30, 2020, December 31, 2019 and June 30, 2019, respectively. Our percent ownership in the real estate entities ranged from 18% to 47% as of  June 30, 2020. The remaining balances were in commercial real estate in Texas.  

 

13. Property and Equipment, net

Balances of major classes of assets and total accumulated depreciation and depletion are included in property and equipment, net in the condensed consolidated balance sheets and were as follows:

        

As Restated

 
(in thousands)  June 30, 2020   December 31, 2019  June 30, 2019 

Equipment and vehicles

 $959,083  $947,687  $943,456 

Quarry property

  196,033   188,960   191,972 

Land and land improvements

  135,707   132,531   135,411 

Buildings and leasehold improvements

  121,387   122,316   109,356 

Office furniture and equipment

  69,258   67,991   66,587 

Property and equipment

  1,481,468   1,459,485   1,446,782 

Less: accumulated depreciation and depletion

  941,415   917,188   888,404 

Property and equipment, net

 $540,053  $542,297  $558,378 

 

18

  

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

14. Long-Term Debt and Credit Arrangements

(in thousands)

 

June 30, 2020

  

December 31, 2019

  

June 30, 2019

 

2.75% Convertible Notes

 $196,946  $193,696  $ 

Credit Agreement - term loan

  135,000   138,750   142,500 

Credit Agreement - revolving credit facility

  75,000   25,000   220,000 

2019 Notes

        40,000 

Debt issuance costs and other

  7,077   6,906   12,793 

Total debt

  414,023   364,352   415,293 

Less current maturities

  8,253   8,244   48,397 

Total long-term debt

 $405,770  $356,108  $366,896 

The aggregate minimum principal maturities of long-term debt related to balances at June 30, 2020 excluding debt issuance costs, including current maturities and the $33.1 million unamortized debt discount related to the 2.75% Convertible Notes are as follows: $4.2 million during the remainder of 2020; $8.5 million in 2021; $8.5 million in 2022; $192.3 million in 2023; $231.1 million in 2024; and $7.9 million in 2025 and thereafter.

Credit Agreement

On March 26, 2020, we entered into Amendment No. 3 to the Third Amended and Restated Credit Agreement, which among other things, (i) reduced the revolving credit facility from $350.0 million to $275.0 million; (ii) amended the definition of Applicable Rate; (iii) amended the definition of Consolidated EBITDA which is used in the Consolidated Leverage Ratio financial covenant calculation; and (iv) modified certain financial covenants to allow for investments in certain large projects during 2020.

On June 19, 2020 and November 12, 2020, we entered into Amendments No. 4 and No. 5, respectively, to the Third Amended and Restated Credit Agreement, which, among other things, provided additional timing for the Company to deliver annual and quarterly financial statements. 

On February 19, 2021, we entered into the Limited Waiver and Amendment No. 6 to the Third Amended and Restated Credit Agreement which 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.

We refer to Third Amended and Restated Credit Agreement dated  May 31, 2018 and all subsequent amendments listed above as “Credit Agreement.” 

The Credit Agreement consists of a term loan and a revolving credit facility. 

The term loan requires that Granite repay 1.25% of the original $150.0 million principal balance each quarter until the maturity date, at which point the remaining balance is due. As of each  June 30, 2020, December 31, 2019 and June 30, 2019, $7.5 million of the term loan balance was included in current maturities of long-term debt on the condensed consolidated balance sheets and the remaining $127.5 million, $131.3 million and $135.0 million, respectively, was included in long-term debt.

As of June 30, 2020, the total unused availability under the Credit Agreement was $168.8 million resulting from $31.2 million in issued and outstanding letters of credit and $75.0 million drawn under the revolving credit facility. The letters of credit had expiration dates between October 2020 and  December 2023.

Borrowings under the Credit Agreement bear interest at LIBOR, subject to a 75 basis point floor, or a base rate (at our option), plus an applicable margin based on the Consolidated Leverage Ratio (as defined in the Credit Agreement) calculated quarterly. LIBOR varies based on the applicable loan term, market conditions and other external factors. The applicable margin was 3.00% for loans bearing interest based on LIBOR and 2.00% for loans bearing interest at the base rate at  June 30, 2020. Accordingly, the effective interest rate at  June 30, 2020 using three-month LIBOR and the base rate was 3.75% and 5.25%, respectively, and we elected to use LIBOR for both the term loan and the revolving credit facility.

2.75% Convertible Notes 

In November 2019, we issued an aggregate principal amount of $230.0 million of convertible senior notes (the “2.75% Convertible Notes”) at an interest rate of 2.75% per annum payable semiannually in arrears on May 1 and November 1 of each year, beginning on May 1, 2020 and maturing on November 1, 2024, unless earlier converted, redeemed or repurchased.

As of June 30, 2020 and  December 31, 2019, the carrying amount of the liability component was $196.9 million and $193.7 million, respectively. As of June 30, 2020 and  December 31, 2019, the unamortized debt discount was $33.1 million and $36.3 million, respectively.

