Item 7. Management’s Discussion and Analysis
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We deliver infrastructure solutions for public and private clients primarily in the United States. We are one of the largest diversified construction and construction materials 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.
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. The Construction segment focuses on construction and rehabilitation of roads, pavement preservation, bridges, rail lines, airports, marine ports, dams, reservoirs, aqueducts, infrastructure and site development for use by the general public and water-related construction for municipal agencies, commercial water suppliers, industrial facilities and energy companies. It also provides construction of various complex projects including infrastructure / site development, mining, public safety, tunnel, solar, battery storage and other power-related projects. The Materials segment focuses on production of aggregates, asphalt concrete, liquid asphalt and recycled materials production
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for internal use in our construction projects and for sale to third parties. See Note 21 of “Notes to the Consolidated Financial Statements” for additional information about our reportable segments.
In addition to reportable segments, we also review our business by operating groups. In alphabetical order, our operating groups are as follows:
• California, which is comprised of vertically integrated businesses in home markets across the state;
• Central, which includes the vertically integrated Arizona region and regional civil construction businesses in Illinois, Florida and Texas. The Central group also includes the Federal division which performs civil construction across the continental United States and Guam, and the Tunnel division; and
• Mountain, which is comprised of vertically integrated regional businesses in Alaska, Washington, Oregon, Utah and Nevada. The Mountain Group also includes national businesses in the Industrial & Energy division, which primarily focuses on commercial solar construction projects, Water Resources, which performs water well drilling and rehabilitation services and Mineral Services, which performs mineral exploration services for mining clients.
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. A stagnant or declining economy will generally result in reduced demand for construction and construction materials in the private sector. This reduced demand increases competition for private sector projects and will ultimately also increase competition in the public sector as companies migrate from bidding on scarce private sector work to projects in the public sector. In addition, a stagnant or declining economy tends to produce less tax revenue for public agencies, thereby decreasing a source of funds available for spending on public infrastructure improvements. Some funding sources that have been specifically earmarked for infrastructure spending, such as diesel and gasoline taxes, are not as directly affected by a stagnant or declining economy, unless actual consumption is reduced or gasoline sales tax revenues decline consistent with fuel prices. However, even these can be temporarily at risk as federal, state and local governments take actions to balance their budgets. Conversely, increased levels of public funding as well as an expanding or robust economy will generally increase demand for our services and provide opportunities for revenue growth and margin improvement.
Critical Accounting Estimates
The financial statements included in “Item 8. Financial Statements and Supplementary Data” have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Our estimates and related judgments and assumptions are continually evaluated based on available information and experiences; however, actual amounts could differ from those estimates.
The following are our most critical accounting estimates that involve management judgment and can have significant effects on our reported results of operations.
Revenue Recognition
Our revenue is primarily derived from construction contracts that can span several quarters or years in our Construction segment and from sales of construction related materials in our Materials segment. We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, and subsequently issued additional related ASUs. The accuracy of our revenue and profit recognition in a given period depends on the accuracy of our estimates of the forecasted revenue and cost to complete each project. Cost estimates for all of our significant projects use a detailed “bottom up” approach. There are a number of factors that can contribute to changes in estimates of contract cost and profitability. The most significant of these include:
• changes in costs of labor and/or materials;
• subcontractor costs, availability and/or performance issues;
• extended overhead and other costs due to owner, weather and other delays;
• changes in productivity expectations;
• changes from original design on design-build projects;
• our ability to fully and promptly recover on affirmative claims and back charges for additional contract costs;
• a change in the availability and proximity of equipment and materials;
• complexity in original design;
• length of time to complete the project;
• the availability and skill level of workers in the geographic location of the project;
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• site conditions that differ from those assumed in the original bid;
• costs associated with scope changes; and
• the customer’s ability to properly administer the contract.
