GRANITE CONSTRUCTION INC - Quarter Report: 2023 March (Form 10-Q)

 

 

---

---

 

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 March 31, 2023

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

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

Indicate by check mark whether the registrant 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 April 26, 2023.

Class		Outstanding
Common stock, $0.01 par value		43,880,771

 

---

---

 

 

---

Table of Contents

PART I. FINANCIAL INFORMATION

GRANITE CONSTRUCTION INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

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

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)

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)

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)

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)

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.  General

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, 2022 (“Annual Report”). 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  March 31, 2023 and 2022 and the results of our operations and cash flows for the periods presented. The  December 31, 2022 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.

Seasonality: Our operations are typically affected more by weather conditions during the first and fourth quarters of our fiscal year which may alter our construction schedules and can create variability in our revenues and profitability. Therefore, the results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the full year.

Subsequent Event: On April 24, 2023, we completed the purchase of Coast Mountain Resources (2020) Ltd. (“CMR”) for approximately $27 million, subject to certain adjustments. CMR is a construction aggregate producer based in British Columbia, Canada operating on Malahat First Nation land. This acquisition is not expected to have a material impact on our results of operations.

2.  Recently Issued and Adopted Accounting Pronouncements

We closely monitor all Accounting Standards Updates issued by the Financial Accounting Standards Board and other authoritative guidance. There are currently no recently issued accounting pronouncements that are expected to have a material impact on our financial statements. No new accounting pronouncements were adopted in the three months ended March 31, 2023 that had a material impact on our financial statements.

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

3.  Restatement and Recast

Restatement and Recast Background

As disclosed in our Annual Report, we identified errors during the preparation of the Annual Report related to deferred taxes and the calculation of income tax expense of $12.3 million in connection with the sale of Inliner, which was completed in the first quarter of 2022 and was classified within discontinued operations in the Company's condensed consolidated financial statements during the first and second quarters of 2022 and in Other costs, net and Provision for income taxes during the third quarter of 2022. As a result, our previously issued unaudited quarterly financial information for each interim period within the nine months ended  September 30, 2022 require restatement. The restated financial information also includes adjustments to correct other immaterial errors in the first three quarters of 2022, including certain errors (primarily in revenue and cost of revenue, including the associated tax impact) that had previously been adjusted for as out of period corrections in the periods identified.

During the fourth quarter of 2021, we concluded that the assets and liabilities of our former Water and Mineral Services operating group (“WMS”) met the criteria for classification as held for sale and the results of operations were presented as discontinued operations. This included: our trenchless and pipe rehabilitation services business (“Inliner”); our water supply, treatment, delivery and maintenance business (“Water Resources”); and our mineral exploration drilling business (“Mineral Services”). During the first quarter of 2022, we completed the sale of Inliner. In  September 2022, we announced our decision to retain the Water Resources and Mineral Services businesses that were previously classified as held for sale and reported in discontinued operations. In connection with the reclassification of the WMS businesses from discontinued operations to continuing operations, the condensed consolidated statement of operations for the period ended March 31, 2022, as previously reported, has been recast to include Inliner through the date of sale, as well as the ongoing operations of Water Resources and Mineral Services in continuing operations.

Description of Restatement and Recast Tables

We have presented below a reconciliation from the previously reported to the restated and recast amounts for the quarter ended  March 31, 2022. The amounts labeled “As Previously Reported” were derived from our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 filed on April 28, 2022.

The impacts to the condensed consolidated statements of shareholders’ equity and comprehensive income (loss) as a result of the restatement were due to the changes in net loss for the three months ended March 31, 2022. In addition, there was no impact to net cash provided by (used in) investing and financing activities for the three months ended March 31, 2022 as a result of the restatement or recast.

The effects of the prior-period errors and the discontinued operations reclassification impacts on our condensed consolidated financial statements are as follows (in thousands, except per share data):

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

4.  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. In addition, the estimated or actual recovery related to estimated costs associated with unresolved affirmative claims and back charges 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.

When we experience significant revisions 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.

In our review of these changes for the three months ended March 31, 2023 and 2022, we did not identify any material amounts that should have been recorded in a prior period.

