Granite Construction Incorporated (NYSE: GVA) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The 10-Q was signed February 25, 2021; 2019 comparative figures are restated. Dollar amounts below are in millions unless stated otherwise.
Financial results
| Metric | Q2 2020 | Q2 2019, restated | H1 2020 | H1 2019, restated |
|---|---|---|---|---|
| Revenue | $915.8 | $866.1 | $1,551.7 | $1,447.9 |
| Gross profit | $88.3 | $46.8 | $112.1 | $47.9 |
| Gross margin | 9.6% | 5.4% | 7.2% | 3.3% |
| Operating loss | $(2.1) | $(28.5) | $(80.5) | $(107.4) |
| Net income (loss) attributable to Granite | $3.4 | $(24.2) | $(62.0) | $(86.7) |
| Diluted EPS | $0.07 | $(0.52) | $(1.36) | $(1.85) |
- Revenue and segment performance: Q2 revenue rose 5.7% year over year, mainly from Transportation, while Water and Materials were slightly lower. H1 revenue increased 7.2%. H1 Transportation revenue rose 13.1%; Water was nearly flat; Specialty declined 1.8%; and Materials increased 5.1%.
- Profitability: Gross profit improved substantially versus restated 2019, especially in Transportation, reflecting a smaller negative impact from project estimate revisions. Q2 SG&A rose to $91.7 million, including $13.5 million of non-recurring legal and accounting fees. H1 SG&A was $170.1 million, including $18.7 million of such fees.
- Cash flow: H1 operating cash flow was $12.5 million, compared with cash used of $93.5 million in 2019. Investing used $21.4 million and financing provided $31.3 million. Capital expenditures were $52.2 million in H1.
- Liquidity: June 30 cash and cash equivalents were $288.9 million, including $93.5 million held by consolidated construction joint ventures; marketable securities were $5.9 million. Management states joint-venture assets generally are not available for Granite’s working capital until distributed. The company said available liquidity and expected operating cash generation should cover requirements for the next 12 months.
- Debt: Total debt was $414.0 million at June 30, including $230 million principal amount of 2.75% convertible notes due November 2024. The revolving facility was reduced to $275 million; $75 million was drawn, with $168.8 million available after letters of credit. Reported leverage and interest-coverage ratios were 2.27 and 7.89, respectively, against limits of 3.25 maximum and 4.00 minimum.
- Backlog: Contract backlog was $3.55 billion at June 30, down from $3.88 billion a year earlier and $3.64 billion at March 31, 2020. Four Transportation contracts with forecast losses represented $422.1 million, or 16.0%, of Transportation backlog.
Material changes, unusual items, and outlook
- Restatement and controls: An Audit/Compliance Committee investigation into Heavy Civil project forecasts led to restatement of prior-period financial statements, including the 2019 comparatives in this filing. Additional immaterial out-of-period corrections were also made. Management concluded disclosure controls were ineffective because of previously disclosed material weaknesses, although it said additional procedures supported the fair presentation of these financial statements.
- Impairments: H1 included $14.8 million of non-cash goodwill impairment and $9.6 million of impairment to foreign affiliate investments, totaling $24.4 million. The filing also reports further goodwill impairments in Q3 2020, after the reporting period.
- Project estimates: Three projects had Q2 downward estimate changes of at least $5 million, reducing gross profit by $30.9 million; five such projects reduced H1 gross profit by $69.8 million. Most reductions related to Transportation projects and reflected additional costs, lower productivity, and weather-related costs.
- COVID-19 and business outlook: Most projects continued as essential work, but restrictions, travel bans, absences, suspensions, and reduced activity affected operations, particularly Water and Mineral Services and some Washington and Arizona operations. Management described backlog as strong, but noted pandemic-related funding uncertainty and near-term delays in some project bookings. No numerical earnings or revenue guidance is provided.
- Heavy Civil strategy: Management said it was narrowing the group’s footprint and reducing exposure to large, complex projects with difficult-to-mitigate risks; the New York office closed in January 2021. Management cited a focus on work with stronger strategic fit and margin expectations.
- Credit and filing matters: Convertible noteholders were to receive an additional 0.50% annual interest while the company was not current with specified filing requirements. A February 2021 lender waiver addressed defaults potentially arising from the restatement and a financial covenant failure, among other matters.
- Legal and regulatory exposure: Securities class and derivative actions related to alleged misleading prior financial reporting, and a separate Layne merger-related class action, remained unresolved. The SEC issued subpoenas concerning the investigation; Granite said it was cooperating. No liability was recorded for the identified cases as of June 30, 2020 because losses were not deemed probable or reasonably estimable; possible losses could be material.
Key investor verification points
- Review the restatement reconciliations and the specific scope and remediation of the material weaknesses in internal control.
- Track the performance and remaining forecast losses of the four loss-making Transportation backlog projects, along with project-estimate revisions and claim recoveries.
- Confirm current liquidity availability, restrictions on joint-venture cash, debt covenant status, and the effect of lender waivers and convertible-note terms.
- Monitor COVID-19 impacts, public infrastructure funding, backlog conversion, and the subsequent goodwill impairment disclosures.
- Follow the SEC investigation and litigation developments, including any changes in loss estimates or accruals.