Business context and reporting period
Granite Construction Incorporated (NYSE: GVA) filed this Form 10-K for the fiscal year ended December 31, 2019. The company provides infrastructure construction and materials services through Transportation, Water, Specialty and Materials segments, primarily in the United States.
Important filing context: Filed February 22, 2021, this 10-K restates 2018 and 2017 annual results and quarterly information for the first three quarters of 2019 and all quarters of 2018. Investors should use the restated figures in this filing, not the previously issued reports.
Financial performance and liquidity
| Metric | 2019 | 2018, restated | Change/comment |
|---|---|---|---|
| Revenue | $3,445.6 million | $3,287.0 million | Up 4.8% |
| Gross profit / margin | $221.7 million / 6.4% | $334.8 million / 10.2% | Margin fell 3.8 percentage points |
| Operating income (loss) | $(82.9) million | $8.2 million | Turned to loss |
| Net income (loss) attributable to Granite | $(60.2) million | $0.6 million | Basic and diluted EPS: $(1.29), versus $0.01 |
| Cash from operating activities | $111.4 million | $86.4 million | Up $25.0 million |
| Cash, cash equivalents and marketable securities | $295.1 million | $338.9 million | Down $43.8 million |
| Working capital | $534.9 million | $603.1 million | Down $68.2 million |
| Contract backlog | $3,734.3 million | $3,787.2 million | Down 1.4%; excludes about $646.6 million of certain awarded CM/GC and CM-at-risk projects |
Segment revenue was Transportation $1,892.1 million, Water $468.7 million, Specialty $727.5 million and Materials $357.2 million. Transportation revenue declined 2.8%, while Water and Specialty revenue increased 35.5% and 16.3%, respectively; Materials declined 3.1%. Growth in Water largely reflected a full year of Layne and LiquiForce results following their 2018 acquisitions.
Fourth-quarter 2019 revenue was $885.6 million, gross profit was $51.2 million (5.8% margin), and net loss attributable to Granite was $19.4 million, or $(0.42) per diluted share.
Year-end debt was $364.4 million carrying value, including $193.7 million carrying value for the 2.75% convertible notes; contractual debt principal was approximately $406.7 million. The $350 million revolving facility had $293.1 million available. The company reported a 1.72 consolidated leverage ratio against a 3.25 maximum and 10.95 interest coverage against a 4.00 minimum. Capital expenditures were $106.8 million; dividends were $0.52 per share.
Material changes versus the prior comparable period
- Despite higher revenue, gross profit declined $113.2 million and operating results shifted to a loss. Transportation gross margin fell to 2.9% from 7.0%; Water margin fell to 6.4% from 17.1%; Specialty margin fell to 11.9% from 14.4%. Materials margin improved to 14.0% from 13.2%.
- Heavy Civil project forecast revisions and other project estimate changes were a major drag. Twelve projects with downward estimate changes of at least $5 million each reduced project profitability by $214.1 million in 2019, compared with $104.6 million across four projects in 2018.
- SG&A rose to $308.0 million from $272.8 million. Acquisition and integration expenses fell to $15.3 million from $61.5 million. A $18.7 million gain on property and equipment sales partially offset operating costs.
- Operating cash flow increased, supported in part by working-capital timing, including accounts payable and construction joint venture balances. Financing cash use rose to $81.6 million, including convertible-note hedge costs and share repurchases.
Outlook, risks, contingencies and unusual items
- The filing provides no formal numeric earnings or revenue guidance. Management described backlog as strong and expected roughly $2.5 billion of year-end 2019 backlog to be completed during 2020. These are expectations, not guarantees; backlog contracts may be canceled or modified.
- The Audit Committee investigation found inconsistent compliance with forecasting procedures, overly optimistic forecasts and instances of incomplete or potentially misleading information to auditors. Management identified material weaknesses in the control environment and Heavy Civil project forecasting; disclosure controls and internal control over financial reporting were ineffective at December 31, 2019. Remediation was underway but not complete.
- PwC gave an unqualified opinion on the restated financial statements but an adverse opinion on the effectiveness of internal control over financial reporting. The auditor identified project revenue and cost estimates as a critical audit matter.
- The company disclosed securities class-action and derivative litigation, a Layne-acquisition-related securities lawsuit, and an ongoing SEC investigation. No liability was recorded for the described securities matters because losses were not considered probable or reasonably estimable; other reasonably possible losses, including liquidated damages, could be material if estimates change.
- After the reporting year, COVID-19 disrupted certain operations, particularly in Canada and Mexico, and created uncertainty around public funding and project timing. Management discussed cost controls, liquidity monitoring and a narrowed Heavy Civil footprint, including closure of its New York office in January 2021. These are subsequent-period developments and should not be read as 2019 operating results.
- In November 2019 Granite issued $230 million of 2.75% convertible senior notes due 2024 and entered related hedge and warrant transactions. A $20.4 million income-tax benefit was recorded in 2019. The company also reported $71.1 million of estimated claim recoveries in contract asset and liability balances; recoveries depend on resolution of claims.
Most important facts for investors to verify
- Review Note 2’s restatement reconciliations and confirm all comparisons use restated 2018 and 2017 figures.
- Assess whether the stated remediation actions address the forecasting failures and whether controls have since been tested and found effective.
- Examine the project-level causes and remaining exposure behind the $214.1 million of 2019 downward estimate revisions and the four loss-making Transportation contracts at year-end.
- Track cash availability, debt maturities, covenant compliance and the distinction between consolidated cash and cash held in construction joint ventures.
- Monitor litigation and SEC developments, potential claim recoveries, backlog conversion and the effect of public funding and subsequent-period operating conditions.