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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
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___ 
Commission File Number1-31993
STERLING CONSTRUCTION COMPANY, INC. 
(Exact name of registrant as specified in its charter)
Delaware25-1655321
(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 shareSTRLThe 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 filerþ
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
  
  
  
  
  
  
  
  
 


2


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,
 2020201920202019
Revenues$400,038  $264,086  $696,726  $488,035  
Cost of revenues(340,439) (238,590) (601,882) (443,036) 
Gross profit59,599  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 income33,046  11,184  45,149  15,904  
Interest income24  291  123  655  
Interest expense(7,557) (2,904) (15,360) (5,964) 
Income before income taxes25,513  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:  
Basic27,941  26,338  27,794  26,357  
Diluted27,957  26,623  27,887  26,657  
 
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

3


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,
 2020201920202019
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 income18,212  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.
4


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 assets416,447  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, net250,620  256,323  
Deferred tax asset, net21,604  26,012  
Other non-current assets, net153  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 payable3,594  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 liabilities337,692  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 earnings53,751  49,003  
Other long-term liabilities ($509 and $0 related to VIEs)
8,221  619  
Total liabilities776,425  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 capital253,820  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’ equity239,637  219,918  
Noncontrolling interests1,448  1,293  
Total stockholders’ equity241,085  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.
5


STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months Ended June 30,
 20202019
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 amortization16,541  8,473  
Amortization of debt issuance costs and non-cash interest1,762  1,602  
Gain on disposal of property and equipment(598) (441) 
Deferred taxes6,223  761  
Stock-based compensation expense6,196  1,670  
Loss on interest rate hedge272    
Changes in operating assets and liabilities (Note 17)
385  (26,116) 
Net cash provided by (used in) operating activities52,261  (4,325) 
Cash flows from investing activities:
Capital expenditures(14,574) (4,854) 
Proceeds from sale of property and equipment769  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) 
Other9,067  76  
Net cash used in financing activities(13,577) (13,988) 
Net change in cash and cash equivalents24,879  (22,365) 
Cash and cash equivalents at beginning of period45,733  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.
6


STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited) 
 Six Months Ended June 30, 2020
Common StockAdditional Paid in CapitalTreasury StockRetained DeficitAccumulated Other Comprehensive LossTotal Sterling Stockholders’ EquityNon-controlling InterestsTotal Stockholders’ Equity
SharesAmountSharesAmount
Balance at December 31, 201927,772  $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 stock248  —  (2,460) (248) 2,563  —  —  103  —  103  
Shares withheld for taxes(54) —  (104) 46  (668) —  —  (772) —  (772) 
Balance at March 31, 202027,966  $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 stock73  —  (740) (73) 844  —  —  104  —  104  
Shares withheld for taxes(5) —  (18) 3  (32) —  —  (50) —  (50) 
Other—  —  (73) —  —  —  —  (73) —  (73) 
Balance at June 30, 202028,034  $283  $253,820  246  $(3,435) $(3,708) $(7,323) $239,637  $1,448  $241,085  
7


Six Months Ended June 30, 2019
Common StockAdditional Paid in CapitalTreasury StockRetained DeficitAccumulated Other Comprehensive LossTotal Sterling Stockholders’ EquityNon-controlling InterestsTotal Stockholders’ Equity
SharesAmountSharesAmount
Balance at December 31, 201826,597  $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 stock130  —  (1,314) (130) 1,314  —  —    —    
Shares withheld for taxes(52) —  —  45  (564) —  —  (564) —  (564) 
Balance at March 31, 201926,424  $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 stock49  —  (494) (49) 494  —  —    —    
Shares withheld for taxes(7) —  (98) —  —  —  —  (98) —  (98) 
Balance at June 30, 201926,466  $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.
8


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.
9


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 adjustment21,323  
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 election5,015  
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 billings974  
Other current assets249  
Property and equipment, net65,492  
Other non-current assets, net10  
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 assets102,149  
Identifiable intangible assets218,600  
Goodwill106,784  
Total consideration transferred$427,533  
10


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 AssetsIntangible 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 relationships25$191,800  
Trade name2524,800  
Non-compete agreements52,000  
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, 2019Six 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 Backlog258,992  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.
11


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