strl-20200630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


☑						QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___


Commission File Number			1-31993


STERLING CONSTRUCTION COMPANY, INC.
(Exact name of registrant as specified in its charter)

Delaware			25-1655321
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

1800 Hughes Landing Blvd. The Woodlands, Texas			77380
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code: (281) 214-0800

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $0.01 par value per share

STRL

The NASDAQ Stock Market LLC

(Title of each class)

(Trading Symbol)

(Name of each exchange on which registered)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No


Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes þ No

The number of shares outstanding of the registrant’s common stock as of July 31, 2020 – 28,068,334

STERLING CONSTRUCTION COMPANY, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


			Page
PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements			3

Statements of Operations			3

Statements of Comprehensive Income (Loss)			4

Balance Sheets			5

Statements of Cash Flows			6

Statements of Changes in Stockholders’ Equity			7

Notes to the Condensed Consolidated Financial Statements			9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23

Item 3. Quantitative and Qualitative Disclosures About Market Risk			30

Item 4. Controls and Procedures			31

PART II—OTHER INFORMATION

Item 1. Legal Proceedings			31

Item 1A. Risk Factors			31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32







Item 6. Exhibits			33

Signatures			34

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Revenues	$	400,038	$	264,086	$	696,726	$	488,035
Cost of revenues	(340,439)		(238,590)		(601,882)		(443,036)
Gross profit	59,599		25,496		94,844		44,999
General and administrative expense	(18,451)		(10,174)		(36,055)		(22,063)
Intangible asset amortization	(2,866)		(600)		(5,703)		(1,200)
Acquisition related costs	(139)		(262)		(612)		(262)
Other operating expense, net	(5,097)		(3,276)		(7,325)		(5,570)
Operating income	33,046		11,184		45,149		15,904
Interest income	24		291		123		655
Interest expense	(7,557)		(2,904)		(15,360)		(5,964)
Income before income taxes	25,513		8,571		29,912		10,595
Income tax expense	(7,248)		(706)		(8,432)		(869)
Net income	18,265		7,865		21,480		9,726
Less: Net income attributable to noncontrolling interests	(55)		(37)		(155)		(83)
Net income attributable to Sterling common stockholders	$	18,210	$	7,828	$	21,325	$	9,643

Net income per share attributable to Sterling common stockholders:
Basic	$	0.65	$	0.30	$	0.77	$	0.37
Diluted	$	0.65	$	0.29	$	0.76	$	0.36

Weighted average common shares outstanding:
Basic	27,941		26,338		27,794		26,357
Diluted	27,957		26,623		27,887		26,657

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Net income	$	18,265	$	7,865	$	21,480	$	9,726
Other comprehensive income, net of tax
Loss on interest rate swap, net of tax (Note 11)	(53)		—		(7,114)		—
Total comprehensive income	18,212		7,865		14,366		9,726
Less: Comprehensive income attributable to noncontrolling interests	(55)		(37)		(155)		(83)
Comprehensive income attributable to Sterling common stockholders	$	18,157	$	7,828	$	14,211	$	9,643

The accompanying Notes are an integral part of these Consolidated Financial Statements.

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)


	June 30, 2020		December 31, 2019
Assets
Current assets:
Cash and cash equivalents ($15,877 and $7,538 related to variable interest entities (“VIEs”))	$	70,612	$	45,733
Accounts receivable, including retainage ($39,085 and $24,642 related to VIEs)	269,406		248,247
Costs and estimated earnings in excess of billings ($5,012 and $8,328 related to VIEs)	52,068		42,555
Receivables from and equity in construction joint ventures ($8,302 and $7,406 related to VIEs)	12,396		9,196
Other current assets ($110 and $503 related to VIEs)	11,965		11,790
Total current assets	416,447		357,521
Property and equipment, net ($6,000 and $5,619 related to VIEs)	119,596		116,030
Operating lease right-of-use assets ($3,951 and $3,817 related to VIEs)	17,076		13,979
Goodwill ($1,501 and $1,501 related to VIEs)	192,014		191,892
Other intangibles, net	250,620		256,323
Deferred tax asset, net	21,604		26,012
Other non-current assets, net	153		183
Total assets	$	1,017,510	$	961,940
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable ($21,943 and $18,213 related to VIEs)	$	131,098	$	137,593
Billings in excess of costs and estimated earnings ($15,514 and $9,649 related to VIEs)	110,934		85,011
Current maturities of long-term debt ($6,793 and $39 related to VIEs)	54,979		42,473
Current portion of long-term lease obligations ($1,792 and $1,838 related to VIEs)	7,423		7,095
Income taxes payable	3,594		1,212
Accrued compensation ($2,965 and $1,521 related to VIEs)	19,075		13,727
Other current liabilities ($1,587 and $1,429 related to VIEs)	10,589		6,393
Total current liabilities	337,692		293,504
Long-term debt ($9 and $2 related to VIEs)	367,028		390,627
Long-term lease obligations ($2,159 and $1,979 related to VIEs)	9,733		6,976
Members’ interest subject to mandatory redemption and undistributed earnings	53,751		49,003
Other long-term liabilities ($509 and $0 related to VIEs)	8,221		619
Total liabilities	776,425		740,729
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock, par value $0.01 per share; 38,000 shares authorized, 28,280 and 28,290 shares issued, 28,034 and 27,772 shares outstanding	283		283
Additional paid in capital	253,820		251,019
Treasury Stock, at cost: 246 and 518 shares	(3,435)		(6,142)
Retained deficit	(3,708)		(25,033)
Accumulated other comprehensive loss	(7,323)		(209)
Total Sterling stockholders’ equity	239,637		219,918
Noncontrolling interests	1,448		1,293
Total stockholders’ equity	241,085		221,211
Total liabilities and stockholders’ equity	$	1,017,510	$	961,940

