Sterling Construction Company, Inc. - 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 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. Following the acquisition of Road and Highway Builders, LLC (RHB) in late 2007, the company now includes significant operations in Nevada.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2008 | Six Months Ended June 30, 2008 |
|---|---|---|
| Revenues | $106.7 million | $191.7 million |
| Gross Profit | $11.7 million | $19.8 million |
| Gross Margin | 11.0% | 10.4% |
| Operating Income | $8.2 million | $12.9 million |
| Net Income | $5.1 million | $8.3 million |
| Diluted EPS | $0.37 | $0.60 |
| Cash and Equivalents | $85.2 million (Balance Sheet) | $85.2 million (Balance Sheet) |
| Working Capital | $85.2 million | $85.2 million |
| Long-Term Debt | $60.5 million | $60.5 million |
| Backlog | $514 million | $514 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 49.7% for the quarter and 36.7% for the six-month period compared to 2007. This growth is primarily attributed to the inclusion of Nevada operations (RHB acquisition) and improved weather conditions in Texas markets.
- Profitability: Net income rose 35.4% for the quarter and 30.9% for the six-month period. Operating margins improved slightly to 7.7% (quarter) and 6.7% (six months).
- Cost Pressures: The company faced headwinds from a long-standing steel vendor default ($1.0 million impact), rising fuel costs ($1.0 million impact), and execution issues on three Dallas projects ($1.0 million impact).
- Liquidity: Cash provided by operating activities increased to $19.6 million for the six months ended June 30, 2008, compared to $11.2 million in the prior year period.
Outlook, Risks, and Unusual Items
- Supplier Bankruptcy Risk: Subsequent to the quarter end, oil supplier SemMaterials, L.P. filed for Chapter 11 bankruptcy. This affects asphalt supply for Nevada projects. Management estimates 2008 revenue could be reduced by up to $25.0 million due to project redesigns and delays.
- Market Conditions: The company notes a softer bidding climate due to the housing slowdown in Nevada and Texas, leading to increased competition and downward pressure on bid prices.
- Capital Resources: The company maintains a $75.0 million Credit Facility with $13.2 million available as of June 30, 2008. A "shelf" registration statement for up to $80.0 million in securities was filed in July 2008.
- Guidance: No specific forward-looking financial guidance was provided beyond the revenue reduction estimate related to the supplier bankruptcy.
Investor Verification Checklist
- Verify the extent of revenue and margin impact from the SemMaterials bankruptcy and the timeline for project redesigns in Nevada.
- Monitor the company's ability to recover costs related to the steel vendor default and fuel price escalations on fixed-price contracts.
- Assess the execution risks in the Dallas market following the reported underperformance on three projects.
- Review the utilization of the $13.2 million remaining credit facility and the potential need for additional capital given the revenue reduction risk.
- Confirm the status of the $31 million in "apparent low bidder" contracts included in the backlog to ensure they are officially awarded.