The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations" is provided to assist readers in understanding our
financial performance during the periods presented and significant trends that
may impact our future performance. This discussion should be read in conjunction
with our Consolidated Financial Statements and the related notes thereto.
OVERVIEW
General-Sterling Construction Company, Inc. 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.
Plateau Acquisition-On October 2, 2019, we completed our 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 (collectively, "Plateau") for aggregate
consideration of $427.5 million. Plateau is engaged in engineering and executing
site development, and their services include surveying, clearing and grubbing,
erosion control, grading, grassing, site excavation, storm drainage, sanitary
sewer and water main installation, drilling and blasting, curb and gutter,
paving, concrete work and landfill services, in each case to general contractors
and developers engaged in construction services, and engineering services
relating thereto. The results of Plateau are included within our Specialty
Services segment. See Note 3 - Plateau Acquisition for further discussion.
Impact of COVID-19-The Company continues to monitor closely the actual and
expected impacts of the COVID-19 pandemic on our business, financial condition
and results of operations. Sterling's business has been identified as a
component of "Essential Critical Infrastructure" per the National Cybersecurity
and Infrastructure Agency, and to date, we have not experienced significant
shutdowns of project sites or operational interruptions. Consistent with
governmental orders and public health guidelines, the Company has continued to
operate across its footprint. For the Company's office-based personnel, the
Company is social distancing and, where practical, working from home. For
personnel onsite at the Company's construction sites, the Company has taken
mitigation measures to prevent the spread of COVID-19, including but not limited
to, social distancing, wellness checks, providing sanitation stations and
wearing personal protective equipment. While the Company has not incurred
significant disruptions thus far from the COVID-19 pandemic, the pandemic may
impact our business, consolidated results of operations and financial condition
in the future. However, the significance of the impact on our operations going
forward is not yet certain and depends on numerous evolving factors as discussed
further in Part I, Item 1A "Risk Factors" in this annual report on Form 10-K.
MARKET OUTLOOK AND TRENDS
Heavy Civil-Sterling's Heavy Civil business is primarily driven by federal,
state and municipal funding. Federal funds, on average, provide 50% of annual
State Department of Transportation (DOT) capital outlays for highway and bridge
projects. Several of the states in Sterling's key markets have instituted
actions to further increase annual spending. In November 2020, various state and
local transportation measures were passed securing, and in some cases increasing
funding of major initiatives in Texas ($7.5 billion) and California ($520
million). In addition to the state locally funded actions, the $305 billion 2015
federally funded Fixing America's Surface Transportation ("FAST") Act increased
the annual federal highway investment by 15.1% over a five-year period from 2016
to 2020. In September 2020, Congress passed a one-year extension of the FAST Act
which added an additional $13.6 billion to the Highway Trust Fund. In October
2018, the Federal Aviation Administration reauthorized $3.35 billion annually
through 2023. This reauthorization also includes more than $1 billion a year for
airport infrastructure grants and about $1.7 billion for disaster relief.
Multiple infrastructure proposals are currently underway in both the federal
House and the Senate. If passed, these bills could add additional multi-year
funding for highways, rail and airports starting in late 2021 or early 2022.
Specialty Services-Sterling's Specialty Services business is primarily driven by
investments from end users and developers. Key end users, including Amazon,
Facebook, and Home Depot, have continued implementing publicly announced
multi-year capital infrastructure campaigns. In our primary market in the
southeastern United States, and specifically Georgia, the availability rate is
at 6.5% and for nine consecutive quarters over 20 million square feet of new
construction has commenced. The outlook for the multi-family market continues to
decline, as developers face economic concerns due to the COVID-19 pandemic and
the availability and affordability of starter single family homes continues to
rise.
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Residential-Continuing revenue growth of the Company's Residential business is
directly related to the growth of new home starts in its key markets. The
Company's core customer base is primarily made up of leading national home
builders as well as regional and custom home builders. The Company has continued
its expansion of the residential business into the Houston market and
surrounding areas.
BACKLOG
At December 31, 2020, our Backlog of construction projects, made up of our Heavy
Civil and Specialty Services segments, was $1.2 billion, as compared to $1.1
billion at December 31, 2019. The contracts in Backlog are typically completed
in 6 to 36 months. Contracts in which we are the apparent low bidder for
projects ("Unsigned Low-bid Awards") are excluded from Backlog until the
contract is executed by our customer. Unsigned Low-bid Awards were $356.9
million at December 31, 2020 and $273.5 million at the end of 2019. The
combination of our Backlog and Unsigned Low-bid Awards, which we refer to as
"Combined Backlog" totaled $1.5 billion and $1.3 billion as of December 31, 2020
and 2019, respectively. Backlog includes $234.2 million and $161.4 million
attributable to our share of estimated revenues related to joint ventures where
we are a noncontrolling joint venture partner at December 31, 2020 and 2019,
respectively. We anticipate that approximately 64% of our Backlog will be
recognized as revenues during 2021, with substantially all remaining recognized
in the twelve months following.
Contracts-in-progress which were not substantially complete totaled
approximately 200 at December 31, 2020 and 2019. These contracts are of various
sizes, of different expected profitability and in various stages of completion.
The nearer a contract progresses toward completion, the more visibility we have
in refining our estimate of total revenues (including incentives, delay
penalties and change orders), costs and gross profit. Thus, gross profit as a
percent of revenues can increase or decrease from comparable and sequential
quarters due to variations among contracts and depending upon the stage of
completion of contracts.
We anticipate that our markets will continue to improve, driven by the
conditions discussed in Item 1 "Business." Furthermore, we believe that the
Company is well established in our particular markets and has the management
depth and experience which gives us the ability to perform a broad range of work
that will allow us to succeed in current market conditions and to continue to
compete successfully for projects as they become available at acceptable profit
margin levels.
Backlog and gross margin:
(In thousands)               Backlog        Gross Margin in Backlog
Fourth quarter of 2020      $1,175,388               12.0%
Third quarter of 2020       $1,238,141               12.4%
Second quarter of 2020      $1,133,814               12.9%
First quarter of 2020       $1,190,120               12.7%
Fourth quarter of 2019      $1,068,025               11.5%


