Sterling Construction Company, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2020; unaudited. The filing identifies the registrant as Sterling Construction Company, Inc. (NASDAQ: STRL), operating in Heavy Civil, Specialty Services and Residential construction across U.S. markets.
Business Context and Key Financial Metrics
| Metric | Three Months 2020 | Three Months 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Revenue | $400.0 million | $264.1 million | $696.7 million | $488.0 million |
| Gross profit | $59.6 million | $25.5 million | $94.8 million | $45.0 million |
| Gross margin | 14.9% | 9.7% | 13.6% | 9.2% |
| Operating income | $33.0 million | $11.2 million | $45.1 million | $15.9 million |
| Net income attributable to Sterling | $18.2 million | $7.8 million | $21.3 million | $9.6 million |
| Diluted EPS | $0.65 | $0.29 | $0.76 | $0.36 |
| Net cash from operating activities | Not separately provided | Not separately provided | $52.3 million | $(4.3) million |
- At June 30, 2020, cash and cash equivalents were $70.6 million, including $31.8 million generally available, $31.3 million held by consolidated 50%-owned subsidiaries and $7.5 million in construction joint ventures.
- Total debt was $430.5 million, including $390.0 million of term borrowings, $20.0 million drawn on the revolving facility, a $10.0 million Plateau seller note and $10.5 million of finance leases and other debt. Long-term debt, net of current maturities and issuance costs, was $367.0 million.
- The $475.0 million senior secured credit facility matures October 2, 2024. Revolving capacity was $55.0 million at quarter-end.
- Total assets were $1.02 billion and total stockholders’ equity was $241.1 million at June 30, 2020.
- Backlog for Heavy Civil and Specialty Services was $1.13 billion, compared with $1.07 billion at December 31, 2019. Approximately 63% was expected to be recognized as revenue within the next twelve months.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 51.5%, while six-month revenue increased 42.8%, primarily because 2020 included a full quarter or six months of results from the October 2019 Plateau Acquisition.
- Specialty Services revenue increased to $135.7 million in the quarter from $27.9 million, and segment operating income increased to $23.2 million from $0.9 million, primarily due to Plateau.
- Heavy Civil revenue increased 10.1% in the quarter, but operating income declined to $3.9 million from $5.7 million because of COVID-19-related costs, productivity impacts and higher members’ interest expense.
- Residential revenue increased 22.1% in the quarter, supported by delayed work from heavy first-quarter rainfall and expansion in Houston.
- General and administrative expense increased to $18.5 million in the quarter from $10.2 million, and intangible amortization increased to $2.9 million from $0.6 million, primarily due to Plateau and higher stock compensation.
- Interest expense increased to $7.6 million in the quarter from $2.9 million because of acquisition-related borrowings. The effective tax rate increased to 28.4% from 8.2%, partly reflecting 2019 valuation-allowance benefits and 2020 state taxes related to Plateau.
- Cash flow improved materially: operating cash provided was $52.3 million in the first six months of 2020 versus cash used of $4.3 million in the prior-year period. Capital expenditures were $14.6 million, and debt repayments were $22.6 million.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue or earnings guidance is provided in the filing.
- Management stated that construction operations remained classified as essential critical infrastructure and had not experienced significant project-site shutdowns or operational interruptions through the filing date. COVID-19 nevertheless caused unfavorable Heavy Civil productivity impacts and could adversely affect future demand, labor, subcontractors, supply chains, project execution and financial results.
- Heavy Civil demand depends substantially on federal, state and municipal infrastructure funding. The FAST Act was scheduled to expire in 2020, and a potential federal infrastructure bill was described as a possible longer-term growth catalyst, but no near-term impact was expected.
- Management described positive commercial and land-development trends supporting Specialty Services, but noted slowing multifamily investment. Residential demand exceeded customer expectations in the second quarter, although a COVID-19-related slowdown remained possible.
- The company uses an interest-rate swap on $350.0 million of the $390.0 million term loan. The derivative had a net fair-value liability of $9.7 million at June 30, 2020, and produced a $7.1 million after-tax loss in accumulated other comprehensive income during the first six months.
- Unapproved change orders and claims included in project prices totaled $8.2 million at June 30, 2020, versus $3.0 million at year-end 2019. Negotiations were ongoing, and legal action could be pursued if acceptable resolutions were not reached.
- Two consolidated 50%-owned subsidiaries have mandatory redemption obligations totaling $40.0 million, plus $13.8 million of accumulated earnings. Related insurance policies are intended to mitigate the potential cash requirement.
- Unconsolidated joint ventures had approximately $625.1 million of remaining construction work, including $278.8 million representing Sterling’s proportionate share. Joint venture agreements generally create joint and several liability.
- The company received approximately $9.8 million of Paycheck Protection Program loans through two 50%-owned subsidiaries. Forgiveness depends on compliance with program requirements and Small Business Administration approval.
- The company reported compliance with all restrictive and financial debt covenants at June 30, 2020. Management stated that pending legal matters were not expected to have a material adverse effect.
Most Important Facts for Investors to Verify
- Whether the acquisition-driven Specialty Services growth and reported margins are sustainable after Plateau integration and against future acquisition-related costs and amortization.
- COVID-19’s continuing effects on project productivity, labor and subcontractor availability, residential demand, supply costs and government infrastructure funding.
- Debt reduction progress, compliance with increasingly restrictive leverage covenants and the October 2024 credit-facility maturity.
- Collection and resolution of retainage, unapproved change orders and claims, and the potential effect of contract-estimate revisions on future margins.
- Exposure to joint and several liabilities, mandatory redemption obligations and the availability or forgiveness status of PPP loans.
- The filing’s disclosure-control scope: acquired Plateau operations were excluded from the design and operation of disclosure controls under applicable SEC guidance for newly acquired businesses.