Item 2. Management’s Discussion and Analysis
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
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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”) continue to be strong at $5.4 billion at the end of the second 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.
Acquisition
On April 24, 2023, we completed the purchase of Coast Mountain Resources (2020) Ltd. (“CMR”) for approximately $26.9 million in cash, subject to certain adjustments. CMR is a construction aggregate producer based in British Columbia, Canada operating on Malahat First Nation land. CMR results are reported in the Materials segment. 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. During the second quarter of 2023, we recorded a pre-tax charge of $12.0 million, net of estimated insurance recovery, which is reflected in other costs on the condensed consolidated statements of operations for the three and six months ended June 30, 2023. 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, legal proceedings and indemnity claims in the ordinary course of our business and may in the future be subject to other litigation, legal proceedings and claims, 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 and six months ended June 30, 2023 and 2022:
Three Months Ended
June 30, Six Months Ended
June 30,
(in thousands) 2023 As Restated and Recast 2023 As Restated and Recast
2022 2022
Total revenue $ 898,552 $ 849,247 $ 1,458,620 $ 1,503,133
Gross profit $ 103,086 $ 97,566 $ 135,445 $ 157,658
Selling, general and administrative expenses $ 64,563 $ 60,121 $ 137,685 $ 130,241
Operating income (loss) $ 28,860 $ 29,748 $ (14,389) $ 14,039
Amount attributable to non-controlling interests $ 6,846 $ (897) $ 9,595 $ (2,535)
Net income (loss) attributable to Granite Construction Incorporated $ (17,000) $ 18,681 $ (40,023) $ (8,052)
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Revenue
Total Revenue by Segment
Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands) 2023 As Restated and Recast 2023 As Recast
2022 2022
Construction $ 749,413 83.4 % $ 713,221 84.0 % $ 1,252,829 85.9 % $ 1,291,487 85.9 %
Materials 149,139 16.6 136,026 16.0 205,791 14.1 211,646 14.1
Total $ 898,552 100.0 % $ 849,247 100.0 % $ 1,458,620 100.0 % $ 1,503,133 100.0 %
Construction Revenue
Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands) 2023 As Restated and Recast 2023 As Recast
2022 2022
California $ 232,902 31.1 % $ 197,435 27.7 % $ 381,849 30.5 % $ 343,744 26.6 %
Central 200,486 26.8 211,605 29.7 371,488 29.7 431,499 33.4
Mountain 316,025 42.1 304,181 42.6 499,492 39.8 516,244 40.0
Total $ 749,413 100.0 % $ 713,221 100.0 % $ 1,252,829 100.0 % $ 1,291,487 100.0 %
Construction revenue for the three months ended June 30, 2023 increased by $36.2 million, or 5.1%, when compared to 2022. Construction revenue from the California and Mountain operating groups increased $35.5 million and $11.8 million, respectively, which were driven by higher levels of CAP going into the quarter. The Central operating group's construction revenue decreased by $11.1 million primarily due to the wind down of several large projects.
Construction revenue for the six months ended June 30, 2023 decreased by $38.7 million, or 3.0%, when compared to the six months ended June 30, 2022. This decrease was primarily driven by a $60.0 million decrease in the Central operating group due to the wind down of several large projects. Revenue from the Mountain operating group decreased $16.8 million mainly 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 $38.1 million despite the unfavorable weather conditions during the first half of the year, partly due to emergency work resulting from the weather as well as higher CAP levels to start the year.
During both the three and six months ended June 30, 2023 and 2022, approximately 65% of revenue earned in the Construction segment was from the public sector.
Materials Revenue
Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands) 2023 2022 2023 As Recast
2022
California $ 77,216 51.7 % $ 71,572 52.6 % $ 107,354 52.2 % $ 117,259 55.4 %
Central 12,338 8.3 13,901 10.2 23,894 11.6 24,263 11.5
Mountain 59,585 40.0 50,553 37.2 74,543 36.2 70,124 33.1
Total $ 149,139 100.0 % $ 136,026 100.0 % $ 205,791 100.0 % $ 211,646 100.0 %
Materials revenue for the three months ended June 30, 2023 increased $13.1 million, or 9.6%, when compared to the same period in 2022 driven by higher asphalt and aggregate sales prices and increased aggregate sales volume. Aggregate sales volume was up 9.2% during the three months ended June 30, 2023.
Materials revenue for the six months ended June 30, 2023 decreased $5.9 million, or 2.8%, when compared to the six months ended June 30, 2022, driven primarily by lower sales volumes in both asphalt and aggregates resulting from inclement weather during the first quarter of 2023, partially offset by increased sales prices. Asphalt and aggregate sales volumes were down 12.6% and 4.8%, respectively, in the six months ended June 30, 2023, with the greatest decreases in the California operating group.
