Granite Construction Incorporated — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2020. The request metadata says “2020 Q1,” but this filing covers 2020 Q3. Filed February 25, 2021. Unless stated otherwise, amounts below are in U.S. dollars.
Business context and results
Granite is a U.S. infrastructure contractor and materials producer, reporting Transportation, Water, Specialty and Materials segments. Its business is seasonal, and quarterly results are not necessarily indicative of full-year performance. 2019 comparative financial information was restated following an investigation of prior-period Heavy Civil project forecasts.
| Metric | Q3 2020 | Q3 2019, restated | Nine months 2020 | Nine months 2019, restated |
|---|---|---|---|---|
| Revenue | $1,065.2m | $1,112.1m | $2,616.9m | $2,560.0m |
| Gross profit / margin | $126.0m / 11.8% | $122.6m / 11.0% | $238.1m / 9.1% | $170.5m / 6.7% |
| Operating income (loss) | $(85.8)m | $53.5m | $(166.3)m | $(54.0)m |
| Net income (loss) attributable to Granite | $(91.2)m | $45.9m | $(153.1)m | $(40.8)m |
| Diluted EPS | $(2.00) | $0.97 | $(3.36) | $(0.87) |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $138.7m | $(26.5)m |
Financial position and material changes
- Nine-month revenue grew 2.2%, while Q3 revenue declined 4.2%. Transportation revenue increased 7.3% for the nine-month period; Water declined 8.0% and Specialty declined 4.7%. Materials rose 2.8%.
- Nine-month gross profit improved by $67.7m, primarily as the negative impact of Heavy Civil estimate revisions was lower than in 2019. Specialty gross profit fell 35.0% for the nine months, including the effect of unfavorable project estimate revisions.
- Non-cash impairment charges were $156.7m for the nine months, including $132.3m in Q3. These included goodwill impairments and a $9.6m impairment of foreign affiliate investments. The filing says its 2020 annual goodwill test, completed in Q4, resulted in no additional charge.
- Downward revisions on projects of at least $5m reduced gross profit by $107.5m for the first nine months of 2020, versus $162.5m in the comparable restated period. The 2020 revisions were mainly attributed to differing site conditions, lower productivity and unfavorable weather.
- At September 30, cash and cash equivalents were $388.0m, including $92.6m held by consolidated construction joint ventures; marketable securities were $5.7m. Cash, cash equivalents and restricted cash increased $121.4m during the nine months. Some joint-venture cash is not generally available for Granite’s working capital.
- Total debt was $413.9m, including $198.6m carrying value of 2.75% convertible notes, $133.1m term-loan balance and $75.0m drawn on the revolver. Revolver capacity was $275m, with $155.9m unused availability after borrowings and letters of credit. Long-term lease liabilities were $51.9m, in addition to current lease liabilities.
- Total contract backlog was $3.28bn at September 30, down from $3.55bn at June 30, 2020 and $3.68bn a year earlier. Four Transportation contracts had forecast losses and represented $477.0m of remaining revenue.
Outlook, risks and unusual items
- Management said the COVID-19 pandemic had caused project suspensions or reduced activity, particularly in Water and Mineral Services and some Washington and Arizona operations. It cited continuing uncertainty around public revenues and project timing, while describing backlog as strong and expressing optimism about infrastructure funding and future best-value procurement opportunities.
- Management expected cash, available borrowing capacity and operating cash generation to meet operating needs for the next 12 months. Capital expenditures for full-year 2020 were estimated at approximately $90m.
- Granite narrowed its Heavy Civil footprint, citing the risks and historical pricing of large, complex projects, and closed its New York office in January 2021. Delayed financial filings had also prevented bidding on certain public projects, though the company said this had not significantly affected liquidity or results.
- Credit covenants at September 30 showed a 2.96 leverage ratio against a 3.25 maximum and 5.69 interest coverage against a 4.00 minimum. Subsequent credit-agreement amendments included a February 19, 2021 waiver of potential defaults associated with the restatement and a financial covenant failure.
- Disclosure controls and procedures were reported as ineffective due to previously disclosed material weaknesses in internal control over financial reporting. Management said additional procedures were performed to validate the financial statements.
- Legal matters include securities and derivative litigation related to prior disclosures and the accounting investigation, plus an SEC document investigation. No liability was recorded for the described principal matters because losses were not considered probable or reasonably estimable; the filing warns that reasonably possible losses could materially affect results if estimates change.
Important facts for investors to verify
- Review the restatement’s effects and the status of remediation of internal-control material weaknesses.
- Track future project estimate revisions, especially Heavy Civil and the four forecast-loss Transportation contracts.
- Assess the sustainability of operating cash flow, liquidity available outside joint ventures, debt maturities and covenant compliance.
- Monitor backlog conversion, new awards and the effects of COVID-19 and public infrastructure funding on project starts and margins.
- Follow developments in the securities litigation, SEC investigation and any resulting financial or operational consequences.