Granite(GVA) - 2021 Q4 - Annual Report

Part I Business A major US infrastructure company, Granite Construction is focusing on its core civil construction and materials businesses following a 2021 strategic shift New Strategic Plan and Operating Structure The company initiated a new strategic plan in Q4 2021, focusing on core businesses and divesting its Water and Mineral Services group - The company updated its strategy in Q4 2021 to focus on its core civil construction and materials business, leading to the decision to sell the Water and Mineral Services (WMS) operating group[16] - As a result of the strategic shift, WMS was classified as held-for-sale and its results are reported as discontinued operations[16] - On February 2, 2022, the company agreed to sell the Inliner business, a part of WMS, for $159.7 million, with the transaction expected to close in the first half of 2022[17] - The company's reportable segments were changed to Construction and Materials, replacing the previous Transportation, Water, and Specialty segments[19] Customers The company serves diverse public and private sector customers, with the California Department of Transportation being its largest single client Revenue from Largest Customer (Caltrans) | Year | Revenue (millions) | % of Total Revenue from Continuing Operations | | :--- | :--- | :--- | | 2021 | $337.1 | 11.2% | | 2020 | $316.9 | 10.1% | | 2019 | $226.2 | 7.8% | - No other single customer accounted for more than 10% of total revenue in 2021, 2020, or 2019[21] Human Capital Resources The company employs approximately 3,300 people in its continuing operations and has established specific inclusive diversity goals for 2025 Employee Count (Continuing Operations) as of Dec 31, 2021 | Employee Type | Count | | :--- | :--- | | Salaried | ~1,900 | | Hourly | ~1,400 | Inclusive Diversity Goals for 2025 (from 2021 baseline) | Metric | 2021 Baseline | 2025 Goal | | :--- | :--- | :--- | | Women in Organization | 13% | 18% | | Women in Leadership | 15% | 20% | | Persons of Color in Leadership | 17% | 20% | | Inclusion Index Score | 70% | 80% | Committed and Awarded Projects (CAP) The company's future work pipeline, measured as CAP, remained stable at $4.0 billion at the end of 2021 - CAP from continuing operations was $4.0 billion at both December 31, 2021 and 2020[46] - Approximately $2.0 billion of the December 31, 2021 CAP is expected to be completed during 2022[46] Contract Provisions The company's contract mix shifted towards fixed unit price contracts, which constituted 53.3% of unearned revenue at year-end 2021 Contract Mix in Unearned Revenue (Continuing Operations) | Contract Type | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Fixed Unit Price | 53.3% | 42.6% | | Fixed Price | 44.3% | 54.8% | | Other | 2.4% | 2.6% | Risk Factors The company faces significant risks from its financial restatement, SEC investigation, fixed-price contracts, and reliance on government funding - The company restated prior period financial statements, which has affected investor confidence and may lead to further litigation; an SEC investigation related to these matters is ongoing[90][95] - Material weaknesses in internal control over financial reporting were identified in 2019 and 2020, which have since been remediated[92] - Approximately 75% of 2021 construction-related revenue was from government contracts, which are subject to strict procurement regulations[54][109] - The company faces risks from fixed price and fixed unit price contracts, where cost overruns could reduce profits or result in losses[100] - The company's divestiture of the WMS businesses involves risks, including the ability to complete the sales on acceptable terms and potential retained liabilities[99] - Failure to comply with covenants under its Credit Agreement could result in default, potentially leading to acceleration of debt[112] Unresolved Staff Comments The company reports no unresolved comments from the staff of the Securities and Exchange Commission - None[115] Properties The company holds significant mineral reserves, estimated at 765.1 million tons, primarily located in California to support its core operations Mineral Reserves by Type and Location (as of Dec 31, 2021) | Location | Sand & Gravel (million tons) | Hard Rock (million tons) | Total (million tons) | | :--- | :--- | :--- | :--- | | California | 359.4 | 205.3 | 564.7 | | Non-California | 101.4 | 99.0 | 200.4 | | Grand Total | 460.8 | 304.3 | 765.1 | Owned Plant Properties (Continuing Operations) | Plant Type | 2021 Count | 2020 Count | | :--- | :--- | :--- | | Aggregate crushing plants | 29 | 29 | | Asphalt concrete plants | 49 | 49 | | Cement concrete batch plants | 5 | 5 | Legal Proceedings This section incorporates by reference the detailed discussion of legal proceedings from Note 20 of the financial statements - The description of legal matters is incorporated by reference from Note 20 of the Notes to the