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Granite Construction Inc (GVA) Q3 2020 Earnings Call Transcript

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GVA earnings call for the period ending December 31, 2020.

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Granite Construction Inc (GVA 1.35%)
Q3 2020 Earnings Call
Feb 25, 2021, 11:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning. My name is Anita, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Investor Relations Third Quarter 2020 Conference Call. [Operator Instructions] [Operator Instructions]

It is now my pleasure to turn the floor over to your host, Granite Construction Inc. Vice President of Finance, Mike Barker. Sir, the floor is yours.

Mike Barker -- Vice President of Finance

We begin today with an overview of the company's safe harbor language. Some of the discussion today may include forward-looking statements. These forward-looking statements are estimates reflecting the current expectations and best judgment of senior management regarding future events, occurrences, growth, demand, strategic plans, circumstances, activities, performance, outcomes, outlook, guidance, backlog, committed and awarded projects and results.

Actual results could differ materially from statements made today. Please refer to Granite's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these forward-looking statements. The company assumes no obligation to update forward-looking statements whether they are results of new information, future events or otherwise, except as required by law. Certain non-GAAP measures may be discussed during today's call and from time to time by the company's executives.

These include, but are not limited to, adjusted EBITDA, adjusted EBITDA margin, adjusted net income or loss and adjusted earnings or loss per share. Please note that some metrics may reference or exclude nonrecurring acquisition-related expenses, nonrecurring legal and accounting investigation costs and noncash impairment charges.Reconciliations of certain non-GAAP measures are included as part of our earnings press releases and in company presentations, which are available on our Investor Relations website.

Now I would like to turn the call over to Granite Construction Inc. Chairman of the Board of Directors, Claes Bjork.

Claes G. Bjork -- Chairman of the Board

Thank you, Mike. Good morning, everyone, and thank you for joining us today. Before I introduce Kyle and Lisa, I want to touch on the independent investigation led by the Board's Audit Compliance Committee. Shortly before we were about to file our 2019 Form 10-K in early February of 2020, our audit committee, in conjunction with the independent external counsel, began a thorough investigation of prior period reporting for the Heavy Civil Operating Group.

The investigation encompassed Heavy Civil Operating Group projects in various stages of completion from 2017 through 2019. And concluded there were issues that affected the accuracy of project forecast and reported results. For a more detailed explanation, I direct you to our 2019 Form 10-K filed on February 22, 2021. From the investigation, the company determined it had project forecasting issues related primarily to the timely recording of forecasted cost.

To address these issues, the company has developed and implemented a very robust remediation plan, which is well under way. Kyle and Visa will talk in more detail on these investigations and remediation efforts. But on behalf of the Board and audit committee who worked tirelessly over the last year, I want to thank all of those who worked so hard to get Granite through this process. Now on to the introductions. Since first joining the Board in 2006 and then serving as Chairman beginning in 2018, I've had the pleasure of watching Granite grow and developed.

And this includes our most recent leadership changes. I would like to formally introduce Kyle Larkin as our new President appointed in September of last year and Lisa Curtis as our more recently appointed CFO. As you likely already know, Kyle has been an integral part of Granite's Evolution since joining the company back in 1996 as a project estimator. And most recently, he served as Granite's Chief Operating Officer.

On behalf of the Board, I'm equally pleased to introduce Lisa Curtis as our Chief Financial Officer. She brings with her a wealth of experience in accounting, finance, Investor Relations and project management from various companies and industries. As we emerge from the investigation with many lessons learned, Kyle has hit the ground running and is leading a cultural shift within the organization to ensure Granite moves forward as a unified team.

Now let me close by saying I know that Kyle, Lisa and the rest of the leadership team are looking forward to engaging with you. In Kyle and Lisa, we have identified leaders who we believe can shape our future and drive execution across the company in a way that creates value for our shareholders and positions Granite to continue as an industry leader for another 100 years.

With that, I will turn the call over to Kyle and Lisa. Kyle?

Kyle Larkin -- President

Thank you, Claes, and good morning, everybody. I'm very excited to be able to talk with you today. A lot has happened in the world and a Granite over the last 16 months. I will start by addressing the investigation. As Claes mentioned, the internal investigation into the Heavy Civil Operating Group and associated projects revealed project forecasting issues related primarily to the timely recording of forecasted costs.

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. This is not granted, and we cannot allow this to happen again. I have been with Granite for more than 25 years, and I know the great people at all levels of our organization. I want to make it very clear that we are committed to fixing the shortcomings that existed by making meaningful changes to our processes.