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended June 30,
	2020		2019
Cash flows from operating activities:
Net income	$	21,480	$	9,726
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	16,541		8,473
Amortization of debt issuance costs and non-cash interest	1,762		1,602
Gain on disposal of property and equipment	(598)		(441)
Deferred taxes	6,223		761
Stock-based compensation expense	6,196		1,670
Loss on interest rate hedge	272		—
Changes in operating assets and liabilities (Note 17)	385		(26,116)
Net cash provided by (used in) operating activities	52,261		(4,325)
Cash flows from investing activities:
Capital expenditures	(14,574)		(4,854)
Proceeds from sale of property and equipment	769		802
Net cash used in investing activities	(13,805)		(4,052)
Cash flows from financing activities:

Repayments of debt	(22,644)		(5,763)
Distributions to noncontrolling interest owners	—		(5,100)
Purchase of treasury stock	—		(3,201)
Other	9,067		76
Net cash used in financing activities	(13,577)		(13,988)
Net change in cash and cash equivalents	24,879		(22,365)
Cash and cash equivalents at beginning of period	45,733		94,095
Cash and cash equivalents at end of period	$	70,612	$	71,730

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


	Six Months Ended June 30, 2020
	Common Stock					Additional Paid in Capital		Treasury Stock							Retained Deficit		Accumulated Other Comprehensive Loss		Total Sterling Stockholders’ Equity		Non-controlling Interests	Total Stockholders’ Equity
	Shares	Amount					Shares			Amount
Balance at December 31, 2019	27,772	$	283	$	251,019	518		$	(6,142)		$	(25,033)	$	(209)	$	219,918	$	1,293	$	221,211
Net income	—	—		—		—		—			3,115		—		3,115		100		3,215
Loss on interest rate swap	—	—		—		—		—			—		(7,061)		(7,061)		—		(7,061)
Stock-based compensation	—	—		2,234		—		—			—		—		2,234		—		2,234


Issuance of stock	248	—		(2,460)		(248)		2,563			—		—		103		—		103
Shares withheld for taxes	(54)	—		(104)		46		(668)			—		—		(772)		—		(772)
Balance at March 31, 2020	27,966	$	283	$	250,689	316		$	(4,247)		$	(21,918)	$	(7,270)	$	217,537	$	1,393	$	218,930
Net income	—	—		—		—		—			18,210		—		18,210		55		18,265
Loss on interest rate swap	—	—		—		—		—			—		(53)		(53)		—		(53)
Stock-based compensation	—	—		3,962		—		—			—		—		3,962		—		3,962

Issuance of stock	73	—		(740)		(73)		844			—		—		104		—		104
Shares withheld for taxes	(5)	—		(18)		3		(32)			—		—		(50)		—		(50)
Other	—	—		(73)		—		—			—		—		(73)		—		(73)
Balance at June 30, 2020	28,034	$	283	$	253,820	246		$	(3,435)		$	(3,708)	$	(7,323)	$	239,637	$	1,448	$	241,085


