Granite Construction Incorporated (NYSE: GVA) — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The filing presents full-year results; fourth-quarter figures are identified separately below. Unless noted, financial results are for continuing operations, with Water and Mineral Services (WMS) classified as discontinued operations.
Business context and strategy
Granite provides U.S. civil infrastructure construction and construction materials, principally aggregates and asphalt. In the fourth quarter, it reorganized its continuing operations into Construction and Materials segments and California, Central and Mountain operating groups. The updated strategy emphasizes core civil construction and materials in existing home markets and measured expansion.
Granite classified WMS as held for sale and discontinued operations, with a plan to divest the businesses. On February 2, 2022, it agreed to sell Inliner for $159.7 million, with closing expected in the first half of 2022, subject to customary conditions. The remaining Water Resources and Mineral Services businesses were expected to be sold within twelve months.
Key financial results
| Metric | FY 2021 | FY 2020 | Change / context |
|---|---|---|---|
| Revenue, continuing operations | $3.010 billion | $3.129 billion | Down 3.8% |
| Construction revenue | $2.602 billion | $2.764 billion | Down 5.9% |
| Materials revenue | $407.7 million | $364.8 million | Up 11.8% |
| Gross profit / margin | $305.6 million / 10.2% | $304.7 million / 9.7% | Gross profit nearly flat; margin improved |
| Operating income | $1.1 million | $19.7 million | Lower, including higher other costs |
| Net income (loss), continuing operations | $(8.3) million | $(1.8) million | Consolidated result |
| Net income (loss) attributable to Granite | $10.1 million | $(145.1) million | Includes discontinued operations |
| Diluted EPS | $0.22 | $(3.14) | Continuing-operations EPS was $(0.01) |
| Operating cash flow | $21.9 million | $268.5 million | Down $246.5 million |
Fourth quarter: Revenue was $683.2 million versus $830.4 million in Q4 2020; gross profit was $51.7 million, or 7.6% of revenue, versus $93.3 million, or 11.2%. Granite-attributable net loss was $13.2 million (diluted loss per share $0.28). The quarter included a $20.0 million loss from discontinued operations.
Margins and project estimates: Construction gross margin rose to 9.5% from 8.7%; Materials gross margin fell to 14.0% from 17.3%, mainly due to higher fuel and liquid asphalt costs and lower California volumes amid late-year weather. Significant project estimate revisions (individual gross-profit impact of at least $5 million) reduced project profitability by a net $70.6 million in 2021, compared with net decreases of $143.5 million in 2020.
Liquidity, debt and capital
- Year-end cash and cash equivalents were $395.6 million, including $92.8 million held by consolidated construction joint ventures; marketable securities were $15.6 million. The company separately reported $302.9 million of cash excluding those joint ventures. Joint-venture funds may not be freely available for Granite’s working capital.
- Debt carrying value was $339.9 million, including $230 million principal of 2.75% convertible notes due 2024 and a $123.8 million term loan. No revolving-credit borrowings were outstanding; $232 million of the $275 million revolver was available, after letters of credit.
- Granite was in compliance with credit agreement covenants at year-end: leverage ratio 2.39 against a maximum of 3.00, and interest coverage 6.69 against a minimum of 4.00.
- Capital expenditures were $94.8 million in 2021, including discontinued operations. The company expected 2022 continuing-operations capital expenditures of approximately $100 million to $115 million.
- Cash dividends paid were $23.8 million in 2021. A February 2022 authorization permits up to $300 million of share repurchases; the filing does not indicate that this authorization had been used.
Backlog, outlook and management commentary
- Committed and Awarded Projects (CAP) was $4.010 billion at year-end, nearly unchanged from $4.025 billion a year earlier. Approximately $2.0 billion of year-end unearned revenue was expected to be recognized in 2022. CAP includes awards and certain probable CM/GC work; substantially all may be canceled or modified by customers and is not a guarantee of profitable revenue.
- The Infrastructure Investment and Jobs Act, signed November 15, 2021, provides $550 billion of incremental funding over five years. Management expected improved public-project visibility and meaningful effects on project lettings beginning in late 2022, increasing in 2023 and beyond. This is an outlook, not company revenue guidance.
- Management described demand prospects as encouraging but cited COVID-19 uncertainty, supply-chain and labor constraints, and inflation in oil-related inputs, concrete and steel. Some contracts have escalation clauses, but protection is partial; further cost increases could pressure results.
- Management said best-value and alternative-delivery procurement may delay near-term bookings and starts, while potentially offering larger future projects with more sustainable margins and lower inherent risk. No specific revenue or earnings guidance was provided.
Material changes, unusual items and risks
- 2021 other costs were $95.2 million, including $66 million in net securities-litigation settlement charges and $21.6 million of non-recurring legal and accounting fees. The $129 million settlement, including $63 million from insurance, was funded into escrow; final court approval remained pending as of the filing.
- Operating cash flow included the company’s $66 million settlement payment and was also affected by working-capital timing, including contract assets and joint ventures. The settlement was a major factor in the year-over-year cash-flow decline.
- Granite reported a continuing SEC investigation related to its prior accounting investigation and restatement. It said previously identified material weaknesses in internal control had been remediated; management and the auditor concluded controls were effective as of December 31, 2021.
- In February 2022, claims related to Layne’s subcontract work on the Salesforce Tower foundation sought approximately $70 million from Layne and $30 million from Granite in separate proceedings. The company said it believed it had defenses and did not consider a material loss probable; it estimated reasonably possible loss could be up to approximately $100 million if unsuccessful.
- Contract profitability depends on estimates of costs, schedule, productivity, claims recovery and project conditions. Fixed-price and fixed-unit-price work, liquidated damages, subcontractor and joint-venture performance, weather, commodity prices, bonding capacity and public funding are significant risks.
- About 75% of 2021 continuing-operations construction-related revenue came from government-funded contracts. Caltrans represented 11.2% of continuing-operations revenue, up from 10.1% in 2020.
Important facts for investors to verify
- Progress and proceeds from the Inliner sale and any divestitures of the remaining WMS businesses.
- Final court approval and release of the $129 million securities-settlement escrow, and the status and potential exposure of the Salesforce Tower claims and SEC investigation.
- Whether the $4.0 billion CAP converts to revenue and acceptable margins, especially given customer cancellation rights and the $204.2 million of remaining revenue on contracts with forecast losses.
- Whether inflation, labor and supply constraints, and project estimate changes affect Construction and Materials margins and cash generation.
- Cash available outside joint ventures, debt maturities and covenant headroom, and actual 2022 capital expenditures and share repurchases.