There were no increases from revisions in estimates, which individually had an impact of $5.0 million or more on gross profit for the three months ended March 31, 2023 and 2022. 

There were no decreases from revisions in estimates, which individually had an impact of $5.0 million or more on gross profit for the three months ended March 31, 2022. 

The projects with decreases from revisions in estimates during the three months ended March 31, 2023, 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):

The decreases during the three months ended March 31, 2023 were due to additional costs related to changes in project duration, increased labor and materials costs, lower productivity than originally anticipated and unfavorable weather. 

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

5.  Disaggregation of Revenue

We disaggregate our revenue based on our reportable segments (see Note 18) and operating groups as these are the formats that are regularly reviewed by management. Our reportable segments are: Construction and Materials. In alphabetical order, our operating groups are: California, Central and Mountain. The following tables present our disaggregated revenue by operating group (in thousands):

Three Months Ended March 31,

6.  Unearned Revenue

The following table presents our unearned revenue as of the respective periods:

All unearned revenue is in the Construction segment. Approximately $2.1 billion of the  March 31, 2023 unearned revenue is expected to be recognized within the next twelve months and the remaining amount will be recognized thereafter.

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

7.  Contract Assets and Liabilities

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 $44.2 million and $35.2 million during the three months ended March 31, 2023 and 2022, respectively. The changes in contract transaction price for the three months ended March 31, 2023 and 2022 were from items such as executed or estimated change orders and unresolved contract modifications and claims.

The components of the contract asset balances as of the respective dates were as follows:

The components of the contract liability balances as of the respective dates were as follows:

8.  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 generally do not bear interest. The following table presents major categories of receivables:

Included in other receivables at  March 31, 2023 and  December 31, 2022 were items such as estimated recovery from back charge claims, notes receivable, insurance receivable, fuel tax refunds and income tax refunds. Other receivables at March 31, 2023 and December 31, 2022 also included $24.9 million of working capital contributions in the form of a loan to a partner in one of our unconsolidated joint ventures that bears interest at prime plus 3.0% per annum. None of our customers had a receivable balance in excess of 10% of our total net receivables as of  March 31, 2023 or  December 31, 2022.

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

9.  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):

Commodity Derivatives

As of March 31, 2023 and December 31, 2022, we held commodity swaps for crude oil designated as cash flow hedges with a total outstanding notional amount of $14.0 million and $7.0 million, respectively, all maturing by October 31, 2023. The realized and unrealized losses associated with commodity swaps for the three months ended March 31, 2023 were immaterial. The realized gain associated with commodity swaps for the three months ended March 31, 2022 was immaterial and the unrealized gain was $3.3 million.

During the three months ended March 31, 2023, we entered into collar contracts to reduce our price exposure on diesel consumption. The collars were not designated as hedges and will be treated as a mark-to-market derivative instruments through the  September 2024 maturity dates. The financial statement impact for the three months ended March 31, 2023 was an unrealized loss of $0.9 million.

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

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:

(1) All marketable securities as of March 31, 2023 and  December 31, 2022 were classified as held-to-maturity and consisted of U.S. Government and agency obligations and corporate commercial paper maturing in two months to three years.

(2) The fair value of our 2.75% convertible senior notes due 2024 (the "2.75% Convertible Notes") is based on the median price of the notes in an active market. The fair value of the Fourth Amended and Restated Credit Agreement (the "Credit Agreement") is based on borrowing rates available to us for long-term loans with similar terms, average maturities, and credit risk. See Note 14 for more information about the 2.75% Convertible Notes and the Credit Agreement.

During the three months ended March 31, 2023 and 2022, we did not record any fair value adjustments related to nonfinancial assets and liabilities measured at fair value on a nonrecurring basis.

10.  Construction Joint Ventures

We participate in various construction joint ventures. We have determined that certain of these joint ventures are consolidated because they are 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 months ended March 31, 2023, 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 our 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  March 31, 2023, there was $245.2 million of remaining contract value on unconsolidated and line item construction joint venture contracts of which $109.4 million represented our share and the remaining $135.8 million represented our partners’ share. We are not able to estimate amounts that may be required beyond the current remaining forecasted cost of the work to be performed. These forecasted costs could be offset by billings to the customer or by proceeds from our partners’ corporate and/or other guarantees. See Note 13 for disclosure of the performance guarantee amounts recorded in the condensed consolidated balance sheets.