Consolidated Financial Statements[132] Mine Safety Disclosures Information regarding mine safety violations is included in Exhibit 95 of this Annual Report - Information concerning mine safety violations is included in Exhibit 95 to this Form 10-K[133] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on the NYSE, and a new $300 million share repurchase program was authorized in February 2022 - The company's common stock is traded on the New York Stock Exchange under the symbol GVA[135] - In February 2022, the Board of Directors authorized a new $300.0 million share repurchase program, replacing the previous 2016 authorization[136] - During Q4 2021, the company did not repurchase any shares under its publicly announced plan[136] [Reserved] This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue from continuing operations decreased 3.8% in 2021, while operating income fell sharply due to a $66 million legal settlement charge Results of Operations In 2021, revenue from continuing operations decreased, and operating income dropped significantly due to increased legal settlement costs Consolidated Results of Operations (Continuing Operations) | (in thousands) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total revenue | $3,010,053 | $3,128,879 | $2,914,877 | | Gross profit | $305,556 | $304,653 | $189,785 | | SG&A expenses | $243,083 | $252,879 | $238,147 | | Operating income (loss) | $1,099 | $19,735 | $(41,724) | | Net income (loss) from continuing operations | $(8,259) | $(1,782) | $(27,936) | - Construction revenue decreased by 5.9% in 2021 compared to 2020, primarily due to lower CAP in the California operating group and disciplined project bidding[166] - Materials revenue increased by 11.8% in 2021 compared to 2020, driven by higher volumes and pricing in certain markets[167] - Other costs increased by $58.2 million in 2021, primarily due to $66 million in net settlement charges related to litigation[180] - Net income from discontinued operations was $10.7 million in 2021, compared to a net loss of $164.4 million in 2020, which was mainly due to goodwill impairment charges[186] Committed and Awarded Projects Total Committed and Awarded Projects (CAP) remained stable at $4.0 billion at the end of 2021 CAP by Operating Group (in thousands) | Operating Group | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | California | $1,476,066 | $1,354,776 | | Central | $1,585,309 | $1,943,622 | | Mountain | $948,689 | $727,087 | | Total | $4,010,064 | $4,025,485 | - At year-end 2021, three contracts with remaining revenue of $204.2 million (5.1% of total CAP) had total forecasted losses[174] Liquidity and Capital Resources Operating cash flow decreased significantly to $21.9 million, largely due to a $129 million payment into a legal settlement escrow fund Cash Flow Summary (in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash from Operating activities | $21,931 | $268,460 | | Net cash used in Investing activities | $(21,478) | $(41,262) | | Net cash used in Financing activities | $(24,446) | $(57,658) | - The decrease in operating cash flow was primarily due to a $99.2 million decrease in adjusted net income and a $147.4 million decrease in cash provided by working capital[203][204] - At December 31, 2021, the company had $232.0 million available for borrowing under its $275.0 million revolving credit facility[196] - The company was in compliance with its financial covenants, with a Consolidated Leverage Ratio of 2.39 (max 3.00) and a Consolidated Interest Coverage Ratio of 6.69 (min 4.00)[212] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuation, which it mitigates through an interest rate swap on its variable-rate debt - The company uses an interest rate swap to convert its variable-rate term loan to a fixed rate of 2.76% plus an applicable margin, mitigating interest rate risk[220] Fair Value vs. Carrying Value of Debt (as of Dec 31, 2021) | Debt Instrument | Carrying Value (thousands) | Fair Value (thousands) | | :--- | :--- | :--- | | 2.75% Convertible Notes | $207,354 | $313,785 | | Credit Agreement - term loan | $123,750 | $124,598 | Financial Statements and Supplementary Data This section incorporates the company's consolidated financial statements and the independent auditor's report by reference - This item incorporates by reference the consolidated financial statements, supplementary data, and the independent auditor's report, which are filed under Part IV, Item 15[226] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure matters - None[226] Controls and Procedures Management concluded that disclosure controls and internal controls were effective as of year-end 2021, having remediated prior material weaknesses - Management concluded that disclosure controls and procedures were effective as of December 31, 2021[226] - Management concluded that its internal control over financial reporting was effective as of December 31, 2021[228] - The