Sterling Infrastructure, Inc. 2022 Form 10-K Summary
Business Context and Reporting Period
Sterling Infrastructure, Inc. operates in the United States through three segments: E-Infrastructure Solutions, Transportation Solutions and Building Solutions. E-Infrastructure serves data center, e-commerce, advanced manufacturing, energy and industrial markets; Transportation serves highways, aviation, rail and related infrastructure; and Building provides residential and commercial concrete services.
The filing covers the fiscal year ended December 31, 2022, with continuing-operations results generally presented on a comparable basis after the Myers disposition was classified as discontinued operations. The company changed its legal name from Sterling Construction Company, Inc. to Sterling Infrastructure, Inc. effective June 1, 2022.
Key Financial Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Continuing-operations revenue | $1.769 billion | $1.414 billion | +25.1% |
| Gross profit | $274.6 million | $203.5 million | +34.9% |
| Gross margin | 15.5% | 14.4% | +110 bps |
| Operating income | $159.9 million | $107.0 million | +49.4% |
| Operating margin | 9.0% | 7.6% | +140 bps |
| Net income attributable to Sterling shareholders, continuing operations | $96.7 million | $61.5 million | +57.4% |
| Diluted EPS, continuing operations | $3.16 | $2.11 | +49.8% |
| Net income attributable to Sterling shareholders, including discontinued operations | $106.5 million | $62.6 million | +70.0% |
| Diluted EPS, including discontinued operations | $3.48 | $2.15 | +61.9% |
| Net cash provided by operating activities | $219.1 million | $158.9 million | +37.9% |
| Capital expenditures | $60.9 million | $46.7 million | +30.6% |
Ending cash and cash equivalents were $181.5 million, compared with $81.8 million at December 31, 2021. Continuing-operations cash was $181.5 million at year-end. Accounts receivable were $262.6 million and contract assets were $109.8 million, while contract liabilities were $239.3 million.
Debt consisted primarily of $423.7 million outstanding under the Term Loan Facility and $10.9 million of other debt. There were no borrowings under the $75.0 million revolving credit facility. Total debt carrying value was $434.6 million, net of $3.2 million of unamortized debt issuance costs. The credit facility matures October 2, 2024. The company reported compliance with all restrictive and financial covenants at year-end.
Segment Performance and Material Changes
| Segment | 2022 Revenue | Year-over-Year Change | 2022 Operating Income | Operating Margin |
|---|---|---|---|---|
| E-Infrastructure Solutions | $905.3 million | +93.1% | $121.5 million | 13.4% |
| Transportation Solutions | $542.6 million | -13.6% | $26.6 million | 4.9% |
| Building Solutions | $321.6 million | +1.3% | $36.7 million | 11.4% |
- E-Infrastructure growth was primarily driven by the inclusion of $288.8 million of Petillo revenue and organic volume growth. Margin was pressured by inflation, supply-chain constraints, lower-margin Petillo scopes and weather-related inefficiencies.
- Transportation revenue declined due to the timing of backlog execution and lower heavy-highway and aviation activity, but operating income increased as the company shifted toward design-build and other higher-margin work.
- Building revenue was broadly stable. Commercial and multifamily demand offset lower single-family activity, while operating profit benefited from passing increased material and labor costs through to customers.
- Low-bid heavy-highway revenue declined to approximately 11% of total revenue from approximately 79% in 2016. Heavy-highway backlog gross margin was 10.9% at year-end.
- Backlog increased to $1.41 billion from $1.33 billion, with a 1.06 book-to-burn ratio. Including $275.0 million of unsigned low-bid awards, combined backlog was $1.69 billion. Backlog margin increased to 14.3% from 12.6%.
Transactions, Outlook, Risks and Unusual Items
- The company acquired CCS on December 20, 2022 for approximately $21 million, including $4.9 million of stock consideration. CCS expands residential foundation services into the greater Phoenix market.
- The company sold its 50% interest in Myers for $18 million. The transaction generated a $16.7 million pretax gain and resulted in Myers being reported as discontinued operations. Payments include $12 million received in January 2023 and three additional $2 million payments due in 2023, 2025 and 2027.
- Discontinued operations generated $9.7 million of net income in 2022, including the Myers disposition gain, despite a $7.3 million operating loss before the disposition.
- Management cited favorable long-term opportunities from data centers, advanced manufacturing, solar and battery facilities, and infrastructure spending under the Infrastructure Investment and Jobs Act. The company reported increased Transportation bid activity and awards beginning in the third quarter of 2022.
- Management expects approximately 75% of year-end backlog to convert to revenue in 2023 and substantially all remaining backlog within the following twelve months. The filing does not provide formal revenue or earnings guidance.
- Net capital expenditures are expected to be approximately $55 million to $60 million in 2023.
- Key risks include inflation and material-cost escalation, labor shortages, supply-chain delays, fixed-price contract overruns, weather, housing-market weakness, customer concentration, project delays, bonding availability, joint-venture obligations, cybersecurity, environmental regulation and government funding changes.
- All contracts are subject to estimation risk because revenue is recognized over time using cost-to-cost measures. Changes in contract estimates increased 2022 income by $52.3 million; future revisions could materially increase or reduce earnings.
- All $423.7 million of credit-facility borrowings were variable-rate debt at year-end. A 100-basis-point rate change would affect annual interest expense by approximately $4.2 million. The interest-rate swap covering $200 million of debt expired December 12, 2022, and the company expected to amend its credit agreement in 2023 for a replacement benchmark following LIBOR transition.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. The 2022 internal-control assessment excluded CCS, which management expected to include beginning in 2023.
Important Facts for Investors to Verify
- Reconcile continuing-operations results with total results, including the Myers discontinued operation and $16.7 million disposition gain.
- Assess the sustainability of the 15.5% gross margin and the 14.3% backlog margin amid inflation, labor constraints and fixed-price contracts.
- Review the conversion, timing and margin quality of the $1.41 billion backlog and the $275.0 million of unsigned low-bid awards.
- Evaluate refinancing and covenant risk associated with the credit facility maturity on October 2, 2024 and the company’s variable-rate exposure.
- Monitor single-family housing demand, multifamily activity and the financial condition of major customers.
- Review contract-estimate revisions, claims and unapproved change orders, including $8.6 million included in project prices at December 31, 2022.
- Confirm the integration and financial contribution of CCS and the continuing contribution of Petillo to E-Infrastructure performance.