Sterling Construction Company, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2021. The company operates Heavy Civil, Specialty Services and Residential construction businesses across the United States. The filing identifies the registrant as Sterling Construction Company, Inc.; the request metadata refers to Sterling Infrastructure, Inc.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|
| Revenue | $401.7 million | $400.0 million | $717.0 million | $696.7 million |
| Gross profit | $56.2 million | $59.6 million | $101.3 million | $94.8 million |
| Gross margin | 14.0% | 14.9% | 14.1% | 13.6% |
| Operating income | $32.7 million | $33.0 million | $55.5 million | $45.1 million |
| Net income attributable to Sterling stockholders | $20.1 million | $18.2 million | $30.6 million | $21.3 million |
| Diluted EPS | $0.69 | $0.65 | $1.06 | $0.76 |
- Q2 revenue increased 0.4%; six-month revenue increased 3.0%.
- Q2 operating income declined modestly, while six-month operating income rose approximately 23%.
- Interest expense declined to $5.7 million in Q2 and $11.7 million for the six months, versus $7.6 million and $15.4 million, respectively, in the prior-year periods.
- Q2 and six-month income included net gains on debt extinguishment of $1.4 million and $1.1 million, respectively, including a $1.5 million gain from forgiveness of a PPP loan at a consolidated 50%-owned subsidiary.
Segment and backlog developments
| Segment | Q2 2021 revenue | Q2 change | Q2 operating income |
|---|
| Heavy Civil | $203.2 million | Down 7.8% | $4.4 million |
| Specialty Services | $151.9 million | Up 11.9% | $22.9 million |
| Residential | $46.6 million | Up 6.2% | $5.4 million |
- Heavy Civil revenue declined because of weather-related disruption and a planned reduction in lower-margin low-bid highway work. Its margin improved as design-build joint venture projects ramped up.
- Specialty Services benefited from higher land-development volume but faced weather, inflation and material-supply headwinds.
- Residential volume increased, including a record number of slabs poured, but profitability was pressured by concrete, lumber and steel costs and higher subcontractor labor costs.
- Heavy Civil and Specialty Services backlog was $1.57 billion at June 30, 2021, up from $1.18 billion at December 31, 2020. Approximately 59% was expected to convert to revenue within 12 months.
- Combined backlog, including unsigned low-bid awards, was $1.65 billion. Backlog margin increased to 12.4% from 12.0% at year-end 2020.
Cash flow, liquidity and capital structure
- Operating cash flow was $91.5 million for the six months, compared with $52.3 million in 2020, supported by net income and favorable changes in contract capital, accounts payable and contracts in progress.
- Capital expenditures were $22.2 million, and net cash used in investing activities was $21.5 million.
- Debt repayments were $40.1 million; net cash used in financing activities was $42.6 million.
- Cash and cash equivalents were $93.6 million at June 30, 2021, compared with $66.2 million at December 31, 2020. Restricted cash was $6.4 million.
- Total debt was $332.3 million, including $315.0 million outstanding under the credit facility. The company had no revolving borrowings and $75.0 million of revolver capacity available.
- The amended credit agreement reduced interest-rate margins, mandatory excess-cash-flow prepayment percentages and scheduled term-loan amortization. The facility matures October 2, 2024.
- The company was in compliance with all restrictive and financial covenants at June 30, 2021.
- An interest-rate swap hedged $275.0 million of the $315.0 million term loan. The swap had a net liability of approximately $4.9 million and a net loss in accumulated other comprehensive income of $4.7 million.
Outlook, risks and unusual items
- Management expects a 2021 effective tax rate of approximately 29.5% to 30% and no federal cash income-tax payments because of net operating loss carryforwards.
- Management expected pre-tax interest expense to decline by approximately $1.6 million per quarter during the remainder of 2021, based on the amended credit agreement.
- The company continued to operate as essential critical infrastructure and had not experienced significant COVID-19 shutdowns, but identified ongoing pandemic, variant and governmental-response risks.
- Primary operating risks include construction-cost inflation, supply-chain constraints, labor availability and costs, adverse weather, project delays, inaccurate contract estimates, customer concentration, bonding and liquidity requirements, and government infrastructure funding changes.
- The company included $14.3 million in project price related to unapproved change orders and claims at June 30, 2021, versus $7.1 million at December 31, 2020. Negotiations remained ongoing, and legal action could follow if acceptable resolutions were not reached.
- Joint ventures expose the company to joint and several liability. Approximately $415.2 million of work remained on unconsolidated joint venture contracts, including $179.5 million representing Sterling’s proportionate share; management was not aware of any partner default requiring Sterling to assume additional obligations.
- Two consolidated 50%-owned subsidiaries have mandatory redemption obligations totaling $40.0 million, supported by death and disability insurance policies. The related balance-sheet liability, including accumulated earnings, was $56.5 million.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile the filing entity name and ticker with the intended Sterling Infrastructure investment.
- Assess whether backlog growth and higher-margin design-build work can offset lower-margin highway volume reductions.
- Monitor material, labor and weather pressures, particularly in Specialty Services and Residential.
- Review the collectability and ultimate resolution of the $14.3 million of unapproved change orders and claims.
- Track debt paydown, 2024 maturity and compliance with credit-facility covenants.
- Evaluate joint-venture performance and potential exposure to partners’ funding or performance failures.
- Confirm whether COVID-19 developments, infrastructure legislation and government funding changes affect future awards and project execution.