Our margin in Backlog has increased from 11.5% at December 31, 2019 to 12.0% at
December 31, 2020, and our Combined Backlog margin increased from 11.0% at
December 31, 2019 to 11.8% at December 31, 2020, driven by project mix of Heavy
Civil and Specialty Services awards.
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RESULTS OF OPERATIONS
Consolidated Results
Summary-For 2020, the Company had operating income of $94.9 million, income
before income taxes of $65.4 million, net income attributable to Sterling common
stockholders of $42.3 million and net income per diluted share attributable to
Sterling common stockholders of $1.50.
Consolidated financial highlights for 2020 as compared to 2019 are as follows:
                                                                        Years Ended December 31,
(In thousands)                                                          2020                 2019
Revenues                                                           $ 1,427,412          $ 1,126,278
Gross profit                                                           191,369              107,794
General and administrative expenses                                    (71,415)             (49,200)
Intangible asset amortization                                          (11,436)              (4,695)
Acquisition related costs                                               (1,026)              (4,311)
Other operating expense, net                                           (12,600)             (11,837)
Operating income                                                        94,892               37,751
Interest, net                                                          (29,216)             (15,544)
Loss on extinguishment of debt                                            (301)              (7,728)
Income before income taxes and noncontrolling interests                 65,375               14,479
Income tax (expense) benefit                                           (22,471)              26,216

Less: Net income attributable to noncontrolling interests                 (598)                (794)
Net income attributable to Sterling common stockholders            $    42,306          $    39,901

Gross margin                                                              13.4  %               9.6  %


