Sterling Infrastructure, Inc. (Sterling Construction Company, Inc.) - 10-Q Summary
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the period ended September 30, 2009. Sterling Construction Company, Inc. is a heavy civil construction firm specializing in transportation (highways, roads, bridges, light rail) and water infrastructure (water, wastewater, storm drainage) primarily in Texas, Nevada, and other select markets. The company operates as a single reportable segment and serves primarily public sector clients.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Dec 31, 2008 (Balance Sheet) |
|---|---|---|---|
| Revenues | $103.9 million | $319.2 million | N/A |
| Gross Profit | $16.5 million | $46.9 million | N/A |
| Gross Margin | 15.9% | 14.7% | N/A |
| Operating Income | $13.0 million | $36.4 million | N/A |
| Net Income (Common Stockholders) | $8.1 million | $22.9 million | N/A |
| Diluted EPS | $0.59 | $1.67 | N/A |
| Cash and Cash Equivalents | N/A | N/A | $62.2 million |
| Short-term Investments | N/A | N/A | $41.2 million |
| Total Debt (Long-term + Current) | N/A | N/A | $40.5 million |
| Working Capital | N/A | N/A | $115.8 million |
Note: Balance sheet figures represent the position at September 30, 2009, compared to December 31, 2008 where applicable.
Material Changes vs. Prior Period
- Revenue: For the nine months ended September 30, 2009, revenues increased 4.4% to $319.2 million compared to $305.8 million in the prior year period. However, for the third quarter alone, revenues decreased 9.0% to $103.9 million due to reduced crew levels and equipment utilization following project completions.
- Profitability: Gross profit increased significantly, up 44.8% for the nine-month period and 31.6% for the quarter. Gross margins improved to 14.7% (nine months) and 15.9% (quarter) compared to 10.6% and 11.0% in the prior year, driven by better execution and a favorable mix of contract completion stages.
- Net Income: Net income attributable to common stockholders rose 61.2% to $22.9 million for the nine-month period and 35.4% to $8.1 million for the quarter.
- Backlog: Backlog stood at $371 million at September 30, 2009, down from $511 million at September 30, 2008, but up from $344 million at June 30, 2009. New contracts awarded in the first nine months of 2009 totaled $242 million, compared to $366 million in the prior year.
- Cash Flow: Net cash provided by operating activities increased to $43.0 million for the nine months ended September 30, 2009, compared to $18.9 million in the prior year period.
Guidance, Outlook, and Risks
- Guidance: The company has decided not to issue guidance for 2010 due to a lack of visibility regarding market and funding conditions.
- Outlook: Management anticipates that 2010 revenues and net income will be below, and could be substantially below, 2009 results. This is due to reduced federal funding (expiration of SAFETEA-LU), increased competition from commercial contractors bidding on public projects, and lower anticipated margins on new awards.
- Liquidity: The company maintains a strong liquidity position with $62.2 million in cash and $41.2 million in short-term investments. It has a $75.0 million Credit Facility with $33.2 million available as of September 30, 2009.
- Risks: Key risks include the expiration of federal transportation funding bills, reduced state and local tax revenues due to the recession, increased competition compressing bid margins, and potential cost escalations for fuel and materials.
- Unusual Items: The company adopted new accounting standards regarding noncontrolling interests in 2009, segregating net income attributable to common stockholders and noncontrolling owners. Additionally, the company began investing in crude oil commodity pools to hedge against fuel price volatility.
Key Facts for Investor Verification
- Backlog Sustainability: Verify the trend of new contract awards versus project completions, given the significant year-over-year decline in backlog and the competitive bidding environment.
- Federal Funding Status: Monitor legislative developments regarding the renewal of federal transportation funding (successor to SAFETEA-LU) and its impact on state-level project authorizations.
- Margin Sustainability: Assess whether the high gross margins achieved in the first nine months of 2009 are sustainable or if they were driven by the specific mix of projects nearing completion.
- 2010 Revenue Trajectory: Confirm management's expectation that 2010 results will be lower than 2009, particularly in light of the reduced backlog and competitive pressures.
- Debt Covenants: Review compliance with financial covenants under the $75 million Credit Facility, specifically regarding leverage and tangible net worth.