Dive Brief:

• On its first earnings call with Wall Street analysts in 16 months yesterday, Granite Construction issued a mea culpa for accounting irregularities in its heavy civil group that led to an internal investigation as well as subpoenas from the Securities and Exchange Commission. But the firm reported that even as it continues to work to put the issues behind it, it sees opportunity ahead in increased federal and state spending coming out of the pandemic.
• After issuing restated financials last week for 2017, 2018 and the first nine months of 2019, Granite reported third quarter year-to-date results for 2020 on Thursday, edging one step closer to getting its books back into compliance. Revenue of $2.6 billion for the nine months ending Sept. 30 was up 2.2% for the year. It ended the third quarter of 2020 with a backlog of $4.2 billion, which it said was modestly higher than second-quarter results, but 10% lower than the $4.7 billion it reported in 2019's third quarter. 
• “Through this process, we also learned a lot about ourselves and that in certain areas, we did not live up to the high expectations that we set as a company,” said Kyle Larkin, a 25-year company vet who was appointed president of the 99-year-old California-based contractor in September. “This is not Granite, and we cannot allow this to happen again.”

Dive Insight:

On the call, Larkin explained the company’s internal investigation uncovered issues related to the timely recording of forecasted costs in its heavy civil group. Since taking over leadership last fall, he said he's headed a “cultural reinvigoration” to emphasize clear-cut rules and promote transparency.

“We have spent a lot of time reflecting on our core values and developing a framework that encourages and allows our employees to fully understand and comply with all our policies and procedures,” Larkin said.

The company filed quarterly reports for the first, second and third quarters of 2020 after yesterday's call, and plans on completing its 2020 annual report by the end of March to bring it back into full reporting compliance.     

Granite is purposefully working through the $1 billion backlog in its heavy civil group, Larkin said, to derisk the jobs it bids on in that business unit. Whereas projects for the group in the past routinely exceeded $500 million, the company is now focused on getting away from what Larkin described as “mega” projects to target those between $20 million and $500 million instead.

“We have made a decision to not pursue large design-build projects, where we have limited and/or incomplete project design at the time of bid,” he said. “We still would entertain design-build projects, but they would have to be very small in size … and we have to be able to price the work accordingly.”

Larkin said the firm sees opportunity coming out of the pandemic, as relief funding is released and state and local governments get back up to full staffing. He pointed to the one-year extension of the Fixing America's Surface Transportation Act, and the $13.6 billion infusion to the Highway Trust Fund which Congress approved in late 2020, as well as $10 billion in relief funding for state departments of transportation.

He, like other construction executives on recent earnings calls, pointed to President Joe Biden’s multitrillion infrastructure push.

“We are optimistic that a bipartisan federal infrastructure bill can be passed this year, which would meaningfully drive our transportation end markets,” Larkin said.