Sterling Construction Company, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2022; filed May 3, 2022. The filing identifies the registrant as Sterling Construction Company, Inc. (NASDAQ: STRL), operating in E-Infrastructure Solutions, Transportation Solutions and Building Solutions across the United States. Financial statements are unaudited and presented in thousands, except per-share data.
Business Context and Reporting Period
The company provides large-scale site development, transportation infrastructure, highway and bridge, water, aviation, residential foundation and commercial concrete services. The December 30, 2021 acquisition of Petillo was included in the E-Infrastructure Solutions segment and contributed $47.3 million of first-quarter revenue.
The company also completed the Kimes acquisition in December 2021, although the filing provides limited first-quarter financial detail for that acquisition. Segment reporting was realigned, and prior-period information was recast accordingly.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $410.3 million | $315.3 million | Up 30.1% |
| Gross profit | $56.1 million | $45.0 million | Up 24.7% |
| Gross margin | 13.7% | 14.3% | Down 60 bps |
| Operating income | $28.3 million | $22.8 million | Up 24.2% |
| Operating margin | 6.9% | 7.2% | Down 30 bps |
| Income before taxes | $26.1 million | $16.4 million | Up 59.0% |
| Net income attributable to Sterling stockholders | $19.3 million | $10.6 million | Up 82.4% |
| Diluted earnings per share | $0.64 | $0.37 | Up $0.27 |
| Net cash provided by operating activities | $19.2 million | $38.1 million | Down $18.9 million |
Segment Results
| Segment | Q1 2022 Revenue | Q1 2021 Revenue | Q1 2022 Operating Income |
|---|---|---|---|
| E-Infrastructure Solutions | $168.9 million | $96.6 million | $21.3 million |
| Transportation Solutions | $160.5 million | $147.1 million | $3.7 million |
| Building Solutions | $80.9 million | $71.7 million | $9.4 million |
E-Infrastructure revenue increased 74.9%, primarily due to Petillo and higher volume. Transportation revenue increased 9.1%, supported by design-build project activity and improved mix. Building Solutions revenue increased 12.8%, driven by higher residential slab volumes.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $80.4 million at March 31, 2022, compared with $81.8 million at December 31, 2021. Of the March 31 balance, $40.3 million was generally available, $18.9 million was held by consolidated 50%-owned subsidiaries and $21.3 million was held by construction joint ventures.
- Total debt was $452.5 million, including $441.1 million outstanding under the credit facility and $11.4 million of other debt. Net of current maturities and unamortized issuance costs, long-term debt was $417.3 million.
- The $75.0 million revolving credit facility had no outstanding borrowings at March 31, 2022. The credit facility matures October 2, 2024.
- The company repaid $5.9 million of debt during the quarter and was in compliance with all restrictive and financial covenants.
- Restricted cash was $7.0 million, primarily collateral for standby letters of credit.
- Capital expenditures were $15.0 million, while net cash used in investing activities was $14.6 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by E-Infrastructure Solutions and the inclusion of Petillo. Petillo generated $47.3 million of first-quarter revenue.
- Gross profit increased, but gross margin declined from 14.3% to 13.7% because of inflation, labor constraints, material availability and supply-chain pressures.
- Operating income increased to $28.3 million despite higher general and administrative expense, intangible amortization and $0.3 million of acquisition-related costs.
- Net income benefited from a $2.4 million gain on extinguishment of debt related to forgiveness of the final outstanding PPP loan. The prior-year period included a $0.3 million loss on debt extinguishment.
- Interest expense declined to $4.6 million from $6.0 million because of a lower applicable interest rate under the amended credit agreement, partly offset by acquisition-related borrowings.
- Operating cash flow declined to $19.2 million from $38.1 million, primarily because changes in contract capital used $15.9 million of liquidity compared with a $10.6 million source in the prior-year period.
- Backlog increased to $1.53 billion from $1.49 billion at December 31, 2021. Combined backlog, including unsigned low-bid awards, increased to $1.67 billion from $1.52 billion.
Guidance, Outlook, Risks and Unusual Items
Outlook and Management Commentary
- Management described long-term growth opportunities as favorable, particularly in data centers, e-commerce distribution, warehouses, infrastructure and residential construction.
- The Infrastructure Investment and Jobs Act could provide additional multi-year funding for roads, bridges, rail and airports, although changes in funding allocation may delay project starts.
- Management expects general and administrative expense to be approximately 5% of revenue for full-year 2022 and the effective tax rate to be 28% to 29%.
- The company expects to recognize approximately 68% of March 31 backlog as revenue during the following twelve months.
- Backlog margin increased to 12.8% from 12.2% at year-end, while combined backlog margin increased to 12.6% from 12.2%.
Risks and Contingencies
- Inflation and volatility in fuel, oil, concrete, steel, lumber, equipment, subcontractor and labor costs may reduce margins. The company may not be able to recover all cost increases from customers.
- Supply-chain delays, equipment availability, labor shortages, adverse weather and COVID-19-related disruptions could affect project timing, productivity and profitability.
- Construction accounting depends on estimates of contract revenue, costs, change orders, claims, productivity and completion. Changes in estimates are recognized in the period identified.
- The company included $14.0 million in project price for unapproved change orders and claims at March 31, 2022. Negotiations remained ongoing, and legal action may be pursued if acceptable resolutions are not reached.
- Unconsolidated joint ventures had approximately $231.5 million of remaining construction work, including $98.6 million representing Sterling’s proportionate share. Joint and several liability could expose Sterling to partners’ obligations if they fail to perform.
- Mandatory redemption obligations related to two 50%-owned subsidiaries totaled $40.0 million, supported by separate $20.0 million death and permanent total disability insurance policies.
- The interest-rate swap hedged $200.0 million of term debt. For the unhedged $241.0 million, a 100-basis-point rate change would affect annual interest expense by approximately $2.4 million.
- Management reported no material pending legal matters and no material changes to previously disclosed risk factors.
- Disclosure controls were deemed effective; however, acquired Petillo and Kimes operations were excluded from the scope of internal control design and operation under applicable SEC guidance for newly acquired businesses.
Important Facts for Investors to Verify
- Assess whether Petillo’s integration, seasonality and acquisition accounting assumptions support sustained E-Infrastructure growth and margins.
- Monitor gross margin, backlog margin and contract estimates for effects from inflation, labor, materials and supply-chain conditions.
- Evaluate cash conversion, particularly contract assets, retainage, accounts payable and other changes in contract capital.
- Review debt maturities, the October 2024 credit facility maturity, interest-rate exposure and covenant compliance.
- Validate the collectability and timing of the $14.0 million of unapproved change orders and claims included in project pricing.
- Track backlog conversion, unsigned low-bid awards and the effect of IIJA-related funding on award timing.
- Consider joint and several obligations, mandatory redemption liabilities and cash availability at subsidiaries and joint ventures.