GRANITE CONSTRUCTION INC 10-Q

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, 2024 (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, vertically integrated civil contractors and construction materials producers 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. We own and lease aggregate reserves and own processing plants that are vertically integrated into our construction operations and we also produce construction materials for sale to third parties. 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 account 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. The increased multi-year spending commitment has improved the programming visibility for state and local governments and has driven an increase in project lettings that started in 2023, continued in 2024 and we believe will carry into 2025 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, despite overall budgetary concerns, a significant part of the state infrastructure spend is funded through Senate Bill 1 (SB-1), the Road Repair and Accountability Act of 2017, a 10-year, $54.2 billion program, which may only be used for transportation-related purposes, without any sunset provisions. 21 Table of Contents Over the last several years, inflation, supply chain and labor constraints have had a significant impact on the global economy including Granite and others in the construction industry in the United States. Recently, concerns over tariffs have been a major source of uncertainty in the economy. To date, we have not experienced a material financial impact due to tariffs. It is impossible to fully mitigate the potential impacts of the foregoing macro-economic factors and they may negatively impact us in the future. However, where practicable, we have applied proactive measures to mitigate these macro-economic factors, 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. Our Committed and Awarded Projects (“CAP”) balance continues to be strong with $5.7 billion at the end of the first quarter of 2025. 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. Acquisition As previously disclosed, we acquired Dickerson & Bowen, Inc. ("D&B") on August 9, 2024. D&B is an aggregates, asphalt, and highway construction company serving central and southern Mississippi. The results of operations of D&B are included in our consolidated financial statements from the date of acquisition, which impacts comparability to the applicable prior periods. See Note 3 of “Notes to the Condensed Consolidated Financial Statements” for further information. Results of Operations Our operations are typically affected more by inclement weather conditions during the first and fourth quarters of our fiscal year which may alter our construction schedules and can create variability in our revenues and profitability. Therefore, the results of operations of a given quarter are not indicative of the results to be expected for the full year. The following table presents a financial summary for the three months ended March 31, 2025 and 2024: Three Months Ended March 31, (in thousands) 2025 2024 Total revenue $ 699,547 $ 672,275 Gross profit $ 83,849 $ 54,285 Selling, general and administrative expenses $ 115,911 $ 87,993 Other costs, net $ 9,426 $ 11,010 Operating loss $ (39,751) $ (43,300) Total other (income) expense, net $ 332 $ (4,332) Amount attributable to non-controlling interests $ (5,329) $ (1,541) Net loss attributable to Granite Construction Incorporated $ (33,656) $ (30,983) Revenue Total Revenue by Segment Three Months Ended March 31, (dollars in thousands) 2025 2024 Construction $ 614,618 87.9 % $ 595,213 88.5 % Materials 84,929 12.1 77,062 11.5 Total $ 699,547 100.0 % $ 672,275 100.0 % 22 Table of Contents Construction Revenue Three Months Ended March 31, (dollars in thousands) 2025 2024 Public $ 395,885 64.4 % $ 419,816 70.5 % Private 218,733 35.6 175,397 29.5 Total $ 614,618 100.0 % $ 595,213 100.0 % Construction revenue for the three months ended March 31, 2025 increased by $19.4 million, or 3.3%, when compared to 2024. This increase was primarily due to several new projects ramping up in the current year as well as favorable weather conditions in early 2025. Additionally, D&B contributed $10.1 million of construction revenue during the three months ended March 31, 2025. Materials Revenue Three Months Ended March 31, (dollars in thousands) 2025 2024 Aggregates $ 40,402 47.6 % $ 36,089 46.8 % Asphalt 43,982 51.8 40,813 53.0 Other 545 0.6 160 0.2 Total $ 84,929 100.0 % $ 77,062 100.0 % Materials revenue for the three months ended March 31, 2025 was $84.9 million, an increase of $7.9 million, or 10.2%, when compared to the three months ended March 31, 2024. This increase was primarily driven by $5.6 million of revenue from D&B, as well as higher aggregates and asphalt volumes and higher aggregates 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 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) March 31, 2025 December 31, 2024 Unearned revenue $ 3,833,875 66.8 % $ 3,584,378 67.7 % Other awards 1,906,140 33.2 1,711,689 32.3 Total $ 5,740,015 100.0 % $ 5,296,067 100.0 % (dollars in thousands) March 31, 2025 December 31, 2024 Customer type: Public $ 4,623,668 80.6 % $ 4,120,821 77.8 % Private 1,116,347 19.4 1,175,246 22.2 Total $ 5,740,015 100.0 % $ 5,296,067 100.0 % CAP of $5.7 billion at March 31, 2025 was $443.9 million or 8.4% higher than at December 31, 2024. Significant additions to CAP during the three months ended March 31, 2025 included $173 million for three highway projects in California, 23 Table of Contents $167 million for two federal projects, a $138 million bridge project in Illinois, an $80 million highway project in Texas, and $78 million for a bridge project in California, all of which are for customers in the public sector. Non-controlling partners’ share of CAP as of March 31, 2025 and December 31, 2024 was $334.7 million and $331.1 million, respectively. At March 31, 2025, one contract with remaining CAP of $10 million or more per project had total forecasted losses with remaining revenue of $57.7 million, or 1.0%, of total CAP. 