The foregoing factors, as well as the stage of completion of contracts in process and the mix of contracts at different margins may cause fluctuations in gross profit and gross profit margin from period to period. Significant changes in revenue and cost estimates, particularly in our larger, more complex, multi-year projects have had, and in the future could have, a significant effect on our profitability. Due to the number of factors that can contribute to changes in estimates of contract cost and profitability, the sensitivity of reported amounts to the assumptions underlying the estimate’s calculation is not reasonably available or meaningful. However, Note 3 of “Notes to the Consolidated Financial Statements” presents the impact material revisions in estimates had on the periods covered by this report.
Goodwill and Acquired Intangible Assets
Goodwill represents the excess of amounts paid over the fair value of net assets acquired from an acquisition. In order to determine the amount of goodwill resulting from an acquisition, we perform an assessment to determine the value of the acquired company’s tangible and identifiable intangible assets and liabilities. In our assessment, we determine whether identifiable intangible assets exist, which typically include customer relationships, backlog and trademarks/trade names. The determination of fair values of assets acquired and liabilities assumed requires us to make estimates and use valuation techniques when a market value is not readily available.
We test goodwill for impairment annually, as of November 1, for each reporting unit and more frequently when events occur or circumstances change which suggest that goodwill should be evaluated. Examples of such events or circumstances include, but are not limited to, the following:
• a significant adverse change in the business climate;
• a significant adverse change in legal factors or an adverse action or assessment by a regulator;
• a more likely than not expectation that a segment or a significant portion thereof will be sold; or
• the testing for recoverability of a significant asset group within the segment.
Goodwill is evaluated for impairment either by assessing qualitative factors or by performing a quantitative assessment. Qualitative factors, such as overall financial performance, industry or market considerations, or other relevant events, are assessed to determine if it is more likely than not that the fair value of the reporting units is less than their carrying amounts. During a quantitative impairment test, we calculate the estimated fair value of the reporting unit in which the goodwill is recorded using the discounted cash flows and market multiple methods, and compare that amount to the carrying value of that reporting unit. In the event the fair value of the reporting unit is determined to be less than the carrying value, goodwill is impaired, and an impairment loss is recognized equal to the excess, limited to the total amount of goodwill allocated to the reporting unit.
The impairment evaluation process includes, among other things, making assumptions about variables such as the determination of appropriate discount rates, the amount and timing of expected future cash flows, revenue and margin growth rates, and appropriate benchmark companies, which are subject to a high degree of judgment.
There are inherent uncertainties related to each of the above listed assumptions, and our judgment in applying them. Changes in the assumptions used in our goodwill and intangible assets valuations could result in impairment charges that could be material to our consolidated financial statements in any given period. Note 1 of “Notes to the Consolidated Financial Statements” includes further information about our long-lived assets and goodwill including the impact of impairments on the periods covered by this report, which are not material. We have not materially changed our estimation methodology during the periods presented.
Current Economic Environment and Outlook
Funding for our public work projects, which accounts for approximately 80% of our portfolio, is dependent on federal, state, regional and local revenues. At the federal level, the continued rollout of the $1.2 trillion Infrastructure Investment and Jobs Act (“IIJA”) has increased federal highway, bridge and transit funding to its highest level in more than six decades with $550 billion in incremental funding over five years. We believe that the increased multi-year spending commitment has improved the programming visibility for state and local governments and drove an increase in project lettings starting in 2023 that will continue 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 aided by 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.
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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 oil price inflation, further price increases may adversely impact us in the future.
Our Committed and Awarded Projects (“CAP”) continues to be strong with $5.5 billion at the end of the fourth quarter of 2023. Our CAP is supported by a positive public funding environment and resilient private market which we believe will provide further opportunities for continued CAP growth in 2024.
Strategic Actions
On March 16, 2022, we sold our trenchless and pipe rehabilitation services business (“Inliner”) for a purchase price of $159.7 million, subject to certain adjustments. As a result of the sale and post-closing adjustments, we received cash proceeds of $140.6 million and recognized a gain of $1.8 million.
On April 24, 2023, we completed the purchase of Coast Mountain Resources (2020) Ltd. (“CMR”) for $26.6 million. CMR is a construction aggregate producer based in British Columbia, Canada operating on Malahat First Nation land. This acquisition did not have a material impact on our results of operations.
