Sterling Construction Company, Inc. — FY2021 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2021. The registrant is Sterling Construction Company, Inc. (NASDAQ: STRL); the provided metadata refers to Sterling Infrastructure, Inc., but the filing text identifies the company as Sterling Construction Company, Inc.
Sterling operates in three U.S. segments: Transportation Solutions, E-Infrastructure Solutions, and Building Solutions. Its work includes highways, bridges, airports, rail, water infrastructure, data-center and distribution-center site development, residential foundations, and commercial concrete construction.
Financial performance and key metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $1.582 billion | $1.427 billion | Up 10.8% |
| Gross profit | $214.8 million | $191.4 million | Up 12.2% |
| Gross margin | 13.6% | 13.4% | Up 0.2 percentage points |
| Operating income | $107.3 million | $94.9 million | Up 13.1% |
| Operating margin | 6.8% | 6.6% | Up 0.2 percentage points |
| Net income attributable to Sterling | $62.6 million | $42.3 million | Up 48.2% |
| Diluted EPS | $2.15 | $1.50 | Up 43.3% |
| Cash flow from operations | $151.6 million | $120.9 million | Up $30.7 million |
Segment revenue and operating income were $795.6 million and $21.5 million for Transportation Solutions, $468.8 million and $80.5 million for E-Infrastructure Solutions, and $317.4 million and $32.6 million for Building Solutions. E-Infrastructure revenue increased 18.0%, while Transportation and Building Solutions revenue increased 5.5% and 14.9%, respectively.
Cash and cash equivalents totaled $81.8 million at year-end, including $29.8 million generally available, $30.4 million at consolidated 50%-owned subsidiaries, and $21.6 million at construction joint ventures. Net cash used in investing activities was $223.4 million, primarily reflecting acquisitions and capital expenditures. Net cash provided by financing activities was $87.9 million.
Total debt was $462.2 million, including $446.9 million outstanding under the Term Loan Facility and no borrowings under the $75.0 million revolving facility. The Credit Facility matures October 2, 2024. Sterling was in compliance with its restrictive and financial covenants at December 31, 2021. Net capital expenditures were $42.5 million; management expects 2022 net capital expenditures of approximately $50.0 million to $55.0 million.
Material changes versus the prior comparable period
- Backlog increased to $1.493 billion from $1.175 billion, while backlog gross margin increased to 12.2% from 12.0%. Approximately 63% of year-end backlog is expected to be recognized as revenue in 2022.
- Low-bid heavy highway revenue declined by $79.8 million, offset by a $126.1 million increase in design-build heavy highway and other Transportation revenue. Low-bid heavy highway represented approximately 19% of total revenue at year-end, versus approximately 79% in 2016.
- On December 30, 2021, Sterling acquired Petillo for aggregate consideration of $204.6 million, consisting primarily of $175.0 million in cash and $20.4 million of Sterling stock. Petillo added $210.6 million to backlog and is included in E-Infrastructure Solutions. Because the acquisition closed near year-end, it had no material impact on 2021 reported operating results.
- On December 28, 2021, Sterling acquired Kimes & Stone for approximately $7.6 million in cash.
- The Credit Facility was amended to add a $140.0 million incremental term loan used to fund a portion of the Petillo acquisition. Debt increased materially from $375.4 million at December 31, 2020 to $462.2 million at December 31, 2021.
- Interest expense declined to $19.3 million from $29.4 million, reflecting lower borrowing rates and repayment of $48.1 million of the prior term loan balance, partly offset by acquisition-related borrowing.
- The effective tax rate decreased to 27.7% from 34.4%. Sterling reported no federal cash tax payments in 2021 or 2020 because of net operating loss carryforwards.
Guidance, outlook, commentary, risks, and unusual items
Management described the long-term outlook as favorable, supported by the Infrastructure Investments and Jobs Act, continued data-center and e-commerce infrastructure investment, and demand for new housing. Management also cited inflation, supply-chain constraints, material availability, fuel-price increases, and labor shortages as continuing pressures.
Building Solutions margins declined because of higher concrete, steel, and lumber costs, inconsistent material availability, and increased subcontractor labor costs. Management has attempted to pass these costs to customers but may not recover all future increases. The commercial multifamily outlook was described as weakening.
The company recognizes most Transportation and E-Infrastructure revenue over time using a cost-to-cost method. Changes in estimated costs, productivity, claims, change orders, weather, labor, materials, or subcontractor performance can materially change reported revenue and profit. Net contract-estimate revisions increased operating income by $14.4 million in 2021.
Unapproved change orders and claims included in estimated transaction prices totaled $13.9 million at December 31, 2021, compared with $7.1 million at December 31, 2020. Recoverability remains subject to customer negotiations and, potentially, legal action.
Key risks include fixed-price contract losses, project delays and liquidated damages, adverse weather, customer concentration, dependence on government infrastructure spending and major private-sector customers, bonding availability, labor and union matters, supply-chain and inflationary costs, cybersecurity, COVID-19 effects, acquisition integration, interest-rate exposure, and refinancing or covenant risk. The company hedged $275.0 million of term debt with an interest-rate swap; a 100-basis-point change on the unhedged portion would affect annual interest expense by approximately $1.7 million.
Other unusual items include a $2.0 million net gain on extinguishment of debt, including approximately $2.5 million attributable to Sterling’s share of forgiven PPP loans, and $3.9 million of acquisition-related costs. The remaining PPP loan was awaiting an SBA forgiveness determination at year-end.
Goodwill totaled $259.8 million and other intangible assets totaled $303.2 million at year-end. No goodwill impairment was recorded. The Petillo purchase price allocation remained preliminary, including $69.8 million of identifiable intangible assets and $67.8 million of goodwill.
Most important facts for investors to verify
- Confirm the company’s current legal name and whether the metadata reference to Sterling Infrastructure, Inc. reflects a later corporate name change.
- Reconcile the $1.493 billion backlog, its 12.2% margin, expected 2022 conversion, and the $210.6 million contributed by Petillo.
- Evaluate leverage, required term-loan amortization, the October 2024 maturity, covenant thresholds, and refinancing capacity.
- Assess whether inflation, labor shortages, material availability, and fuel costs are being recovered through pricing or are compressing segment margins.
- Review the estimates supporting over-time revenue recognition, including the $14.4 million favorable contract-estimate revisions and $13.9 million of unapproved claims and change orders.
- Assess Petillo and Kimes integration, preliminary acquisition valuations, earn-out and retention obligations, and the effect of acquired operations on 2022 results.
- Monitor customer and government-funding concentration, bonding capacity, joint-venture obligations, and the company’s ability to maintain liquidity through project-cycle fluctuations.