Revenues-Revenues increased $301.1 million, or 26.7% in 2020 compared to the
prior year. The increase was driven by a $296.1 million increase in Specialty
Services due to the inclusion of a full year of results from Plateau, which was
acquired on October 2, 2019, and an $11.6 million increase in Residential,
partly offset by a $6.5 million decrease in Heavy Civil.
Gross profit-Gross profit increased $83.6 million, or 77.5%, in 2020 compared to
the prior year. The Company's gross margin as a percent of revenue increased
to 13.4% in 2020, as compared to 9.6% in the prior year. The increases in gross
profit and gross margin as a percent of revenue are primarily driven by
Specialty Services due to the inclusion of a full year of results from Plateau
operations in 2020.
General and administrative expenses-General and administrative expenses
increased $22.2 million during 2020 to $71.4 million from $49.2 million in the
prior year. This increase is primarily due to the inclusion of a full year of
results from Plateau operations in 2020 and higher stock compensation and other
corporate related costs.
Intangible asset amortization-Intangible asset amortization increased $6.7
million during 2020 to $11.4 million from $4.7 million in the prior year, as a
result of the acquisition of Plateau.
Acquisition related costs-The Company had acquisition related costs of $1.0
million and $4.3 million in the years ended 2020 and 2019, respectively, all of
which related to the acquisition of Plateau.
Other operating expense, net-Other operating expense, net, includes 50% of
earnings and losses related to Members' interest of consolidated 50% owned
subsidiaries, earn-out expense, and other miscellaneous operating income or
expense. Members' interest earnings are treated as an expense and increase the
liability account. The change in other operating expense, net, was an increase
of $0.8 million during 2020 compared to the prior year. Members' interest
earnings increased by $1.3 million during 2020 to $11.1 million from $9.8
million in the prior year, as a result of improved margin mix from our 50% owned
subsidiaries. Earn-out expense decreased by $0.5 million during 2020 to $1.5
million from $2.0 million in the prior year.
Interest expense-Interest expense was $29.4 million in 2020 compared to $16.7
million in the prior year. The increase is due to borrowings related to the
acquisition of Plateau.
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Income taxes-The effective income tax rate was 34.4% in 2020 and there was a tax
rate benefit in the prior year. The increase is primarily due to a reduction in
the tax valuation allowance that reduced the effective income tax rate in 2019,
additional state taxes in 2020 primarily related to Plateau, and an increase of
non-deductible stock based compensation expense. Due to its net operating loss
carryforwards, the Company had no cash payments for federal income taxes for
2020 or 2019. See Note 13 - Income Taxes for more information.
Segment Results
                                                  Years Ended December 31,
                                                     % of                            % of
(In thousands)                      2020           Revenues          2019          Revenues
Revenues
Heavy Civil                    $     753,824          52%        $   760,325          67%
Specialty Services                   508,894          36%            212,824          19%
Residential                          164,694          12%            153,129          14%
Total Revenues                 $   1,427,412                     $ 1,126,278

Operating Income
Heavy Civil                    $       4,536         0.6%        $     3,316         0.4%
Specialty Services                    70,583         13.9%            18,207         8.6%
Residential                           20,799         12.6%            20,539         13.4%
Subtotal                              95,918         6.7%             42,062         3.7%
Acquisition related costs             (1,026)                         (4,311)
Total Operating Income         $      94,892         6.6%        $    37,751         3.4%


Heavy Civil
Revenues-Revenues were $753.8 million for 2020, a decrease of $6.5 million or
1%, compared to the prior year. The decrease was driven by lower aviation and
other revenue, partly offset by higher heavy highway and water
containment/treatment revenue in 2020 compared to the prior year.
Operating income-Operating income was $4.5 million for 2020, an increase of $1.2
million, compared to the prior year. The increase was the result of greater
project mix shift to our 50% owned subsidiaries, partly offset by a margin shift
from lower volume of aviation work to higher volume of lower margin heavy
highway work and efficiency related costs associated with COVID-19.
Specialty Services
Revenues-Revenues were $508.9 million for 2020, an increase of $296.1 million or
139%, compared to the prior year. The increase was primarily attributable to the
inclusion of a full year of results from Plateau operations in 2020 of $312.6
million, partly offset by a $16.5 million decrease in commercial revenues.
Operating income-Operating income was $70.6 million for 2020, an increase of
$52.4 million, compared to the prior year. The increase was primarily
attributable to the inclusion of a full year of operating income generated from
Plateau operations in 2020.
Residential
Revenues-Revenues were $164.7 million for 2020, an increase of $11.6 million or
8%, compared to the prior year. The increase in revenue was primarily the result
of the continued ramp-up of work in Houston.
Operating income-Operating income was $20.8 million for 2020, an increase of
$0.3 million, compared to the prior year. The increase was driven by the ramp-up
of operations and scale in Houston. Houston as a percentage of completed slabs
was 13% for 2020 compared to 10% for the prior year. Operating income as a
percent of revenue decreased 76 basis points compared to the prior year, driven
by the ramp-up of operations and scale in Houston, temporary price concessions
to our customers to mitigate a potential decrease in demand due to COVID-19, and
an increase in lumber and concrete costs in 2020.
                                       26
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LIQUIDITY AND SOURCES OF CAPITAL
Cash-Cash at December 31, 2020 was $66.2 million, and includes the following
components:
                                           As of December 31,
 (In thousands)                            2020           2019
Generally Available                    $   26,419      $ 29,659