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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.
(dollars in thousands) June 30, 2023 March 31, 2023 December 31, 2022
Unearned revenue $ 3,392,506 62.4 % $ 3,163,568 62.0 % $ 2,877,478 64.2 %
Other awards 2,045,082 37.6 1,940,385 38.0 1,607,661 35.8
Total $ 5,437,588 100.0 % $ 5,103,953 100.0 % $ 4,485,139 100.0 %
(dollars in thousands) June 30, 2023 March 31, 2023 December 31, 2022
California $ 2,345,611 43.2 % $ 1,913,634 37.5 % $ 1,747,163 39.0 %
Central 1,599,538 29.4 1,750,375 34.3 1,661,613 37.0
Mountain 1,492,439 27.4 1,439,944 28.2 1,076,363 24.0
Total $ 5,437,588 100.0 % $ 5,103,953 100.0 % $ 4,485,139 100.0 %
CAP of $5.4 billion at June 30, 2023 increased $333.6 million and $952.4 million when compared to March 31, 2023 and December 31, 2022, respectively. Significant additions to CAP during the three months ended June 30, 2023 included a $173 million weir widening project in California, a $72 million highway project in California, a $48 million flood control project in Texas, a $45 million railway project in California and a $38 million highway project in Alaska.
Non-controlling partners’ share of CAP as of June 30, 2023, March 31, 2023 and December 31, 2022 was $129.6 million, $109.6 million and $85.0 million, respectively.
At June 30, 2023, three contracts with remaining CAP of $10 million or more per project had total forecasted losses with remaining revenue of $86.2 million, or 1.6%, of total CAP.
Gross Profit
The following table presents gross profit by reportable segment for the respective periods:
Three Months Ended
June 30, Six Months Ended
June 30,
(dollars in thousands) 2023 As Restated and Recast 2023 As Recast
2022 2022
Construction $ 79,154 $ 80,252 $ 115,859 $ 138,731
Percent of segment revenue 10.6 % 11.3 % 9.2 % 10.7 %
Materials 23,932 17,314 19,586 18,927
Percent of segment revenue 16.0 % 12.7 % 9.5 % 8.9 %
Total gross profit $ 103,086 $ 97,566 $ 135,445 $ 157,658
Percent of total revenue 11.5 % 11.5 % 9.3 % 10.5 %
Construction gross profit for the three and six months ended June 30, 2023 decreased by $1.1 million and $22.9 million, or 1.4% and 16.5%, respectively, when compared to 2022. The decrease for the six months ended June 30, 2023 was primarily due to an increase in the negative net impact from revisions in estimates, mainly in our Central operating group. For further discussion of projects with revisions in estimates which individually had an impact of $5.0 million or more on
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gross profit, see Note 4 of "Notes to the Condensed Consolidated Financial Statements." Increased depreciation expense during the three and six months ended June 30, 2023 also contributed to the decrease in gross profit. As previously disclosed, our former Water and Mineral Services operating group (“WMS”) was classified as held for sale throughout the first and second quarters of 2022, and therefore no depreciation expense was recorded for WMS assets during that period.
Materials gross profit for the three and six months ended June 30, 2023 increased by $6.6 million and $0.7 million, respectively, when compared to 2022. Higher sales prices were the primary driver of the gross profit improvement for the three months ended June 30, 2023.
Selling, General and Administrative Expenses
The following table presents the components of selling, general and administrative expenses for the respective periods:
Three Months Ended
June 30, Six Months Ended
June 30,
(dollars in thousands) 2023 As Recast 2023 As Recast
2022 2022
Selling
Salaries and related expenses $ 13,894 $ 14,314 $ 30,256 $ 31,628
Stock-based compensation 243 215 1,072 858
Other selling expenses 1,797 3,238 3,236 4,981
Total selling 15,934 17,767 34,564 37,467
General and administrative
Salaries and related expenses 25,460 23,930 51,825 53,577
Stock-based compensation 1,255 1,166 5,968 3,107
Other general and administrative expenses 21,914 17,258 45,328 36,090
Total general and administrative 48,629 42,354 103,121 92,774
Total selling, general and administrative $ 64,563 $ 60,121 $ 137,685 $ 130,241
Percent of revenue 7.2 % 7.1 % 9.4 % 8.7 %
Selling Expenses
Selling expenses include the costs for estimating and bidding including offsetting customer reimbursements for portions of our selling/bid submission expenses (i.e., stipends), business development and materials facility permits. Selling expenses can vary depending on the volume of projects in process and the number of employees assigned to estimating and bidding activities. As projects are completed or the volume of work slows down, we temporarily redeploy project employees to bid on new projects, moving their salaries and related costs from cost of revenue to selling expenses. Selling expenses for the three and six months ended June 30, 2023 decreased by $1.8 million and $2.9 million, or 10.3% and 7.7%, when compared to 2022, primarily due to reduced prebid costs in the current year.
