Sterling Construction Company, Inc. - Q1 2008 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2008. Sterling Construction Company, Inc. is a heavy civil construction firm specializing in transportation and water infrastructure in Texas and Nevada. The company operates as a single reportable segment. Notably, the results for this period include the full impact of the acquisition of Road and Highway Builders, LLC ("RHB") in Nevada, which was completed on October 31, 2007.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 |
|---|---|---|
| Revenues | $84.9 million | $68.9 million |
| Gross Profit | $8.1 million | $5.6 million |
| Gross Margin | 9.5% | 8.2% |
| Operating Income | $4.6 million | $3.3 million |
| Operating Margin | 5.5% | 4.8% |
| Net Income | $3.1 million | $2.5 million |
| Diluted EPS | $0.23 | $0.21 |
| Cash from Operations | $0.7 million | $4.6 million |
| Cash & Equivalents (End) | $72.2 million | $15.2 million |
| Long-Term Debt | $60.5 million | $65.6 million |
| Working Capital | $80.8 million | $51.8 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 23.3% year-over-year, driven by the inclusion of RHB operations and improved weather conditions in Texas markets (30% decrease in rainfall compared to the prior year).
- Profitability: Gross profit rose 43.9% and operating income increased 39.0%, attributed to higher volume, better crew productivity, and the RHB contribution.
- Cash Flow: Net cash provided by operating activities decreased significantly to $0.7 million from $4.6 million in the prior year. This was primarily due to a $5.3 million decrease in accounts payable (more timely payments) and a $1.9 million increase in costs in excess of billings.
- Debt Reduction: The company reduced borrowings under its $75 million Credit Facility by $5.0 million during the quarter, bringing total outstanding borrowings to $60.0 million.
- Backlog: Total backlog increased to $485 million at March 31, 2008, from $450 million at year-end 2007, despite recognizing $85 million in revenue during the quarter.
Outlook, Risks, and Management Commentary
- Liquidity: Management believes liquid resources, including $72.2 million in cash and the unused portion of the Credit Facility, are sufficient to fund operations for the next 12 months.
- Market Conditions: While Texas and Nevada populations continue to grow, the company notes a softer bidding climate in water infrastructure markets due to the national housing slowdown. Competition has increased as residential contractors bid on infrastructure projects.
- Risks: Key risks include dependence on government funding (SAFETEA-LU), potential funding shortfalls in Texas, cost escalations in oil products, and weather-related project delays.
- Acquisition Integration: The company is integrating RHB, which includes a quarry lease. A minority interest put option exists for the remaining 8.33% of RHB, exercisable starting in 2011.
- Subsequent Event: On May 8, 2008, stockholders approved an increase in authorized common stock from 14 million to 19 million shares.
Investor Verification Checklist
- Backlog Quality: Verify the $48.3 million of "apparent low bidder" contracts included in backlog, as these are not yet officially awarded.
- Working Capital Trends: Monitor the significant decrease in accounts payable and the increase in "costs in excess of billings" to ensure cash flow from operations stabilizes.
- Debt Covenants: Confirm continued compliance with Credit Facility covenants regarding fixed charges, leverage, and tangible net worth.
- Acquisition Accounting: Review the final purchase price allocation for the RHB acquisition, specifically regarding the quarry lease valuation and goodwill amortization.
- Weather Impact: Assess the sustainability of the revenue growth driven by improved weather in Texas versus historical averages.