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. We are also leading a cultural reinvigoration which will emphasize our refreshed core values and promote transparency across the company. Now let me touch on a few aspects of our remediation plan. First, with the shortfall in our project forecasting processes, we have implemented additional processes, controls and accountability for compliance with our policies and procedures.

Lisa will discuss this in more detail. Second, we have begun what I call a cultural reinvigoration. We have a great company full of great people, and limited shortcomings do not take away from that reality. Our cultural reinvigoration involves all of our employees working together to promote best practices and to be an industry leader. In connection with this, we have recently refreshed our core values to reflect what is most important and relevant to how we operate as a company today as well as the Granite we want to be in the future.

Our refreshed core values are safety, integrity, excellence, inclusion and sustainability. Although consistent with our long-standing core values, we believe these values are more modern, more meaningful and better resonate with our employees and stakeholders today. Finally, we have also made leadership changes as part of our remediation plan. At the end of 2019, we made changes in the Heavy Civil Operating Group management team. Since that time and through the investigation, additional changes were made in this group to ensure an open and compliant environment for our employees.

We have also hired additional personnel and dedicated existing resources to support our efforts to ensure the project teams have the required areas of expertise to prepare their project forecast. I strongly believe that these actions, along with the progress we have made on our Heavy Civil strategic review that was completed and communicated back in October 2019, positions Granite well for return to sustained success.

I will get into this strategic review and status a little later in the call. Before I turn my attention to the road ahead, I want to discuss several key successes as well as a few challenges experienced in our business over the course of 2020. Since we last spoke, our vertically integrated businesses have continued to perform exceptionally well in key markets such as California and the states within our Northwest operating group.

There continues to be robust opportunities in these markets post pandemic which are diverse in size, procurement type and the public and private sectors. While the majority of our work is in the public sector, we have been successful in strategically targeting opportunities and developing relationships in various private markets. This has helped us diversify our project portfolio to include a wide array of work, including commercial site development for data centers, mining operations and renewable energy projects.

As a key component of our vertically integrated business, the Materials segment has been another bright spot for Granite during 2020. Our year-to-date third quarter gross margin of over 16% in this segment reflects both the strong demand in our markets and the proactive initiatives we have introduced across our Materials business to gain operational efficiencies.

Additionally, in the past year, we have opened two large quarries in California that will drive our Materials business in those markets for years to come. These new quarries are designed with the latest technology for both efficiency and sustainability and are significant additions to our aggregate reserves. We continually evaluate additional opportunities to reinvest in our Materials business and strengthen our existing footprint. Now let me touch on claims settlements, another bright spot for us.

Our teams have been successful in bringing several difficult claims resolution during the year. As expected, these claim resolutions generally do not impact our income statement as they were in line with what was recorded in previous periods. However, they did positively impact cash during the first three quarters of 2020. Moving on. Transforming the risk profile of Granite's committed and awarded or, CAP, portfolio has been another key objective for our teams that has continued throughout 2020.

As I will highlight in more detail later in the call, we have made significant progress in this area by rethinking the way we assess and pursue opportunities. Ultimately, we believe this derisking initiative will drive far more consistent financial performance as our portfolio continues to evolve. The last thing I want to touch on for our 2020 highlights relates to Granite's progress and commitment to ESG. We have added dedicated resources who are focused on sustainable operations.

This is a key foundational element of our ESG program. During 2020, we expanded our initiatives to promote important social priorities at Granite. This journey began back in 2019 when we launched an inclusive diversity program with measurable targets. Inclusive diversity has gained momentum at Granite throughout 2020 and will remain at the forefront with our core value of inclusion.

We look forward to highlighting our comprehensive ESG objectives in more detail as these practices continue to evolve during the months and years ahead. Now that I've touched on the favorable areas of progress during 2020, let me shift to some of the challenges we have addressed during the year. The internal investigation was a long process that absorbed financial capital and human resources over the past year. In addition, while Granite teams have done an exceptional job of mitigating the impact, it has hampered our ability to obtain work in certain limited areas of our business due to the lack of audited financials.

While this has not significantly impacted our financial condition, becoming current with all financial reporting requirements is a key priority that we expect to complete by the end of March. We continue to have challenges with certain projects within the Heavy Civil Operating Group. This portion of our backlog continues to shrink, as intended, and any new work added to the project portfolio will be in accordance with our updated bidding risk criteria.