	Six Months Ended June 30, 2019
	Common Stock					Additional Paid in Capital		Treasury Stock							Retained Deficit		Accumulated Other Comprehensive Loss		Total Sterling Stockholders’ Equity		Non-controlling Interests	Total Stockholders’ Equity
	Shares	Amount					Shares			Amount
Balance at December 31, 2018	26,597	$	271	$	233,795	467		$	(4,731)		$	(64,934)	$	—	$	164,401	$	7,859	$	172,260
Net income	—	—		—		—		—			1,815		—		1,815		46		1,861
Stock-based compensation	(1)	—		1,021		—		—			—		—		1,021		—		1,021
Distributions to owners	—	—		—		—		—			—		—		—		(5,100)		(5,100)
Purchase of treasury stock	(250)	—		—		250		(3,201)			—		—		(3,201)		—		(3,201)
Issuance of stock	130	—		(1,314)		(130)		1,314			—		—		—		—		—
Shares withheld for taxes	(52)	—		—		45		(564)			—		—		(564)		—		(564)
Balance at March 31, 2019	26,424	$	271	$	233,502	632		$	(7,182)		$	(63,119)	$	—	$	163,472	$	2,805	$	166,277
Net income	—	—		—		—		—			7,828		—		7,828		37		7,865
Stock-based compensation	—	—		649		—		—			—		—		649		—		649


Issuance of stock	49	—		(494)		(49)		494			—		—		—		—		—
Shares withheld for taxes	(7)	—		(98)		—		—			—		—		(98)		—		(98)
Balance at June 30, 2019	26,466	$	271	$	233,559	583		$	(6,688)		$	(55,291)	$	—	$	171,851	$	2,842	$	174,693

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

($ and share values in thousands, except per share data)

(Unaudited)


1.			NATURE OF OPERATIONS

Business Summary

Sterling Construction Company, Inc., (“Sterling,” “the Company,” “we,” “our” or “us”), a Delaware corporation, is a construction company that has been involved in the construction industry since its founding in 1955. The Company operates through a variety of subsidiaries within three operating groups specializing in heavy civil, specialty services, and residential projects in the United States (the “U.S.”), primarily across the southern U.S., the Rocky Mountain States, California and Hawaii, as well as other areas with strategic construction opportunities. Heavy civil includes infrastructure and rehabilitation projects for highways, roads, bridges, airfields, ports, light rail, water, wastewater and storm drainage systems. Specialty services projects include construction site excavation and drainage, drilling and blasting for excavation, foundations for multi-family homes, parking structures and other commercial concrete projects. Residential projects include concrete foundations for single-family homes.


2.			BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Presentation Basis—The accompanying Condensed Financial Statements are presented in accordance with accounting policies generally accepted in the United States (“GAAP”) and reflect all wholly owned subsidiaries and those entities the Company is required to consolidate. See the “Consolidated 50% Owned Subsidiaries” and “Construction Joint Ventures” section of this Note for further discussion of the Company’s consolidation policy for those entities that are not wholly owned. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. Values presented within tables (excluding per share data) are in thousands. Reclassifications have been made to historical financial data in the Condensed Consolidated Financial Statements to conform to the current year presentation.

Estimates and Judgments—The preparation of the accompanying Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting estimates of the Company require a higher degree of judgment than others in their application. These include the recognition of revenue and earnings from construction contracts over time, the valuation of long-lived assets, goodwill, income taxes, and purchase accounting estimates, including goodwill and other intangible assets. Management continually evaluates all of its estimates and judgments based on available information and experience; however, actual results could differ from these estimates.

Significant Accounting Policies

Consistent with Regulation S-X Rule 10-1(a), the Company has omitted significant accounting policies in this quarterly report that would duplicate the disclosures contained in the Company’s annual report on Form 10-K for the year ended December 31, 2019 under “Part II, Item 8. - Notes to Consolidated Financial Statements”.

Receivables, including Retainage—Receivables are generally based on amounts billed to the customer in accordance with contractual provisions. Many of the contracts under which the Company performs work also contain retainage provisions. Retainage refers to that portion of our billings held for payment by the customer pending satisfactory completion of the project. Unless reserved, the Company assumes that all amounts retained by customers under such provisions are fully collectible. Retainage on active contracts is classified as a current asset regardless of the term of the contract and is generally collected within one year of the completion of a contract. At June 30, 2020 and December 31, 2019, receivables included $72,800 and $79,400 of retainage, respectively.

Receivables are written off based on individual credit evaluation and specific circumstances of the customer, when such treatment is warranted. The Company performs a review of outstanding receivables, historical collection information and existing economic conditions to determine if there are potential uncollectible receivables. At both June 30, 2020 and December 31, 2019, our allowance for doubtful accounts against contracts receivable was zero.

Cash and Restricted cash—Our cash is comprised of highly liquid investments with maturities of three months or less. Restricted cash of approximately $4,900 and $4,800 is included in “Other current assets” on the Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019, respectively. This primarily represents cash deposited by the Company into separate accounts and designated as collateral for standby letters of credit in the same amount in accordance with contractual agreements.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13 to add the guidance in ASC 326 on the impairment of financial instruments. The ASU introduces an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. The amendments in the ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted this guidance effective January 1, 2020 as required and noted no material impact to the Company’s Condensed Consolidated Financial Statements.


