Business Context and Reporting Period
Company: Sterling Construction Company, Inc. (the filing provided does not use the name Sterling Infrastructure, Inc.). The company operates in U.S. Heavy Civil, Specialty Services and Residential construction markets, primarily in the southern U.S., Rocky Mountain States, California and Hawaii.
Period: Unaudited first quarter ended March 31, 2021, compared with the three months ended March 31, 2020. The company had 28.6 million common shares outstanding as of April 30, 2021.
Financial Performance and Position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $315.3 million | $296.7 million | Up 6.3% |
| Gross profit | $45.0 million | $35.2 million | Up 27.8% |
| Gross margin | 14.3% | 11.9% | Up 240 bps |
| Operating income | $22.8 million | $12.1 million | Up 88.0% |
| Operating margin | 7.2% | 4.1% | Up 310 bps |
| Net income attributable to Sterling stockholders | $10.6 million | $3.1 million | Up 238.8% |
| Diluted EPS | $0.37 | $0.11 | Up $0.26 |
| Net cash from operating activities | $38.7 million | $10.8 million | Up $27.9 million |
- Segment revenue was $147.1 million in Heavy Civil, $124.1 million in Specialty Services and $44.2 million in Residential.
- Segment operating income was $1.1 million in Heavy Civil, $16.2 million in Specialty Services and $5.5 million in Residential.
- Cash and cash equivalents were $61.4 million at March 31, 2021, including approximately $5.8 million of restricted cash.
- Total debt was $344.9 million, including $324.5 million outstanding under the credit facility. The company had no revolving borrowings and $75.0 million of revolver capacity available.
- Debt declined from $375.4 million at December 31, 2020. The company repaid $30.5 million of debt during the quarter, including a $12.5 million scheduled payment and an $18.0 million excess cash flow payment.
- Capital expenditures were $11.2 million. Net cash used in investing activities was $11.0 million, and net cash used in financing activities was $32.5 million.
- Stockholders’ equity increased to $275.7 million from $268.7 million at year-end 2020.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by Specialty Services, which increased 18.5%, and Residential, which increased 21.5%. Heavy Civil revenue declined 5.5%.
- Heavy Civil operating income improved from a $3.6 million loss to $1.1 million of income, primarily due to the ramp-up of large design-build joint venture projects and reduced low-margin low-bid highway work.
- Specialty Services operating income increased to $16.2 million from $11.1 million, reflecting higher land-development volume.
- Residential operating income increased modestly to $5.5 million, although its margin declined to 12.4% from 14.0% because of higher and less consistently available concrete, lumber and steel costs.
- Interest expense declined to $6.0 million from $7.8 million as debt balances decreased. The company recorded a $337,000 loss on extinguishment of debt related to the early repayment of debt issuance costs.
- Operating cash flow increased substantially, aided by a $10.6 million favorable change in contract capital compared with a $7.0 million unfavorable change in Q1 2020.
- Backlog increased to $1.64 billion from $1.18 billion at December 31, 2020. Combined backlog, including unsigned low-bid awards, was approximately $1.7 billion versus $1.5 billion at year-end, although backlog margin declined to 11.8% from 12.0%.
Guidance, Outlook, Risks and Unusual Items
- Management maintained an estimated full-year 2021 effective tax rate of approximately 30%. Net operating loss carryforwards are expected to eliminate federal cash income tax payments for 2021; state tax payments may continue.
- Approximately 52% of backlog is expected to convert to revenue over the next twelve months. Backlog contracts generally have six- to 36-month completion periods.
- Management expects infrastructure funding proposals and state and local transportation initiatives to support Heavy Civil demand. Specialty Services benefits from continued commercial and distribution-related development, while the multifamily outlook remains weaker.
- Residential demand remained strong in Texas, but material price volatility and availability constraints may pressure margins and create delays in recovering costs from customers.
- COVID-19 had not caused significant project shutdowns or operational interruptions through the filing date, but future effects remained uncertain.
- The company included $7.1 million in contract price relating to unapproved change orders and claims. Negotiations remain ongoing, and legal action may be taken if acceptable resolutions are not reached.
- Contract accounting produced an $8.3 million net increase in estimated revenue and gross margin during the quarter. Results remain sensitive to changes in estimated costs, productivity, subcontractor performance, project conditions, penalties and final settlements.
- The company hedged $275.0 million of its $324.5 million term loan with an interest-rate swap. The swap had a $5.7 million net liability at March 31, 2021. A 100-basis-point rate change on the unhedged $49.5 million would affect annual interest expense by approximately $495,000.
- The credit agreement matures October 2, 2024 and contains financial and other restrictive covenants. The company reported compliance with all covenants at March 31, 2021.
- Joint ventures may expose the company to joint and several liability. Approximately $477 million of work remained on unconsolidated joint venture contracts, including $206.1 million representing the company’s proportionate share; management was not aware of any partner-performance situation requiring it to assume such obligations.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect on results, financial position or cash flows.
Important Facts for Investors to Verify
- Confirm the issuer identity and ticker because the supplied filing identifies the company as Sterling Construction Company, Inc., while the request metadata states Sterling Infrastructure, Inc.
- Assess whether backlog growth offsets the decline in backlog margin and the greater mix of Heavy Civil awards.
- Monitor realization of the $7.1 million of unapproved change orders and claims and the effect of contract estimate revisions on future earnings.
- Evaluate liquidity after scheduled debt repayments, excess cash flow prepayments, capital expenditures and potential strategic acquisitions.
- Track material-cost inflation, supply availability and the company’s ability to pass costs through to Residential customers.
- Review exposure to joint and several liabilities, bonding requirements, standby letters of credit and the $40.0 million mandatory redemption obligations associated with consolidated 50%-owned subsidiaries.