We have several complex design go projects remaining in our Heavy Civil Operating Group backlog, which do not meet our current risk criteria, and we are working diligently to complete these riskier projects as soon as possible. We expect backlog for them to be substantially reduced by the end of 2021. As part of our new risk criteria, we have made the decision to not pursue large design-build projects where we have limited and/or incomplete project design at the time of bid.

And lastly, although our business has been remarkably resilient to the unique challenges associated with the pandemic, our water and specialty businesses obtained to the Layne Christensen Company acquisition were disproportionately impacted by COVID-19 headwinds through the third quarter of 2020. These headwinds resulted in project opportunities being significantly delayed or canceled in our Water and Mineral Services operating group due to limited crew availability and extended shutdowns of some customers' mining operations.

To close out the 2020 summary, the core of our portfolio is resilient and performing very well. But we fully recognize and understand the challenged I just discussed will continue to require our steadfast attention. My job is to ensure that our teams are focused on working diligently to confront and mitigate these challenges in the months ahead. This takes us to the next slide, which houses our near-term priorities with the understanding that improving Granite's performance and reshaping our business requires a clearly defined plan underpinned by key priorities.

Our leadership and cultural reinvigoration changes are the initial steps in a multiyear journey to deliver value to our shareholders, customers and employees. The first phase in this process is to stabilize the business and achieve consistent financial performance. We intend to do that by first achieving compliance with the SEC and listing exchange requirements. With the imminent filing of our quarterly reports for the first, second and third quarters of 2020, we are now focusing on the completion of our annual report for 2020, which we expect will be filed by the end of March.

We will also focus on strengthening our people, processes and controls. These initiatives will be combined with the reinvigoration of our culture led by our refreshed core values. Through these steps, we believe we are taking action so that Granite will never be in this position again. Additionally, delivering on the Heavy civil Operating Group backlog while continuing to align our project pipeline to our new project bidding risk strategy is imperative to achieving consistent financial performance for all of our stakeholders. Executing on these priorities should allow Granite to achieve expected levels of profitability in future quarters and years.

Finally, I intend to revisit our strategic plan with my new leadership team and our Board to chart Granite's new strategic direction. Through a defined strategic direction, we will grow by leveraging our competitive advantages while continuing to achieve sustainable and consistent financial performance. Now I would like to highlight the portfolio piece of our key near-term priorities a bit more.

Granite has made significant progress in reshaping our project portfolio and capabilities as we work to drive better growth and achieve sustainable and consistently better margins. We have gradually continued to diversify our end market exposure as we build upon our relationships in both the private and public markets, driving the increase in our specialty segment cap to 18% of our portfolio as of the fourth quarter of 2020.

While the transportation segment will remain our primary end market, I'm very pleased with our progress with customers in the specialty segment and look for growth in this segment to continue. Importantly, we continue to derisk our portfolio by shifting away from the higher risk design-build projects, which have historically been the focus of the Heavy Civil Operating Group while replacing it with lower risk, best value procurement work.

This type of work includes construction management general contractor referred to as CMGC; construction management at risk or CMAR; and progressive design-build projects where contractors are awarded work based on qualification as compared to the more traditional award criteria, a low bid on the project. From 2018 to 2020, the percentage of higher risk design-build projects included in CAP has been nearly cut in half, while the percentage of best value procurement projects has more than doubled.

We have made tremendous progress in this area by bidding and winning in attractive, high growth, vertically integrated markets with strong funding trends, which I will discuss shortly. Finally, we have also seen a shift in our CAP across operating groups since 2018. as these historically higher risk design-build projects are completed, the percentage of our portfolio within the Heavy Civil Operating Group will continue to decrease, as seen by the almost 20% decline between 2018 and in 2020.

This is in line with objectives outlined in our Heavy Civil strategic review completed in October of 2019. Conversely, CAP in our Northwest and California operating groups have increased led by successful bids on the best value procurement projects. While there's still a lot of work left to do, I'm pleased with the progress made thus far and look forward to providing updates in the coming quarters.

Finally, before I turn it over to Lisa, I want to discuss what we are currently seeing in terms of public funding trends. And importantly, what they mean for Granite. On a whole, we are optimistic around long-term spending across all levels of government, federal, state and local. At the federal level, several approvals were passed over the last few months, including a one year extension of the FAST Act as well as a $13.6 billion infusion from the general fund to the Highway Trust fund for 2021 construction programs.

Additionally, Congress approved $10 billion in release spending for state DOTs in response to the pandemic. Based on formulaic estimates from the Federal Highway administration, over $1.5 billion of this relief fund is expected to be allocated to Granite six vertically integrated states: Alaska, Arizona, Nevada, Utah and Washington could receive approximately $650 million in the aggregate and California alone could receive almost $1 billion in relief funding. We will likely begin to see the impact of these approvals in late 2021 and into 2022.

We are optimistic that a bipartisan federal infrastructure bill could be passed this year, which would meaningfully drive our transportation end markets. On the water-related construction side, Congress approved the Water Resources Development Act in December of 2020, which authorized nearly $10 billion in spending for 46 projects on waterways nationwide. Now let me touch on what we are seeing at the state and local level.

Overall, funding remains solid as $14 billion of infrastructure improvements were approved by voters during the elections in November of 2020. Additionally, the pandemic had a smaller impact on budgets than initially anticipated, although some related headwinds are expected in select dates in the first nine months of 2021. However, I want to make clear that spending in project lettings in many of our key core states are strong.

For example, in California, our top revenue-generating state, infrastructure spending funded through SP1 is still on track to increase over the next five years. The annual average level of spending anticipated for SP1 is $6.2 billion between fiscal 2021 and 2027. States and municipal authorities are weighing options for overdue water and wastewater infrastructure investment would suggest a number of opportunities in the future. As you can tell, there are a lot of good things in terms of funding and government spending taking place in which we expect to fund and drive growth in 2021 and 2022.

With that, I'm going to turn it over to Lisa to discuss our financial results. Lisa?

Lisa Curtis -- Executive Vice President, Chief Financial Officer

Thank you, Kyle. I'm very excited to be able to talk with you today. Before my current position as CFO, I served Granite in the Investor Relations role and I am fully aware that we have been in a very long quiet period. Having this call today is a significant milestone for Granite. Now for my comments on the numbers, I will be discussing our financial performance for the first nine months of 2020 as compared to the corresponding restated amounts in the prior year 2019.

Consolidated revenue grew a little over 2% to $2.6 billion, with gross profit increasing almost 40% year-over-year to $238 million due primarily to improved performance in our Transportation segment. Within our Transportation segment, our vertically integrated construction business had a very strong performance during this period, driving overall revenue growth of over 7% year-over-year to $1.5 billion. However, that strong performance was partially offset by writedowns in our Heavy Civil Operating Group.

While the gross loss recognized by the Heavy Civil Group decreased significantly from 2019 to 2020, it remains at a level that prevented us from achieving the gross margins that we expect overall from this segment. In our Water segment, revenue of $318 million was down 8% year-over-year due to bid and project delays resulting from the effects from a pandemic and, to a lesser extent, impacts from the lack of audited financial statements.

However, the Water segment gross profit increased almost 11% year-over-year due mostly to writedowns in 2019 and on projects primarily associated with the Layne Christensen acquisition that were not repeated in 2020. Specialty segment revenue was down just under 5% year-over-year. Although the pandemic negatively affected the mining industry, shutting down these operations for a period of time, these declines were partially offset by strong site development and renewables work in certain markets.

Segment gross profit was down 35% year-over-year, driven by a dispute on a tunneling project and impacts arising out of the pandemic. Finally, Materials segment demonstrated strong performance, with revenue increase of almost 3% and a gross profit increase over 29% year-over-year. These increases were primarily driven by operational efficiencies and higher volumes.

Despite the significant headwinds associated with our Heavy Civil Operating Group and the ongoing pandemic effects, adjusted EBITDA increased $63 million for the first nine months of 2020, resulting in an adjusted EBITDA margin of 4.8% while adjusted net income of $41 million increased from a loss of $15 million in the first nine months of 2019.

As a reminder, we exclude nonrecurring or nonoperational items from adjusted EBITDA and net income, which includes acquisition-related expenses, nonrecurring legal and accounting costs related to the investigation and the noncash impairment charges. Altogether, these costs or charges totaled $194 million for the nine months ended September 30, 2020, and $26 million for the same period in 2019.

The impairment charges of $157 million during the first nine months of 2020 relates to goodwill and our investment in equity and affiliates obtained through our acquisition of Layne Christensen Company in 2018. The impacts of the pandemic triggers a need to perform interim impairment analysis. The charges reflect revised growth and margin expectations for the related reporting units.

Now moving on to our balance sheet. Granite's balance sheet shows continued strength despite some of the headwinds that we have discussed today. As of the end of the fourth quarter 2020, we had $671 million of available liquidity, including $441 million of cash and marketable securities. In addition to increasing our cash and marketable securities, we have also reduced our outstanding debt during 2020 by $25 million to $339 million and did not have any draws outstanding on our revolver as of the fourth quarter of 2020.