3.			PLATEAU ACQUISITION

General—As more fully described in Sterling’s 2019 Annual Report, on October 2, 2019, Sterling consummated the acquisition (the “Plateau Acquisition”) of all of the issued and outstanding shares of capital stock of LK Gregory Construction, Inc. and Plateau Excavation, Inc., and all of the issued and outstanding equity interests in DeWitt Excavation, LLC. The Plateau Acquisition is accounted for using the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations.

Purchase Consideration—Sterling completed the Plateau Acquisition for a purchase price of $427,533, net of cash acquired, detailed as follows:


Cash consideration transferred, net of $2,425 of cash acquired	$	375,000
Target working capital adjustment	21,323
Equity consideration transferred (1,245 shares at $13.01 per share⁽¹⁾)	16,195
Note payable to seller (See Note 9 - Debt)	10,000
Tax basis election	5,015
Total consideration	$	427,533

⁽¹⁾ Sterling’s closing stock price on October 1, 2019

Preliminary Purchase Price Allocation—The aggregate purchase price noted above was allocated to the assets and liabilities acquired based upon their estimated fair values at the acquisition closing date, which were based, in part, upon an external preliminary appraisal and valuation of certain assets, including specifically identified intangible assets. The excess of the purchase price over the preliminary estimated fair value of the net tangible and identifiable intangible assets acquired totaling $106,784, was recorded as goodwill.

The following table summarizes our purchase price allocation at the acquisition closing date, net of cash acquired:


Net tangible assets:
Accounts receivable, including retainage	$	81,921
Costs and estimated earnings in excess of billings	974
Other current assets	249
Property and equipment, net	65,492
Other non-current assets, net	10
Accounts payable	(22,039)
Billings in excess of costs and estimated earnings	(16,540)
Other current and non-current liabilities	(7,918)
Total net tangible assets	102,149
Identifiable intangible assets	218,600
Goodwill	106,784
Total consideration transferred	$	427,533

The purchase price allocation above is subject to further change when additional information is obtained. We have not finalized our assessment of the fair values primarily for intangible assets and property and equipment. We intend to finalize the purchase price allocation as soon as practicable within the measurement period, but in no event later than one year following the closing date of the Plateau Acquisition. Our final purchase price allocation may result in additional adjustments to various other assets and liabilities, including the residual amount allocated to goodwill during the measurement period.

Identifiable Intangible Assets—Intangible assets identified as part of the Plateau Acquisition are reflected in the table below and are recorded at their estimated fair value, as determined by the Company’s management, based on available information which includes a preliminary valuation from external experts. The estimated useful lives for intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows.


	Weighted Average Life (Years)	October 2, 2019 Fair Value
Customer relationships	25	$	191,800
Trade name	25	24,800
Non-compete agreements	5	2,000
Total		$	218,600

Supplemental Pro Forma Information (Unaudited)—The following unaudited pro forma combined financial information (“the pro forma financial information”) gives effect to the Plateau Acquisition, accounted for as a business combination using the purchase method of accounting. The pro forma financial information reflects the Plateau Acquisition and related events as if they occurred at the beginning of the period, and gives effect to pro forma events that are: directly attributable to the acquisition, factually supportable and expected to have a continuing impact on the combined results of Sterling and Plateau following the Plateau Acquisition. The pro forma financial information includes adjustments to: (1) exclude transaction costs that were included in historical results and are expected to be non-recurring, (2) include additional intangibles amortization and net interest expense associated with the Plateau Acquisition and (3) include the pro forma results of Plateau for the three and six months ended ended June 30, 2019. This pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the pro forma events taken place on the dates indicated. Further, the pro forma financial information does not purport to project the future operating results of the combined company following the Plateau Acquisition.


	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Pro forma revenue	$	347,862	$	630,471
Pro forma net income attributable to Sterling	$	20,992	$	28,323


4.			REVENUE FROM CUSTOMERS

Backlog

The Company had the following backlog, by segment:


	June 30, 2020		December 31, 2019

Heavy Civil Backlog	$	874,822	$	834,049
Specialty Services Backlog	258,992		233,976
Total Heavy Civil and Specialty Services Backlog	$	1,133,814	$	1,068,025

The Company expects to recognize approximately 63% of its backlog as revenue during the next twelve months, and the balance thereafter.

Revenue Disaggregation

The following tables present the Company’s revenue disaggregated by major end market and contract type: