Granite Construction Incorporated (NYSE: GVA) — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited results; dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Granite is a diversified U.S. infrastructure contractor and materials producer, reporting Transportation, Water, Specialty and Materials segments. Approximately 75% of its portfolio is public work. Construction activity and results are seasonal and can vary with weather, project progress and contract estimates.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1,062.1 | $1,065.2 | $2,696.2 | $2,616.9 |
| Gross profit | $119.9 | $126.0 | $300.2 | $238.1 |
| Gross margin | 11.3% | 11.8% | 11.1% | 9.1% |
| Operating income (loss) | $43.7 | $(85.8) | $26.6 | $(166.3) |
| Net income (loss) attributable to Granite | $35.0 | $(91.2) | $23.3 | $(153.1) |
| Diluted EPS | $0.73 | $(2.00) | $0.49 | $(3.36) |
- Segment trends: Q3 Transportation revenue fell 8.9%, while Water, Specialty and Materials revenue rose 14.4%, 14.2% and 6.3%, respectively. Materials gross profit declined 19.5% in Q3 as higher fuel and liquid asphalt costs were not fully offset. Nine-month Transportation and Specialty gross profit improved, partly reflecting fewer adverse project-estimate revisions than in 2020.
- Cash flow: Nine-month operating cash flow was $59.9, versus $138.7 in 2020; investing cash outflow was $17.4 versus $41.9; financing cash outflow was $14.6, compared with $24.7 of inflow. Capital expenditures were $73.0.
- Cash and debt: September 30 cash and equivalents were $464.0, including $119.6 held by consolidated construction joint ventures, plus $10.6 of marketable securities. Total debt was $339.9, including $8.7 current maturities. The revolving facility had $227.9 available after letters of credit. Management said liquidity should cover expected requirements for the next 12 months, including the settlement payment.
- Backlog and working capital indicators: Committed and Awarded Projects (CAP) was $4.33 billion, versus $4.19 billion a year earlier and $4.45 billion at June 30, 2021. Unearned revenue was $3.03 billion; approximately $2.3 billion was expected to be recognized within 12 months. Four Transportation contracts with forecast losses represented $252.1 of remaining revenue.
Material changes versus comparable periods
- Q3 revenue was nearly flat year over year, while gross profit and margin declined. For the first nine months, revenue increased 3.0% and gross profit increased 26.1%.
- Granite moved from large reported losses in 2020 to profits in 2021. The comparison is substantially affected by 2020 non-cash impairment charges ($132.3 in Q3 and $156.7 for nine months); there were no such charges in 2021.
- Nine-month 2021 results included $85.5 of other costs, principally a $66.0 net securities-litigation settlement charge and related legal, accounting and investigation costs. The prior-year nine-month period included $28.5 of other costs.
- Nine-month gains on property and equipment sales were $39.3, versus $4.9 a year earlier, primarily reflecting California property sales, including a $29.7 gain on a June sale-leaseback.
- Operating cash flow declined by $78.7 year over year, driven by lower cash generation after non-cash adjustments, increased working-capital use and higher net contributions to unconsolidated joint ventures and affiliates.
Outlook, commentary, risks and unusual items
- Outlook: The filing gives no specific financial guidance. Management described the balance sheet and liquidity as strong and anticipated approximately $100 million of 2021 capital expenditures. It was optimistic that federal infrastructure legislation could improve state and local project visibility beginning in mid-to-late 2022, while noting that funding and timing remained uncertain.
- Operating environment: Management said activity had largely returned to pre-pandemic levels, but pandemic effects remained uncertain. It was monitoring inflation, labor and supply constraints; the reported direct impact was primarily higher diesel fuel and liquid asphalt costs, which the company was seeking to price into contracts.
- Project-estimate risk: Downward estimate revisions of at least $5 million per project reduced nine-month 2021 gross profit by $48.2 across five projects, versus $107.5 across six projects in 2020. The 2021 revisions reflected acceleration costs, lower productivity, higher costs, unfavorable weather and extended project duration.
- Securities litigation settlement: Granite accrued $129.0, with $63.0 expected from insurance, for a net pre-tax charge of approximately $66.0. The court granted preliminary approval in October 2021; payment to the settlement fund was made that month. Final approval and the scheduled February 24, 2022 fairness hearing remained pending as of the filing.
- Other legal exposure: Following an arbitration award denying insurance coverage related to the Salesforce Tower project, management considered a claim against the company probable but could not reasonably estimate the amount; no provision was recorded. The company also reported an SEC document subpoena and said it was cooperating. Other reasonably possible losses could materially affect results if they become probable and estimable.
- Controls: Management concluded disclosure controls were not effective at quarter-end because previously disclosed material weaknesses in internal control over financial reporting had not yet been remediated. Additional controls and remediation steps were underway; management said the financial statements were fairly stated after additional procedures.
- Debt and accounting: Credit Agreement covenants were met at quarter-end (leverage ratio 1.73 against a 3.00 maximum; interest coverage 8.52 against a 4.00 minimum). The company expected adoption of convertible-debt accounting changes in 2022, estimating a $20–$40 reduction to debt and retained earnings from transition adjustments.
Important facts for investors to verify
- Whether the securities settlement receives final court approval, and the ultimate insurance recovery and cash impact.
- Progress in remediating the disclosed material weaknesses and any developments in the SEC inquiry or derivative litigation.
- The status, potential amount and insurance implications of any Salesforce Tower-related claim.
- Whether CAP converts to funded, profitable work, particularly given forecast-loss Transportation contracts and the lower CAP level versus June 2021.
- Whether project cost inflation, labor and supply constraints, weather, and estimate revisions affect margins and operating cash flow.
- Availability of revolver capacity, covenant headroom and the practical availability of joint-venture cash, which may not be freely available for Granite’s working capital.