Additionally, while many companies suspended dividends during 2020, we maintained our quarterly dividend, and our payout ratio remained consistent with our capital allocation framework. On the cash flow front, I am pleased to report that Granite generated over $138 million and operating cash flow in the first nine months of 2020. This was the highest level of cash generation for the first nine months of a fiscal year since 2006.

We were able to achieve this through prudent cash management, intense focus on working capital and the settlement of several claims during the period. Going into 2021, with our strong balance sheet, Granite is well positioned to invest in our business and achieve the long term sustainable, consistently profitable growth Kyle described earlier. On the basis of this strength, I look forward to presenting our capital allocation strategy in the coming months.

Before handing it back to Kyle, I want to dive deeper into the improvements we are making to strengthen our people, processes and controls as a component of our overall improvement. This is our key priority for 2021. First, we are strengthening and improving controls that engage every level of the organization. In addition, we have already improved organizational structures, impacting both operations and finance so that priorities are aligned across Granite to achieve compliance at every level, function and department.

Next, we are already actively training both operational and finance members across the company to ensure that all teams clearly understand what is required and are held accountable for complying with our policies and procedures. Finally, our cultural reinvigoration will engage all employees in this important effort. I believe that we will execute these actions in a timely manner and complete our remediation plan by the end of 2021.

And finally, I wish to personally thank everyone on the call today for your support and patience while we work to reestablish full SEC compliance with filing requirements. As we have stated, we expect our 2020 annual report to be delayed but expect to be in full compliance with all SEC and stock exchange listing requirements by the end of March. Kyle and I are very eager to put this process in the rearview mirror, and we are excited to share more about the Granite story with you very soon. As I have told many of you in the investment community over the past year, stay tuned.

With that, I will turn it back over to Kyle for closing comments.

Kyle Larkin -- President

Thanks, Lisa. Our team is excited about the road ahead for Granite, and let me close with the following points. The core of our business is healthy and generating consistent financial returns. We are focused on ensuring that we are compliant with all of our reporting requirements, and we are reinvigorating our corporate culture with a focus on our refreshed core values that will benefit Granite's customers, employees and the communities in which we work.

The implementation of our remediation plan, which is well under way, will continue to strengthen our people, processes and culture. Big picture trends in our industry, markets and geographies are providing fresh tailwinds that align with Granite's core competencies, and we are reshaping our portfolio to maximize value to you, our shareholders. We take these responsibilities very seriously, and we appreciate your continued support. In the months ahead, we look forward to engaging with you in more detail about our vision and strategy as we move the company forward.

Operator, I will now turn it back to you for questions.

Questions and Answers:


Thank you. [Operator Instructions] Our first question comes from Michael Dudas with Vertical Research Partners. Please go ahead.

Michael Dudas -- Vertical Research Partners -- Analyst

Good morning, everybody. And welcome. Great to hear your voices. Congratulations on your promotions and the job you've done up to date.

Kyle Larkin -- President

Thank you.

Lisa Curtis -- Executive Vice President, Chief Financial Officer

Thank you, Mike.

Michael Dudas -- Vertical Research Partners -- Analyst

All right. So Kyle, you mentioned in your prepared remarks about derisking the company. I understand it's probably more focused on the heavy construction division, but maybe a sense of, like, in the derisk -- like on the core business, on the vertical integration, transportation and water and specialty side, is there much adjustment required there to achieve what your perception will be for margins and growth based on the tailwinds going forward?

And having said that, the time frame of HCD and the rapidness you can get through that, is that something that will start to blend away and not be so significantly impactful to, say, 2022 in margin beyond, given what I'm sure the drag will be in 2021?

Kyle Larkin -- President

Okay. So thanks, Mike. Let me start with really the first question, and it's really around our vertically integrated business, Water and Mineral Services business and the risk associated with those business lines. And those inherently are less risky, obviously, than what we've seen with the Heavy Civil Group.

The project sizes are drastically different. I think our vertically integrated business average job size is really less than around $5 million, if not lower in certain markets. In Water and Mineral Services, the average job size is less than two relative to the Heavy Civil Group, where the average job size is significantly larger, as we know.

And so I don't think -- as we look at derisking our portfolio, it's really around the Heavy Civil group and how we transition away from really the way we were looking at bidding and what type of projects we're pursuing and transitioning that into what we want to look like in the future in terms of the size of projects, the duration of projects, where we're building work and who we're building work for.

