STERLING INFRASTRUCTURE, INC. Cautionary Statement Regarding Forward-Looking Statements
This quarterly report on Form 10-Q ("Report") contains statements that are, or
may be considered to be, "forward-looking statements" regarding the Company
which represent our expectations and beliefs concerning future events. These
forward-looking statements are intended to be covered by the safe harbor for
certain forward-looking statements provided by the Private Securities Litigation
Reform Act of 1995. Forward-looking statements included herein relate to matters
that are not based on historical facts and reflect our current expectations as
of the date of this Report, regarding items such as: our industry and business
outlook, including relating to federal, state and municipal funding for
infrastructure projects, the residential home building market and demand from
our customers; business strategy, including the integration of recent
acquisitions and the potential for additional future acquisitions; expectations
and estimates relating to our backlog; expectations concerning our market
position; future operations; margins; profitability; capital expenditures;
liquidity and capital resources; and other financial and operating information.
Forward-looking statements may use or contain words such as "anticipate,"
"assume," "believe," "continue," "could," "estimate," "expect," "forecast,"
"future," "intend," "likely," "may," "plan," "potential," "predict," "project,"
"seek," "should," "strategy," "will," "would" and similar terms and phrases.
Actual events, results and outcomes may differ materially from those anticipated, projected or assumed in the forward-looking statements due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, the following:
•factors that affect the accuracy of estimates inherent in the bidding for contracts, estimates of backlog, and over time revenue recognition accounting policies, including onsite conditions that differ materially from those assumed in the original bid, contract modifications, mechanical problems with machinery or equipment and effects of other risks referenced below; •cost escalations associated with our contracts, including changes in availability, proximity and cost of materials such as steel, cement, concrete, aggregates, oil, fuel and other construction materials, including changes inU.S. trade policies and retaliatory responses from other countries, and cost escalations associated with subcontractors and labor;
•changes in costs to lease, acquire or maintain our equipment;
•changes in general economic conditions, including reductions in federal, state and local government funding for infrastructure services, changes in those governments' budgets, practices, laws and regulations and adverse economic conditions in our geographic markets, such as those caused by the ongoing COVID-19 pandemic;
•the presence of competitors with greater financial resources or lower margin requirements than ours, and the impact of competitive bidders on our ability to obtain new backlog at reasonable margins acceptable to us;
•design/build contracts which subject us to the risk of design errors and omissions;
•our ability to obtain bonding or post letters of credit;
•adverse weather conditions;
•potential disruptions, failures or security breaches of the information technology systems on which we rely to conduct our business;
•potential risks and uncertainties relating to the ongoing COVID-19 pandemic, and any future major public health crisis;
•actions of suppliers, subcontractors, design engineers, joint venture partners, customers, competitors, banks, surety companies and others which are beyond our control, including suppliers', subcontractors' and joint venture partners' failure to perform;
•our dependence on a limited number of significant customers;
•our ability to attract and retain key personnel;
•increased unionization of our workforce or labor costs and any work stoppages or slowdowns;
•federal, state and local environmental laws and regulations where non-compliance can result in penalties and/or termination of contracts as well as civil and criminal liability;
•citations issued by any governmental authority, including the
•our ability to qualify as an eligible bidder under government contract criteria;
•delays or difficulties related to the completion of our projects, including additional costs, reductions in revenues or the payment of liquidated damages, or delays or difficulties related to obtaining required governmental permits and approvals;
•any prolonged shutdown of the government;
•our ability to successfully identify, finance, complete and integrate recent and potential acquisitions, including the Petillo Acquisition;
•our ability to raise additional capital in the future on favorable terms or at all;
•our ability to generate cash flows sufficient to fund our financial commitments and objectives;
•our ability to meet the terms and conditions of our debt obligations and covenants; and
•the other risks discussed in more detail in the Company's annual report on Form 10-K for the year endedDecember 31, 2021 (the "2021 Form 10-K") under "Part I, Item 1A. Risk Factors", or our other filings with theSecurities and Exchange Commission . In reading this Report, you should consider these factors carefully in evaluating any forward-looking statements and you are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements reflect our current expectations as of the date of this Report regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect. Additional factors or risks that we currently deem immaterial, that are not presently known to us or that arise in the future could also cause our actual results to differ materially from our expected results. Given these uncertainties, investors are cautioned that many of the assumptions upon which our forward-looking statements are based are likely to change after the date the forward-looking statements are made. Further, we may make changes to our business plans that could affect our results. Although we believe that our plans, intentions and expectations reflected in, or suggested by, the forward-looking statements that we make in this Report are reasonable, we can provide no assurance that they will be achieved. The forward-looking statements speak only as of the date made, and we undertake no obligation to publicly update or revise any forward-looking statements for any reason, whether as a result of new information, future events or developments, changed circumstances, or otherwise, and notwithstanding any changes in our assumptions, changes in business plans, actual experience or other changes. 20 --------------------------------------------------------------------------------
