Granite Construction Incorporated (NYSE: GVA) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The unaudited filing was signed February 25, 2021, following reporting delays. Financial figures below are in millions, except per-share data and ratios.
Business context and reporting period
Granite is a U.S. infrastructure contractor and construction-materials producer, reporting Transportation, Water, Specialty and Materials segments. First-quarter results are typically affected by seasonal weather and are not necessarily indicative of full-year performance.
The 2019 comparison is restated. An independent Audit/Compliance Committee investigation found prior-period misstatements involving Heavy Civil project forecasts; the company also corrected other immaterial errors. The investigation was complete, but material weaknesses in internal control over financial reporting remained.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019, restated |
|---|---|---|
| Revenue | $635.9 | $581.8 |
| Gross profit | $23.8 | $1.1 |
| Gross margin | 3.7% | 0.2% |
| Operating loss | $(78.4) | $(79.0) |
| Net loss attributable to Granite | $(65.4) | $(62.5) |
| Diluted loss per share | $(1.44) | $(1.34) |
| Cash used in operating activities | $(20.1) | $(36.4) |
- Revenue increased 9.3% year over year. Transportation rose 16.2%; Water rose 2.6%; Specialty fell 4.4%; Materials rose 20.9%.
- Specialty gross profit fell to a $10.7 million loss from $13.3 million profit, primarily due to unfavorable estimate revisions on a tunnel project. Transportation gross profit improved to $25.4 million from a $16.3 million loss, largely reflecting improved Heavy Civil project estimate revisions.
- Q1 included $24.4 million of non-cash impairment charges: $14.8 million for Materials reporting-unit goodwill and $9.6 million for foreign affiliate investments. Operating expenses also included $5.2 million in non-recurring legal and accounting fees related to the investigation.
- Investing activities provided $5.9 million; financing activities used $6.4 million. Capital expenditures were $21.4 million. Cash, cash equivalents and marketable securities totaled $247.6 million, including $101.7 million held by consolidated construction joint ventures and generally not available for Granite’s working capital until distributed.
- Total debt was $364.2 million; current maturities were $8.3 million. The revolving facility was reduced to $275 million, with $218.8 million available after borrowings and letters of credit. At March 31, 2020, leverage was 1.97 against a maximum of 3.25; interest coverage was 9.02 against a minimum of 4.00.
- Current assets were $1.30 billion and current liabilities $809.6 million. Contract backlog was $3.64 billion, down from $3.73 billion at December 31, 2019.
Material changes versus the prior comparable period
- Restatement materially worsened the reported Q1 2019 comparison: revenue changed from $619.8 million as previously reported to $581.8 million restated, and net loss attributable to Granite changed from $34.6 million to $62.5 million. Restated Q1 2019 EPS was $(1.34), versus $(0.74) previously reported.
- Q1 2020 revenue and gross profit improved year over year, but Granite’s attributable net loss widened and loss per share increased. Impairment charges and higher other expense affected the 2020 results.
- Backlog was 2.5% below year-end 2019. Transportation backlog declined to $2.70 billion, partly reflecting progress on existing Heavy Civil and Midwest projects; Water and Specialty backlog increased modestly.
- Cash used in operations improved by $16.2 million year over year, while the company continued to use cash in the quarter.
Outlook, commentary, risks and unusual items
- Guidance: The filing provides no specific financial guidance. Management said backlog remained strong and described possible longer-term opportunity from increased use of best-value or alternative-delivery procurement, while warning that this could delay near-term project bookings.
- COVID-19: Most projects continued as essential infrastructure work, but restrictions, travel bans, temporary suspensions and workforce absences affected some operations, particularly Water and Mineral Services and certain locations. Management highlighted uncertainty around state and local funding and focused on liquidity and controlling costs.
- Heavy Civil strategy: Management described efforts to reduce exposure to large, complex projects with difficult-to-mitigate risks, narrow the group’s footprint and prioritize work with stronger margin expectations.
- Further impairment disclosed later in 2020: The filing reports additional non-cash goodwill impairment charges in Q3 2020 of $117.9 million for Water and $14.4 million for Materials. These are subsequent-period amounts, not part of Q1 results.
- Controls and filing delay: Disclosure controls were deemed ineffective because of previously reported material weaknesses. Management said additional procedures supported the fairness of the Q1 statements. Lenders later waived defaults or potential defaults connected with the restatement and covenant compliance; verify the terms and status of that waiver.
- Legal and regulatory exposure: Securities class-action, merger-related and derivative litigation, as well as an SEC investigation with document subpoenas, were disclosed. No liability was recorded for the specified matters because losses were not considered probable or reasonably estimable. The filing cautions that reasonably possible losses, including liquidated damages, could materially affect results if estimates or circumstances change.
- Construction estimates, claims and back charges can change materially; substantially all backlog contracts may be canceled or modified at the customer’s election. Joint-venture arrangements include performance obligations and potential exposure if partners fail to perform.
Important facts for investors to verify
- Review the 2019 restatement and the investigation findings, including the status of material weaknesses and remediation.
- Track Specialty and Heavy Civil project forecasts, estimate revisions, claims and any additional impairment charges.
- Confirm liquidity available for Granite itself, distinguishing company cash from joint-venture funds, and monitor revolver availability and covenant compliance.
- Assess backlog quality, expected conversion, cancellation exposure and the concentration of forecast-loss projects.
- Monitor COVID-related project disruption and public-sector funding, along with the status and potential financial impact of litigation and the SEC inquiry.