And the contract method in which we're getting the work. So that's really where we're headed from a companywide portfolio standpoint. The second question was really around the Heavy Civil group and what does it look like in terms of timing of that backlog. So as we ended 2020, our Heavy Civil group backlog was just over $1 billion. And we want to look at things a little bit different in terms of we have maybe under our old risk profile work versus our new risk profile work.

So of that $1 billion of Heavy Civil group backlog we would say there's roughly 60% was under the old risk profile. As we kind of move the time line forward into 2021 through the end of this year, we think we'll be sitting on around $331 million of backlog or $350 million or so at the end of 2021.

And then, of course, as we get later out in the year to 2022, the end 2022, the backlog is just over about $50 million. So you can start to see the kind of the winding down of those projects. And that assumes new work within the Heavy Civil group. And of course, we anticipate they will procure work within the Heavy Civil group. It will just be under the new risk profile. So hopefully, that answers the question, Mike.

Michael Dudas -- Vertical Research Partners -- Analyst

Yes. Yes, it does. Thank you. And my follow-up, if I may. You talk about the overall positive tailwinds from post pandemic. Can you maybe characterize how the states and municipalities have come through from the pandemic?

And do you get the sense from them that with all the stimulus discussion in Washington and away from the federal highway build, but just more improvement to state and local areas and economy picking up, is there an ability or a need or I guess a want or desire for these to start to reaccelerate and get projects let quicker and start working through the opportunities to get the -- kind of take advantage of the opportunity into funding? And do you think those DOTs and such are prepared, the Caltrans, or what have you are prepared to get that work out and get it to you, so you guys can start to accelerate your backlog and your revenues?

Kyle Larkin -- President

Yes. So there might be maybe two parts to that question. I think certainly, what we saw in 2020, funding was there at the initial in the beginning. I think some of the agencies, states held back. They were challenged to actually get projects out the door under the COVID environment or they just -- they held back in terms of lettings for that period of time. So there is a little bit of pent-up lettings that are coming out as a result of really what we saw with the COVID impacts in 2020.

As we move forward in terms of funding, obviously, we're interested to see how the COVID relief spending impacts our business. And when those projects are going to come out for us to pursue. So more to come on that. We do think that's going to give several of the states that we operate in confidence to put work out on the street. And then, of course, we're looking at with some sort of federal bill will look like later in the year that would impact us more long-term into 2022.

At the state and local funding level, I think for the states, they're all a little bit different. Certainly, we highlighted California. We see that the California Caltrans to SB1 is still looking like it's going to continue funding at very high levels for the entire state, which is great. But we are seeing a little bit of softening in some other states within the Northwest operating group. Nothing significant. I think initially, we were getting some feedback, there were some bigger concerns. But I think those states are even gaining more confidence that the funding levels are going to be relatively strong moving forward.

So there's still a lot of state and local funding that's out there, at least with the kind of the smaller agencies that we operate in that have some local self-help funding. We think those are still in place. So all in all, we think there is the pent-up demand in terms of letting that were kind of held off during the COVID environment. And we think that the funding levels moving forward are still looking very strong.

Michael Dudas -- Vertical Research Partners -- Analyst

Thank you, Kyle.

Kyle Larkin -- President

Thank you.


The next question comes from Steve Ramsey with Thompson Research. Please go ahead.

Steve Ramsey -- Thompson Research -- Analyst

Good morning. Yes. Good to be on call with you guys again after a break.

Kyle Larkin -- President

Good morning.

Steve Ramsey -- Thompson Research -- Analyst

Yes. Maybe jumping into SG&A. How much of SG&A year-to-date 2020 was due to costs for the investigation and associated work? And maybe thinking on go-forward SG&A, if it will remain elevated on a permanent basis to some degree? Or should we expect it to subside over time?

Lisa Curtis -- Executive Vice President, Chief Financial Officer

Yes, Steven, I'll take that question. So for SG&A, if you take out the costs, the accounting and legal costs related to the investigation, year-over-year, year-to-date September, SG&A was relatively flat. Now obviously, there were some puts and takes throughout the year. Of course, travel and entertainment was down during the year due to COVID-related impacts.

But there was a -- with the heavy civil work that's being done, there were some increases in personnel that offset that a little bit. So when we had the Water acquisition, the Layne Christensen acquisition in 2018, that cost structure is a little bit higher than the average run rate for Granite. So that's definitely an area that we're going to be looking at and focused on, on a go-forward basis. So going into 2021, we'll be taking a look at it, but we expect by the time we get to 2022 to be at a more -- what we hope to be a more normalized level on a go-forward basis.

