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 70% 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 project lettings will continue to be elevated for the remainder of 2023 and in 2024 as IIJA funds are utilized.
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 $5.6 billion at the end of the third quarter of 2023. Our CAP is supported by a positive public funding environment and private market which we believe will provide further opportunities 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”), was sued relating to its work on the Salesforce Tower foundation. On October 11, 2023, the parties to the lawsuit and related arbitration proceeding entered into a settlement agreement to fully and finally resolve the matter. During the nine months ended September 30, 2023, we recorded a pre-tax charge of $20.0 million, net of estimated insurance recovery, which is reflected in other costs on the condensed consolidated statements of operations.
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 nine months ended September 30, 2023 and 2022:
Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands) 2023 As Restated 2023 As Restated
2022 2022
Total revenue $ 1,116,820 $ 1,008,910 $ 2,575,440 $ 2,512,043
Gross profit $ 166,643 $ 115,055 $ 302,088 $ 272,713
Selling, general and administrative expenses $ 74,794 $ 61,795 $ 212,479 $ 192,036
Other costs, net $ 19,843 $ (490) $ 37,973 $ 22,401
Operating income $ 73,818 $ 54,699 $ 59,429 $ 68,738
Total other (income) expense, net $ (6,101) $ (2,789) $ 29,573 $ 1,747
Amount attributable to non-controlling interests $ 128 $ 4,104 $ 9,723 $ 1,569
Net income attributable to Granite Construction Incorporated $ 57,624 $ 69,302 $ 17,601 $ 61,250
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Revenue
Total Revenue by Segment
Three Months Ended September 30, Nine Months Ended September 30,
(dollars in thousands) 2023 As Restated 2023 As Restated
2022 2022
Construction $ 945,698 84.7 % $ 847,371 84.0 % $ 2,198,527 85.4 % $ 2,138,858 85.1 %
Materials 171,122 15.3 161,539 16.0 376,913 14.6 373,185 14.9
Total $ 1,116,820 100.0 % $ 1,008,910 100.0 % $ 2,575,440 100.0 % $ 2,512,043 100.0 %
Construction Revenue
Three Months Ended September 30, Nine Months Ended September 30,
(dollars in thousands) 2023 As Restated 2023 As Restated
2022 2022
California $ 317,244 33.5 % $ 262,972 31.0 % $ 699,093 31.8 % $ 606,716 28.4 %
Central 222,144 23.5 222,082 26.2 593,632 27.0 653,581 30.6
Mountain 406,310 43.0 362,317 42.8 905,802 41.2 878,561 41.0
Total $ 945,698 100.0 % $ 847,371 100.0 % $ 2,198,527 100.0 % $ 2,138,858 100.0 %
Construction revenue for the three months ended September 30, 2023 increased by $98.3 million, or 11.6%, when compared to 2022. Construction revenue from the California and Mountain operating groups increased $54.3 million and $44.0 million, respectively, which were driven by higher levels of CAP going into the quarter. The Central operating group's construction revenue was consistent with prior year. This was the result of increased revenue from new work in Texas, Arizona and Illinois, which offset the wind down of several large projects.
Construction revenue for the nine months ended September 30, 2023 increased by $59.7 million, or 2.8%, when compared to the nine months ended September 30, 2022. California operating group revenue increased $92.4 million despite the unfavorable weather conditions during the first half of the year, partly due to elevated work volume achieved once weather conditions improved as well as higher CAP levels to start the year. Mountain operating group revenue increased $27.2 million, which includes Inliner in the prior year that contributed $33.2 million prior to its sale in April 2022. The increase in revenue is primarily due to new work in Alaska, Nevada and the Pacific Northwest. Central operating group revenue decreased $59.9 million primarily due to the wind down of several large projects. This decrease was partially offset by increased revenue from new work in Texas, Arizona and Illinois.
During both the three and nine months ended September 30, 2023 and 2022, approximately 70% of revenue earned in the Construction segment was from the public sector.
Materials Revenue
Three Months Ended September 30, Nine Months Ended September 30,
(dollars in thousands) 2023 2022 2023 2022
California $ 83,867 49.0 % $ 85,173 52.7 % $ 191,221 50.7 % $ 202,371 54.2 %
Central 11,357 6.6 9,348 5.8 35,251 9.4 33,634 9.0
Mountain 75,898 44.4 67,018 41.5 150,441 39.9 137,180 36.8
Total $ 171,122 100.0 % $ 161,539 100.0 % $ 376,913 100.0 % $ 373,185 100.0 %
Materials revenue for the three and nine months ended September 30, 2023 increased by $9.6 million and $3.7 million, or 5.9% and 1.0%, when compared to the same periods in 2022 driven primarily by higher asphalt and aggregate sales prices.