On November 30, 2023 (“acquisition date”), we completed the acquisition of Lehman-Roberts Company and Memphis Stone & Gravel Company (collectively, "LRC/MSG") for $278.0 million, subject to customary closing adjustments, plus an estimated amount related to tax make-whole agreements with the seller. We purchased all of the outstanding equity interests in LRC/MSG and the purchase price was funded by our new $150.0 million senior secured term loan, as described further in Note 14 of "Notes to the Consolidated Financial Statements,” a draw of $100 million under our existing revolver and cash on hand. The acquired businesses are longstanding asphalt paving and asphalt and aggregates producers and suppliers. LRC/MSG operates strategically located asphalt plants and sand and gravel mines serving the greater Memphis area and northern Mississippi. LRC/MSG has exclusive rights to an estimated 57 million tons of proven and probable reserves and 24 million tons of measured and indicated reserves.
See Note 1 and Note 2 of “Notes to the Consolidated Financial Statements” for further information.
Results of Operations
Our operations are typically affected more by weather conditions during the first and fourth quarters of our fiscal year which may alter our construction schedules and can create variability in our revenues and profitability.
Years Ended December 31, 2023 2022 2021
(in thousands)
Total revenue $ 3,509,138 $ 3,301,256 $ 3,501,865
Gross profit $ 396,399 $ 369,494 $ 362,645
Selling, general and administrative expenses $ 294,466 $ 272,610 $ 303,015
Other costs, net (see Note 1 of “Notes to the Consolidated Financial Statements”)
$ 50,217 $ 24,120 $ 101,351
Gain on sales of property and equipment, net $ (28,346) $ (12,617) $ (66,439)
Operating income $ 80,062 $ 85,381 $ 24,718
Total other (income) expense, net $ 20,208 $ (6,436) $ 2,591
Amount attributable to non-controlling interests $ 14,012 $ 4,445 $ 7,682
Net income attributable to Granite Construction Incorporated $ 43,599 $ 83,302 $ 10,096
Revenue
Total Revenue by Segment
Years Ended December 31, 2023 2022 2021
(dollars in thousands)
Construction $ 2,992,254 85.3 % $ 2,803,935 84.9 % $ 3,076,190 87.8 %
Materials 516,884 14.7 497,321 15.1 425,675 12.2
Total $ 3,509,138 100.0 % $ 3,301,256 100.0 % $ 3,501,865 100.0 %
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Construction Revenue
Years Ended December 31, 2023 2022 2021
(dollars in thousands)
California $ 1,029,410 34.4 % $ 811,623 28.9 % $ 822,448 26.7 %
Central 765,560 25.6 851,779 30.4 1,058,448 34.4
Mountain 1,197,284 40.0 1,140,533 40.7 1,195,294 38.9
Total $ 2,992,254 100.0 % $ 2,803,935 100.0 % $ 3,076,190 100.0 %
Construction revenue in 2023 increased by $188.3 million, or 6.7%, compared to 2022. California operating group revenue increased $217.8 million despite 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 $56.8 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 $86.2 million primarily due to the wind down of several large projects and a decrease in the estimated amount of probable recovery on an outstanding claim. This decrease was partially offset by increased revenue from new work in Arizona, Texas and Illinois.
During both 2023 and 2022, approximately 70% of revenue earned in the Construction segment was from the public sector.
Materials Revenue
Years Ended December 31, 2023 2022 2021
(dollars in thousands)
California $ 258,725 50.0 % $ 273,314 54.9 % $ 242,552 57.0 %
Central 55,125 10.7 46,531 9.4 33,270 7.8
Mountain 203,034 39.3 177,476 35.7 149,853 35.2
Total $ 516,884 100.0 % $ 497,321 100.0 % $ 425,675 100.0 %
Materials revenue in 2023 increased by $19.6 million, or 3.9%, when compared to 2022, driven primarily by sales from facilities and businesses acquired in 2023. This contributed $16.5 million of revenue during the current year. The remaining increase of $3.1 million, is due to higher asphalt and aggregate sales prices in our legacy facilities that overcame decreases in asphalt and aggregate sales volumes. Inclement weather during the first half of 2023 negatively impacted 2023 sales volumes.