Steve Ramsey -- Thompson Research -- Analyst

Great. And can you share normalized level as then a percentage of sales? Or just any thoughts on what normalized looks like?

Lisa Curtis -- Executive Vice President, Chief Financial Officer

Yes. So we're really -- as Kyle mentioned in his earlier -- that we're looking at our strategic plan on a go-forward basis. So we definitely have more work that we want to do in that level. So it's really kind of to be determined. We're looking at the historical levels, 8% to 8.5%. So really kind of more to come. We'll be able to talk with you again toward the end of March. So...

Steve Ramsey -- Thompson Research -- Analyst

Okay, great. And then a quick one on the specialty segment, the site development strength. Is that primarily data centers thus far in 2020? Or is renewables picking up maybe kind of a sense of order of magnitude of data centers and renewables as a percentage of maybe revenue or CAP for specialty?

Kyle Larkin -- President

Yes. And I don't know if I have the numbers completely in front of me, but I would say that it's kind of across the board. Our specialty encompasses a whole lot of commercial development, wherever is the subcontractor, oftentimes the vertical builders. Obviously, the data center work that we talked about in the renewables. And we think the renewables has actually been a highlight.

We've seen a whole bunch of renewable activities from battery stores to solar fields that we've been working on across the country. And so that's been actually very exciting for us. And we do believe moving forward, there's tremendous opportunities in renewables market for us. I would say, in general, the revenues for those specifically for the data centers and renewables are under 5% for the company today.

Steve Ramsey -- Thompson Research -- Analyst

Great. Thank you.


The next question comes from Jerry Revich with Goldman Sachs. Please go ahead.

Adam Beavis -- Goldman Sachs -- Analyst

Hi. This is Adam Beavis on behalf of Jerry Revich today. Congratulations on the round. Really impressive. But wanted to talk about some of the implemented rate across the business, particularly in Civil. Can you talk about the relative size of the Heavy Civil business that you'll be comfortable with going forward? And how does that compare with the size of the business year-to-date?

Kyle Larkin -- President

So you broke up a little bit, Adam. But I think if I heard the question correctly, it was kind of getting back. I think in Q3 of '19, we talked about the Heavy Civil group being roughly 15% of our overall revenue of the company. I think your question was about what do we see in the future for the Heavy Civil group.

And I think that's a good follow-up question to our strategic review back in 2019, and we've made progress from where we were in 2019 and kind of where we are today. We've made a lot of changes, certainly around I think our project selection, primarily in our approval process. So it might be good for me to highlight what that looks like today for us.

We go through on these projects and how we select them to group leadership approval, goes up to a large project committee, which is comprised of our executive team. And it also goes through our newly formed Board Risk committee if it hits a certain criteria. Those criteria around size, duration, home market, contract terms, etc.

And we also want to make sure that as we price work, it really reflects the risk associated with different types of projects. We've shifted away back in '19, I think we were still talking about projects over $500 million. I think today, we're not looking at those. We're shifting away from what I would call maybe a mega project. We're targeting projects under $500 million.

We're still -- would entertain design-build projects, but they have to be very small in size, by our home markets and we have to be able to price to work accordingly. Bid build is obviously still a focus, but this value-based selection opportunities for us is really where we want to head in many of the markets that we're in. So we're really changing the Heavy Civil group.

I can tell you, what's interesting is our average projects that we're pursuing today within the Heavy Civil group range from $20 million to $500 million. So a very different type of work that we're pursuing within the Heavy Civil group regions as we kind of descale or derisk that business. So the average job size today is only $225 million in terms of pursuit size for the Heavy Civil group as an average.

So I think the teams are doing a really nice job of moving and transforming that business into the right work in the right market. So getting back to your question around the 15% or what percentage. It's hard to say because -- and that was an easier number to come up with when we're looking at our Heavy Civil group is simply large projects, significant size and risk profile.

And now that we're transforming that business and it's starting to look a lot like our other businesses in many ways, I don't think it's applicable. So I'm not sure we can come out today and tell you what that percentage is. But I think we're kind of moving away from that being a necessary need for us to identify. So hopefully, that makes sense, Adam.

Adam Beavis -- Goldman Sachs -- Analyst

No, that makes sense, and that's very helpful. Thank you. And so then in the past before these charges, your earnings have ranged from slight losses to just over $3 at the peak of 2008. What do you view as your peak earnings potential this cycle?

Kyle Larkin -- President

Well, that might be a question that we come back in March and revisit. I think it would probably be more appropriate than us trying to come up with that number for you here on this call today.