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
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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) September 30, 2023 June 30, 2023 December 31, 2022
Unearned revenue $ 3,964,749 71.0 % $ 3,392,506 62.4 % $ 2,877,478 64.2 %
Other awards 1,619,774 29.0 2,045,082 37.6 1,607,661 35.8
Total $ 5,584,523 100.0 % $ 5,437,588 100.0 % $ 4,485,139 100.0 %
(dollars in thousands) September 30, 2023 June 30, 2023 December 31, 2022
California $ 2,345,294 42.0 % $ 2,345,611 43.2 % $ 1,747,163 39.0 %
Central 1,811,426 32.4 1,599,538 29.4 1,661,613 37.0
Mountain 1,427,803 25.6 1,492,439 27.4 1,076,363 24.0
Total $ 5,584,523 100.0 % $ 5,437,588 100.0 % $ 4,485,139 100.0 %
CAP of $5.6 billion at September 30, 2023 increased $146.9 million and $1.1 billion when compared to June 30, 2023 and December 31, 2022, respectively. Significant additions to CAP during the three months ended September 30, 2023 included a $205 million tunnel project in Ohio, $156 million for two highway projects in Texas, a $45 million highway project in Utah, and a $24 million highway project in California.
Non-controlling partners’ share of CAP as of September 30, 2023, June 30, 2023 and December 31, 2022 was $277.5 million, $129.6 million and $85.0 million, respectively.
At September 30, 2023, four contracts with remaining CAP of $10 million or more per project had total forecasted losses with remaining revenue of $94.4 million, or 1.7%, of total CAP.
Gross Profit
The following table presents gross profit by reportable segment for the respective periods:
Three Months Ended
September 30, Nine Months Ended
September 30,
(dollars in thousands) 2023 As Restated 2023 As Restated
2022 2022
Construction $ 137,162 $ 93,017 $ 253,021 $ 231,748
Percent of segment revenue 14.5 % 11.0 % 11.5 % 10.8 %
Materials 29,481 22,038 49,067 40,965
Percent of segment revenue 17.2 % 13.6 % 13.0 % 11.0 %
Total gross profit $ 166,643 $ 115,055 $ 302,088 $ 272,713
Percent of total revenue 14.9 % 11.4 % 11.7 % 10.9 %
Construction gross profit for the three and nine months ended September 30, 2023 increased by $44.1 million and $21.3 million, or 47.5% and 9.2%, respectively, when compared to 2022 primarily due to higher revenue. In the three month period, a reduction in the negative net impact from revisions in estimates, mainly in our Central operating group, also contributed to the gross profit improvement. For further discussion of projects with revisions in estimates which individually had an impact of $5.0 million or more on gross profit, see Note 4 of "Notes to the Condensed Consolidated Financial Statements."
Increased depreciation expense during the three months ended September 30, 2022 also contributed to the favorable variance in gross profit during the three months ended September 30, 2023 when compared to the prior year. 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. Cost of revenue during the three months ended September 30, 2022 included $6.9 million of depreciation that would have
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been recognized in prior quarters if the unsold businesses had been continually classified as held and used from the beginning of the year.
Materials gross profit for the three and nine months ended September 30, 2023 increased by $7.4 million and $8.1 million, respectively, when compared to 2022. Higher sales prices for aggregates and asphalt were the primary driver of the gross profit improvement for the three and nine months ended September 30, 2023. Additionally, in 2023, oil and energy costs have normalized compared to the significant inflation in 2022 which negatively impacted materials gross profit margin in the prior year.
Selling, General and Administrative Expenses
The following table presents the components of selling, general and administrative expenses for the respective periods:
Three Months Ended
September 30, Nine Months Ended
September 30,
(dollars in thousands) 2023 2022 2023 2022
Selling
Salaries and related expenses $ 13,939 $ 12,720 $ 44,195 $ 44,348
Stock-based compensation 231 194 1,303 1,052
Other selling expenses 3,246 2,839 6,482 7,820
Total selling 17,416 15,753 51,980 53,220
General and administrative
Salaries and related expenses 22,890 23,262 74,715 76,839
Stock-based compensation 1,136 1,068 7,104 4,175
Other general and administrative expenses 33,352 21,712 78,680 57,802
Total general and administrative 57,378 46,042 160,499 138,816
Total selling, general and administrative $ 74,794 $ 61,795 $ 212,479 $ 192,036
Percent of revenue 6.7 % 6.1 % 8.3 % 7.6 %
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 months ended September 30, 2023 increased by $1.7 million, or 10.6%, when compared to 2022, primarily due to increased selling salaries and related expenses, including incentive compensation due to improved financial performance. Selling expenses for the nine months ended September 30, 2023 decreased $1.2 million, or 2.3%, when compared to 2022, primarily due to reduced prebid costs in the current year and the sale of Inliner on March 16, 2022, partially offset by an increase in incentive compensation.
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 nine months ended September 30, 2023 increased by $11.3 million and $21.7 million, or 24.6% and 15.6%, respectively, primarily due to an increase in incentive compensation due to improved financial performance. The increase in the nine months ended September 30, 2023 was also attributable to stock-based compensation and 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. The increases for the nine months ended September 30, 2023 were partially offset by the sale of Inliner in the first quarter of 2022.