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 (loss) by reportable segment for the respective periods: Three Months Ended March 31, (dollars in thousands) 2025 2024 Construction $ 85,438 $ 56,828 Percent of segment revenue 13.9 % 9.5 % Materials (1,589) (2,543) Percent of segment revenue (1.9) % (3.3) % Total gross profit $ 83,849 $ 54,285 Percent of total revenue 12.0 % 8.1 % Construction gross profit for the three months ended March 31, 2025 increased by $28.6 million, or 50.3%, when compared to 2024 primarily due to higher revenue and improved project execution across our project portfolio resulting in net increases from revisions in estimates in the current period compared to net decreases in the prior period. 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." Materials gross loss for the three months ended March 31, 2025 decreased by $1.0 million, or 37.5%, when compared to 2024. The decreased loss was primarily due to the newly acquired D&B business. Selling, General and Administrative Expenses The following table presents the components of selling, general and administrative expenses for the respective periods: Three Months Ended March 31, 2025 2024 (dollars in thousands) Salaries and related expenses $ 55,416 $ 46,048 Stock-based compensation 30,053 12,352 Other selling, general and administrative expenses 30,442 29,593 Total selling, general and administrative expenses $ 115,911 $ 87,993 Percent of revenue 16.6 % 13.1 % Selling, general and administrative ("SG&A") 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, materials facility permits, and costs related to our operational offices that are not allocated to direct contract costs and expenses related to our corporate functions. Other SG&A 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. SG&A 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. SG&A expenses for the three months ended March 31, 2025 increased $27.9 million compared to 2024, primarily due to a $17.7 million increase in stock-based compensation due to improved financial performance, as well as higher salaries and related expenses due to increased labor costs. 24 Table of Contents Other Costs, net The following table presents other costs, net for the respective periods: Three Months Ended March 31, (in thousands) 2025 2024 Other costs, net $ 9,426 $ 11,010 Other costs, net mainly consist of costs related to the defense of a former Company officer in his ongoing civil litigation with the Securities and Exchange Commission, and remained fairly consistent with the prior year. Other Income, net Three Months Ended March 31, (in thousands) 2025 2024 Interest income $ (6,268) $ (6,702) Interest expense 7,757 8,083 Equity in income of affiliates, net (1,094) (3,970) Other income, net (63) (1,743) Total other (income) expense, net $ 332 $ (4,332) During the three months ended March 31, 2025, total other income, net decreased $4.7 million compared to prior year. This decrease was primarily due to a decrease of $2.9 million in Equity in income of affiliates, net due to reduced net income of our affiliates and a $1.7 million decrease from Other income, net primarily due to lower gains on investments held within the rabbi trust related to our non-qualified deferred compensation plan obligations. The fluctuations in these investments mostly offset variances in our non-qualified deferred compensation plan expense in SG&A. Income Taxes The following table presents the benefit from income taxes for the respective periods: Three Months Ended March 31, (dollars in thousands) 2025 2024 Benefit from income taxes $ (11,756) $ (9,526) Effective tax rate 29.3 % 24.4 % We calculate our income tax provision or benefit at the end of each interim period by estimating our annual effective tax rate, applying that rate to our income or loss before taxes and adjusting for discrete items not included in our estimate of the annual effective tax rate. 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 March 31, (in thousands) 2025 2024 Amount attributable to non-controlling interests $ (5,329) $ (1,541) 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. During the three months ended March 31, 2025 the increase was primarily due to the impact of new joint venture projects. 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 25 Table of Contents 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 long-term debt. 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. See Note 3 of “Notes to the Condensed Consolidated Financial Statements” for information on our most recent acquisition. 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 March 31, 2025, our cash and cash equivalents consisted of deposits and money market funds held with established national financial institutions and marketable securities consisting of commercial paper, corporate notes and bonds, Municipal notes and bonds and U.S. Government and agency obligations. As of March 31, 2025, the total unused availability under our Credit Agreement was $330.4 million, resulting from $19.6 million in issued and outstanding letters of credit and nothing drawn under the Revolver. See Note 14 of “Notes to the Condensed Consolidated Financial Statements.” 