Sterling Construction Company, Inc. — Q1 2014 Form 10-Q Summary
Reporting period: Three months ended March 31, 2014; comparative period is the three months ended March 31, 2013. The filing identifies the registrant as Sterling Construction Company, Inc., a heavy civil infrastructure contractor serving transportation and water infrastructure markets across multiple U.S. states. Results are unaudited and may be seasonally variable.
Financial Results and Key Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $134.5 million | $111.0 million | Up 21.2% |
| Gross profit | $7.9 million | $1.4 million | Up $6.5 million |
| Gross margin | 5.8% | 1.2% | Improved 4.6 percentage points |
| Operating income (loss) | $0.4 million | $(7.9) million | Improved $8.3 million |
| Net income (loss) | $0.5 million | $(4.4) million | Improved $4.9 million |
| Net income (loss) attributable to common stockholders | $0.2 million | $(4.6) million | Improved $4.8 million |
| Diluted EPS | $0.01 | $(0.39) | Improved |
| Operating margin | 0.3% | (7.2)% | Improved 7.5 percentage points |
| Cash flow from operating activities | $(12.2) million | $(10.2) million | Higher use of cash |
General and administrative expense declined to $8.5 million from $9.6 million, or from 8.7% to 6.3% of revenue. Other operating income included a one-time gain of approximately $1.0 million from revaluing a receivable previously written down. Changes in estimated gross margins on contracts produced a net $2.7 million gain included in operating income, equivalent to approximately $0.16 per diluted share.
Balance Sheet, Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $1.3 million at March 31, 2014, down from $1.9 million at December 31, 2013. Approximately $0.5 million was held by consolidated joint ventures and was generally unavailable for corporate purposes.
- Working capital was $25.1 million, compared with $8.7 million at year-end 2013.
- Total assets were $280.8 million and total equity was $132.4 million at March 31, 2014.
- Total debt was approximately $21.3 million, consisting primarily of $20.7 million outstanding under the revolving Credit Facility, plus current and other long-term debt.
- The Credit Facility provided up to $40 million of borrowings and letters of credit. At quarter-end, $20.7 million was borrowed and a $2.0 million letter of credit reduced available capacity to approximately $17.3 million.
- Operating cash use reflected increases in contract costs and estimated earnings in excess of billings, receivables from construction joint ventures, and other working-capital requirements.
- Capital expenditures were $2.3 million, partly offset by $2.3 million of proceeds from equipment sales. Financing activities provided $11.6 million, primarily from a net $12.9 million Credit Facility draw.
Backlog and Material Changes
- Backlog increased to $799 million at March 31, 2014 from $687 million at December 31, 2013. Approximately $71 million of apparent low-bid work was excluded because awards or pricing had not been finalized.
- Revenue growth was driven primarily by a greater number of projects in progress, particularly in Texas.
- Profitability improved substantially versus Q1 2013, when several large Texas projects experienced downward revisions.
- Joint venture activity improved: Sterling’s share of joint venture revenue was $8.9 million versus $9.1 million, while its share of pretax income improved to $0.6 million from a $2.2 million loss.
- The Company distributed approximately $1.0 million to noncontrolling interest owners during the quarter.
- The Company recorded a $24.2 million liability related to the mandatory redemption obligation for a 50% member interest in Road and Highway Builders, including a $20.0 million redemption amount.
Outlook, Risks and Unusual Items
Management was cautiously optimistic that 2014 government infrastructure spending and continued efforts to improve project profitability would support improved gross margins. No formal quantitative revenue or earnings guidance was provided in the filing.
- The Company was not in compliance with minimum tangible net worth and leverage covenants at December 31, 2013, but obtained a waiver and amendment. Management believed it could remain compliant for at least the next twelve months.
- The Credit Facility carried a 4.75% borrowing rate after the year-end amendment, with potential increases if liquidity thresholds were not met, and a 0.75% annual commitment fee on unused availability.
- On April 29, 2014, the Fifth Amendment removed a requirement to raise $20 million of equity by September 30, 2014, provided the Company raised $10 million of new equity by May 30, 2014.
- On May 6, 2014, the Company completed a public offering of 2.1 million common shares at $6.90 per share, generating approximately $14 million of net proceeds intended to repay Credit Facility borrowings.
- An amended shelf registration statement became effective on April 29, 2014, permitting offerings of up to $80 million of securities.
- The Company hedged approximately 820,000 gallons of diesel purchases through August 2015 at fixed prices ranging from $2.75 to $2.89 per gallon. These contracts reduce fuel-price volatility but limit benefits from declining fuel prices.
- Key risks include project cost overruns, inaccurate estimates under percentage-of-completion accounting, weather, construction delays, governmental funding changes, subcontractor or joint venture partner failures, fuel and materials inflation, customer concentration, and limited cash reserves.
- Unconsolidated joint ventures had approximately $85 million of remaining construction work, including $27 million representing Sterling’s proportionate share. Joint and several liability could expose Sterling to partners’ obligations if they fail to perform.
- Management stated that pending litigation and ordinary-course claims were not expected to have a material adverse effect.
Investor Verification Points
- Verify the sustainability of the improved 5.8% gross margin and the extent to which the $2.7 million contract-estimate gain and $1.0 million receivable revaluation gain are nonrecurring.
- Reconcile operating cash outflows with backlog growth, contract receivables, contract assets, and joint venture receivables.
- Confirm post-quarter-end equity offering proceeds, Credit Facility repayment, remaining availability, and compliance with amended covenants.
- Assess the Company’s ability to fund operations with only $1.3 million of reported cash and approximately $17.3 million of quarter-end revolver availability.
- Evaluate exposure from the $24.2 million mandatory redemption liability and the potential $18 million disability payment or $20 million death-related obligation.
- Review the effect of project estimate revisions, joint and several joint venture obligations, fuel hedges, and construction-cost inflation on future margins and liquidity.