Consolidated 50% Owned Subsidiaries 30,354 12,004 Construction Joint Ventures

                 9,412         4,070
Total Cash                             $   66,185      $ 45,733

The following tables set forth information about our cash flows and liquidity:


                                                Years Ended December 31,
 (In thousands)                                   2020                2019
Net cash provided by (used in):
Operating activities                      $     119,283            $  41,093
Investing activities                            (30,491)            (410,386)
Financing activities                            (68,340)             320,931
Net change in cash and cash equivalents   $      20,452            $ 

(48,362)




Operating Activities-During 2020, net cash provided by operating activities was
$119.3 million compared to $41.1 million in the prior year. Cash flows provided
by operating activities were driven by higher net income, adjusted for various
non-cash items and changes in accounts receivable, net contracts in progress and
accounts payable balances (collectively, "Contract Capital"), as discussed
below, and other accrued liabilities.
Changes in Contract Capital-The change in operating assets and liabilities
varies due to fluctuations in operating activities and investments in Contract
Capital. The changes in components of Contract Capital during the years ended
December 31, 2020 and 2019 were as follows:
                                                                            Years Ended December 31,
 (In thousands)                                                              2020                 2019
Contracts in progress, net                                             $      65,963          $  (5,188)
Accounts receivable                                                           (8,552)           (10,089)
Receivables from and equity in construction joint ventures                    (7,457)             1,524
Accounts payable                                                             (42,392)            10,987
Change in Contract Capital, net                                        $    

7,562 $ (2,766)




