Granite Construction Incorporated (NYSE: GVA) — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This annual filing also presents restated quarterly information for the first three quarters of 2022. Unless otherwise noted, financial amounts below are in U.S. dollars.
Business context
Granite provides civil infrastructure construction and construction materials, primarily in the United States. Its reportable segments are Construction and Materials; approximately 70% of 2022 construction revenue was funded by federal, state and local government customers. Caltrans was the largest customer, contributing $348.0 million, or 10.5% of total revenue.
Key financial results
| Metric | FY2022 | FY2021 |
|---|---|---|
| Total revenue | $3,301.3 million | $3,501.9 million |
| Gross profit / margin | $369.5 million / 11.2% | $362.6 million / 10.4% |
| Operating income | $85.4 million | $24.7 million |
| Net income attributable to Granite | $83.3 million | $10.1 million |
| Diluted earnings per share | $1.70 | $0.21 |
| Cash from operating activities | $55.6 million | $21.9 million |
| Capital expenditures | $121.6 million | $94.8 million |
- Construction revenue fell 8.9% to $2,803.9 million, primarily due to the wind-down of large Central-group projects and the Inliner sale. Construction gross margin improved to 10.8% from 9.9%.
- Materials revenue rose 16.8% to $497.3 million, reflecting price increases, energy surcharges and stronger aggregate volumes. Materials gross profit increased 10.4% to $65.6 million, while segment margin declined to 13.2% from 14.0% amid higher fuel and energy costs.
- Revenue declined 5.7% year over year, while operating income and Granite-attributable net income increased. Lower SG&A and other costs contributed to improved results; 2021 included a $66 million securities-litigation settlement charge.
- Fourth-quarter 2022 revenue was $789.2 million, gross profit was $96.8 million (12.3% margin), and net income attributable to Granite was $22.1 million, or $0.50 basic and $0.46 diluted per share.
Liquidity, debt and capital
- At year-end, cash and cash equivalents totaled $294.0 million, including $102.5 million held by consolidated construction joint ventures; marketable securities were $65.9 million. Granite stated it expects liquidity sources to meet near-term and long-term requirements.
- Total debt carrying value was $288.4 million: $230 million of 2.75% convertible notes due November 2024 and $50 million drawn on a $350 million revolving facility maturing June 2027. Revolver availability, net of letters of credit and borrowings, was $269.3 million.
- The company prepaid its term loan during 2022. It reported compliance with credit-agreement covenants, with a 1.46 leverage ratio against a 3.25 maximum and 15.06 interest-coverage ratio against a 3.00 minimum.
- Operating cash flow increased from $21.9 million to $55.6 million, but contract assets rose, partly from disputed work and retentions. Financing cash outflow was $164.3 million, including debt repayment and $70.9 million of share repurchases.
- Committed and Awarded Projects (CAP) was $4.5 billion, up 11.8% reported (10.4% on the filing’s comparable basis). About $1.8 billion of year-end unearned revenue was expected to be recognized in 2023. CAP can be canceled or modified by customers and is not a guarantee of revenue or profit.
Outlook, unusual items and principal risks
- Management expected Infrastructure Investment and Jobs Act funding to support increased project lettings beginning in 2023, with a more meaningful effect in 2024 and beyond. The filing gives no revenue or earnings guidance. Planned 2023 capital expenditures were approximately $100–$120 million.
- Granite sold Inliner in March 2022 for $140.6 million of cash proceeds and a $1.8 million gain. It decided to retain Water Resources and Mineral Services after market conditions impeded an appropriate sale; these businesses were reclassified into continuing operations for all periods presented.
- The filing restated 2022 first-, second- and third-quarter information for deferred-tax and income-tax errors related to the Inliner sale, along with other immaterial errors. Previously issued quarterly reports for these periods should not be relied upon; the annual 2022 financial statements were not changed by the restatement.
- Management and the auditor concluded that internal control over financial reporting was ineffective at December 31, 2022 because a material weakness affected controls for assessing significant and unusual items in interim tax provisions. The auditor nevertheless issued an unqualified opinion on the annual consolidated financial statements. Remediation activities were planned but not yet completed.
- The company paid a $12 million SEC civil penalty in September 2022, without admitting or denying the SEC’s allegations. It also received $5 million, net of fees and expenses, from a shareholder derivative settlement.
- Layne faces claims connected with the Salesforce Tower foundation. Granite said a material loss was not probable, but disclosed a reasonably possible loss of up to approximately $100 million if unsuccessful.
- Key risks include fixed-price contract overruns, labor and materials inflation, weather and project delays, government funding and contract cancellations, project-estimate uncertainty, joint-venture and subcontractor exposure, and the restatement and control weakness. Brightline had $28.4 million of contract retention receivable at year-end and continued to face funding challenges; $3.4 million was past due at the report date.
Most important facts for investors to verify
- Review the restated quarterly results and monitor whether the interim-tax control material weakness is remediated and operating effectively.
- Track project-level estimate revisions, loss contracts and conversion of the $4.5 billion CAP into funded, profitable work.
- Assess cash conversion and collection of contract assets, retentions and disputed claims, including Brightline balances.
- Follow the Salesforce Tower litigation, including any change in the probability or estimated range of loss.
- Monitor execution of IIJA-funded awards, cost inflation and the stated 2023 capital-expenditure plan.