Consolidated Construction Joint Ventures (“CCJVs”)

At  March 31, 2023, we were engaged in eleven active CCJV projects with total contract values ranging from $6.1 million to $432.5 million for a combined total of $1.7 billion of which our share was $1.0 billion. As of March 31, 2023, our share of revenue remaining to be recognized on these CCJVs was $181.3 million and ranged from $0.9 million to $85.1 million by project. Our proportionate share of the equity in these joint ventures was between 50.0% and 70.0%. During the three months ended March 31, 2023 and 2022, total revenue from CCJVs was $61.3 million and $104.3 million, respectively. During the three months ended March 31, 2023 and 2022, CCJVs used $24.8 million and $7.6 million of operating cash flows, respectively. 

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Unconsolidated Construction Joint Ventures

As of  March 31, 2023, we were engaged in seven active unconsolidated joint venture projects with total contract values ranging from $12.3 million to $3.8 billion for a combined total of $7.9 billion of which our share was $2.3 billion. Our proportionate share of the equity in these unconsolidated construction joint ventures ranged from 23.0% to 50.0%. As of  March 31, 2023, our share of the revenue remaining to be recognized on these unconsolidated construction joint ventures was $72.4 million and ranged from $3.2 million to $34.4 million by project.

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

(1) Included in this balance and in accrued expenses and other current liabilities on the condensed consolidated balance sheets as of  March 31, 2023 and  December 31, 2022 was $58.2 million and $64.7 million, respectively, related to performance guarantees (see Note 13).

(2) Included in this balance as of March 31, 2023 and  December 31, 2022 was $96.6 million and $104.3 million, respectively, related to Granite’s share of estimated cost recovery of customer affirmative claims. In addition, this balance included $2.6 million and $2.7 million related to Granite’s share of estimated recovery of back charge claims as of  March 31, 2023 and  December 31, 2022, 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 $14.5 million and $14.0 million as of  March 31, 2023 and  December 31, 2022, respectively, related to deficits in unconsolidated construction joint ventures, which includes provisions for losses.

(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 and/or actual differences.

(2) 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.

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

11.  Investments in Affiliates

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

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

(1) This balance is primarily related to local bank debt for equipment purchases and debt associated with our real estate investments.

Of the $373.5 million of total affiliate assets as of March 31, 2023, we had investments in two real estate entities with total assets of $73.3 million, our foreign affiliates had total assets of $269.7 million and the asphalt terminal entity had total assets of $30.5 million. As of  March 31, 2023 and  December 31, 2022, all of the investments in real estate affiliates were in residential real estate in Texas. As of March 31, 2023, our percent ownership in the real estate entities ranged from 10% to 25%. We have direct and indirect investments in our foreign affiliates, and our percent ownership in foreign affiliates ranged from 25% to 50% as of March 31, 2023.

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

12.  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 as follows:

13.  Accrued Expenses and Other Current Liabilities

The decrease in performance guarantees in the current year is due to receiving customer acceptance on two unconsolidated construction joint ventures during the three months ended March 31, 2023.

Other includes dividends payable, warranty reserves, asset retirement obligations, remediation reserves and other miscellaneous accruals, none of which were greater than 5% of total current liabilities at any of the presented dates.

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

14.  Long-Term Debt and Credit Arrangements

In June 2022, we entered into the Credit Agreement which matures on June 2, 2027. The Credit Agreement is a $350.0 million senior secured, five-year revolving facility (the “Revolver”), including an accordion feature allowing us to increase borrowings up to the greater of (a) $200.0 million and (b) 100% of twelve-month trailing consolidated EBITDA, subject to lender approval. The Credit Agreement includes a $150.0 million sublimit for letters of credit ($75.0 million for financial letters of credit) and a $20.0 million sublimit for swingline loans.