During 2020, the change in Contract Capital increased liquidity by $7.6 million.
The Company's Contract Capital fluctuations are impacted by the mix of projects
in Backlog, seasonality, the timing of new awards and related payments for work
performed and the contract billings to the customer as projects are completed.
Contract Capital is also impacted at period-end by the timing of accounts
receivable collections and accounts payable payments for projects.
Investing Activities-During 2020, net cash used in investing activities was
$30.5 million, compared to net cash used of $410.4 million in the prior year. In
2020, the cash used in investing activities was driven by purchases of capital
equipment and buildings and improvements. Capital equipment is acquired as
needed to support changing levels of production activities and to replace
retiring equipment.
Financing Activities-During 2020, net cash used in financing activities was
$68.3 million compared to net cash provided of $320.9 million in the prior year.
In 2020, the cash used in financing activities was driven by $77.7 million of
repayments on debt, primarily consisting of $45.0 million in repayments on the
term loan facility ("Term Loan Facility," as defined below), $20.0 million in
repayments on the revolving credit facility ("Revolving Credit Facility," as
defined below) and $12.5 million in payments on the combined promissory notes
and deferred cash payments issued as part of the acquisition of Tealstone.
                                       27
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Credit Facilities, Debt, and Other Capital
General-In addition to our available cash, cash equivalents and cash provided by
operations, from time to time we use borrowings to finance acquisitions, our
capital expenditures and working capital needs.
Credit Facility-On October 2, 2019, the Company, as borrower, and certain of its
subsidiaries, as guarantors, entered into a Credit Agreement (as amended, the
"Credit Agreement") with BMO Harris Bank N.A., as administrative agent (the
"Agent"), Bank of America, N.A., as syndication agent, and BMO Capital Markets
Corp. and BofA Securities, Inc., as joint lead arrangers and joint book runners.
The Credit Agreement provides the Company with senior secured debt financing in
an amount up to $475 million in the aggregate, consisting of (i) a senior
secured first lien revolving credit facility (the "Revolving Credit Facility")
in an aggregate principal amount of $75 million (with a $75 million limit for
the issuance of letters of credit and a $15 million sublimit for swing line
loans) and (ii) a senior secured first lien term loan facility (the "Term Loan
Facility") in the amount of $400 million (collectively, the "Credit Facility").
The obligations under the Credit Facility are secured by substantially all
assets of the Company and the subsidiary guarantors, subject to certain
permitted liens and interests of other parties. The Credit Facility will mature
on October 2, 2024.
The Company obtained the Credit Facility in order to facilitate the transactions
contemplated by the Plateau Acquisition, including to refinance the existing
indebtedness of the Company, finance capital expenditures, finance working
capital, finance acquisitions permitted under the Credit Agreement, finance
other general corporate purposes and fund certain fees and expenses associated
with the closing of the Credit Facility and the Plateau Acquisition.
On December 2, 2019, the Credit Agreement was amended to modify (i) the
applicable margins with respect to Base Rate and London Inter-Bank Offered Rate
("LIBOR") borrowings under the Credit Facility, (ii) the required amounts of
mandatory prepayments of the Credit Facility with excess cash flow, (iii) the
amounts of scheduled principal payments quarterly and at maturity on the Term
Loan Facility, and (iv) the applications of partial prepayments of the Term Loan
Facility on a ratable, weighted basis among all remaining scheduled principal
payments on the Term Loan Facility. The modifications in (i)-(iii) mentioned
above were pursuant to the customary "market flex" rights contained in the fee
letter related to the Credit Agreement.
The Company is required to make mandatory prepayments on the Credit Facility
with proceeds received from issuances of debt, events of loss and certain
dispositions. The Company also is required to prepay the Credit Facility with
its excess cash flow in an amount equal to (a) if the Total Leverage Ratio (as
defined in the Credit Agreement) is greater than or equal to 2.50 to 1.00, 75%
of excess cash flow, (b) if the Total Leverage Ratio is greater than or equal to