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, respectively. All CAP is in the Construction segment.
December 31, 2023 2022
(dollars in thousands)
Unearned revenue $ 3,596,676 64.9 % $ 2,877,478 64.2 %
Other awards 1,949,078 35.1 1,607,661 35.8
Total $ 5,545,754 100.0 % $ 4,485,139 100.0 %
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December 31, 2023 2022
(dollars in thousands)
California $ 2,436,521 43.9 % $ 1,747,163 39.0 %
Central 1,707,862 30.8 1,661,613 37.0
Mountain 1,401,371 25.3 1,076,363 24.0
Total $ 5,545,754 100.0 % $ 4,485,139 100.0 %
CAP of $5.5 billion at December 31, 2023 was $1.1 billion, or 24% higher than 2022 primarily due to higher award volume throughout 2023, specifically in our California and Mountain operating groups which increased $689.4 million and $325.0 million, respectively, between December 31, 2022 and 2023. The most significant new addition to CAP during the fourth quarter of 2023 was $344.5 million related to a private rail facility project in California.
Non-controlling partners’ share of CAP as of December 31, 2023 and 2022 was $243.8 million and $85.0 million, respectively.
At December 31, 2023 and 2022, six and five contracts with remaining CAP of $10.0 million or more per project had total forecasted losses with remaining revenue of $188.9 million, or 3.4% of total CAP, and $134.2 million, of 3.0% of total CAP, respectively. Provisions are recognized in the consolidated statements of operations for the full amount of estimated losses on uncompleted contracts whenever evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue.
Gross Profit
The following table presents gross profit by reportable segment for the respective periods:
Years Ended December 31, 2023 2022 2021
(dollars in thousands)
Construction $ 325,055 $ 303,881 $ 303,228
Percent of segment revenue 10.9 % 10.8 % 9.9 %
Materials 71,344 65,613 59,417
Percent of segment revenue 13.8 13.2 14.0
Total gross profit $ 396,399 $ 369,494 $ 362,645
Percent of total revenue 11.3 % 11.2 % 10.4 %
Construction gross profit for the year ended December 31, 2023 increased by $21.2 million, or 7.0%, when compared to 2022, primarily driven by strong performance in the vertically integrated Mountain operating group, partially offset by a decrease in the estimated amount of probable recovery on an outstanding claim in our Central operating group, as well as the impact of other downward revisions in estimates (see Note 3 of “Notes to the Consolidated Financial Statements”).
Materials gross profit for the year ended December 31, 2023 increased by $5.7 million, or 8.7%, when compared to 2022 and gross profit margin increased to 13.8% in the current year from 13.2% in the prior year. These improvements were primarily due to price increases as well as normalized fuel and energy costs in 2023. Our newly acquired operations produced a gross loss of $3.6 million, including the impact of purchase accounting primarily related to LRC/MSG.
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Selling, General and Administrative Expenses
The following table presents the components of selling, general and administrative expenses for the respective periods:
Years Ended December 31, 2023 2022 2021
(dollars in thousands)
Selling
Salaries and related expenses $ 58,617 $ 57,921 $ 65,758
Incentive compensation 5,784 4,316 5,160
Stock-based compensation 1,595 1,277 1,415
Other selling expenses 5,964 8,627 4,632
Total selling 71,960 72,141 76,965
General and administrative
Salaries and related expenses 98,622 103,161 111,149
Incentive compensation 23,580 12,108 8,908
Stock-based compensation 8,158 5,084 3,792
Other general and administrative expenses 92,146 80,116 102,201
Total general and administrative 222,506 200,469 226,050
Total selling, general and administrative $ 294,466 $ 272,610 $ 303,015
Percent of revenue 8.4 % 8.3 % 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 2023 decreased $0.2 million compared to 2022. Increased selling incentive and stock-based compensation resulting from improved financial performance was offset by a decrease in other selling expenses.