As of  March 31, 2023, the total unused availability under the Credit Agreement was $269.5 million, resulting from $30.5 million in issued and outstanding letters of credit and $50.0 million drawn under the Revolver. The letters of credit had expiration dates between April 2023 and  December 2026. As of March 31, 2023, the applicable rate was 1.50% for loans under the Credit Agreement bearing interest based on the Secured Overnight Financing Rate ("SOFR") and 0.50% for loans bearing interest at the base rate. Accordingly, the effective interest rates at  March 31, 2023 for SOFR and base rate loans were 6.41% and 8.50%, respectively.

The Credit Agreement contains certain affirmative and restrictive covenants, and customary events of default. The financial covenants include a maximum Consolidated Leverage Ratio (as defined in the Credit Agreement) of 3.25 to 1.00 and a minimum Consolidated Interest Coverage Ratio (as defined in the Credit Agreement) of 3.00 to 1.00. As of March 31, 2023, the Consolidated Leverage Ratio was 1.4, which did not exceed the maximum of 3.25. Our Consolidated Interest Coverage Ratio was 15.7, which was above the minimum of 3.00.

As of March 31, 2023 and December 31, 2022, the 2.75% Convertible Notes comprised our only convertible debt instrument. The 2.75% Convertible Notes were issued in  November 2019 in an aggregate principal amount of $230.0 million, with an interest rate of 2.75% and a maturity date of  November 1, 2024, unless earlier converted, redeemed or repurchased. The 2.75% Convertible Notes are convertible at the option of the holders prior to  May 1, 2024 only during certain periods and upon the occurrence of certain events. After  May 1, 2024, the 2.75% Convertible Notes will be convertible at the option of the holders at any time until the second scheduled trading day immediately preceding the maturity date. The conversion rate applicable to the 2.75% Convertible Notes is 31.7776 shares of Granite common stock per $1,000 principal amount of 2.75% Convertible Notes, which is equivalent to a conversion price of approximately $31.47 per share of Granite common stock. Upon conversion, we will pay or deliver shares of Granite common stock or a combination of cash and shares of Granite common stock, at our election. In addition, upon the occurrence of a “make-whole fundamental change” as defined in the indenture governing the 2.75% Convertible Notes, (the “Indenture”) we will, in certain circumstances, increase the conversion rate for a holder that elects to convert its 2.75% Convertible Notes in connection with such a make-whole fundamental change.

We have the option to redeem for cash all or any portion of the 2.75% Convertible Notes if the last reported sale price of our common stock is equal to or greater than 130% of the conversion price for a specified period of time. Upon the occurrence of a “fundamental change” as defined in the Indenture, holders  may require us to repurchase for cash all or any portion of their 2.75% Convertible Notes at a price equal to 100% of the principal amount plus any accrued and unpaid interest. In addition, as described in the Indenture, certain events of default including, but not limited to, bankruptcy, insolvency or reorganization,  may result in the 2.75% Convertible Notes becoming due and payable immediately.

During both the three months ended March 31, 2023 and 2022, we recorded $0.3 million of amortization related to debt issuance costs.

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

15.  Weighted Average Shares Outstanding and Net Loss Per Share

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

Due to the net losses for the three months ended March 31, 2023 and 2022, RSUs representing 583,000 and 534,000 shares, respectively, and the potential dilution from the 2.75% Convertible Notes converting into 7,309,000 shares of common stock for both periods have been excluded from the number of shares used in calculating diluted net loss per share, as their inclusion would have been antidilutive.

16.  Income Taxes

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

Our effective tax rate for the three months ended March 31, 2023 was higher than the same quarter in the prior year primarily due to non-deductible goodwill associated with the sale of Inliner in the first quarter of 2022.

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

17.  Contingencies - Legal Proceedings

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. It is possible that future developments in our legal proceedings and inquiries could require us to (i) adjust or reverse 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, disclosure is required when a material loss is probable but not reasonably estimable, a material loss is reasonably possible but not probable, or when it is reasonably possible that the amount of a loss will exceed the amount recorded.

The total liabilities recorded as of  March 31, 2023 and  December 31, 2022 related to legal proceedings were immaterial. The total 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.

Ordinary Course 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 often cannot be predicted with certainty. For information on our accounting policies regarding affirmative claims and back charges that we are party to in the ordinary course of business, see Note 1 of our Annual Report. 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 often 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.