2.00 to 1.00 but less than 2.50 to 1.00, 50% of excess cash flow, (c) if the
Total Leverage Ratio is greater than or equal to 1.50 to 1.00 but less than 2.00
to 1.00, 25% of excess cash flow and (d) if the Total Leverage Ratio is less
than 1.50 to 1.00, 0% of excess cash flow, within 5 days after receipt of its
annual audited financial statements.
The Credit Agreement contains various affirmative and negative covenants that
may, subject to certain exceptions, restrict the ability of us and our
subsidiaries to, among other things, grant liens, incur additional indebtedness,
make loans, advances or other investments, make non-ordinary course asset sales,
declare or pay dividends or make other distributions with respect to equity
interests, purchase, redeem or otherwise acquire or retire capital stock or
other equity interests, or merge or consolidate with any other person, among
various other things. In addition, the Company is required to maintain the
following financial covenants:
•a Total Leverage Ratio (as defined in the Credit Agreement) at the last day of
each fiscal quarter not to be greater than 4.00 to 1.00 ending on December 31,
2019 through and including June 30, 2020, 3.75 to 1.00 ending on September 30,
2020, 3.50 to 1.00 ending on December 31, 2020 through and including March 31,
2021, 3.25 to 1.00 ending on June 30, 2021 through and including September 30,
2021, and 3.00 to 1.00 ending on December 31, 2021 and thereafter; and
•a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of not less
than 1.20 to 1.00 as of the last day of each fiscal quarter of the Company,
commencing with the fiscal quarter ending December 31, 2019.
The Revolving Credit Facility bears interest at either the base rate ("Base
Rate") plus a margin, or at a one-, two-, three-, six- or, if available,
twelve-month LIBOR rate plus a margin, at the Company's election.
At December 31, 2020, the Company calculated interest using a one-month LIBOR
rate and an applicable margin of 0.15% and 4.50% per annum, respectively. In
addition to interest on debt borrowings, we are assessed quarterly commitment
fees on the unutilized portion of the facility as well as letter of credit fees
on outstanding instruments. Interest under the Revolving Credit Facility is
payable (i) with respect to LIBOR borrowings, on the last day of each applicable
interest period (one, two, three, six or twelve months), unless the applicable
interest period is longer than three months, then on each day occurring every
three months after the commencement of such interest period, and on the maturity
date, and (ii) with respect to Base Rate borrowings, on the last day of every
calendar quarter and on the maturity date. At December 31, 2020, we had no
outstanding borrowings under the Revolving Credit
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Facility, providing $75 million of available capacity. During 2020, our weighted
average interest rate on borrowings under the Revolving Credit Facility was
approximately 6.68%. The Revolving Credit Facility may be repaid in whole or in
part at any time, with final payment of all principal and interest then
outstanding due on October 2, 2024.
Interest under the Term Loan Facility is payable at the same frequencies and
bears interest at the same rate options as the Revolving Credit Facility. We
continue to utilize an interest rate swap to hedge against $350 million of the
outstanding Term Loan Facility, which resulted in a weighted average interest
rate of approximately 5.74% per annum during 2020. At December 31, 2020, we
had $355 million of outstanding borrowings under the facility. Principal
payments on the Term Loan Facility total $30 million, $50 million, $50 million,
$50 million and $15 million for each of the years ending 2020, 2021, 2022, 2023,
and 2024, respectively. Additionally, based on the December 31, 2020
Consolidated Financial Statements, the Company is required to make a $32.7
million excess cash flow payment in the first quarter of 2021, of which the
Company has prepaid $15 million in the fourth quarter of 2020 and will make the
remaining $17.7 million payment in the first quarter of 2021. The Company's
final payment under the Term Loan Facility is due on October 2, 2024, which will
include the remaining $172.5 million of outstanding principal and any related
interest outstanding.
Debt Issuance Costs-The costs associated with the Term Loan Facility and
Revolving Credit Facility are reflected on the Balance Sheets as a direct
reduction from the related debt liability and amortized over the terms of the
respective facilities.