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, incentive compensation, changes in the fair market value of our Non-Qualified Deferred Compensation plan liability and other miscellaneous expenses. Total general and administrative expenses for the three and six months ended June 30, 2023 increased by $6.3 million and $10.3 million, or 14.8% and 11.2%, primarily due to increases in the fair market value of our Non-Qualified Deferred Compensation plan liability, which is mostly offset in Other (income) expense, net, through investments held within our own company-owned life insurance policy, as well as increases in stock-based compensation expense. The increases for the six months ended June 30, 2023 were partially offset by the sale of Inliner on March 16, 2022.
Loss on Debt Extinguishment
In the second quarter of 2023, we issued 1,390,500 shares of Granite common stock and paid approximately $198.8 million in cash in exchange for approximately $198.7 million aggregate principal amount of our 2.75% Convertible Notes (the "Exchange Transaction") concurrent with the offering of the 3.75% Convertible Notes. As a result of the Exchange Transaction, we incurred a $51.1 million loss on debt extinguishment. Included in the loss on debt extinguishment is a $1.7
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million charge for the acceleration of the amortization of debt issuance costs associated with the 2.75% Convertible Notes that were redeemed early.
Income Taxes
The following table presents the provision for (benefit from) income taxes for the respective periods:
Three Months Ended
June 30, Six Months Ended
June 30,
As Restated and Recast As Restated and Recast
(dollars in thousands) 2023 2022 2023 2022
Provision for (benefit from) income taxes $ 9,024 $ 8,668 $ (445) $ 15,020
Effective tax rate (60.9 %) 30.7 % 0.9 % 158.1 %
We calculate our income tax provision (benefit) at the end of each interim period by estimating our annual effective tax rate and applying that rate to our income or loss before tax. 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 16 of "Notes to the Condensed Consolidated Financial Statements" for more information.
Amount Attributable to Non-controlling Interests
The following table presents the amount attributable to non-controlling interests in consolidated subsidiaries for the respective periods:
Three Months Ended
June 30, Six Months Ended
June 30,
(in thousands) 2023 As Restated 2023 2022
2022
Amount attributable to non-controlling interests $ 6,846 $ (897) $ 9,595 $ (2,535)
The amount attributable to non-controlling interests represents the non-controlling owners’ share of the net income or loss of our consolidated construction joint ventures. The amounts for the three and six months ended June 30, 2023 increased $7.7 million and $12.1 million, respectively, primarily due to the impact from revisions in estimates (see Note 4 of “Notes to the Condensed Consolidated Financial Statements”).
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Liquidity and Capital Resources
Our primary sources of liquidity are cash and cash equivalents, investments, available borrowing capacity and cash generated from operations. We may also from time-to-time issue and sell equity, debt or hybrid securities or engage in other capital markets transactions or sell one or more business units or assets. See Note 14 of the "Notes to the Condensed Consolidated Financial Statements" for further information on the issuance of our 3.75% Convertible Notes during the second quarter of 2023.
Our material cash requirements include 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, repurchase shares of our common stock or acquire assets or businesses that are complementary to our operations.
We believe our primary sources of liquidity will be sufficient to meet our expected working capital needs, capital expenditures, financial commitments, cash dividend payments and other liquidity requirements associated with our existing operations for the next twelve months. We also believe our primary sources of liquidity, access to debt and equity capital markets and cash expected to be generated from operations will be sufficient to meet our long-term requirements and plans. However, there can be no assurance that sufficient capital will continue to be available or that it will be available on terms acceptable to us.
As of June 30, 2023, our cash and cash equivalents consisted of deposits and money market funds held with established national financial institutions and marketable securities consisting primarily of U.S. Government and agency obligations and corporate commercial paper. As of June 30, 2023, the total unused availability under our Credit Agreement was $275.9 million, resulting from $19.1 million in issued and outstanding letters of credit and $55.0 million drawn under the Credit Agreement. See Note 14 of “Notes to the Condensed Consolidated Financial Statements.”
As of June 30, 2023, we had $2.0 million of receivables and $29.0 million of contract retention receivables from Brightline Trains Florida LLC ("Brightline") (see Note 7 of “Notes to the Condensed Consolidated Financial Statements”). As of the date of this report, $1.9 million of the Brightline receivables have been collected and the remaining $0.1 million are current. Brightline has experienced delays in securing additional funding in the past, therefore the timing and probability of future payments may be affected and our liquidity impacted if Brightline faces additional funding difficulties.
