Sterling Construction Company, Inc. — FY2015 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2015. The registrant is identified in the filing as Sterling Construction Company, Inc. and operates as a heavy civil construction company, with projects involving highways, roads, bridges, airfields, ports, light rail, water, wastewater and storm drainage infrastructure. Operations are conducted primarily in Texas, Utah, Nevada, Colorado, Arizona, California and Hawaii, and are reported as one heavy civil construction segment.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $623.6 million | $672.2 million | Down 7.2% |
| Gross profit | $29.0 million | $32.4 million | Down 10.7% |
| Gross margin | 4.6% | 4.8% | Down 0.2 percentage points |
| Operating loss | $14.4 million | $4.2 million | Loss widened |
| Net loss attributable to common stockholders | $20.4 million | $9.8 million | Loss widened |
| Basic and diluted loss per share | $2.02 | $0.54 | Loss increased |
| Cash flow from operations | $9.0 million | $(10.5) million | Improved |
| Capital expenditures | $10.8 million | $16.7 million | Down |
| Cash and equivalents | $4.4 million | $22.8 million | Down $18.4 million |
| Working capital | $30.3 million | $52.3 million | Down $22.0 million |
| Total debt | $21.3 million | $38.0 million | Down $16.7 million |
| Equity attributable to Sterling stockholders | $95.8 million | $133.7 million | Down $37.8 million |
Interest expense increased to $3.0 million from $1.1 million, primarily because the company replaced its prior credit facility with a higher-cost equipment-based facility. The company reported a $0.2 million loss on extinguishment of debt.
Material changes versus the prior comparable period
- Revenue declined primarily because of downward percentage-of-completion revisions on Texas projects, completion of large Texas projects, and a $2.8 million out-of-period revenue decrease recorded in the first quarter.
- 2015 included approximately $9.7 million of net charges from changes in estimated contract revenues and gross margins, compared with $9.1 million in 2014.
- General and administrative expense rose to $41.9 million from $36.9 million, including $1.2 million of consulting costs and $2.9 million of employee severance costs. Excluding these items, 2015 G&A was approximately 6.0% of revenue.
- Backlog was broadly stable at $761 million versus $764 million. Unsigned low-bid awards increased to $197 million from $24 million; management expected substantially all to be executed and added to backlog in the first quarter of 2016.
- Cash from operations improved to $9.0 million, but total cash declined because of debt repayments, equipment investment, restricted cash requirements and distributions to noncontrolling owners.
- Stockholders’ equity declined substantially, including a $20.4 million attributable net loss and a $18.8 million reduction in additional paid-in capital related to the Myers noncontrolling-interest amendment.
Debt, liquidity and unusual items
In May 2015, Sterling entered into a $40.0 million equipment-based facility consisting of a $20.0 million term loan and a $20.0 million revolving loan. At December 31, 2015, $18.0 million was outstanding on the term loan, nothing was drawn on the revolver, and approximately $11.6 million was available. The facility initially bears interest at 12%, subject to potential adjustments of up to two percentage points based on the fixed-charge coverage ratio. It is secured by substantially all personal property and construction equipment and restricts additional debt, liens, acquisitions, investments and material asset dispositions.
Management stated that available liquidity, operating cash flow and borrowing capacity were sufficient for the next twelve months, including bonding requirements, but cautioned that continued losses or a substantial cash constraint could adversely affect working capital. The company had $4.4 million of cash, approximately $5.0 million of restricted cash, and $29.6 million of borrowing base availability at year-end.
- The company sold its only long-term contract receivable to a related party for approximately $7.1 million and recorded a $1.4 million loss.
- The company sold land to a former executive for approximately $2.4 million and recognized an approximately $1.4 million gain.
- Goodwill totaled $54.8 million. Annual and interim impairment testing indicated no goodwill impairment, although the equity fair value cushion was subject to significant estimates.
- A full $56.4 million valuation allowance was recorded against net deferred tax assets, including federal and state net operating losses.
- The company had approximately $35 million of remaining work on unconsolidated joint venture contracts, including $12 million representing its share, while joint venture agreements generally impose joint and several liability.
Guidance, outlook, management commentary and risks
Management expected 2016 capital expenditures to be similar to 2015 levels of approximately $10.8 million, subject to project awards and equipment needs. Management viewed the transportation infrastructure market as improving, citing the federal FAST Act, increased Texas transportation funding under Propositions 1 and 7, and Utah’s gas-tax increase. The company also stated that it would pursue cost reductions, revenue growth and additional capital alternatives, with potential proceeds intended partly for debt reduction and working capital.
Key risks include inaccurate contract estimates, fixed-price and lump-sum contract exposure, project delays, weather, subcontractor and supplier failures, material and fuel cost increases, labor shortages, customer concentration, government funding changes, contract cancellations, bonding capacity, regulatory and environmental liabilities, joint and several joint venture obligations, and liquidity constraints. Revenue is recognized using percentage-of-completion accounting, making reported results sensitive to revisions in estimated contract costs, claims, change orders and profitability.
Customer concentration was significant: TXDOT represented approximately 13.5% of 2015 revenue and Caltrans approximately 15.5%. At year-end, TXDOT, Caltrans and Nevada DOT represented 25.7%, 14.1% and 11.4% of backlog, respectively. The company reported no material pending legal proceedings and stated that internal-control material weaknesses identified during 2015 relating to goodwill valuation review and Texas work-in-progress reviews had been remediated by year-end. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for an investor to verify
- Whether the $197 million of unsigned low-bid awards was formally executed and converted into backlog during the first quarter of 2016.
- Whether Texas project execution and estimating controls produced sustainable gross-margin improvement after the 2015 contract revisions.
- Actual 2016 cash generation, borrowing-base availability and compliance with the 12% equipment-facility terms.
- Collection timing for the $82.1 million of contract receivables, including $19.8 million of retainage, and the effect of claims and unapproved change orders.
- Potential exposure from customer concentration, contract cancellations, joint and several joint venture liabilities and surety-bond obligations.
- Whether goodwill and deferred tax assets remain recoverable given the company’s continuing losses and reliance on improved future operating performance.
- The filing identifies the registrant as Sterling Construction Company, Inc.; investors should verify whether this corresponds to the requested Sterling Infrastructure, Inc. entity.