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Other Costs, net
The following table presents other costs, net for the respective periods:
Three Months Ended
September 30, Nine Months Ended
September 30,
(in thousands) 2023 2022 2023 2022
Other costs, net $ 19,843 $ (490) $ 37,973 $ 22,401
During the three and nine months ended September 30, 2023, Other costs, net increased $20.3 million and $15.6 million, respectively, compared to prior year. These increases were primarily due to the settlement of the Salesforce Tower matter (see Note 17 of “Notes to the Condensed Consolidated Financial Statements”) and non-cash impairment charges associated with the wind down of our international Mineral Services operations (see Note 1 of “Notes to the Condensed Consolidated Financial Statements”) in the current year. Also included in Other costs, net for the three and nine months ended September 30, 2023 and 2022 are non-recurring legal fees related to lawsuits, with the third quarter of last year also reflecting a $5 million settlement payment we received in connection with the shareholder derivative lawsuit.
Loss on Debt Extinguishment
In the second quarter of 2023, we issued 1,390,500 shares of Granite common stock and paid $198.8 million in cash in exchange for $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 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
September 30, Nine Months Ended
September 30,
As Restated As Restated
(dollars in thousands) 2023 2022 2023 2022
Provision for (benefit from) income taxes $ 22,423 $ (7,710) $ 21,978 $ 7,310
Effective tax rate 28.1 % (13.4 %) 73.6 % 10.9 %
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
September 30, Nine Months Ended
September 30,
(in thousands) 2023 2022 2023 2022
Amount attributable to non-controlling interests $ 128 $ 4,104 $ 9,723 $ 1,569
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 nine months ended September 30, 2023 decreased $4.0 million and increased $8.2 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 information on our 3.75% Convertible Notes and our 2.75% Convertible Notes.
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 September 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. As of September 30, 2023, the total unused availability under our Credit Agreement was $330.8 million, resulting from $19.2 million in issued and outstanding letters of credit and nothing drawn under the Credit Agreement. See Note 14 of “Notes to the Condensed Consolidated Financial Statements.”
As of September 30, 2023, we had $1.9 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, $1.8 million of the receivables are past due. Our project with Brightline is nearing completion and final payment, including the retention receivable, will be due to us no later than 40 days after all conditions of final completion are satisfied. We expect to achieve final completion in the fourth quarter of 2023; however, timing cannot be assured. 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 future 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) September 30, 2023 December 31, 2022
Cash and cash equivalents excluding CCJVs $ 173,471 $ 191,444
CCJV cash and cash equivalents (1) 118,653 102,547
Total consolidated cash and cash equivalents 292,124 293,991
Short-term and long-term marketable securities (2) 37,028 65,943
Total cash, cash equivalents and marketable securities $ 329,152 $ 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. Government and agency obligations as of September 30, 2023 and December 31, 2022.
Granite’s portion of CCJV cash and cash equivalents was $71.0 million and $62.5 million as of September 30, 2023 and December 31, 2022, respectively. Excluded from the table above is $44.4 million and $40.4 million as of September 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 nine months ended September 30, 2023, we had capital expenditures of $109.0 million, compared t o $97.8 mi llion, during the nine months ended September 30, 2022. The increase year over year is primarily due to acquisition of materials reserves in 2023. We currently anticipate 2023 capital expenditures to be approximately $120 million.
Cash Flows
Nine Months Ended September 30,
(in thousands) 2023 2022
Net cash provided by (used in):
Operating activities $ 34,198 $ (14,631)
Investing activities $ (89,270) $ 13,874
Financing activities $ 53,205 $ (157,814)
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 provided by operating activities of $34.2 million for the nine months ended September 30, 2023 represents a $48.8 million increase in cash provided by operating activities when compared to the same period of 2022. The change was primarily attributable to net cash contributions to unconsolidated joint ventures and 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. Contributions, net of distributions, to unconsolidated joint ventures and affiliates decreased $27.3 million and cash used in working capital decreased by $24.8 million.
Investing activities
Cash used in investing activities of $89.3 million for the nine months ended September 30, 2023 represents a $103.1 million increase in cash used in investing activities when compared to the same period of 2022. The change was primarily due to proceeds of $142.6 million from the sale of the Inliner business in March 2022, partially offset by decreased cash used for marketable securities activity of $75.1 million, and $26.9 million used for the acquisition of CMR in the current year.
Financing activities
Cash provided by financing activities of $53.2 million for the nine months ended September 30, 2023 represents a $211.0 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 $98.8 million in cash. The year over year increase in cash provided by financing activities was also due to $66.8 million less cash used for repurchases of common stock and higher contributions from non-controlling partners, net of distributions, of $21.1 million. These increases were partially offset by a $100.0 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.
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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 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 September 30, 2023, approximately $3.5 billion of our $5.6 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 September 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 nine months ended September 30, 2023 and $231.5 million remained available as of September 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
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