Granite Construction Incorporated — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; comparison is with the corresponding 2020 periods. Amounts below are in U.S. dollars. The unaudited filing covers Granite’s transportation, water, specialty construction and materials businesses.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $964.2 million | $915.8 million | $1,634.1 million | $1,551.7 million |
| Gross profit | $116.9 million | $88.3 million | $180.3 million | $112.1 million |
| Gross margin | 12.1% | 9.6% | 11.0% | 7.2% |
| Operating income (loss) | $68.6 million | $(2.1) million | $(17.1) million | $(80.5) million |
| Net income (loss) attributable to Granite | $54.5 million | $3.4 million | $(11.7) million | $(62.0) million |
| Diluted EPS | $1.14 | $0.07 | $(0.26) | $(1.36) |
| Cash from (used in) operations | Not presented separately for the quarter | Not presented separately for the quarter | $(31.0) million | $12.5 million |
Balance sheet and liquidity
- At June 30, 2021, cash and cash equivalents were $393.2 million, including $107.9 million held by consolidated construction joint ventures (CCJVs); marketable securities totaled $10.9 million.
- Total debt was $339.9 million, including $203.8 million of 2.75% convertible notes and a $127.5 million term loan. Debt was $414.0 million at June 30, 2020. No revolving-credit borrowings were outstanding; $226.6 million of the facility was available after letters of credit.
- Current assets were $1,566.4 million and current liabilities were $1,048.3 million. Management said liquidity should be sufficient for expected operating needs, including the anticipated securities-settlement payment, for the next 12 months.
- First-half capital expenditures were $46.4 million; the company anticipated $100.2 million for full-year 2021. First-half dividends paid were $11.9 million.
Material changes and operating trends
- Q2 revenue increased 5.3% year over year; first-half revenue increased 5.3%. Specialty and Materials led growth, while Transportation revenue declined slightly. Management attributed Transportation weakness mainly to Heavy Civil projects nearing completion.
- First-half gross profit improved substantially, particularly in Transportation and Specialty, reflecting a smaller negative impact from project estimate revisions than in 2020. Water gross profit declined, while Materials benefited from higher asphalt and aggregate volumes.
- Q2 operating results included a $31.6 million net gain on property and equipment sales, including a $29.7 million gain from a California sale-leaseback. First-half results also included $81.8 million of other costs, primarily a $66.0 million net securities-litigation settlement charge and investigation-related fees.
- First-half operating cash flow was negative, versus positive in the prior year. The filing cites increased working-capital use, contributions to unconsolidated joint ventures and lower cash contribution after adjusting net loss for non-cash items. The settlement liability of $129 million and related $63 million insurance receivable had no first-half cash-flow impact; both were expected to settle in the second half, subject to court approval.
Outlook, risks and unusual items
- Granite provided no specific full-year revenue or earnings guidance in the supplied filing text. Management expected full-year capital expenditures of $100.2 million and described the balance sheet and liquidity as strong.
- Committed and Awarded Projects (CAP) totaled $4.45 billion at June 30, 2021, approximately flat with March 31 and up from $4.17 billion a year earlier. Water CAP rose to $531.9 million, while Transportation CAP was $2.89 billion. Four Transportation contracts had forecast total losses, with $303.1 million of remaining revenue (10.5% of Transportation CAP).
- Management said business activity had largely returned to pre-pandemic levels, while warning that COVID-19 and related funding uncertainty could still affect operations. It cited federal and state infrastructure funding measures and a proposed bipartisan infrastructure framework as potential supports, not guaranteed awards.
- Granite continues to narrow its pursuit of large, complex Heavy Civil projects (“Old Risk Portfolio”) and apply stricter bidding and project-approval criteria. Construction results remain subject to seasonality, weather, project execution, cost forecasts, claims and change orders.
- A proposed $129 million settlement of securities class actions, including the related Layne-merger class action, remained subject to court approval. Granite expected $63 million from insurance and recorded a $66 million pre-tax charge. The agreement contains no admission of liability.
- Following a July 2021 arbitration award denying insurance coverage related to Salesforce Tower remedial work, management considered a claim against Granite probable but said the amount could not be reasonably estimated; no provision was recorded. No claim had been filed as of the report date.
- The company is cooperating with SEC subpoenas concerning accounting issues identified in an independent investigation of prior-period Heavy Civil reporting. Disclosure controls were deemed ineffective at quarter-end due to previously disclosed material weaknesses; remediation measures were underway but had not yet operated long enough to be considered effective.
- Management reported compliance with credit-agreement financial covenants at June 30, 2021: leverage ratio 1.69 versus a maximum 3.00, and interest coverage ratio 8.26 versus a minimum 4.00.
Most important facts for investors to verify
- Whether the securities settlement receives final court approval, the timing and amount of payment, and collection of the expected $63 million insurance proceeds.
- Any Salesforce Tower-related claim, potential exposure and available defenses or counterclaims.
- Performance and revised cost estimates for loss-making Transportation contracts, project claims and joint-venture obligations.
- Operating cash-flow recovery, working-capital requirements and the availability of cash held within joint ventures.
- Progress in remediating internal-control material weaknesses and developments in the SEC investigation.
- Conversion of CAP and infrastructure funding prospects into funded, executable projects; CAP includes some awards not yet in unearned revenue.