Sterling Infrastructure, Inc. — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
Sterling Infrastructure, Inc. operates in three segments: E-Infrastructure Solutions, Transportation Solutions, and Building Solutions, primarily across the United States. The filing covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022.
The company completed the sale of its 50% interest in Myers & Sons Construction L.P. on November 30, 2022. Myers results are presented as discontinued operations, so the operating discussion primarily reflects continuing operations.
Financial Performance and Liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $403.6 million | $366.0 million | +10.3% |
| Gross profit | $61.7 million | $55.1 million | +11.9% |
| Gross margin | 15.3% | 15.1% | +20 basis points |
| Operating income | $32.6 million | $29.4 million | +11.1% |
| Operating margin | 8.1% | 8.0% | +10 basis points |
| Net income from continuing operations attributable to Sterling | $19.6 million | $17.7 million | +11.2% |
| Net income attributable to common stockholders | $19.6 million | $19.3 million | +2.1% |
| Diluted earnings per share | $0.64 | $0.64 | Flat |
| Net cash provided by operating activities | $49.1 million | $26.6 million | +84.7% |
E-Infrastructure revenue increased 21.8% to $205.8 million, driven by advanced manufacturing and data center work. Transportation revenue decreased 4.3% to $111.1 million, while its operating margin improved to 4.8% from 3.8%. Building Solutions revenue increased 7.1% to $86.6 million, but operating margin declined to 10.0% from 11.6% due to a greater mix of lower-margin commercial work and higher concrete prices.
Cash and cash equivalents were $202.6 million at March 31, 2023, compared with $181.5 million at December 31, 2022. Generally available cash was $125.2 million; the balance included cash held by consolidated entities and construction joint ventures. Cash flow benefited from improved working capital, $14.0 million of Myers disposition proceeds, and $6.7 million of equipment sale proceeds, partly offset by $14.2 million of capital expenditures.
Total debt was $403.2 million at March 31, 2023, down from $434.6 million at year-end 2022. The company repaid $30.8 million of debt during the quarter, including a $25.0 million voluntary early payment. The credit facility had no revolver borrowings, and the company was in compliance with its debt covenants. The senior credit facility matures on October 2, 2024.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by E-Infrastructure, while Transportation revenue declined because of the timing of heavy highway and aviation backlog execution.
- Gross margin and operating margin improved modestly, with the strongest margin benefit from Transportation Solutions.
- Interest expense increased as variable interest rates rose and the company’s interest rate swap expired in the fourth quarter of 2022. Net interest expense was $5.6 million versus $4.6 million.
- Operating cash flow increased substantially, primarily because of improved collections and working-capital movements.
- Net income attributable to common stockholders increased only modestly because Q1 2022 included $1.6 million of income from discontinued operations.
- Remaining performance obligations increased to $1.62 billion from $1.41 billion at December 31, 2022. Approximately 70% is expected to be recognized as revenue within the next twelve months.
- Backlog margin increased to 14.8% from 14.3%; combined backlog, including unsigned awards, was $1.75 billion.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management reported favorable long-term opportunities across all segments. Strategic priorities include expanding higher-value E-Infrastructure work, reducing exposure to low-bid heavy highway projects, growing Building Solutions’ market share and geographic presence, and improving margins.
- Management expects full-year 2023 general and administrative expense to be approximately 5% of revenue.
- Management expects a full-year 2023 effective tax rate of 28% to 29%.
- E-Infrastructure demand is supported by data centers, advanced manufacturing, electric vehicle, solar and other technology-related investments, although select fulfillment-center activity is expected to remain muted through 2023.
- Building Solutions may benefit from gradually improving housing starts and increased multifamily demand, but higher interest rates could constrain residential demand.
- The credit agreement must be amended in Q2 2023 to replace LIBOR with an alternative benchmark; the new benchmark could increase borrowing costs. A 100-basis-point rate change would affect annual interest expense by approximately $3.9 million.
- The company recognized $9.0 million of unapproved change orders and claims in contract prices at March 31, 2023. Negotiations remain ongoing, and the company may pursue legal action if acceptable resolutions are not reached.
- Contract estimates increased income by $8.6 million in Q1 2023. Future revisions to project costs, productivity, claims, penalties or completion estimates could materially affect results.
- Key risks include inflation and material costs, labor availability, subcontractor and joint-venture performance, project delays, weather, interest rates, customer concentration, bonding and letters of credit, government infrastructure funding, and contract execution.
- The company is subject to joint and several liability on certain joint venture projects. Approximately $35 million of work remained on unconsolidated joint venture contracts, including approximately $14 million representing Sterling’s proportionate share. Management was not aware of a current circumstance requiring it to fund a partner’s obligations.
- Management stated that no pending legal proceedings were expected to have a material adverse effect. Disclosure controls were considered effective, although the newly acquired CCS business was excluded from the controls evaluation under applicable SEC guidance.
Investor Verification Checklist
- Verify the sustainability of E-Infrastructure growth and the reported backlog conversion, backlog margin and book-to-burn ratios.
- Monitor Transportation Solutions’ continued shift away from low-bid work and whether margin improvement persists.
- Assess housing starts, multifamily demand, concrete costs and interest rates affecting Building Solutions.
- Review debt maturities through the October 2024 credit facility maturity and the impact of the LIBOR replacement.
- Track cash conversion, capital expenditures and additional voluntary debt repayments.
- Evaluate the collectibility and timing of the $9.0 million of unapproved claims and change orders and the sensitivity of results to contract-estimate revisions.
- Confirm the timing and collectibility of the remaining $4.0 million of deferred Myers disposition payments due by the end of 2025 and 2027.