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) March 31, 2025 December 31, 2024 Cash and cash equivalents excluding CCJVs $ 214,264 $ 404,436 CCJV cash and cash equivalents (1) 164,810 173,894 Total consolidated cash and cash equivalents 379,074 578,330 Short-term marketable securities (2) 43,708 7,311 Long-term marketable securities (2) 90,295 — Total cash, cash equivalents and marketable securities $ 513,077 $ 585,641 (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 commercial paper, corporate notes and bonds, Municipal notes and bonds and U.S. Government and agency obligations as of March 31, 2025 and U.S. Government and agency obligations as of December 31, 2024. Granite’s portion of CCJV cash and cash equivalents was $101.4 million and $106.0 million as of March 31, 2025 and December 31, 2024, respectively. Excluded from the table above is $34.5 million and $28.7 million as of March 31, 2025 and December 31, 2024, respectively, of 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 three months ended March 31, 2025, we had capital expenditures of $32.2 million, compared to $27.9 million during the three months ended March 31, 2024. We currently anticipate 2025 capital expenditures to be approximately $140 million to $160 million, including approximately $50 million in planned strategic materials investments. 26 Table of Contents Cash Flows Three Months Ended March 31, (in thousands) 2025 2024 Net cash provided by (used in): Operating activities $ 3,647 $ 24,073 Investing activities $ (156,310) $ (10,762) Financing activities $ (46,593) $ (109,222) 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 construction work 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 construction 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 $3.6 million for the three months ended March 31, 2025 represents a $20.4 million decrease in cash provided by operating activities when compared to the same period of 2024. The change was primarily attributable to a $33.3 million decrease 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 construction joint ventures and affiliates decreased $13.4 million when compared to the same period of 2024. Partially offsetting this was an increase in net income after adjusting for non-cash items of $26.3 million. Investing activities Cash used in investing activities of $156.3 million for the three months ended March 31, 2025 represents a $145.5 million increase in cash used in investing activities when compared to the same period of 2024. The change was primarily due to $134.7 million in purchases of marketable securities along with $12.9 million less in maturities of marketable securities. There was also $4.3 million more in property and equipment purchases compared to the same period in 2024. Partially offsetting these increases was $6.1 million in cash paid for purchase price adjustments on an acquisition in 2024 that did not occur in 2025. Financing activities Cash used in financing activities of $46.6 million for the three months ended March 31, 2025 represents a $62.6 million decrease in cash used in financing activities when compared to the same period of 2024. The change was primarily due to repayment of the balance drawn on our revolving credit facility in 2024, which had $100.0 million outstanding as of December 31, 2023. See Note 14 of the “Notes to the Condensed Consolidated Financial Statements” for further information about our credit facility. This decrease was partially offset by an increase in distributions to non-controlling partners, net of contributions, of $31.5 million and a $7.8 million increase in repurchases of common stock. 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 capped call transactions related to the 3.75 % Convertible Notes and 3.25 % Convertible Notes were recorded to equity on our condensed consolidated balance sheets based on the cash proceeds. See Note 14 to “Notes to the Condensed Consolidated Financial Statements” for further information. Surety Bonds and Real Estate Mortgages We are generally required to provide various types of surety bonds that provide an additional measure of security under certain public and private sector contracts. At March 31, 2025, approximately $3.6 billion of our $5.7 billion CAP was bonded. Performance bonds do not have stated expiration dates; rather, we are generally released from the bonds when the obligations of the underlying contract have been fulfilled. The ability to maintain bonding capacity requires that we maintain cash and working capital balances satisfactory to our sureties. 27 Table of Contents Our investments in real estate ventures are subject to mortgage indebtedness. This indebtedness is non-recourse to Granite but is recourse to the real estate venture. The terms of this indebtedness are typically renegotiated to reflect the evolving nature of the real estate projects as they progress through acquisition, entitlement, development and leasing. Modification of these terms may include changes in loan-to-value ratios requiring the real estate venture to repay portions of the debt. Our equity method investments in our foreign affiliates are subject to local bank debt primarily for equipment purchases. This debt is non-recourse to Granite, but it is recourse to the affiliates. The debt associated with our equity method investments is included in Note 11 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 3.25% 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 3.25% Convertible Notes, our 3.75% Convertible Notes or our Credit Agreement would constitute an event of default under the 3.25% Convertible Notes indenture, the 3.75% Convertible Notes 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 3.25% 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 March 31, 2025, 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 200 shares repurchased under the 2022 authorization in the three months ended March 31, 2025 and $189.5 million remained available under the 2022 authorization as of March 31, 2025. 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 except as disclosed in Note 9 of “Notes to the Condensed Consolidated Financial Statements” regarding diversification of our investment portfolio.