General and Administrative Expenses
General and administrative expenses include costs related to our operational offices that are not allocated to direct contract costs and expenses related to our corporate functions. Other general and administrative expenses include travel and entertainment, outside services, information technology, depreciation, occupancy, training, office supplies, changes in the fair market value of our Non-Qualified Deferred Compensation plan liability and other miscellaneous expenses. Total general and administrative expenses for 2023 increased by $22.0 million, or 11.0%, compared to 2022, primarily due to an increase in incentive compensation due to improved financial performance. The increase 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. These increases were partially offset by the elimination of general and administrative expenses related to Inliner which was sold in the first quarter of 2022.
Other Costs, net
The following table presents other costs for the respective periods:
Years Ended December 31, 2023 2022 2021
(in thousands)
Other costs, net $ 50,217 $ 24,120 $ 101,351
Other costs for the year ended December 31, 2023 increased by $26.1 million when compared to 2022 primarily due to the settlement of the Salesforce Tower matter in October 2023. See Note 20 of "Notes to the Consolidated Financial Statements" for information related to legal matters. Also included in 2023 are costs and non-cash impairment charges associated with the wind down of our international Mineral Services operations. See Note 1 of "Notes to the Consolidated Financial Statements" for more information.
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Gain on Sales of Property and Equipment, net
The following table presents the gain on sales of property and equipment, net for the respective periods:
Years Ended December 31, 2023 2022 2021
(in thousands)
Gain on sales of property and equipment, net $ (28,346) $ (12,617) $ (66,439)
Gain on sales of property and equipment, net for the year ended December 31, 2023 increased by $15.7 million when compared to 2022 primarily due to the sale of a property in Texas in 2023. The sale was part of our ongoing asset optimization plan.
Other (Income) Expense
The following table presents the components of other (income) expense, net for the respective periods:
Years Ended December 31, 2023 2022 2021
(in thousands)
Loss on debt extinguishment $ 51,052 $ — $ —
Interest income (17,538) (6,528) (1,176)
Interest expense 18,462 12,624 20,739
Equity in income of affiliates, net (25,748) (13,571) (12,586)
Other (income) expense, net (6,020) 1,039 (4,386)
Total other (income) expense, net $ 20,208 $ (6,436) $ 2,591
We incurred a $51.1 million loss on debt extinguishment in the second quarter of 2023 related to the refinancing of a portion of our 2.75% Convertible Notes. We issued 1,390,500 shares of Granite common stock and paid $198.8 million in cash in separate and individually negotiated transactions in exchange for $198.7 million aggregate principal amount of our 2.75% Convertible Notes concurrent with the offering of the 3.75% Convertible Notes. 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.
Interest income for 2023 increased by $11.0 million when compared to 2022 primarily due to higher interest rates on our investments. Interest expense for 2023 increased by $5.8 million when compared to 2022 as a result of increased borrowings in 2023. Equity in income of affiliates increased by $12.2 million when compared to 2022 due to overall increases in net income of our affiliates driven by increases in sales and margins. Other income, net increased by $7.1 million primarily due to increases in the fair market value of our company-owned life insurance policy.
Income Taxes
The following table presents the provision for income taxes for the respective periods:
Years Ended December 31, 2023 2022 2021
(in thousands)
Provision for income taxes $ 30,267 $ 12,960 $ 19,713
Effective tax rate 50.6 % 14.1 % 89.1 %
Our effective tax rate increased from 14.1% to 50.6% when compared to 2022 due to increases in our provision for income taxes relative to lower income before income taxes. Provision for income taxes in the current year was higher than last year due to $49.3 million of non-deductible expense related to the refinancing of a portion of our 2.75% Convertible Notes in the second quarter of 2023. See Note 14 of “Notes to the Consolidated Financial Statements.” In the prior year, provision for income taxes was lower due to the benefit associated with the reversal of deferred tax liabilities related to our Water Resources and Minerals businesses no longer being held for sale, and the benefit from the release of valuation allowances related to utilization of capital loss carryforwards net of the tax expense from non-deductible goodwill associated with the sale of Inliner. The decrease in year-over-year income before income taxes was primarily due to the loss in the current year related to debt extinguishment.