Salesforce Tower Matter

Our wholly-owned subsidiary, Layne Christensen Company ("Layne"), was a subcontractor on the foundation for the Salesforce Tower office building in San Francisco in 2013 and 2014. Certain anomalies were discovered in  March 2014 in the foundation’s structural concrete, which were remediated by the general contractor during 2015. Layne assigned any insurance claims it  may have had under the project’s builder’s risk insurance policy to the general contractor. During 2014, the project owner and the general contractor submitted a claim to the project’s builder’s risk insurers to cover the cost of remedial work and related damages. The claim was denied by the builder’s risk insurers. The project owner and the general contractor subsequently filed a legal proceeding against the insurers seeking coverage under the builder’s risk insurance policy, which proceeding was then transferred by agreement to arbitration. On  July 20, 2021, we were informed of an arbitration award denying insurance coverage for claims related to the remedial measures undertaken by the general contractor of the Salesforce Tower and related damages.

On  February 3, 2022, a lawsuit titled Steadfast Insurance Company (“Steadfast”), a subrogee of Clark/Hathaway Dinwiddie, a Joint Venture (“CHDJV”) v. Layne Christensen Company (“Layne”), was filed in the Superior Court of the State of California, County of San Francisco, seeking damages of approximately $70 million for costs incurred by Steadfast on behalf of CHDJV to cure Layne’s allegedly defective work on the foundation of the Salesforce Tower. On  February 4, 2022, CHDJV submitted an arbitration demand with the American Arbitration Association against Granite Construction Incorporated seeking to recover approximately $30 million for costs incurred by CHDJV to cure Layne’s allegedly defective work on the foundation of the Salesforce Tower. CHDJV subsequently dismissed Granite and added Layne as a respondent to the arbitration. On  May 6, 2022, CHDJV consolidated its claims with those of Steadfast and joined as a plaintiff in the Steadfast lawsuit, and on  May 16, 2022, the arbitration was stayed. CHDJV has moved for summary adjudication on two potentially dispositive issues. The hearing for these summary adjudication motions is scheduled for May 24, 2023. Layne opposes these motions and believes it has multiple defenses and counterclaims to the claims at issue. Layne intends to vigorously defend against the claims and prosecute its counterclaims, but we cannot provide assurance that Layne will be successful in these efforts. We do not believe it is probable this matter will result in a material loss, however, if we are unsuccessful, we believe the range of reasonably possible loss upon final resolution of this matter could be up to approximately $100 million.

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

18.  Reportable Segment Information

Our reportable segments are the same as our operating segments and correspond with how our chief operating decision maker, or decision-making group (our “CODM”), regularly reviews financial information to allocate resources and assess performance. We identified our CODM as our Chief Executive Officer and our Chief Operating Officer. Our reportable segments are: Construction and Materials.

Summarized segment information is as follows (in thousands):

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

The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022 (our "Annual Report") and the unaudited condensed consolidated financial statements and the accompanying notes thereto included herein.

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

The five primary economic drivers of our business are (i) the overall health of the U.S. economy including access to resources (labor, supplies and subcontractors); (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

Funding for our public work projects, which accounts for approximately 65% of our work, is dependent on federal, state, regional and local revenues. At the federal level, the rollout of the $1.2 trillion Infrastructure Investment and Jobs Act (“IIJA”) is ongoing with states receiving and allocating funds to projects. The five-year IIJA provides the largest increase in federal highway, bridge and transit funding in more than six decades and includes $550 billion in incremental funding. In October 2022, the U.S. Department of Transportation announced that it released $59.9 billion in Fiscal Year 2023 apportionments directly to all 50 states, all of which is available for states to authorize following the passing of the Fiscal Year 2023 omnibus appropriations bill in December 2022. We continue to believe that the increased multi-year spending commitment will improve the programming visibility for state and local governments. We are seeing projects funded by the IIJA for bid and believe there will be an increase in project lettings throughout 2023 and then more meaningfully in 2024 and beyond.

At state, regional and local levels, voter-approved state and local transportation measures continue to support infrastructure spending. While each market is unique, we see a strong funding environment at the state and local levels currently and we expect that environment to improve with the impact of the IIJA. 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 without any sunset provisions.

