Granite Construction Incorporated (NYSE: GVA) — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 30, 2021. Granite provides infrastructure construction and materials, primarily in the United States, through Transportation, Water, Specialty and Materials segments. Comparisons below are with fiscal 2019 unless noted.
Financial performance
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $3.562 billion | $3.446 billion |
| Gross profit / margin | $344.8 million / 9.7% | $221.7 million / 6.4% |
| Operating income (loss) | $(158.3) million | $(82.9) million |
| Net income (loss) attributable to Granite | $(145.1) million; $(3.18) per diluted share | $(60.2) million; $(1.29) per diluted share |
| Cash from operating activities | $268.5 million | $111.4 million |
| Capital expenditures | $93.3 million | $106.8 million |
| Cash, cash equivalents and marketable securities | $441.3 million | $295.1 million |
| Total debt, including current maturities | $338.8 million | $364.4 million |
- Revenue rose 3.4%. Transportation revenue increased 6.7% and Materials 6.6%; Water declined 6.1% and Specialty 0.6%.
- Gross profit improved 55.5%, with higher gross margins across all four segments. Transportation and Water benefited in part from a lower negative impact from project estimate revisions; Materials benefited from volume and favorable weather.
- Despite higher gross profit, the operating loss widened, principally reflecting $156.7 million of non-cash impairment charges and increased selling, general and administrative expense. SG&A included $35.6 million in non-recurring legal and accounting fees related to the independent investigation.
- Operating cash flow increased by $157.0 million, primarily due to working-capital timing and joint-venture activity. Cash balances include cash held by consolidated construction joint ventures, which is generally not freely available for Granite’s working-capital needs.
Backlog, liquidity and debt
- Contract backlog was $3.307 billion at year-end, down 11.4% from $3.734 billion. It excludes approximately $973.8 million of awarded construction management/general contractor and construction management at-risk projects, compared with $646.6 million a year earlier. About $2.3 billion of year-end backlog was expected to be completed in 2021.
- Transportation backlog fell 21.1% to $2.219 billion; Water backlog increased 37.9% to $311.7 million; Specialty backlog increased 11.5% to $776.9 million. Backlog is subject to customer cancellation or modification and is not a guarantee of profitable revenue.
- Four Transportation contracts had forecast losses with $423.0 million of remaining revenue, equal to 19.1% of Transportation backlog, versus four contracts and $263.6 million (9.4%) in 2019.
- Granite reported $229.6 million of borrowing availability under its $275 million revolving facility at year-end, after letters of credit; no revolver balance was outstanding. Management stated available liquidity and expected operating cash flow should cover anticipated needs for the next 12 months.
- Debt included $230 million principal of 2.75% convertible notes due 2024 and a $131.3 million term loan. Year-end leverage ratio was 2.58 against a maximum of 3.25; interest coverage was 5.13 against a minimum of 4.00. The company reported compliance with credit-agreement covenants at December 31, 2020. A subsequent February 2021 amendment waived specified defaults and covenant issues connected with the restatement and filing delays.
Outlook, risks and unusual items
- Management forecast 2021 capital expenditures of $95 million to $105 million. The filing provides no numerical earnings or revenue guidance.
- Management said the pandemic disrupted some operations, particularly Water and Mineral Services, including temporary suspensions or reduced activity in Mexico and Canada. It described backlog as strong and expressed optimism about future infrastructure funding, while warning that state and local fiscal pressures could affect 2021 spending. A potential federal infrastructure bill was an expectation, not enacted guidance in this filing.
- Granite narrowed its Heavy Civil footprint after concluding that historical pricing and risk in that work did not meet stakeholder expectations; it closed its New York office in January 2021 and said it would focus on markets with strategic advantages and improved margin expectations.
- Project accounting estimates remain a major source of volatility. Downward revisions on seven projects with at least a $5 million gross-profit impact each reduced project profitability by $143.4 million in 2020, compared with $214.1 million on 12 projects in 2019. Management said it did not identify material amounts that should have been recorded in prior periods for 2020.
- Goodwill impairment charges totaled $147.1 million, chiefly associated with Water and Mineral Services Water and Materials reporting units; an additional $9.6 million impairment related to foreign affiliate investments. The annual goodwill review found no further impairment, but the filing identifies limited valuation headroom in certain reporting units.
- The company restated prior-period financial statements following an independent investigation into Heavy Civil project forecasts. Material weaknesses in the control environment and project forecasting remained unremediated at year-end; management and the auditor concluded internal control over financial reporting was ineffective. The auditor nevertheless gave an unqualified opinion on the financial statements.
- Related securities and derivative litigation remained unresolved, and an SEC investigation was ongoing. No liability was recorded for the specifically described matters because the amounts were not reasonably estimable. The filing warns that reasonably possible losses, including certain legal and liquidated-damages matters, could be material if they become probable and estimable.
- Other key risks include fixed-price project cost overruns, schedule penalties, claims recovery, joint-venture and subcontractor performance, weather, commodity prices, public funding, bonding capacity, and environmental and permitting requirements.
Key facts for investors to verify
- Whether Heavy Civil forecasting controls and the broader material weaknesses have been remediated and are operating effectively.
- How the remaining loss-making Transportation contracts perform and whether further project-estimate revisions arise.
- Whether backlog converts to revenue as expected, particularly the probability and timing of awarded-but-not-yet-contracted projects; backlog is cancelable or modifiable.
- Liquidity available after accounting for joint-venture cash restrictions, debt service, covenant requirements and any changes to credit-facility terms.
- Developments, potential exposure and costs associated with the SEC investigation and pending securities litigation.
- Whether pandemic-related disruption, public infrastructure funding, and impairment-sensitive business conditions change the company’s operating outlook.