Note Payable to Seller, Plateau Acquisition-As part of the Plateau Acquisition,
the Company issued a $10.0 million subordinated promissory note to one of the
Plateau sellers that bears interest at 8% with interest payments due quarterly
beginning January 1, 2020. The subordinated promissory note has no scheduled
payments, however, it may be repaid in whole or in part at any time, subject to
certain payment restrictions under a subordination agreement with the Agent
under our Credit Agreement, without premium or penalty, with final payment of
all principal and interest then outstanding due on April 2, 2025. At inception,
the subordinated promissory note's interest rate approximated market.
Notes and Deferred Payments to Sellers, Tealstone Acquisition-At December 31,
2020 the Company had no balance remaining on the combined promissory notes and
deferred cash payments issued as part of the Tealstone Acquisition. During
the year ended December 31, 2020, the Company paid $7.5 million of the deferred
cash payments and $5 million on promissory notes that were due on April 3, 2020.
Other Debt-During the second quarter of 2020, the Company's two 50% owned
subsidiaries received three short-term Paycheck Protection Program loans (the
"PPP Loans") totaling approximately $9.8 million. The loans may be fully or
partially forgiven if the funds are used for payroll related costs, interest on
mortgages, rent, and utilities, and as long as our employee headcount and salary
levels remain consistent with our baseline period over an eight to twenty-four
week period following the date the loans were received. Any forgiveness of the
loans requires approval by the Small Business Administration ("SBA"). If the SBA
determines that the loans are not fully or partially forgiven, the balance is
subject to a 1% interest rate and requires repayment. The PPP Loans have been
classified as short-term debt under "Current Liabilities" on the Consolidated
Balance Sheets at December 31, 2020, as we expect to submit forgiveness
applications and receive a determination by the SBA within the next six months.
Compliance and Other-As of December 31, 2020, we were in compliance with all of
our restrictive and financial covenants. The Company's debt is recorded at its
carrying amount in the Consolidated Balance Sheets. As of December 31, 2020 and
2019, the carrying values of our debt outstanding approximated the fair values.
Borrowings-Based on our average borrowings for 2020 and our 2021 forecasted cash
needs, we continue to believe that the Company has sufficient liquid financial
resources to fund our requirements for the next year of operations. Furthermore,
the Company is continually assessing ways to increase revenues and reduce costs
to improve liquidity. However, in the event of a substantial cash constraint and
if we were unable to secure adequate debt financing, our liquidity could be
materially and adversely affected. Refer to Item 1A "Risk Factors" for further
discussion of liquidity related risks.
Issuance Common Stock-On October 2, 2019, in connection with the acquisition of
Plateau, the Company issued 1,244,813 shares of the Company's stock as
consideration paid to the Plateau sellers. The value of the shares issued was
$16.2 million based on Sterling's closing stock price on October 1, 2019. See
Note 3 - Plateau Acquisition for further discussion.
Bonding-As is customary in the construction business, we are required to provide
surety bonds to secure our performance under construction contracts. Our ability
to obtain surety bonds primarily depends upon our capitalization, working
capital, past performance, management expertise and reputation and certain
external factors, including the overall capacity of the surety market. Surety
companies consider such factors in relationship to the amount of our backlog and
their underwriting standards, which may change from time to time. We have
pledged all proceeds and other rights under our construction contracts to our
bond surety company. Events that affect the insurance and bonding markets may
result in bonding becoming more difficult to
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obtain in the future, or being available only at a significantly greater cost.
To date, we have not encountered difficulties or material cost increases in
obtaining new surety bonds.
Capital Strategy-The Company will continue to explore additional revenue growth
and capital alternatives to improve leverage and strengthen its financial
position in order to take advantage of trends in the civil infrastructure and
specialty services markets. The Company expects to pursue strategic uses of its
cash, such as, investing in projects or businesses that meet its gross margin
targets and overall profitability and managing its debt balances.
Material Cash Requirements
The following table sets forth our material cash requirements from contractual
obligations at December 31, 2020:
                                                                                  Payments due by period
                                                                          <1               1 - 3              4 - 5               >5
(In thousands)                                       Total               Year              Years              Years             Years
Credit Facility                                   $ 355,000          $  67,690          $ 100,000          $ 187,310          $     -
Credit Facility interest                             73,009             22,293             39,544             11,172                -
Other notes payable (inclusive of outstanding
interest)                                            14,160                988              1,896             11,276                -
Members' interest subject to mandatory redemption
and undistributed earnings (1)                       51,290             51,290                  -                  -                -
Total                                             $ 493,459          $ 142,261          $ 141,440          $ 209,758          $     -