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Amount Attributable to Non-controlling Interests
The following table presents the amount attributable to non-controlling interests in consolidated subsidiaries for the respective periods:
Years Ended December 31, 2023 2022 2021
(in thousands)
Amount attributable to non-controlling interests $ 14,012 $ 4,445 $ 7,682
The amount attributable to non-controlling interests represents the non-controlling owners’ share of the net loss of our consolidated construction joint ventures. The change during 2023 was primarily due to increased losses due to downward revisions in estimates from an existing joint venture, partially offset by increased profits from new joint ventures. (see Note 3 of “Notes to the Consolidated Financial Statements”).
Prior Years Comparison (2022 to 2021)
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Annual Report on Form 10-K filed with the SEC on February 21, 2023.
Liquidity and Capital Resources
Our primary sources of liquidity are cash and cash equivalents, investments, available borrowing capacity under our credit facility 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 Consolidated Financial Statements" for information on our 2.75% Convertible Notes, our 3.75% Convertible Notes and our Credit Agreement.
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 and acquire assets or businesses that are complementary to our operations.
Our primary contractual obligations are as follows and are further discussed in the referenced “Notes to the Consolidated Financial Statements:”
• Asset retirement obligations - see Note 11, Property and Equipment, net
• Long-term debt and the associated interest payments – see Note 14, Long-Term Debt
• Operating lease and royalty future minimum payments – see Note 15, Leases
• Non-Qualified Deferred Compensation Plan obligations – see Note 16, Employee Benefit Plans
In addition to the obligations referenced above, as of December 31, 2023 we had $18.6 million of purchase commitments for equipment and other goods and services not directly connected with our construction contracts, which are individually greater than $50,000 and have an expected fulfillment date after December 31, 2023. Of this, approximately $16.1 million and $2.5 million will be paid in 2024 and 2025, respectively. There are no material purchase commitments in the periods thereafter.
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 believe our primary sources of liquidity, access to the 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.
Cash, cash equivalents and marketable securities as of December 31, 2023 increased $93.6 million to $453.5 million from the prior year end. In addition to meeting our liquidity requirements listed above, our increased cash balances are expected to be used to invest in our business through strategic capital expenditures in 2024 and we will continue to explore acquisition opportunities in alignment with our strategic plan.
As of December 31, 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.
In June 2022, we entered into the Fourth Amended and Restated Credit Agreement (the “Credit Agreement”) maturing June 2, 2027. The Credit Agreement is a $350.0 million senior secured, five-year revolving facility (the “Revolver”). In November 2023, we entered into Amendment No. 2 (the "Amendment") to the Credit Agreement which provided for a
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$150 million senior secured term loan (the “Term Loan”). As of December 31, 2023, the total unused availability under our Credit Agreement was $230.7 million, resulting from $19.3 million in issued and outstanding letters of credit and $100.0 million drawn on the Revolver. See Note 14 of “Notes to the Consolidated Financial Statements” for further discussion regarding the Revolver.
As of December 31, 2023, we had $2.0 million of receivables and $29.1 million of contract retention receivables from Brightline Trains Florida LLC ("Brightline") (see Note 6 of “Notes to the Consolidated Financial Statements”). As of the date of this report, $1.9 million of the receivables outstanding at year-end have been collected. 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 first half of 2024; 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:
December 31, 2023 2022
(in thousands)
Cash and cash equivalents excluding CCJVs $ 297,439 $ 191,444
CCJV cash and cash equivalents (1) 120,224 102,547
Total consolidated cash and cash equivalents 417,663 293,991
Short-term and long-term marketable securities (2) 35,863 65,943
Total cash, cash equivalents and marketable securities $ 453,526 $ 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 as of all periods presented.