On October 29, 2019, in connection with the offering of our 2.75% Convertible Notes, we entered into a purchased equity derivative instrument (“Hedge Option”) and sold warrants to reduce the cost of the Hedge Option. The Hedge Option and warrants were included in additional paid-in capital on the condensed consolidated balance sheets and were $27.9 million and $11.2 million,, respectively, as of  both  June 30, 2020 and December 31, 2019.

On May 4, 2020, the Company notified the Trustee for the 2.75% Convertible Notes that beginning May 5, 2020 until the date on which the Company regained compliance with its filing requirements under section 4.06(d) of the indenture, the Company would pay 0.50% per annum of additional interest to the Noteholders on the November 1st and May 1st semi-annual coupon payment dates. 

2019 Notes

As of June 30, 2019, senior notes payable in the amount of $40.0 million were due to a group of institutional holders, and had an interest rate of 6.11% per annum and were originally due in December 2019 (“2019 Notes”). On July 29, 2019, we called and redeemed the $40.0 million outstanding balance. 

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  June 30, 2020, the Consolidated Leverage Ratio was 2.27, which did not exceed the maximum of 3.25. Our Consolidated Interest Coverage Ratio was 7.89, 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 Annual Report on Form 10-K and all of our 2020 Quarterly Reports on Form 10-Qs to February 28, 2021. 

  

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

15. Leases

We have leases for office and shop space, as well as for equipment primarily utilized in our construction projects. As of  June 30, 2020, our lease contracts were classified as operating leases and had terms ranging from month-to-month to 23 years. As of June 30, 2020, December 31, 2019 and June 30, 2019, right of use (“ROU”) assets and long term lease liabilities were separately presented and short term lease liabilities of $19.0 million, $17.0 million and $15.6 million, respectively, were included in accrued and other current liabilities on our condensed consolidated balance sheets.

As of June 30, 2020, December 31, 2019 and  June 30, 2019, we had no lease contracts that had not yet commenced but created significant rights and obligations.

Lease expense was $5.4 million and $10.6 million during the three and six months ended June 30, 2020, respectively and $4.6 million and $8.9 million during the three and six months ended June 30, 2019, respectively. As of  June 30, 2020, December 31, 2019 and June 30, 2019, our weighted-average remaining lease term was 5.4 years, 5.8 years and 6.3 years, respectively, and the weighted-average discount rate was 3.90%, 3.97% and 4.08%, respectively. As of  June 30, 2020, December 31, 2019 and June 30, 2019, the lease liability was equal to the present value of the remaining lease payments, discounted using the incremental borrowing rate on our secured debt, using one maturity discount rate that is updated quarterly, as it is not materially different than the discount rates applied to each of the leases in the portfolio.

The following table summarizes our undiscounted lease liabilities outstanding as of  June 30, 2020 (in thousands):

Remainder of 2020

 $11,100 

2021

  21,099 

2022

  18,752 

2023

  12,707 

2024

  7,415 

2025 through 2036

  13,600 

Total future minimum lease payments

  84,673 

Less: imputed interest

  (9,578)

Total

 $75,095 

  

20

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

16. Weighted Average Shares Outstanding and Net Income (Loss) Per Share

The following table presents a reconciliation of the weighted average shares outstanding used in calculating basic and diluted net income (loss) per share as well as the calculation of basic and diluted net income (loss) per share:

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
      

As Restated

     

As Restated

 
(in thousands, except per share amounts) 2020  2019  2020  2019 

Numerator (basic and diluted)

                
Net income (loss) allocated to common shareholders for basic calculation $3,405  $(24,242) $(61,965) $(86,712)

Denominator

                

Weighted average common shares outstanding, basic

  45,620   46,824   45,570   46,762 

Dilutive effect of RSUs and 2.75% Convertible Notes (1),(2)

  661          

Weighted average common shares outstanding, diluted

  46,281   46,824   45,570   46,762 
Net income (loss) per share, basic $0.07  $(0.52) $(1.36) $(1.85)
Net income (loss) per share, diluted $0.07  $(0.52) $(1.36) $(1.85)

(1) Due to the net loss, RSUs representing approximately 552,000 for the six months ended June 30, 2020, and RSUs representing approximately 375,000 and 398,000 for the three and six months ended June 30, 2019, respectively, have been excluded from the number of shares used in calculating diluted net loss per share, as their inclusion would be antidilutive. 

(2) As the average price of our common stock was below $31.47 per share since the issuance date of the 2.75% Convertible Notes, the number of shares used in calculating diluted net loss per share for the three and six months ended June 30, 2020 excluded the potential dilution from the 2.75% Convertible Notes converting into shares of common stock.  

 

17.  Income Taxes

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

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
      

2019

     

2019

 
(dollars in thousands)  2020   As Restated   2020   As Restated 

Benefit from income taxes

 $(1,782) $(5,913) $(16,492) $(23,263)

Effective tax rate

  64.7%  21.5%  18.3%  22.2%

Our effective tax rate for the three months ended June 30, 2020 increased to 64.7% from 21.5%, when compared to the same period in 2019. This change was primarily due to the impact of adjusting our estimate of our annual effective tax rate relative to the loss before benefit from income taxes for the three months ended June 30, 2020. Our effective tax rate for the six months ended June 30, 2020 decreased to 18.3% from 22.2%, when compared to the same period in 2019. This change was primarily due to the goodwill impairment and the investment in affiliates impairment which is discrete to the six months ended June 30, 2020 and resulted in no discrete tax benefit. See Note 4 for discussion of the impairment charges.