Over the recent years, inflation, supply chain and labor constraints have had a significant impact on the global economy including the construction industry in the United States. While it is impossible to fully eliminate the impact of these factors, we have applied proactive measures such as fixed forward purchase contracts of oil related inputs, energy surcharges, and adjustment of project schedules for constraints related to construction materials such as concrete. While we actively work to mitigate the impacts of inflation, further price increases may adversely impact us in the future.

Our Committed and Awarded Projects (“CAP”) continues to be strong at $5.1 billion at the end of the first quarter of 2023. Our CAP is supported by a positive public funding environment and resilient private market which we believe will provide further opportunities in 2023 to continue to grow CAP.

Subsequent Event

On April 24, 2023, we completed the purchase of Coast Mountain Resources (2020) Ltd. (“CMR”) for approximately $27 million, subject to certain adjustments. CMR is a construction aggregate producer based in British Columbia, Canada operating on Malahat First Nation land. This acquisition is not expected to have a material impact on our results of operations.

Litigation Matter

As further discussed in Note 17 of “Notes to the Condensed Consolidated Financial Statements,” our wholly owned subsidiary, Layne Christensen Company (“Layne”), has been sued for approximately $100 million relating to Layne’s work on the Salesforce Tower foundation. Layne was a subcontractor on this project and potential liability for this project remained with Layne in connection with our acquisition of Layne in June 2018. For additional information, see “Item 1A. Risk Factors - In connection with acquisitions or divestitures, we may become subject to liabilities” and “Item 1A. Risk Factors - We are involved in lawsuits and legal proceedings in the ordinary course of our business and may in the future be subject to other litigation and legal proceedings, and, if any of these are resolved adversely against us, it could harm our business, financial condition and results of operations” in our Annual Report.

Results of Operations

Our operations are typically affected more by inclement 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.

The following table presents a financial summary for the three months ended March 31, 2023 and 2022:

Revenue

Total Revenue by Segment

Construction Revenue

Construction revenue for the three months ended March 31, 2023 decreased by $74.9 million, or 12.9%, respectively, when compared to 2022. This decrease was primarily driven by the wind down of several large projects in the Central operating group, as well as the sale of Inliner in the first quarter of 2022. Revenue from the Mountain operating group decreased $28.6 million for the three months ended March 31, 2023 primarily due to the sale of Inliner which contributed $33.2 million in 2022 prior to its sale. This decrease was partially offset by increased revenue driven by higher beginning CAP levels. California operating group revenue increased $2.6 million during the three months ended March 31, 2023 despite the unfavorable weather conditions during the quarter, partly due to emergency work resulting from the weather. During both the three months ended March 31, 2023 and 2022, approximately 65% of revenue earned in the Construction segment was from the public sector.

Materials Revenue 

Materials revenue for the three months ended March 31, 2023 decreased by $19.0 million, or 25.1%, when compared to 2022 driven by lower sales volumes in both asphalt and aggregates resulting from inclement weather during the first quarter of 2023. Asphalt and aggregate sales volumes were down 39.4% and 20.6%, respectively, with the greatest decreases in the California operating group. 

Committed and Awarded Projects

CAP consists of two components: (1) unearned revenue and (2) other awards. Unearned revenue includes the revenue we expect to record in the future on executed contracts, including 100% of our consolidated joint venture contracts and our proportionate share of unconsolidated joint venture contracts. We generally include a project in unearned revenue at the time a contract is awarded, the contract has been executed and to the extent we believe funding is probable. Contract options and task orders are included in unearned revenue when exercised or issued, respectively. Certain government contracts where funding is appropriated on a periodic basis are included in unearned revenue at the time of the award when it is probable the contract value will be funded and executed.

Other awards include the general construction portion of construction management/general contractor (“CM/GC”) contracts and awarded contracts with unexercised contract options or unissued task orders. The general construction portion of CM/GC contracts are included in other awards to the extent contract execution and funding is probable. Contracts with unexercised contract options or unissued task orders are included in other awards to the extent option exercise or task order issuance is probable. All CAP is in the Construction segment.