In evaluating our liquidity position and needs, we also consider cash and cash equivalents held by our consolidated construction joint ventures (“CCJVs”). The following table presents our cash, cash equivalents and marketable securities, including amounts from our CCJVs, as of the respective dates:
(in thousands) June 30, 2023 December 31, 2022
Cash and cash equivalents excluding CCJVs $ 128,630 $ 191,444
CCJV cash and cash equivalents (1) 85,816 102,547
Total consolidated cash and cash equivalents 214,446 293,991
Short-term and long-term marketable securities (2) 36,556 65,943
Total cash, cash equivalents and marketable securities $ 251,002 $ 359,934
(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 and corporate commercial paper as of all periods presented.
Granite’s portion of CCJV cash and cash equivalents was $52.1 million and $62.5 million as of June 30, 2023 and December 31, 2022, respectively. Excluded from the table above is $32.9 million and $40.4 million as of June 30, 2023 and December 31, 2022, respectively, of Granite’s portion of unconsolidated construction joint venture cash and cash equivalents.
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Capital Expenditures
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 six months ended June 30, 2023, we had capital expenditures of $79.7 million, compared t o $73.2 mi llion, during the six months ended June 30, 2022. We currently anticipate 2023 capital expenditures to be between approximately $100 million and $120 million.
Cash Flows
Six Months Ended June 30,
(in thousands) 2023 2022
Net cash provided by (used in):
Operating activities $ (118,948) $ (103,278)
Investing activities $ (64,378) $ 30,317
Financing activities $ 103,781 $ (157,055)
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 project progression 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.
Cash used in operating activities of $118.9 million for the six months ended June 30, 2023 represents a $15.7 million increase in cash used when compared to the same period of 2022. The change was primarily attributable to the timing of receipts and payments of working capital, which includes receivables, net contract assets, inventories, other assets, accounts payable and accrued expenses and other liabilities. Cash used in working capital increased by $28.3 million. This was partially offset by a decrease in contributions, net of distributions, of $18.6 million to unconsolidated joint ventures and affiliates.
Investing activities
Cash used in investing activities of $64.4 million for the six months ended June 30, 2023 represents a $94.7 million increase in cash used when compared to the same period of 2022. The change was primarily due to proceeds from the sale of the Inliner business in March 2022, partially offset by changes in marketable securities activity and the acquisition of CMR in the current year.
Financing activities
Cash provided by financing activities of $103.8 million for the six months ended June 30, 2023 represents a $260.8 million increase in cash provided by financing activities when compared to the same period of 2022. The change was primarily due to the prepayment in the prior year of our term loan of $123.8 million, which did not recur this year. Also, net cash inflows related to our convertible bond transactions in the current year generated $99.0 million in cash. The year over year increase in cash provided by financing activities was also due to $66.6 million less cash used for repurchases of common stock and higher contributions from non-controlling partners, net of distributions, of $15.9 million. These increases were partially offset by a $45.0 million decrease in cash provided by our revolving credit facility. See Note 14 of the “Notes to the Condensed Consolidated Financial Statements” for further information about our long-term debt transactions and our credit facility.
Derivatives
We recognize derivative instruments as either assets or liabilities in the condensed consolidated balance sheets at fair value using Level 2 inputs. See Note 9 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 and the Capped Call
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transactions related to the 3.75% Convertible Notes were recorded to equity on our condensed consolidated balance sheets based on the cash proceeds.
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, 2023, approximately $3.1 billion of our $5.4 billion CAP 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 10 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, the 2.75% Convertible Notes and 3.75% Convertible Notes are governed by the terms and conditions of their respective indentures. Our failure to pay principal, interest or other amounts when due or within the relevant grace period on our 2.75% Convertible Notes, our 3.75% Convertible Notes or our Credit Agreement would constitute an event of default under the 2.75% Convertible Notes indenture, the 3.75% Convertible Note indenture 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 2.75% Convertible Notes indenture or the 3.75% Convertible Notes indenture 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, 2023, we were in compliance with the covenants in the Credit Agreement.
Share Repurchase Program
As announced on February 3, 2022, on February 1, 2022, the Board of Directors authorized us to purchase up to $300.0 million of our common stock at management’s discretion (the “2022 authorization”). There were no share repurchases under the 2022 authorization in the six months ended June 30, 2023 and $231.5 million of the 2022 authorization remained available as of June 30, 2023.
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 any 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 material change in our exposure to market risk from what was previously disclosed in our Annual Report.
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Table of Contents
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.