Granite Construction Incorporated (NYSE: GVA) — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. The unaudited results are seasonal and, as the company cautions, are not necessarily indicative of full-year performance. Granite is a U.S. infrastructure contractor and materials producer with Transportation, Water, Specialty and Materials segments.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $669.9 million | $635.9 million |
| Gross profit / margin | $63.3 million / 9.5% | $23.8 million / 3.7% |
| Operating loss | $85.7 million | $78.4 million |
| Net loss attributable to Granite | $66.2 million; $1.45 per diluted share | $65.4 million; $1.44 per diluted share |
| Operating cash flow | $38.1 million | $(20.1) million |
| Capital expenditures | $18.8 million | $21.4 million |
Revenue increased 5.3%. Specialty revenue grew 17.0% and Materials 26.1%; Transportation was essentially flat and Water declined 1.9%. Gross margin improved substantially, with higher gross profit in Transportation, Specialty and Materials, partly offset by lower Water gross profit. The operating loss includes $75.8 million of other costs, principally a $66.0 million net legal settlement charge and $7.3 million of investigation-related fees. In Q1 2020, the company recorded $24.4 million of non-cash impairment charges, including goodwill and affiliate-investment impairments.
Liquidity, debt and backlog
- At March 31, cash and cash equivalents were $452.9 million, including $110.5 million held by consolidated construction joint ventures; marketable securities were $11.3 million. Some joint-venture assets are not generally available for Granite’s working capital.
- Total debt was $340.3 million, including $8.7 million of current maturities. The revolving facility had $226.6 million of unused availability after letters of credit; none was drawn. Credit-agreement leverage and interest-coverage ratios were within required limits.
- Operating cash flow improved by $58.2 million year over year, primarily from working-capital changes and lower net contributions to unconsolidated ventures. The company separately recorded a $129 million settlement liability and $63 million insurance receivable; it said these had no Q1 operating-cash-flow impact and were expected to settle in Q2 or Q3, subject to court approval.
- Contract backlog was $3.47 billion, up 5.0% from December 31, 2020 but down 4.7% from March 31, 2020. Specialty backlog rose 39.5% sequentially, while Transportation backlog fell 6.6%. Four Transportation contracts with remaining revenue of $364.2 million had forecast total losses.
Outlook, risks and notable items
- Granite expects 2021 capital expenditures of $105 million to $115 million. It did not provide overall revenue or earnings guidance in the supplied filing text.
- Management described a gradual improvement in pandemic conditions but said COVID-19 restrictions and disruptions continued to affect operations, particularly Water and Mineral Services. Public funding, state and local budgets, project timing, weather, input costs and construction estimates remain important business drivers.
- The company said it expects liquidity to remain sufficient for expected operating needs, including the securities-litigation settlement. The $129 million cash settlement, with an expected $63 million insurance contribution, was agreed to after quarter-end and remains subject to court approval; it includes no admission of liability.
- Disclosure controls and procedures were reported ineffective at quarter-end because of previously identified material weaknesses in internal control over financial reporting. Remediation steps were underway but incomplete. The SEC had issued subpoenas concerning accounting issues identified in the Audit/Compliance Committee investigation; Granite said it was cooperating.
- Management is narrowing the Heavy Civil footprint and reducing exposure to large, complex projects. The filing also notes that prior delayed annual-report filing requirements had restricted bidding in some jurisdictions, though management said this had not significantly affected liquidity or results to date.
Most important facts for investors to verify
- Final court approval, payment timing and insurance recovery for the $129 million securities-litigation settlement.
- Progress and independent evidence of remediation of the material weaknesses, and developments in the SEC investigation and related litigation.
- Whether the backlog converts into revenue and profit as expected, particularly the four loss-making Transportation contracts and the impact of project-estimate revisions.
- Cash availability after distinguishing Granite’s cash from joint-venture funds, and continued compliance with credit-agreement covenants.
- Whether COVID-19 disruptions, public infrastructure funding and construction-cost pressures affect the stated capital-expenditure plan or operating outlook.