  

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

18.  Contingencies - 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  June 30, 2020 and 2019 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. 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 June 30, 2020, 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 the 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.

  

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

19. Business Segment Information

Summarized segment information is as follows (in thousands):

Three Months Ended June 30,

   

Transportation

   

Water

   

Specialty

   

Materials

   

Total

 

2020

                                       
Total revenue from reportable segments   $ 535,101     $ 109,724     $ 174,914     $ 141,858     $ 961,597  

Elimination of intersegment revenue

                      (45,826 )     (45,826 )
Revenue from external customers     535,101       109,724       174,914       96,032       915,771  
Gross profit     31,197       12,579       25,280       19,287       88,343  

Depreciation, depletion and amortization

    4,391       9,577       6,737       5,470       26,175  

 

2019 (As Restated)

                                       

Total revenue from reportable segments

  $ 481,746     $ 112,070     $ 174,629     $ 153,343     $ 921,788  

Elimination of intersegment revenue

                      (55,696 )     (55,696 )

Revenue from external customers

    481,746       112,070       174,629       97,647       866,092  

Gross profit

    499       10,502       21,755       14,002       46,758  

Depreciation, depletion and amortization

    4,845       10,931       8,401       6,054       30,231  

Six Months Ended June 30,

   

Transportation

   

Water

   

Specialty

   

Materials

   

Total

 

2020

                                       

Total revenue from reportable segments

  $ 886,002     $ 211,381     $ 307,953     $ 206,510     $ 1,611,846  

Elimination of intersegment revenue

                      (60,148 )     (60,148 )

Revenue from external customers

    886,002       211,381       307,953       146,362       1,551,698  

Gross profit

    56,566       21,926       14,561       19,089       112,142  

Depreciation, depletion and amortization

    9,417       19,141       13,120       10,443       52,121  

Segment assets

    304,312       267,385       123,881       377,909       1,073,487  

 

2019 (As Restated)

                                       

Total revenue from reportable segments

  $ 783,710     $ 211,152     $ 313,753     $ 203,899     $ 1,512,514  

Elimination of intersegment revenue

                      (64,609 )     (64,609 )

Revenue from external customers

    783,710       211,152       313,753       139,290       1,447,905  

Gross (loss) profit

    (15,849 )     18,448       35,053       10,244       47,896  

Depreciation, depletion and amortization

    8,485       21,987       14,213       11,633       56,318  

Segment assets

    329,140       302,143       146,346       379,648       1,157,277  

A reconciliation of segment gross profit (loss) to consolidated income (loss) before provision for (benefit from) income taxes is as follows:

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
           

As Restated

           

As Restated

 

(in thousands)

 

2020

   

2019

   

2020

   

2019

 
Total gross profit from reportable segments   $ 88,343     $ 46,758     $ 112,142     $ 47,896  

Selling, general and administrative expenses

    91,682       70,998       170,063       151,153  
Acquisition and integration expenses           9,177             11,025  
Non-cash impairment charges (See Note 4)                 24,413        

Gain on sales of property and equipment

    (1,190 )     (4,935 )  

(1,813

)     (6,835 )

Total other expense (income)

    606       (923 )     9,482       (2,777 )
Loss before benefit from income taxes   $ (2,755 )   $ (27,559 )   $ (90,003 )   $ (104,670 )

 

23

  
 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Disclosure

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

Overview

We are one of the largest diversified infrastructure companies in the United States, engaged in infrastructure projects including the construction of streets, roads, highways, mass transit facilities, airport infrastructure, bridges, trenchless and underground utilities, power-related facilities, water-related facilities, well drilling, utilities, tunnels, dams and other infrastructure-related projects, site preparation, mining services, and infrastructure services for residential development, energy development, commercial and industrial sites, and other facilities, as well as construction management professional services. We have four reportable business segments: Transportation, Water, Specialty and Materials (see Note 19 of “Notes to the Condensed Consolidated Financial Statements”). In addition to business segments, we review our business by operating groups. Our operating groups are California, Federal, Heavy Civil, Northwest, Midwest and Water and Mineral Services.

The five primary economic drivers of our business are (i) the overall health of the U.S. economy; (ii) federal, state and local public funding levels; (iii) population growth resulting in public and private development; (iv) the need to build, replace or repair aging infrastructure; and (v) the pricing of certain commodity related products. Changes in these drivers can either reduce our revenues and/or gross profit margins or provide opportunities for revenue growth and gross profit margin improvement.

 

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 the 2019 Annual Report on Form 10-K.

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. Therefore, the results of operations of a given quarter are not indicative of the results to be expected for the full year. As described in the Explanatory Note, we have restated our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2019, the impact of which is reflected in the tables below. 

