Sterling Construction Company, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2013; filed August 9, 2013. The filing identifies the registrant as Sterling Construction Company, Inc. (the request metadata refers to Sterling Infrastructure, Inc.). Sterling is a heavy civil contractor focused on transportation and water infrastructure projects, primarily in Texas, Utah, Nevada, Arizona and California.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $133.4 million, down 21.0% | $244.4 million, down 8.5% |
| Gross profit (loss) | $(16.6) million | $(15.2) million |
| Gross margin | (12.5)% | (6.2)% |
| Operating income (loss) | $(26.1) million | $(34.1) million |
| Net income (loss) attributable to Sterling stockholders | $(17.0) million | $(21.6) million |
| Diluted loss per share | $(0.93) | $(1.32) |
| Net cash provided by (used in) operating activities | Not separately provided | $(26.9) million |
For comparison, second-quarter 2012 revenue was $168.7 million, gross profit was $15.2 million, operating income was $8.2 million and net income attributable to Sterling stockholders was $3.3 million. Six-month 2012 revenue was $267.1 million, gross profit was $17.0 million, operating income was $3.7 million and net income attributable to Sterling stockholders was a loss of $4.2 million.
- At June 30, 2013, cash and cash equivalents were $1.0 million, short-term investments were $21.0 million and working capital was $65.5 million, compared with $87.5 million at December 31, 2012.
- Total assets were $329.1 million and total equity was $190.5 million at June 30, 2013. Sterling stockholders’ equity declined to $187.8 million from $210.1 million at year-end.
- Total debt was approximately $29.7 million, consisting principally of $29.3 million outstanding under the Credit Facility and a $0.2 million current mortgage obligation.
- The $50 million Credit Facility had $18.7 million of availability at June 30, 2013 after considering outstanding borrowings and a $2.0 million letter of credit.
- Investing activities provided $22.8 million of cash, primarily from $28.6 million of short-term investment sales. Capital expenditures were $6.7 million.
- Backlog increased to $714 million at June 30, 2013 from $656 million at December 31, 2012. New contract awards during the second quarter were $154 million.
Material changes versus the prior comparable period
- Revenue declined primarily because large Utah projects were completed.
- Profitability deteriorated sharply because of production problems and downward revisions to estimated contract profitability. Revisions reduced pre-tax results by $20.6 million during the first six months, including $16.3 million related to two Texas projects and one Arizona project.
- The company reported negative gross and operating margins in both the quarter and first half, compared with positive margins in the 2012 periods.
- General and administrative expense increased 12.3% in the quarter and 18.5% for the first half, reflecting expanded information-technology staffing, employee benefit costs and process-improvement expenses.
- Operating cash flow changed from $23.1 million provided in the first half of 2012 to $26.9 million used in the first half of 2013. The principal working-capital uses included a $16.9 million increase in contracts receivable and a $3.4 million income-tax receivable.
- The company purchased the remaining 20% interest in RLW at December 31, 2012; consequently, noncontrolling-interest earnings were substantially lower in 2013 than in the comparable 2012 period.
Guidance, outlook, risks and unusual items
- Management expects 2013 backlog gross margin to be below the 7.5% realized in 2012 because of legacy projects bid during highly competitive periods. Management expects margins on projects awarded in 2013 to improve 2014 results.
- Management has identified high-risk legacy projects and is pursuing cost reductions, productivity improvements and increased oversight. The filing does not provide formal revenue or earnings guidance.
- The company was not in compliance with its Credit Facility leverage covenant at June 30, 2013. On August 8, 2013, the lender waived the violation, temporarily relaxed the leverage covenant through March 31, 2014 and increased borrowing rates by 100 basis points effective June 30, 2013. Management expects compliance through at least June 30, 2014.
- Management believes available liquidity, including unused Credit Facility capacity, is sufficient for the next twelve months, but warns that higher equipment purchases, acquisitions or adverse operating developments could affect liquidity and tangible net worth.
- The $12.5 million first-half income-tax benefit included a $9.3 million deferred tax benefit associated largely with construction-project losses. Management expects the benefit to be deductible in future years based on expected future income.
- A $2.3 million pre-tax benefit from revaluation of the RHB noncontrolling interest was recorded in the second quarter; the first-half net impact of the revaluation was a $0.7 million pre-tax charge.
- Diesel fuel swaps covered approximately 1.8 million gallons through August 2015. These contracts had a net fair-value liability of $130,000 at June 30, 2013 and reduce fuel-price volatility while limiting benefits from falling fuel prices.
- Unconsolidated joint ventures had $162.4 million of remaining construction work, including $54.5 million attributable to Sterling. Joint and several liability provisions could require Sterling to fund a partner’s share if that partner fails to perform.
- Management reported no pending litigation expected to have a material adverse impact and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective.
Investor verification points
- Verify the status and performance of the three projects responsible for the $16.3 million of major contract charges, including remaining cost-to-complete estimates and potential additional losses.
- Review the amended Credit Facility, covenant headroom, increased interest costs and available borrowing capacity following the June 30 covenant breach.
- Assess whether operating cash flow can recover as contracts receivable and unbilled contract assets convert to cash.
- Reconcile reported backlog with expected gross margins, awarded-but-not-finalized work and the $55 million joint-venture component.
- Evaluate the realizability of the $14.8 million net deferred tax asset and the assumptions supporting expected future taxable income.
- Monitor joint-and-several obligations, fuel-hedging exposures, the RHB noncontrolling-interest valuation and the JBC earn-out liability.