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. OVERVIEWGeneral-Sterling Construction Company, Inc. operates through a variety of subsidiaries within three segments specializing in Heavy Civil, Specialty Services and Residential projects inthe United States (the "U.S."), primarily across the southernU.S. , the Rocky Mountain States,California andHawaii , 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-OnOctober 2, 2019 , we completed our acquisition of all of the issued and outstanding shares of capital stock ofLK Gregory Construction, Inc. andPlateau Excavation, Inc. , and all of the issued and outstanding equity interests inDeWitt 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 ofCOVID-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 theNational 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 annualState 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. InNovember 2020 , various state and local transportation measures were passed securing, and in some cases increasing funding of major initiatives inTexas ($7.5 billion ) andCalifornia ($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. InSeptember 2020 ,Congress passed a one-year extension of the FAST Act which added an additional$13.6 billion to theHighway Trust Fund . InOctober 2018 , theFederal 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 theSenate . 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 southeasternUnited States , and specificallyGeorgia , 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. 23 -------------------------------------------------------------------------------- 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 theHouston market and surrounding areas. BACKLOG AtDecember 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 atDecember 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 atDecember 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 ofDecember 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 atDecember 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 atDecember 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% atDecember 31, 2019 to 12.0% atDecember 31, 2020 , and our Combined Backlog margin increased from 11.0% atDecember 31, 2019 to 11.8% atDecember 31, 2020 , driven by project mix of Heavy Civil and Specialty Services awards. 24 -------------------------------------------------------------------------------- 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 onOctober 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$16.7 million in the prior year. The increase is due to borrowings related to the acquisition of Plateau. 25 -------------------------------------------------------------------------------- Income taxes-The effective income tax rate was 34.4% in 2020 and there was a tax rate benefit in the prior year. The increase is primarily due to a reduction in the tax valuation allowance that reduced the effective income tax rate in 2019, additional state taxes in 2020 primarily related to Plateau, and an increase of non-deductible stock based compensation expense. Due to its net operating loss carryforwards, the Company had no cash payments for federal income taxes for 2020 or 2019. See Note 13 - Income Taxes for more information. Segment Results Years Ended December 31, % of % of (In thousands) 2020 Revenues 2019 Revenues Revenues Heavy Civil$ 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 inHouston . 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 inHouston .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 inHouston , 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 -------------------------------------------------------------------------------- LIQUIDITY AND SOURCES OF CAPITAL Cash-Cash atDecember 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
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$41.1 million in the prior year. Cash flows provided by operating activities were driven by higher net income, adjusted for various non-cash items and changes in accounts receivable, net contracts in progress and accounts payable balances (collectively, "Contract Capital "), as discussed below, and other accrued liabilities. Changes in Contract Capital-The change in operating assets and liabilities varies due to fluctuations in operating activities and investments inContract Capital . The changes in components ofContract Capital during the years endedDecember 31, 2020 and 2019 were as follows: Years Ended December 31, (In thousands) 2020 2019 Contracts in progress, net$ 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
During 2020, the change inContract Capital increased liquidity by$7.6 million . The Company'sContract 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 -------------------------------------------------------------------------------- Credit Facilities, Debt, andOther 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-OnOctober 2, 2019 , the Company, as borrower, and certain of its subsidiaries, as guarantors, entered into a Credit Agreement (as amended, the "Credit Agreement") withBMO Harris Bank N.A ., as administrative agent (the "Agent"),Bank of America, N.A ., as syndication agent, andBMO Capital Markets Corp. andBofA 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 onOctober 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. OnDecember 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 onDecember 31, 2019 through and includingJune 30, 2020 , 3.75 to 1.00 ending onSeptember 30, 2020 , 3.50 to 1.00 ending onDecember 31, 2020 through and includingMarch 31, 2021 , 3.25 to 1.00 ending onJune 30, 2021 through and includingSeptember 30, 2021 , and 3.00 to 1.00 ending onDecember 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 endingDecember 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. AtDecember 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. AtDecember 31, 2020 , we had no outstanding borrowings under the Revolving Credit 28 -------------------------------------------------------------------------------- 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 onOctober 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. AtDecember 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 theDecember 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 onOctober 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 beginningJanuary 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 onApril 2, 2025 . At inception, the subordinated promissory note's interest rate approximated market. Notes and Deferred Payments to Sellers, Tealstone Acquisition-AtDecember 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 endedDecember 31, 2020 , the Company paid$7.5 million of the deferred cash payments and$5 million on promissory notes that were due onApril 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 theSmall 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 atDecember 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 ofDecember 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 ofDecember 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-OnOctober 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$16.2 million based on Sterling's closing stock price onOctober 1, 2019 . See Note 3 - Plateau Acquisition for further discussion. Bonding-As is customary in the construction business, we are required to provide surety bonds to secure our performance under construction contracts. Our ability to obtain surety bonds primarily depends upon our capitalization, working capital, past performance, management expertise and reputation and certain external factors, including the overall capacity of the surety market. Surety companies consider such factors in relationship to the amount of our backlog and their underwriting standards, which may change from time to time. We have pledged all proceeds and other rights under our construction contracts to our bond surety company. Events that affect the insurance and bonding markets may result in bonding becoming more difficult to 29 -------------------------------------------------------------------------------- obtain in the future, or being available only at a significantly greater cost. To date, we have not encountered difficulties or material cost increases in obtaining new surety bonds.Capital Strategy-The Company will continue to explore additional revenue growth and capital alternatives to improve leverage and strengthen its financial position in order to take advantage of trends in the civil infrastructure and specialty services markets. The Company expects to pursue strategic uses of its cash, such as, investing in projects or businesses that meet its gross margin targets and overall profitability and managing its debt balances. Material Cash Requirements The following table sets forth our material cash requirements from contractual obligations atDecember 31, 2020 : Payments due by period <1 1 - 3 4 - 5 >5 (In thousands) Total Year Years Years Years Credit Facility$ 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 inthe 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 30 -------------------------------------------------------------------------------- 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 ofOctober 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 ofOctober 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 endedDecember 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 endedDecember 31, 2020 and 2019, there were no events or changes in circumstances that would indicate a material impairment of our long-lived assets. 31
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