The following table presents a financial summary for the three and six months ended June 30, 2020 and 2019:

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
           

As Restated

           

As Restated

 

(in thousands)

 

2020

   

2019

   

2020

   

2019

 

Total revenue

  $ 915,771     $ 866,092     $ 1,551,698     $ 1,447,905  

Gross profit

    88,343       46,758       112,142       47,896  

Selling, general and administrative expenses

    91,682       70,998       170,063       151,153  
Non-cash impairment charges (See Note 4)                 24,413        

Operating loss

    (2,149 )     (28,482 )     (80,521 )     (107,447 )

Total other expense (income)

    606       (923 )     9,482       (2,777 )

Amount attributable to non-controlling interests

    4,378       (2,596 )     11,546       (5,305 )

Net income (loss) attributable to Granite Construction Incorporated

    3,405       (24,242 )     (61,965 )     (86,712 )

  

 

Revenue

Total Revenue by Segment 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
                   

As Restated

                   

As Restated

 

(dollars in thousands)

 

2020

   

2019

   

2020

   

2019

 

Transportation

  $ 535,101       58.4 %   $ 481,746       55.6 %   $ 886,002       57.2 %   $ 783,710       54.1 %

Water

    109,724       12.0       112,070       12.9       211,381       13.6       211,152       14.6  

Specialty

    174,914       19.1       174,629       20.2       307,953       19.8       313,753       21.7  

Materials

    96,032       10.5       97,647       11.3       146,362       9.4       139,290       9.6  

Total

  $ 915,771       100.0 %   $ 866,092       100.0 %   $ 1,551,698       100.0 %   $ 1,447,905       100.0 %

Transportation Revenue

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
                   

As Restated

                   

As Restated

 

(dollars in thousands)

 

2020

   

2019

   

2020

   

2019

 
California   $ 159,022       29.7 %   $ 138,411       28.8 %   $ 253,954       28.7 %   $ 207,924       26.5 %

Federal

    1,768       0.3       50       0.1       2,166       0.2       77       0.1  

Heavy Civil

    187,103       35.0       153,760       31.9       354,529       40.0       313,502       39.9  

Midwest

    34,942       6.5       28,135       5.8       59,185       6.7       46,196       5.9  

Northwest

    152,266       28.5       161,390       33.4       216,168       24.4       216,011       27.6  

Total

  $ 535,101       100.0 %   $ 481,746       100.0 %   $ 886,002       100.0 %   $ 783,710       100.0 %

Transportation revenue for the three and six months ended June 30, 2020 increased $53.4 million, or 11.1%, and $102.3 million, or 13.1%, respectively, when compared to 2019 primarily due to increases in the Heavy Civil operating group from the decrease in the net negative impact of revisions in estimates when compared to 2019 (see Note 5 of “Notes to the Condensed Consolidated Financial Statements” for more information) as well as from an increase in the California and Midwest operating groups which began the year with higher contract backlog. During the three and six months ended June 30, 2020 and 2019 the majority of revenue earned in the Transportation segment was from the public sector.

Water Revenue

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
                    As Restated                     As Restated  

(dollars in thousands)

 

2020

   

2019

   

2020

   

2019

 

California

  $ 8,215       7.4 %   $ 2,634       2.3 %   $ 13,727       6.5 %   $ 4,000       1.9 %

Federal

    587       0.5       371       0.3       968       0.5       879       0.4  

Heavy Civil

    11,173       10.2       2,620       2.3       18,275       8.6       6,981       3.3  

Midwest

    152       0.1                   152       0.1       84       0.1  

Northwest

    2,243       2.1       1,349       1.2       3,900       1.8       2,580       1.2  

Water and Mineral Services

    87,354       79.7       105,096       93.9       174,359       82.5       196,628       93.1  

Total

  $ 109,724       100.0 %   $ 112,070       100.0 %   $ 211,381       100.0 %   $ 211,152       100.0 %

Water revenue for the three and six months ended June 30, 2020 decreased by $2.3 million, or 2.1%, and $0.2 million, or 0.1%, respectively, when compared to 2019 primarily due to decreases in the Water and Mineral Services operating group from delays in recently awarded projects and deferrals in bidding processes as a result of the COVID-19 pandemic. Decreases were partially offset by increases in the Heavy Civil and California operating groups from beginning the year with higher contract backlog. During the three and six months ended June 30, 2020 and 2019 the majority of revenue earned in the Water segment was from the public sector.

Specialty Revenue

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
                    As Restated                     As Restated  

(dollars in thousands)

 

2020

   

2019

   

2020

   

2019

 

California

  $ 50,965       29.1 %   $ 42,982       24.6 %   $ 95,453       31.0 %   $ 75,137       24.0 %

Federal

    23,504       13.4       18,523       10.6       49,995       16.2 %     33,725       10.7  
Heavy Civil     11,577       6.6                   15,071       4.9 %            

Midwest

    38,648       22.1       39,126       22.4       50,151       16.3       73,447       23.4  

Northwest

    36,787       21.1       48,675       27.9       68,400       22.2       80,867       25.8  

Water and Mineral Services

    13,433       7.7       25,323       14.5       28,883       9.4       50,577       16.1  

Total

  $ 174,914       100.0 %   $ 174,629       100.0 %   $ 307,953       100.0 %   $ 313,753       100.0 %

Specialty revenue decreased by $0.3 million, or 0.2% for the three months ended June 30, 2020 and increased by $5.8 million, or 1.8%, for the six months ended June 30, 2020 when compared to 2019. Increases during six months ended June 30, 2020 were primarily due to increases in the California and Federal operating groups which began the year with higher contract backlog as well as from new awards in 2020 in the Federal and Heavy Civil operating groups. Increases during the six months ended June 30, 2020 were partially offset by decreases in the Water and Mineral Services from reduced activities as a result of the COVID-19 pandemic and Midwest operating group which began the year with lower contract backlog. Decreases in the Water and Mineral Services from reduced activities as a result of the COVID-19 pandemic and in the Midwest operating group which began the year with lower contract backlog contributed to the changes during the three and the six months ended June 30, 2020.