Adam Beavis -- Goldman Sachs -- Analyst

Okay. Sure. And so just one last question, if I may. It's nice to hear about the legal settlements that you've reached. Can you talk about how many projects reach settlements and what the cash flow and income statement benefit was?

Kyle Larkin -- President

Yes. I can update you. I mean we sit on multiple claims in 2020. It's generated increased to our cash balance of around $66 million. All in all, from a net income standpoint, it was relatively flat. We still have several claims that are outstanding, I think, in excess of about $100 million to Granite. If we were to get some sort of settlement along the way, again, we see that more as from a cash front, not necessarily from a net income front. But obviously, these needs take a long time to resolve.

Adam Beavis -- Goldman Sachs -- Analyst

Okay. Great. Thanks so much.

Kyle Larkin -- President

Thank you.


[Operator Instructions] The next question comes from Eugene Gilligan with Information News. Please go ahead.

Eugene Gilligan -- Information News -- Analyst

Hello. Good morning. Thanks for taking my call. I'm curious, is Granite entertaining any possibility of divesting itself of the Heavy Civil Operations Group?

Kyle Larkin -- President

No, Eugene, but not at this time or not in any sort of discussions in terms of sale with the Heavy Civil group.

Eugene Gilligan -- Information News -- Analyst

Okay. Great. Thank you very much.

Kyle Larkin -- President

Thank you.


The next question is a follow-up from Michael Dudas with Vertical Research Partners. Please go ahead.

Michael Dudas -- Vertical Research Partners -- Analyst

Kyle, how would you characterize the competitive nature of the markets, primarily in the vertically integrated business, in the small project side? Maybe translate that to the other specialty and Water. Is it different from prior to the pandemic trends? You were talking about numbers through September 30, but now we're almost into March. Have trends and visibility improved? Or how would you characterize that as we think about what 2021 and beyond could be like?

Kyle Larkin -- President

Yes. I mean, that's a good question. And I think there's post pandemic and pre pandemic. And then there's just kind of the normal cycle that our business goes through in general. And so as we look at kind of the bid environment, normally, contractors tend to pick up work late Q4, Q1.

As they start to put work on their books, we see the competitive landscape, I'm being very general, start to back off a little bit in the summer months, while our contractors are busy building work. I think the pandemic may have shifted things a little bit. As I mentioned before, that lettings were delayed in some markets. So that kind of moved things around for contractors in order to put backlog on their books.

But in general, I think we're seeing the market a little more competitive than it's been in the past. I think as there was a little bit of a slowing in lettings of the contractors went through some backlog. And I think they're looking to put more on their books. So I think -- I'm being very broad brush across a big organization. But in general, we're seeing a little bit more bid activity than we were probably pre pandemic.

Michael Dudas -- Vertical Research Partners -- Analyst

I mean in the sense of more competition than pre pandemic, and -- is that what you're referring to?

Kyle Larkin -- President

Yes. It's probably both. I mean, I think it's probably both a little bit more competition. And obviously, our competitors are looking for a little bit of work early in the year.

Michael Dudas -- Vertical Research Partners -- Analyst

And would some of the stimulus or funding that flows through to these -- the six states that you're talking about could -- as seasonally, things get better, it could be more helpful as you're looking to bid some of the work for the second half of the year in 2022?

Kyle Larkin -- President

Yes. We think it will absolutely be helpful. I think it will allow some confidence for those agencies that are going to receive the money to put more work out, to bid. And that's what we're looking for later this year.

Michael Dudas -- Vertical Research Partners -- Analyst

Thanks, Kyle.

Kyle Larkin -- President

Thank you.


This is the end of Q&A. And now I would like to turn the call back over to Mr. Larkin.

Kyle Larkin -- President

Okay. Well, thank you for your questions. And before we conclude, I do want to thank all of our employees and our financial stakeholders for their unyielding professionalism, dedication and support under extraordinary circumstances. On behalf of Granite Management and our Board of Directors, thank you. And with that, thanks for your continued interest in Granite. We look forward to speaking with everyone very soon.


[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Mike Barker -- Vice President of Finance

Claes G. Bjork -- Chairman of the Board

Kyle Larkin -- President

Lisa Curtis -- Executive Vice President, Chief Financial Officer

Michael Dudas -- Vertical Research Partners -- Analyst

Steve Ramsey -- Thompson Research -- Analyst

Adam Beavis -- Goldman Sachs -- Analyst

Eugene Gilligan -- Information News -- Analyst

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