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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 September 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. þYes ¨ 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 October 30, 2020 – 28,101,317



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 September 30,Nine Months Ended September 30,
 2020201920202019
Revenues$383,458 $291,699 $1,080,184 $779,734 
Cost of revenues(333,542)(262,483)(935,424)(705,519)
Gross profit49,916 29,216 144,760 74,215 
General and administrative expense(15,154)(10,239)(51,209)(32,302)
Intangible asset amortization(2,866)(600)(8,569)(1,800)
Acquisition related costs(401)(1,896)(1,013)(2,158)
Other operating expense, net(2,664)(4,366)(9,989)(9,936)
Operating income28,831 12,115 73,980 28,019 
Interest income23 331 146 986 
Interest expense(7,177)(3,024)(22,537)(8,988)
Income before income taxes21,677 9,422 51,589 20,017 
Income tax expense(6,280)(913)(14,712)(1,782)
Net income 15,397 8,509 36,877 18,235 
Less: Net income attributable to noncontrolling interests(240)(552)(395)(635)
Net income attributable to Sterling common stockholders$15,157 $7,957 $36,482 $17,600 
Net income per share attributable to Sterling common stockholders:   
Basic$0.54 $0.30 $1.31 $0.67 
Diluted$0.54 $0.30 $1.30 $0.66 
Weighted average common shares outstanding:
Basic28,003 26,365 27,832 26,359 
Diluted28,233 26,637 27,986 26,661 
 
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 September 30,Nine Months Ended September 30,
2020201920202019
Net income$15,397 $8,509 $36,877 $18,235 
Other comprehensive income, net of tax
Change in interest rate swap, net of tax (Note 11)
1,010  (6,104) 
Total comprehensive income16,407 8,509 30,773 18,235 
Less: Comprehensive income attributable to noncontrolling interests(240)(552)(395)(635)
Comprehensive income attributable to Sterling common stockholders$16,167 $7,957 $30,378 $17,600 
 
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)
 September 30,
2020
December 31,
2019
Assets
Current assets:
Cash and cash equivalents ($24,009 and $7,538 related to variable interest entities (“VIEs”))
$72,593 $45,733 
Accounts receivable, including retainage ($37,721 and $24,642 related to VIEs)
271,342 248,247 
Costs and estimated earnings in excess of billings ($7,213 and $8,328 related to VIEs)
55,310 42,555 
Receivables from and equity in construction joint ventures ($9,684 and $7,406 related to VIEs)
13,802 9,196 
Other current assets ($146 and $503 related to VIEs)
14,171 11,790 
Total current assets427,218 357,521 
Property and equipment, net ($5,944 and $5,619 related to VIEs)
121,534 116,030 
Operating lease right-of-use assets ($4,079 and $3,817 related to VIEs)
17,250 13,979 
Goodwill ($1,501 and $1,501 related to VIEs)
192,014 191,892 
Other intangibles, net247,754 256,323 
Deferred tax asset, net16,589 26,012 
Other non-current assets, net153 183 
Total assets$1,022,512 $961,940 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable ($25,276 and $18,213 related to VIEs)
$127,336 $137,593 
Billings in excess of costs and estimated earnings ($18,533 and $9,649 related to VIEs)
126,986 85,011 
Current maturities of long-term debt ($6,793 and $39 related to VIEs)
57,476 42,473 
Current portion of long-term lease obligations ($1,716 and $1,838 related to VIEs)
7,624 7,095 
Income taxes payable2,251 1,212 
Accrued compensation ($3,582 and $1,521 related to VIEs)
24,328 13,727 
Other current liabilities ($2,256 and $1,429 related to VIEs)
11,368 6,393 
Total current liabilities357,369 293,504 
Long-term debt ($37 and $2 related to VIEs)
335,237 390,627 
Long-term lease obligations ($2,363 and $1,979 related to VIEs)
9,668 6,976 
Members’ interest subject to mandatory redemption and undistributed earnings50,798 49,003 
Other long-term liabilities ($1,016 and $0 related to VIEs)
10,124 619 
Total liabilities763,196 740,729 
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, 28,086 and 27,772 shares outstanding
283 283 
Additional paid in capital254,860 251,019 
Treasury stock, at cost: 194 and 518 shares
(2,651)(6,142)
Retained earnings (deficit)11,449 (25,033)
Accumulated other comprehensive loss(6,313)(209)
Total Sterling stockholders’ equity257,628 219,918 
Noncontrolling interests1,688 1,293 
Total stockholders’ equity259,316 221,211 
Total liabilities and stockholders’ equity$1,022,512 $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)
Nine Months Ended September 30,
20202019
Cash flows from operating activities:
Net income$36,877 $18,235 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization24,639 12,288 
Amortization of debt issuance costs and non-cash interest2,489 2,375 
Gain on disposal of property and equipment(1,042)(466)
Deferred taxes10,946 1,561 
Stock-based compensation expense7,961 2,489 
Change in interest rate hedge251  
Changes in operating assets and liabilities (Note 17)
8,828 (28,005)
Net cash provided by operating activities90,949 8,477 
Cash flows from investing activities:
Capital expenditures(22,088)(7,871)
Proceeds from sale of property and equipment1,557 1,265 
Net cash used in investing activities(20,531)(6,606)
Cash flows from financing activities:
Repayments of debt(52,695)(10,435)
Distributions to noncontrolling interest owners (5,900)
Purchase of treasury stock (3,201)
Other borrowings9,137 100 
Net cash used in financing activities(43,558)(19,436)
Net change in cash and cash equivalents26,860 (17,565)
Cash and cash equivalents at beginning of period45,733 94,095 
Cash and cash equivalents at end of period$72,593 $76,530 
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) 
Nine Months Ended September 30, 2020
Common StockAdditional Paid in CapitalTreasury StockRetained Earnings (Deficit)Accumulated 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 
Change in 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 
Change in 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 
Net income— — — — — 15,157 — 15,157 240 15,397 
Change in interest rate swap— — — — — — 1,010 1,010 — 1,010 
Stock-based compensation— — 1,765 — — — — 1,765 — 1,765 
Issuance of stock66 — (714)(66)917 — — 203 — 203 
Shares withheld for taxes(14)— — 14 (133)— — (133)— (133)
Other— — (11)— — — — (11)— (11)
Balance at September 30, 202028,086 $283 $254,860 194 $(2,651)$11,449 $(6,313)$257,628 $1,688 $259,316 
7


STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited) 
Nine Months Ended September 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 
Net income— — — — — 7,957 — 7,957 552 8,509 
Stock-based compensation— — 819 — — — — 819 — 819 
Distributions to owners— — — — — — —  (800)(800)
Issuance of stock13 — (69)(13)139 — — 70 — 70 
Shares withheld for taxes(3)— — 3 (32)— — (32)— (32)
Balance at September 30, 201926,476 $271 $234,309 573 $(6,581)$(47,334)$ $180,665 $2,594 $183,259 
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
September 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 segments 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 the Notes 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 September 30, 2020 and December 31, 2019, receivables included $78,300 and $79,400 of retainage (contract asset), 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 September 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 $6,100 and $4,800 is included in “Other current assets” on the Condensed Consolidated Balance Sheets at September 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 Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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 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 and noted no material impact to the Company’s Condensed Consolidated Financial Statements.
3.PLATEAU ACQUISITION
General—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 was accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification (“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
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 appraisal and valuation of certain assets, including specifically identified intangible assets. The excess of the purchase price over the 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


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 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 nine months ended September 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 September 30, 2019Nine Months Ended September 30, 2019
Pro forma revenue$381,721 $1,012,192 
Pro forma net income attributable to Sterling$29,902 $58,225 
4.REVENUE FROM CUSTOMERS
Backlog
The Company had the following backlog, by segment:
September 30,
2020
December 31,
2019
Heavy Civil Backlog$945,060 $834,049 
Specialty Services Backlog293,081 233,976 
Total Heavy Civil and Specialty Services Backlog$1,238,141 $1,068,025 
The Company expects to recognize approximately 66% 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:
Three Months Ended September 30,Nine Months Ended September 30,
Revenue by major end market2020201920202019
Heavy Highway$148,239 $142,118 $397,139 $365,692 
Aviation20,473 39,105 83,797 106,103 
Water Containment and Treatment17,751 15,960 56,089 46,709 
Other14,615 21,711 40,116 51,131 
Heavy Civil Revenue$201,078 $218,894 $577,141 $569,635 
Land Development$114,961 $ $296,845 $ 
Commercial25,010 32,863 83,552 91,436 
Specialty Services Revenue$139,971 $32,863 $380,397 $91,436 
Residential Revenue$42,409 $39,942 $122,646 $118,663 
Revenues$383,458 $291,699 $1,080,184 $779,734 
Revenue by contract type
Fixed-Unit Price$187,692 $207,807 $631,639 $534,323 
Lump Sum148,463 43,959 301,025 125,096 
Residential and Other47,303 39,933 147,520 120,315 
Revenues$383,458 $291,699 $1,080,184 $779,734 
Each of these contract types presents advantages and disadvantages. Typically, the Company assumes more risk with lump-sum contracts. However, these types of contracts offer additional profits if the work is completed for less than originally estimated. Under fixed-unit price contracts, the Company’s profit may vary if actual labor-hour costs vary significantly from the negotiated rates. Also, because some contracts can provide little or no fee for managing material costs, the components of contract cost can impact profitability.
Variable Consideration
