STERLING INFRASTRUCTURE, INC. annual report, FY2023

Sterling Infrastructure, Inc. — Fiscal 2023 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2023. The filing presents annual results, not standalone fourth-quarter results. Sterling operates in E-Infrastructure, Transportation and Building Solutions across the United States and Pacific Islands.

Business Context and Key Developments

E-Infrastructure provides large-scale site development for data centers, advanced manufacturing, e-commerce, warehousing and power-generation projects.
Transportation provides highway, aviation, rail, bridge, airport, port and storm-drainage infrastructure services.
Building provides residential and commercial concrete construction and residential plumbing services.
Sterling acquired Professional Plumbers Group in November 2023 for approximately $56.7 million, expanding residential plumbing services in the Dallas-Fort Worth market. PPG contributed approximately $6.7 million of 2023 revenue after acquisition and had no material impact on net income.
The 2022 disposition of Myers & Sons Construction remains classified as discontinued operations. Sterling received $14 million in 2023, with two additional $2 million payments due by the end of 2025 and 2027.

Financial Results and Metrics

Metric	2023	2022	Change
Revenue	$1.972 billion	$1.769 billion	Up 11.5%
Gross profit	$337.6 million	$274.6 million	Up 23.0%
Gross margin	17.1%	15.5%	Up 160 basis points
Operating income	$205.8 million	$159.9 million	Up 28.7%
Operating margin	10.4%	9.0%	Up 140 basis points
Net income from continuing operations	$138.7 million	$96.7 million	Up 43.3%
Diluted EPS from continuing operations	$4.44	$3.16	Up 40.5%
Net income attributable to common stockholders	$138.7 million	$106.5 million	Prior year included $9.7 million of discontinued operations

Segment revenue: E-Infrastructure $937.4 million, Transportation $630.9 million and Building $403.9 million.
Segment operating margins: E-Infrastructure 15.0%, Transportation 6.6% and Building 11.4%.
Revenue growth was driven by advanced manufacturing and data-center work, higher Transportation volume and a record number of residential slabs poured.
Net interest expense declined to $15.2 million from $19.7 million because higher interest income more than offset increased borrowing costs.
The effective tax rate declined to 25.1% from 29.8%, primarily because stock-compensation-related tax deductions offset nondeductible compensation.

Cash Flow, Liquidity and Capital Structure

Cash and cash equivalents were $471.6 million at December 31, 2023, compared with $181.5 million at year-end 2022.
Operating cash flow was $478.6 million, versus $219.1 million in 2022. The improvement was principally attributable to higher earnings and a favorable $245.8 million change in contract capital.
Investing cash outflows were $87.8 million, including $51.2 million for PPG and $50.6 million of net capital equipment purchases, partly offset by $14 million received from the Myers disposition.
Financing cash outflows were $104.5 million, including $93.5 million of debt repayments and $9.6 million of employee equity-award withholding taxes.
Total debt was $344.3 million, including $343.4 million under the Term Loan Facility. There were no borrowings under the $75 million revolving facility.
The Credit Facility matures April 2, 2026, bears variable interest based on Term SOFR or a base rate, and had an approximately 6.91% weighted-average interest rate for 2023. Sterling was in compliance with its financial and restrictive covenants at year-end.
Management expects sufficient liquidity to fund at least the next year of operations. Planned 2024 net capital expenditures are approximately $55 million to $60 million.
The company authorized a $200 million share-repurchase program expiring December 5, 2025, but repurchased no shares during 2023. Sterling has not paid cash dividends and does not anticipate paying them in the foreseeable future.

Backlog, Outlook and Management Commentary

Backlog increased to $2.07 billion from $1.41 billion, with a 2023 book-to-burn ratio of 1.38. Including unsigned awards, combined backlog was $2.37 billion.
Backlog gross margin increased to 15.2% from 14.3%; combined backlog margin increased to 15.4% from 14.2%.
Management expects approximately 65% of year-end backlog to convert to revenue during 2024 and substantially all remaining backlog within the following twelve months.
E-Infrastructure outlook remains favorable because of anticipated investment in electric-vehicle, battery, solar, food and semiconductor manufacturing and hyperscale data centers. Large e-commerce distribution-center and small-warehouse activity declined in 2023 and is expected to remain subdued through 2024.
Transportation activity benefited from the Infrastructure Investment and Jobs Act and increased project awards; management expects the positive trend to continue.
Residential Building Solutions activity recovered during 2023, and management cited population growth and housing shortages as support for continued 2024 growth. Commercial multifamily demand slowed late in 2023 and is expected to decline in 2024.

Material Risks, Contingencies and Unusual Items

Most backlog contracts are fixed-unit-price or lump-sum arrangements, exposing Sterling to cost overruns from labor, materials, fuel, subcontractors, weather, productivity and project conditions.
Revenue on many long-term contracts is recognized over time using cost-to-cost estimates. Changes in estimated costs, claims, change orders, incentives or penalties could materially increase or reverse previously reported revenue and profit. Revenue recognition over time was the auditor’s critical audit matter.
Backlog and unsigned awards may not be realized at the stated value or margin and may be canceled or modified, subject to contractual compensation provisions.
Customer concentration is significant by segment: four customers represented 40% of E-Infrastructure revenue, four state DOTs represented 50% of Transportation revenue, and four customers represented 42% of Building revenue in 2023. No individual customer exceeded 10% of consolidated revenue.
Variable-rate debt creates interest-rate exposure; a 100-basis-point rate increase would increase annual interest expense by approximately $3.4 million, while a comparable increase in rates on cash would increase annual interest income by approximately $4.7 million.
Construction joint ventures expose Sterling to potential joint and several liability. Approximately $230 million of work remained on unconsolidated joint-venture contracts, including $112.4 million representing Sterling’s proportionate share.
Other risks include economic cycles, housing-market weakness, government funding and shutdowns, bonding capacity, labor shortages and union activity, environmental compliance, cybersecurity, adverse weather, acquisitions and potential goodwill or intangible-asset impairment.
Management reported no pending legal matter expected to have a material adverse effect. The company reported effective disclosure controls and internal control over financial reporting; PPG was excluded from the 2023 control assessment as a recently acquired business and is expected to be included beginning in 2024.

Most Important Facts for Investors to Verify

Whether the $2.07 billion backlog converts to revenue and profit at the disclosed 15.2% margin, particularly given fixed-price contract exposure.
The timing and terms of refinancing or repayment of the $343.4 million Term Loan Facility maturing in April 2026.
Whether E-Infrastructure growth offsets weakness in e-commerce and warehouse activity and whether multifamily weakness affects Building Solutions.
The sustainability of the 2023 cash-flow improvement, including the significant favorable change in contract capital and advance billings.
The integration, earnings contribution and potential earn-out obligation of PPG, which may require up to $20 million based on cumulative EBITDA through December 31, 2026.
Potential effects of interest rates, inflation, labor and material costs, claims and change-order recoveries on future margins.
Future use of cash for debt reduction, acquisitions, capital expenditures and the authorized $200 million share-repurchase program.