material weaknesses disclosed in the 2019 and 2020 Form 10-K reports have been remediated[229][233] Other Information The company reports no other information for this item - None[231] Part III Directors, Executive Officers and Corporate Governance Information regarding directors and corporate governance is incorporated by reference from the company's 2022 Proxy Statement - Information required by this item is incorporated by reference from the company's 2022 Proxy Statement[235] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2022 Proxy Statement - Information required by this item is incorporated by reference from the company's 2022 Proxy Statement[236] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's 2022 Proxy Statement - Information required by this item is incorporated by reference from the company's 2022 Proxy Statement[237] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2022 Proxy Statement - Information required by this item is incorporated by reference from the company's 2022 Proxy Statement[238] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2022 Proxy Statement - Information required by this item is incorporated by reference from the company's 2022 Proxy Statement[239] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the annual report - This item lists the financial statements, financial statement schedules, and exhibits filed as part of the annual report[241][242] Financial Statements and Notes Report of Independent Registered Public Accounting Firm The auditor issued unqualified opinions on the financial statements and internal controls, identifying one Critical Audit Matter - The auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on both the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2021[255] - The audit identified one Critical Audit Matter (CAM): Revenue Recognition for multi-year fixed-price contracts in the Construction segment[264][265] Consolidated Financial Statements The company's total assets grew to $2.5 billion in 2021, and it reported a net income of $10.1 million attributable to the company Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $1,827,399 | $1,455,246 | | Current assets held-for-sale | $392,641 | $171,263 | | Total Assets | $2,494,927 | $2,379,996 | | Total Current Liabilities | $1,069,318 | $943,256 | | Long-Term Debt | $331,191 | $330,522 | | Total Granite Shareholders' Equity | $967,682 | $975,664 | Consolidated Statement of Operations Highlights (in thousands) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Total Revenue | $3,010,053 | $3,128,879 | | Gross Profit | $305,556 | $304,653 | | Operating Income | $1,099 | $19,735 | | Net Income (Loss) from Continuing Operations | $(8,259) | $(1,782) | | Net Income (Loss) from Discontinued Operations | $10,673 | $(164,399) | | Net Income (Loss) Attributable to Granite | $10,096 | $(145,117) | Notes to the Consolidated Financial Statements The notes detail the impact of discontinued operations, significant project estimate revisions, debt structure, and major legal contingencies Note 2. Discontinued Operations and Held-for-Sale The WMS group, classified as discontinued operations, generated $10.7 million in net income in 2021, a major turnaround from 2020 Summarized Operations of Discontinued Operations (in thousands) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Revenue | $491,812 | $433,580 | | Non-cash impairment charges | $0 | $156,690 | | Net income (loss) | $10,673 | $(164,399) | - Total assets classified as held-for-sale were $392.6 million and total liabilities were $83.4 million as of December 31, 2021[360] Note 3. Revisions in Estimates In 2021, significant revisions in project estimates resulted in a net decrease to project profitability of $70.6 million Net Impact of Significant Revisions in Estimates on Gross Profit | Year | Net Decrease to Project Profitability (millions) | | :--- | :--- | | 2021 | $70.6 | | 2020 | $143.5 | | 2019 | $199.1 | - The 2021 decreases were primarily due to additional costs from work acceleration, lower productivity, unfavorable weather, and extended project duration[369] Note 20. Contingencies - Legal Proceedings The company details a $129 million securities litigation settlement and a new dispute with a potential loss of up to $100 million - The company entered into a settlement agreement for securities class action lawsuits for a total of $129.0 million, with the company's portion being $66 million[489][490][491] - In February 2022, the company and its subsidiary Layne were sued for approximately $70 million and received an arbitration demand for $30 million related to foundation work on the Salesforce Tower[499] - For the Salesforce Tower matter, the company estimates the range of reasonably possible loss could be up to approximately $100 million[499] - The SEC is conducting an investigation related to the accounting issues identified in the company's previously disclosed internal investigation[497]