Granite’s portion of CCJV cash and cash equivalents was $73.1 million and $62.5 million as of December 31, 2023 and 2022, respectively. Excluded from the table above is $34.2 million and $40.4 million as of December 31, 2023 and 2022, respectively, in Granite’s portion of unconsolidated construction joint venture cash and cash equivalents.
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 year ended December 31, 2023, we had capital expenditures of $140.4 million, compared to $121.6 million during 2022, an increase of $18.8 million. The increase year over year is primarily due to acquisitions of materials reserves in 2023. We currently anticipate 2024 capital expenditures to be between approximately $130 million and $150 million, including approximately $50 million in planned strategic materials investments in land, reserves and an aggregate plant. This range also includes approximately $20 million related to a project-specific tunnel boring machine.
Cash Flows
Years Ended December 31, 2023 2022 2021
(in thousands)
Net cash provided by (used in):
Operating activities $ 183,707 $ 55,647 $ 21,931
Investing activities $ (359,290) $ (11,000) $ (21,478)
Financing activities $ 299,255 $ (164,311) $ (24,446)
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Operating activities
As a large infrastructure contractor and construction materials producer, our revenue, gross profit and the resulting operating cash flows can differ significantly from period to period due to a variety of factors, including seasonal cycles, 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 $183.7 million during 2023 represents a $128.1 million increase in cash provided by operating activities when compared to 2022. The change was primarily due to a $73.6 million increase in cash provided by working capital, which includes receivables, net contract assets, inventories, other assets, accounts payable and accrued expenses and other liabilities. Additionally, distributions from, net of contributions to, unconsolidated joint ventures and affiliates increased $42.6 million from 2022.
Investing activities
Cash used in investing activities of $359.3 million during 2023 represents a $348.3 million increase in cash used in investing activities when compared to 2022. The change was primarily due to the acquisition of LRC/MSG which resulted in a $294.0 million cash outflow during 2023. In addition, net cash used in investing activities in 2022 included $140.6 million of proceeds from the sale of the Inliner business in March 2022. These changes were partially offset by decreased purchases of marketable securities in the current year.
Financing activities
Cash provided by financing activities of $299.3 million during 2023 represents a $463.6 million increase in cash provided by financing activities when compared to 2022. The change was primarily due to a $150.0 million increase in cash provided by our Revolver and Term Loan. The change was also due to the prepayment in the prior year of our term loan of $123.8 million, which did not recur this year. In addition, net cash inflows related to our convertible bond transactions in 2023 generated $98.8 million in cash. See Note 14 to “Notes to the Consolidated Financial Statements” for further information about our long-term debt transactions and our credit facility.
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 $24.5 million.
Derivatives
We recognize derivative instruments as either assets or liabilities in the consolidated balance sheets at fair value using Level 2 inputs. See Note 8 to “Notes to the 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. See Note 14 to “Notes to the Consolidated Financial Statements” for further information.
Surety Bonds and Real Estate Mortgages
We are generally required to provide various types of surety bonds that provide an additional measure of security for our performance under certain public and private sector contracts. At December 31, 2023, approximately $3.2 billion of our $5.5 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. The debt associated with our unconsolidated non-construction entities is included in Note 10 of “Notes to the Consolidated Financial Statements.”
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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 collateral 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 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) and a minimum Consolidated Interest Coverage Ratio (as defined in the Credit Agreement). As of December 31, 2023, we were in compliance with the covenants in the Credit Agreement.
Share Purchase 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”). We did not purchase shares under the share purchase program in 2023. As of December 31, 2023, $231.5 million of the 2022 authorization remained available.
The specific timing and amount of any future repurchases will vary based on market conditions, securities law limitations and other factors.
Recently Issued and Adopted Accounting Pronouncements
See Note 1 of “Notes to the Consolidated Financial Statements” under the caption Recently Issued and Adopted Accounting Pronouncements.