Sterling Infrastructure, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2022. Financial statements are unaudited and presented in accordance with U.S. GAAP. Sterling operates in E-Infrastructure Solutions, Transportation Solutions and Building Solutions across the United States. The company changed its legal name from Sterling Construction Company, Inc. to Sterling Infrastructure, Inc. on June 1, 2022.
Financial Performance and Position
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $556.9 million | $463.4 million | $1.478 billion | $1.180 billion |
| Gross profit | $82.0 million | $57.8 million | $206.5 million | $159.1 million |
| Gross margin | 14.7% | 12.5% | 14.0% | 13.5% |
| Operating income | $47.7 million | $32.0 million | $117.0 million | $87.5 million |
| Operating margin | 8.6% | 6.9% | 7.9% | 7.4% |
| Net income attributable to Sterling | $29.5 million | $21.1 million | $74.7 million | $51.7 million |
| Diluted EPS | $0.97 | $0.72 | $2.46 | $1.79 |
- Cash flow: Nine-month operating cash flow was $130.6 million, compared with $135.7 million in the prior-year period. Investing cash usage was $47.8 million, including $47.8 million of capital expenditures and acquisition-related payments. Financing cash usage was $17.6 million, primarily term-loan repayments.
- Liquidity: Cash and cash equivalents were $146.5 million at September 30, 2022, compared with $81.8 million at December 31, 2021. Restricted cash was $7.4 million.
- Debt: Total debt was $440.5 million, including $429.5 million outstanding under the term loan facility. Long-term debt, net of current maturities and issuance costs, was $407.1 million. The company had no revolving-credit borrowings under its $75.0 million facility and was in compliance with its covenants.
- Balance sheet: Total assets were $1.503 billion and total stockholders’ equity was $439.9 million at September 30, 2022.
- Backlog: Backlog increased to $1.665 billion from $1.493 billion at December 31, 2021. Combined backlog, including unsigned low-bid awards, was $1.90 billion. Approximately 70% of backlog is expected to be recognized as revenue within twelve months.
Material Changes Versus Prior Comparable Period
- Third-quarter revenue increased 20.2%, while nine-month revenue increased 25.2%, primarily due to higher E-Infrastructure activity and the inclusion of Petillo operations.
- E-Infrastructure revenue increased 110.7% in the quarter and 92.6% year to date. Petillo contributed $83.6 million of third-quarter revenue and $207.0 million of nine-month revenue.
- Transportation revenue declined 11.5% in the quarter and 4.5% year to date, reflecting lower heavy-highway and aviation revenue and the planned reduction in low-bid heavy-highway work. Transportation operating margins improved.
- Building Solutions revenue declined 13.0% in the quarter because higher interest rates and inflation reduced housing demand, although nine-month revenue increased 3.4%.
- Gross margin improved to 14.7% from 12.5% in the quarter and to 14.0% from 13.5% year to date, driven by a greater mix of E-Infrastructure work, improved Transportation mix and customer cost-recovery efforts.
- Interest expense increased in the quarter because of higher borrowings related to the Petillo acquisition and rising interest rates, although nine-month interest expense declined due to amended credit-agreement pricing.
- General and administrative expense increased to $26.5 million in the quarter and $73.0 million year to date. Management expects full-year 2022 G&A to be approximately 5% of revenue.
Outlook, Commentary, Risks and Unusual Items
- Management describes long-term market opportunities as favorable, supported by data-center, e-commerce, industrial, infrastructure and multi-family development. The Infrastructure Investment and Jobs Act has increased Transportation bid activity and awards.
- Management is shifting away from low-bid heavy-highway work toward E-Infrastructure and Building Solutions and higher-margin projects. Backlog margin increased to 13.1% from 12.2% at December 31, 2021.
- Management expects a full-year 2022 effective tax rate of approximately 28% and no federal cash income-tax payments because of net operating loss carryforwards.
- Inflation, fuel and material costs, supply-chain disruptions, equipment availability, labor shortages and subcontractor costs remain significant pressures. The company may not recover all additional costs from customers.
- Higher interest rates could further reduce single-family housing demand. E-Infrastructure activity may also be affected by equipment and land constraints, material delays and potential customer pullbacks.
- The company included $14.7 million in project price for unapproved change orders and claims at September 30, 2022. Negotiations remain ongoing and legal action may be pursued if acceptable resolutions are not reached.
- Contract estimates increased operating income by approximately $13.4 million in the quarter and $39.4 million year to date. Future revisions to contract estimates could materially affect reported results.
- The company has joint and several liability exposure on construction joint ventures. Approximately $210 million of work remained on unconsolidated joint-venture contracts, including approximately $93 million representing Sterling’s proportionate share.
- The Petillo acquisition, completed December 30, 2021 for $196.8 million, remains subject to final purchase-price allocation adjustments. Acquisition-related costs were $0.3 million in the quarter and $0.8 million year to date.
- A $2.4 million gain on debt extinguishment was recognized year to date from forgiveness of a subsidiary’s PPP loan. The company also maintains a $200.0 million interest-rate swap; a 100-basis-point change in the unhedged term-loan rate would affect annual interest expense by approximately $2.3 million.
- Management reported no material pending legal matters and no material changes to previously disclosed risk factors. Disclosure controls were considered effective, although acquired Petillo and Kimes operations were excluded from the controls evaluation under applicable SEC guidance.
Facts Investors Should Verify
- Whether E-Infrastructure growth and Petillo integration continue to offset weakness in Transportation and residential Building Solutions.
- Conversion of the $1.665 billion backlog and $235.3 million of unsigned low-bid awards into executed contracts and revenue at stated margins.
- Collection of receivables and contract assets, which increased substantially during 2022 and reduced operating cash conversion.
- Exposure to inflation, labor and supply-chain costs, and the extent to which customer change orders and claims are ultimately approved and collected.
- Debt repayment capacity and refinancing requirements before the credit facility’s October 2, 2024 maturity, including effects of rising variable interest rates.
- Potential obligations from joint and several joint-venture liabilities and mandatory redemption provisions totaling $40.0 million for partners’ interests.
- Final purchase-price allocation for Petillo and any resulting changes to goodwill, intangible assets, deferred taxes or future amortization.