The Company has projects that it is in the process of negotiating, or awaiting final approval of, unapproved change orders and claims with its customers. The Company is proceeding with its contractual rights to recoup additional costs incurred from its customers based on completing work associated with change orders, including change orders with pending change order pricing, or claims related to significant changes in scope which resulted in substantial delays and additional costs in completing the work. Unapproved change order and claim information has been provided to the Company’s customers and negotiations with the customers are ongoing. If additional progress with an acceptable resolution is not reached, legal action will be taken.
Based upon the Company’s review of the provisions of its contracts, specific costs incurred and other related evidence supporting the unapproved change orders and claims, together in some cases as necessary with the views of the Company’s outside claim consultants, the Company concluded it was appropriate to include in project price amounts of approximately $7,900 and $3,000, at September 30, 2020 and December 31, 2019, respectively, relating to unapproved change orders and claims. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Contract Estimates
Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, the Company estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognizes such profit over the life of the contract.
Contract estimates are based on various assumptions to project the outcome of future events that often span several years. These assumptions include labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials and the performance of subcontractors. Changes in job performance, job conditions and estimated profitability, including those changes arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined.
12


Changes in contract estimates resulted in net increases of approximately $2,700 and $5,000 for the three and nine months ended September 30, 2020, and net increases of approximately $500 and $3,700 for the three and nine months ended September 30, 2019, included in “Operating income” on the Condensed Consolidated Statements of Operations.
5.CONSOLIDATED 50% OWNED SUBSIDIARIES
The Company has 50% ownership interests in two subsidiaries (“Myers” and “RHB”) that it fully consolidates as a result of its exercise of control over the entities. The earnings attributable to the 50% portions the Company does not own were approximately $2,600 and $8,900 for the three and nine months ended September 30, 2020, respectively, and $5,500 and $8,200 for the three and nine months ended September 30, 2019, respectively, and are eliminated within “Other operating expense, net” in the Condensed Consolidated Statements of Operations. Any undistributed earnings for partners are included in “Members’ interest subject to mandatory redemption and undistributed earnings” within the Condensed Consolidated Balance Sheets and are mandatorily payable at the time of the noncontrolling owners’ death or permanent disability.
These two subsidiaries have individual mandatory redemption provisions which, under circumstances outlined in the partner agreements, are certain to occur and obligate the Company to purchase each partner’s remaining 50% interests for $20,000 ($40,000 in the aggregate). The Company has purchased two separate $20,000 death and permanent total disability insurance policies to mitigate the Company’s cash draw if such events were to occur. These purchase obligations are recorded in “Members’ interest subject to mandatory redemption and undistributed earnings” on the Condensed Consolidated Balance Sheets.
The liability consists of the following:
September 30,
2020
December 31,
2019
Members’ interest subject to mandatory redemption$40,000 $40,000 
Net accumulated earnings10,798 9,003 
Total liability$50,798 $49,003 
The Company must determine whether any of its entities, including these two 50% owned subsidiaries, in which it participates, is a VIE. The Company determined Myers is a VIE, as the Company is the primary beneficiary, as pursuant to the terms of the Myers Operating Agreement the Company is exposed to the majority of potential losses of the partnership.
Summary financial information for Myers is as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Revenues$57,566 $55,111 $156,292 $157,189 
Operating income$1,889 $1,861 $3,093 $4,142 
Net income$1,864 $1,869 $3,073 $4,160