During the three and six months ended June 30, 2020 and 2019 revenue earned in the Specialty segment was from both the public and private sectors.

Materials Revenue 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

(dollars in thousands)

 

2020

   

2019

   

2020

   

2019

 

California

  $ 52,229       54.4 %   $ 50,962       52.2 %   $ 85,496       58.4 %   $ 74,027       53.1 %

Northwest

    40,685       42.4       40,846       41.8       55,138       37.7       55,378       39.8  

Water and Mineral Services

    3,118       3.2       5,839       6.0       5,728       3.9       9,885       7.1  

Total

  $ 96,032       100.0 %   $ 97,647       100.0 %   $ 146,362       100.0 %   $ 139,290       100.0 %

Materials revenue for the three months ended June 30, 2020 remained relatively unchanged and increased by $7.1 million, or 5.1%, for the six months ended June 30, 2020 when compared to 2019 primarily due to an increase in volume as a result of favorable weather during 2020 in the California operating group as compared to 2019.

 

 

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. Awarded contracts that include unexercised contract options or unissued task orders are included in contract backlog to the extent option exercise or task order issuance is probable. Substantially all of the contracts in our contract backlog may be canceled or modified at the election of the customer; however, we have not been materially adversely affected by contract cancellations or modifications in the past.

Total Contract Backlog by Segment 

                As Restated  
(dollars in thousands)   June 30, 2020     March 31, 2020     June 30, 2019  

Transportation

  $ 2,633,936       74.3 %   $ 2,700,336       74.2 %   $ 2,993,825       77.2 %

Water

    232,133       6.5       241,161       6.6       320,209       8.3  

Specialty

    681,255       19.2       700,588       19.2       562,239       14.5  

Total

  $ 3,547,324       100.0 %   $ 3,642,085       100.0 %   $ 3,876,273       100.0 %

Transportation Contract Backlog 

                As Restated  
(dollars in thousands)   June 30, 2020     March 31, 2020     June 30, 2019  

Unearned revenue

  $ 2,626,520       99.7 %   $ 2,691,091       99.7 %   $ 2,975,535       99.4 %

Other awards (1)

    7,416       0.3       9,245       0.3       18,290       0.6  

Total

  $ 2,633,936       100.0 %   $ 2,700,336       100.0 %   $ 2,993,825       100.0 %

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

                As Restated  
(dollars in thousands)   June 30, 2020     March 31, 2020     June 30, 2019  

California

  $ 641,708       24.4 %   $ 530,657       19.7 %   $ 594,545       19.9 %

Federal

    16,464       0.6       18,152       0.7       80       0.1  

Heavy Civil

    1,188,678       45.1       1,321,442       48.9       1,805,917       60.2  

Midwest

    214,016       8.1       208,872       7.7       204,749       6.8  

Northwest

    573,070       21.8       621,213       23.0       388,534       13.0  

Total

  $ 2,633,936       100.0 %   $ 2,700,336       100.0 %   $ 2,993,825       100.0 %

Transportation contract backlog of $2.6 billion at June 30, 2020 was $66.4 million, or 2.5%, lower than at March 31, 2020 primarily due to progress on existing projects in the Heavy Civil and Northwest operating groups, partially offset by a higher success rate on bidding activity in California and Midwest operating groups. Significant new awards during the three months ended June 30, 2020 included a $79.0 million highway reconstruction project and a $10.0 million highway paving project both in California.

Non-controlling partners’ share of Transportation contract backlog as of June 30, 2020, March 31, 2020 and June 30, 2019 was $280.0 million, $295.4 million and $196.9 million, respectively. Four contracts in our Transportation segment with recorded forecasted losses had remaining revenue of $422.1 million, or 16.0%, of Transportation contract backlog at June 30, 2020.

 

Water Contract Backlog 

                As Restated  
(dollars in thousands)   June 30, 2020     March 31, 2020     June 30, 2019  

Unearned revenue

  $ 227,864       98.2 %   $ 241,161       100.0 %   $ 255,516       79.8 %

Other awards (1)

    4,269       1.8                   64,693       20.2  

Total

  $ 232,133       100.0 %   $ 241,161       100.0 %   $ 320,209       100.0 %

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

                As Restated  
(dollars in thousands)   June 30, 2020     March 31, 2020     June 30, 2019  

California

  $ 61,151       26.3 %   $ 52,136       21.6 %   $ 14,382       4.5 %

Federal

    861       0.4       957       0.4 %     1,350       0.4  

Heavy Civil

    34,961       15.1       41,511       17.2 %     53,327       16.7  

Midwest

                150       0.1 %     110        

Northwest

    330       0.1       2,868       1.2 %     710       0.2  

Water and Mineral Services

    134,830       58.1       143,539       59.5 %     250,330       78.2  

Total

  $ 232,133       100.0 %   $ 241,161       100.0 %   $ 320,209       100.0 %

Water contract backlog of $232.1 million as of June 30, 2020 was $9.0 million, or 3.7%, lower than at March 31, 2020. Decreases in the Water and Mineral Services and Heavy Civil operating groups from progress on existing projects was partially offset by an increase in the California operating group from new awards.

Specialty Contract Backlog 

                As Restated  
(dollars in thousands)   June 30, 2020     March 31, 2020     June 30, 2019  

Unearned revenue

  $ 681,255       100.0 %   $ 667,776       95.2 %   $ 520,432       92.6 %

Other awards (1)

                32,812       4.8       41,807       7.4  

Total

  $ 681,255       100.0 %   $ 700,588       100.0 %   $ 562,239       100.0 %

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

                As Restated  
(dollars in thousands)   June 30, 2020     March 31, 2020     June 30, 2019  

California

  $ 122,989       18.0 %   $ 109,016       15.5 %   $ 127,930       22.7 %

Federal

    123,169       18.1       139,480       19.9       146,516       26.1  

Heavy Civil

    233,068       34.2       240,059       34.3              

Midwest

    112,299       16.5       142,680       20.4       185,886       33.1  

Northwest

    89,730       13.2       69,353       9.9       101,907       18.1  

Total

  $ 681,255       100.0 %   $ 700,588       100.0 %   $ 562,239       100.0 %

Specialty contract backlog of $681.3 million as of June 30, 2020 was $19.3 million, or 2.8%, lower than at March 31, 2020 due to progress on existing projects in the Federal and Midwest operating groups partially offset by an increase in the Northwest operating group from a higher success rate on bidding activity. 

Non-controlling partners’ share of Specialty contract backlog as of June 30, 2020, March 31, 2020 and June 30, 2019 was $71.0 million, $84.3 million and $94.6 million, respectively.

 

Gross Profit (Loss)

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

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
           

As Restated

   

2020

   

As Restated

 

(dollars in thousands)

 

2020

   

2019

           

2019

 

Transportation

  $ 31,197     $ 499     $ 56,566     $ (15,849 )

Percent of segment revenue

    5.8

%

    0.1 %     6.4

%

    (2.0 )%

Water

    12,579       10,502       21,926       18,448  

Percent of segment revenue

    11.5       9.4       10.4       8.7  

Specialty

    25,280       21,755       14,561       35,053  

Percent of segment revenue

    14.5       12.5       4.7       11.2  

Materials

    19,287       14,002       19,089       10,244  

Percent of segment revenue

 

20.1

      14.3       13.0       7.4  

Total gross profit (loss)

  $ 88,343     $ 46,758     $ 112,142     $ 47,896  

Percent of total revenue

    9.6

%

    5.4 %     7.2

%

    3.3 %

Transportation gross profit for the three and six months ended June 30, 2020 increased by $30.7 million, or more than 100%, and $72.4 million, or more than 100%, respectively, when compared to gross loss in 2019 primarily due to a decrease in the negative net impact from revisions in estimates in our Heavy Civil operating group (see Note 5 of “Notes to the Condensed Consolidated Financial Statements”).

Water gross profit for the three and six months ended June 30, 2020 increased by $2.1 million, or 19.8%, and $3.5 million, or 18.9%, respectively, when compared to 2019 primarily due to reduction in cost from lower volume. 

Specialty gross profit for the three months ended June 30, 2020 increased by $3.5 million, or 16.2% and $20.5 million, or 58.5%, for the six months ended June 30, 2020 when compared to 2019 primarily from the net negative impact from revisions in estimates during the six months ended June 30, 2020 on a tunnel project (see Note 5 of “Notes to the Condensed Consolidated Financial Statements”).

Materials gross profit for the three and six months ended June 30, 2020 increased by $5.3 million, or 37.7%, and $8.8 million, or 86.3%, respectively, when compared to 2019 due to an increase in volume from favorable weather during 2020 as compared to 2019.

 

Selling, General and Administrative Expenses

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

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
           

As Restated

               

(dollars in thousands)

 

2020

   

2019

   

2020

   

2019

 

Selling

                               

Salaries and related expenses

  $ 17,351     $ 15,466     $ 33,917     $ 32,454  

Restricted stock unit amortization

    306       237       738       1,346  

Other selling expenses

    1,861       3,993       6,571       7,092  

Total selling

    19,518       19,696       41,226       40,892  

General and administrative

                               

Salaries and related expenses

    26,779       24,972       54,914       50,916  

Restricted stock unit amortization

    703       658       2,122       5,479  
Non-recurring legal and accounting fees     13,549             18,714        

Other general and administrative expenses

    31,133       25,672       53,087       53,866  

Total general and administrative

    72,164       51,302       128,837       110,261  

Total selling, general and administrative

  $ 91,682     $ 70,998     $ 170,063     $ 151,153  

Percent of revenue

    10.0

%

    8.2

%

    11.0

%

    10.4

%

Selling Expenses

Selling expenses include the costs for estimating and bidding including customer reimbursements for portions of our selling/bid submission expenses (i.e. stipends), business development and materials facility permits. Selling expenses can vary depending on the volume of projects in process and the number of employees assigned to estimating and bidding activities. As projects are completed or the volume of work slows down, we temporarily redeploy project employees to bid on new projects, moving their salaries and related costs from cost of revenue to selling expenses. Selling expenses remained relatively unchanged during both the three and six months ended June 30, 2020 when compared to 2019.

General and Administrative Expenses

General and administrative expenses include costs related to our operational offices that are not allocated to direct contract costs and expenses related to our corporate functions. Other general and administrative expenses include travel and entertainment, outside services, information technology, depreciation, occupancy, training, office supplies, changes in the fair market value of our Non-Qualified Deferred Compensation plan liability and other miscellaneous expenses. Total general and administrative expenses during the three and six months ended June 30, 2020 increased $20.9 million, or 40.7%, and $18.6 million, or 16.8%, respectively, when compared to 2019 due to legal and accounting fees incurred during the six months ended June 30, 2020 that were related to the independent Investigation undertaken by the Audit Committee starting in February 2020. 

 

Income Taxes 

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

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
           

2019

         

2019

 
(dollars in thousands)     2020       As Restated       2020       As Restated  

Benefit from income taxes

  $ (1,782 )   $ (5,913 )   $ (16,492 )   $ (23,263 )

Effective tax rate

    64.7 %     21.5 %     18.3 %     22.2 %

We calculate our income tax provision at the end of each interim period by estimating our annual effective tax rate and applying that rate to our income (loss) before provision for (benefit from) income taxes. The effect of changes in enacted tax laws, tax rates or tax status is recognized in the interim period in which the change occurs. See Note 17 of “Notes to the Condensed Consolidated Financial Statements” for more information.

Certain Legal Proceedings

As discussed in Note 18 of “Notes to the Condensed Consolidated Financial Statements,” under certain circumstances the resolution of certain legal proceedings to which we are subject could have direct or indirect consequences that could have a material adverse effect on our financial position, results of operations, cash flows and/or liquidity.

Liquidity and Capital Resources

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. As of June 30, 2020, 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 $275.0 million revolving credit facility capacity, $168.8 million was available for borrowing at June 30, 2020. See Note 14 of “Notes to the Condensed Consolidated Financial Statements” for further discussion regarding our 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 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 operating requirements for the next twelve months from the date of this filing. 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 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:

(in thousands)

 

June 30, 2020

   

December 31, 2019

   

June 30, 2019

 

Cash and cash equivalents excluding CCJVs

  $ 195,422     $ 184,141     $ 29,025  

CCJV cash and cash equivalents (1)

    93,500       78,132       115,933  

Total consolidated cash and cash equivalents

    288,922       262,273       144,958  
Short-term and long-term marketable securities (2)     5,896       32,799       61,037  
Total cash, cash equivalents and marketable securities   $ 294,818     $ 295,072     $ 205,995  

(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 $55.1 million, $44.3 million and $67.4 million as of June 30, 2020, December 31, 2019 and June 30, 2019, respectively. Excluded from the table above is Granite’s portion of unconsolidated construction joint venture cash and cash equivalents of $65.6 million, $60.4 million and $69.4 million as of June 30, 2020, December 31, 2019 and June 30, 2019, respectively. 

Cash Flows

   

Six Months Ended June 30,

 
           

As Restated

 

(in thousands)

 

2020

   

2019

 

Net cash provided by (used in):

               
Operating activities   $ 12,483     $ (93,515 )

Investing activities

    (21,407 )     (47,926 )

Financing activities

    31,250       13,595  

Operating activities

As a large infrastructure contractor and construction materials producer, our revenue, gross profit and the resulting operating cash flows can differ significantly from period to period due to a variety of factors, including seasonal cycles, our projects’ progressions toward completion, outstanding contract change orders and affirmative claims, and the payment terms of our contracts.

Additionally, operating cash flows are impacted by the timing related to funding construction joint ventures and the resolution of uncertainties inherent in the complex nature of the work that we perform, including claim and back charge settlements.

Our working capital assets result from both public and private sector projects. Customers in the private sector can be slower paying than those in the public sector; however, private sector projects generally have higher gross profit as a percentage of revenue. While we typically invoice our customers on a monthly basis, our contracts frequently provide for retention that is a specified percentage withheld from each payment by our customers until the contract is completed and the work accepted by the customer which can cause fluctuations in operating cash flows.

Cash provided by operating activities of $12.5 million for the six months ended June 30, 2020 represents a $106.0 million increase when compared to cash used in operating activities in 2019. The change was primarily due to a $87.9 million increase in cash provided by working capital, a $27.6 million decrease in net contributions to unconsolidated joint ventures and affiliates and a $9.5 million increase in cash provided by net loss after adjusting for non-cash items. The increase in cash provided by working capital was primarily due to increases from CCJVs.

Investing activities

Cash used in investing activities of $21.4 million for the six months ended June 30, 2020 represents a $26.5 million increase when compared to 2019 primarily due to an increase in maturities of marketable securities.

Financing activities

Cash provided by financing activities of $31.3 million for the six months ended June 30, 2020 represents a $17.7 million increase when compared to 2019. The change was primarily due to an increase in debt proceeds, net of payments.

Capital Expenditures

During the six months ended June 30, 2020, we had capital expenditures of $52.2 million compared to $54.4 million during 2019. 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 interest rate and commodity swap derivative instruments as either assets or liabilities at fair value using Level 2 inputs in the condensed consolidated balance sheets. See Note 10 to “Notes to the Condensed 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 condensed consolidated balance sheets based on the cash proceeds. See Note 14 to “Notes to the Condensed Consolidated Financial Statements” for further information.

Surety Bonds and Real Estate Mortgages

We are generally required to provide various types of surety bonds that provide an additional measure of security under certain public and private sector contracts. At June 30, 2020, approximately $3.3 

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

Our 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 12 of “Notes to the Condensed 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 June 30, 2020, the Consolidated Leverage Ratio was 2.27, which did not exceed the maximum of 3.25. Our Consolidated Interest Coverage Ratio was 7.89, 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 Annual Report on Form 10-K and all of our 2020 Quarterly Reports on Form 10-Qs to February 28, 2021. 

Share Repurchase Program

As announced on April 29, 2016, on April 7, 2016, the Board of Directors authorized us to repurchase up to $200.0 million of our common stock at management’s discretion. As part of this authorization we have established a plan to facilitate common stock repurchases. As of June 30, 2020, $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. 

Website Access

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

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no significant change in our exposure to market risk when compared to those disclosed in our 2019 Annual Report on Form 10-K. 

 

Item 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures 

Based on their evaluation as of the end of the period covered by this report as required by paragraph (b) of Rule 13a-15 or Rule 15d-15 of the Exchange Act, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act) were not effective due to material weaknesses previously disclosed in our 2019 Annual Report on Form 10-K. In light of the material weaknesses in our internal control over financial reporting, we performed extensive additional analysis and other procedures to validate that our financial information contained in this Form 10-Q was prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Following such additional analysis and procedures, our management, including our principal executive officer and principal financial officer, has concluded that our financial statements state fairly, in all material respects, our financial position, results of our operations and our cash flows for the periods presented in this Form 10-Q, in conformity with U.S. GAAP. 

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting that occurred during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

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 June 30, 2020 and 2019 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 June 30, 2020, 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 1A.

RISK FACTORS

There have been no material changes in the risk factors previously disclosed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information regarding the repurchase of shares of our common stock during the three months ended June 30, 2020:

Period

 

Total number of shares purchased (1)

   

Average price paid per share

   

Total number of shares purchased as part of publicly announced plans or programs

   

Approximate dollar value of shares that may yet be purchased under the plans or programs (2)

 

April 1, 2020 through April 30, 2020

    1,499     $ 16.37           $ 157,165,044  

May 1, 2020 through May 31, 2020

    706     $ 15.96           $ 157,165,044  

June 1, 2020 through June 30, 2020

    2,006     $ 18.15           $ 157,165,044  
      4,211     $ 17.15                

(1) The number of shares purchased is in connection with employee tax withholding for restricted stock units vested under our 2012 Equity Incentive Plan.
(2) As announced on April 29, 2016, on April 7, 2016, the Board of Directors authorized us to repurchase up to $200.0 million of our common stock at management’s discretion. As part of this authorization we have established a share repurchase program to facilitate common stock repurchases. We did not purchase shares under the share repurchase plan in any of the periods presented. The specific timing and amount of any future repurchases will vary based on market conditions, securities law limitations and other factors.

 

Item 4.

MINE SAFETY DISCLOSURES

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

 

Item 6.

EXHIBITS

 

10.1

 

 

Amendment No. 4 to Third Amended and Restated Credit Agreement, dated June 19, 2020, by and among the Company, Granite Construction Company, and GILC Incorporated, as borrowers, Bank of America, N.A., as Administrative Agent, and the lenders party thereto 

31.1

 

 

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

 

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32

 

††

 

Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

95     Mine Safety Disclosure

101.INS

 

 

Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document)

101.SCH

 

 

Inline XBRL Taxonomy Extension Schema

101.CAL

 

 

Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF

 

 

Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB

 

 

Inline XBRL Taxonomy Extension Label Linkbase

101.PRE

 

 

Inline XBRL Taxonomy Extension Presentation Linkbase

104

 

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

 

 

 

 

 

 

 

Filed herewith

 

 

††

 

Furnished herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

 

GRANITE CONSTRUCTION INCORPORATED

 

 

 

 

 

 

 

 

Date:

February 25, 2021

 

 

 

By:

 

/s/ Elizabeth L. Curtis

 

 

 

 

 

 

 

Elizabeth L. Curtis

 

 

 

 

 

 

 

Executive Vice President and Chief Financial Officer

 

 

 

 

 

 

 

(Principal Financial and Accounting Officer)

 

36