(1) Mandatory redemption is based on the death or disability of the interest
holders. Undistributed earnings can be distributed upon unanimous consent from
the members and for tax distributions. At this time we cannot predict when such
distributions will be made. The Company has purchased two separate $20 million
death and permanent total disability insurance policies to mitigate the
Company's cash draw if such events were to occur.
Capital Expenditures-Capital equipment is acquired as needed by increased levels
of production and to replace retiring equipment. Capital expenditures incurred
in 2020 were $33 million. Management expects capital expenditures in 2021 to be
in the range of $35 to $40 million; however, the award of a project requiring
significant purchases of equipment or other factors could result in increased
expenditures.
NEW ACCOUNTING STANDARDS
See the applicable section of Note 2 - Basis of Presentation and Significant
Accounting Policies for a discussion of new accounting standards.
CRITICAL ACCOUNTING ESTIMATES
The discussion and analysis of the financial condition and results of operations
are based on the Company's Consolidated Financial Statements, which have been
prepared in accordance with accounting policies generally accepted in the United
States ("GAAP"). The preparation of these Consolidated Financial Statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses and related disclosures of
contingent assets and liabilities. The Company continually evaluates its
estimates based on historical experience and various other assumptions that the
Company believes to be reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions. The
Company believes the following critical accounting estimates involve more
significant judgment used in the preparation of the Consolidated Financial
Statements.
Revenue Recognition
Performance Obligations Satisfied Over Time-Revenue for contracts that satisfy
the criteria for over time recognition is recognized as the work progresses. The
Company measures transfer of control of the performance obligation utilizing the
cost-to-cost measure of progress, with cost of revenue including direct costs,
such as materials and labor, and indirect costs that are attributable to
contract activity. Under the cost-to-cost approach, the use of estimated costs
to complete each performance obligation is a significant variable in the process
of determining recognized revenue and is a significant factor in the accounting
for such performance obligations. Significant estimates that impact the cost to
complete each performance obligation are materials, components, equipment, labor
and subcontracts; labor productivity; schedule durations, including
subcontractor or supplier progress; contract disputes, including claims;
achievement of contractual performance requirements; and contingencies, among
others. The cumulative impact of revisions in total cost estimates during the
progress of work is reflected in the period in which these changes become known,
including, to the extent required, the reversal of profit recognized in prior
periods and the recognition of losses expected to be incurred on performance
obligations in progress. Due to the various
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estimates inherent in contract accounting, actual results could differ from
those estimates, which could result in material changes to the Company's
Consolidated Financial Statements and related disclosures. See "Contract
Estimates" within Note 4 - Revenue from Customers for further discussion.
Fair Value Measurements
The Company may use fair value measurements that involve the input of estimates
that require significant judgment. The Company's use of these fair value
measurements include:
•Determining the purchase price allocation for an acquired business;
•Goodwill impairment testing when a quantitative analysis is deemed necessary;
and
•Long-lived asset (such as property, equipment and intangible assets) impairment
testing when impairment indicators are present.
When performing quantitative fair value or impairment evaluations, the Company
estimates the fair value of assets by considering the results of income-based
and/or a market-based valuation method. Under the income-based method, a
discounted cash flow valuation model uses recent forecasts to compare the
estimated fair value of each asset to its carrying value. Cash flow forecasts
are discounted using the weighted-average cost of capital for the applicable
reporting unit at the date of evaluation. The weighted-average cost of capital
is comprised of the cost of equity and the cost of debt with a weighting for
each that reflects the Company's current capital structure. Preparation of
long-term forecasts involve significant judgments involving consideration of
backlog, expected future awards, customer attribution, working capital
assumptions and general market trends and conditions. Significant changes in
these forecasts or any valuation assumptions, such as the discount rate
selected, could affect the estimated fair value of our assets and could result
in impairment. Under the market-based method, market information such as
multiples of comparable publicly traded companies and/or completed sales
transactions are used to develop or validate our fair value conclusions, when
appropriate and available.
Purchase Price Allocations-The aggregate purchase price for the acquisition of
Plateau was allocated to the major categories of assets and liabilities acquired
based upon their estimated fair values as of October 2, 2019, which were based,
in part, upon internal and external valuations of certain assets, including
specifically identified intangible assets and property and equipment. The
valuations were based on the income-based and market-based valuation methods
noted above. The excess of the purchase price over the estimated fair value of
the net tangible and identifiable intangible assets acquired, totaling $106.8
million, was recorded as goodwill. See Note 3 - Plateau Acquisition for further
discussion.
Goodwill-Goodwill is not amortized to earnings, but instead is reviewed for
impairment at least annually, absent any indicators of impairment or when other
actions require an impairment assessment. The Company performs the annual
impairment assessment during the fourth quarter of each year based on balances
as of October 1. During the fourth quarter of 2020, 2019 and 2018, the Company
performed a qualitative assessment of goodwill, and based on this assessment, no
indicators of impairment were present. Factors considered include macroeconomic,
industry and competitive conditions, financial performance and reporting unit
specific events. These are discussed in a number of places including Item 1A
"Risk Factors." Our annual assessments indicated there was no impairment of
goodwill during the years ended December 31, 2020, 2019 and 2018.
Long-lived Assets-Long-lived assets, which include property, equipment and
acquired intangible assets, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If a recoverability assessment is required, the estimated future
cash flow associated with the asset or asset group will be compared to their
respective carrying amounts to determine if an impairment exists. Actual useful
lives and cash flows could be different from those estimated by management, and
this could have a material effect on operating results and financial position.
For the years ended December 31, 2020 and 2019, there were no events or changes
in circumstances that would indicate a material impairment of our long-lived
assets.
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