OVERVIEW
General-Sterling Construction Company, Inc. ("Sterling" or "the Company") operates through a variety of subsidiaries within three segments specializing in E-Infrastructure, Transportation andBuilding Solutions inthe United States (the "U.S."), primarily across the Southern, Northeastern, Mid-Atlantic and the Rocky Mountain States,California andHawaii , as well as other areas with strategic construction opportunities. E-Infrastructure Solutions projects develop advanced, large-scale site development systems and services for data centers, e-commerce distribution centers, warehousing, transportation, energy and more. Transportation Solutions includes infrastructure and rehabilitation projects for highways, roads, bridges, airports, ports, light rail, water, wastewater and storm drainage systems. Building Solutions projects include residential and commercial concrete foundations for single-family and multi-family homes, parking structures, elevated slabs and other concrete work. From strategy to operations, we are committed to sustainability by operating responsibly to safeguard and improve society's quality of life. Caring for our people and our communities, our customers and our investors - that isThe Sterling Way . Petillo Acquisition-OnDecember 30, 2021 , we completed our acquisition of Petillo for aggregate consideration of$196.8 million . Petillo is a leading specialty site development contractor based inFlanders, New Jersey and serves the Northeastern and Mid-Atlantic States, providing large-scale site infrastructure improvement services, including full-service excavation, underground utility construction, environmental remediation, drainage systems for commercial construction and water management and distribution systems. The results of Petillo are included within our E-Infrastructure Solutions segment. See Note 3 - Acquisitions 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. To date, we have not experienced significant shutdowns of project sites or operational interruptions. While the Company has not incurred significant disruptions thus far from the COVID-19 pandemic, the pandemic may impact our business, condensed consolidated results of operations and financial condition in the future. The significance of impacts on our operations going forward is not yet certain and depends on numerous evolving factors as discussed further in the Company's 2021 Form 10-K under "Part I, Item 1A. Risk Factors." MARKET OUTLOOK AND TRENDS The market outlook and trends currently reflect favorable opportunities for long-term growth despite the challenging market pressures that include inflation, supply chain issues and labor challenges. To remain competitive in the current market environments, Sterling remains focused on our strategic business elements and objectives as outlined. We continue to shift our focus from low-bid heavy highway, that now represents approximately 14% of our total revenue, and increasing margins in our E-Infrastructure andBuilding Solutions segments. E-Infrastructure Solutions-Sterling's E-Infrastructure Solutions business is primarily driven by investments in the development of data centers, e-commerce distribution centers and warehouses. The continued revenue growth of the Company's complex site development business is directly related to the continued implementation of publicly announced multi-year capital infrastructure campaigns from end users, including Amazon, Facebook and Home Depot. In our growingEast Coast market, project activity includes data centers, new warehouse and industrial development. Within this market, the current warehouse availability rate is at 4.1%, despite over 16.7 million square feet of new building deliveries in 2021. Additionally, the market experienced over 11.8 million square feet of absorption during Q4, bringing 2021 total absorption to 34.5 million square feet, more than any other year on record. Equipment availability, material delays and fuel price increases continue to be challenging factors. With the forecasted increases expected in land prices, the customer trends show projects for full site development versus staged site development. The trend for full site development is expected to continue in 2022. Transportation Solutions-Sterling's Transportation Solutions business is primarily driven by federal, state and municipal funding. Federal funds, on average, provide 50% of annualState Department of Transportation capital outlays for highway and bridge projects. 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. 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 ). OnNovember 5, 2021 Congress passed the Infrastructure Investments and Jobs Act ("IIJA") that provided a new five-year reauthorization of highway and public transportation programs with historic investment increases of$284 billion for all modes of transportation. With the passing of the IIJA, additional funding is reserved for transportation infrastructure with$110 billion reserved for roads and bridges,$66 billion for rail and$25 billion for airports. This bill could add additional multi-year funding for highways, rail and airports starting in 2022, however current changes for funding allocation may cause project start delays. Even though several of the states in Sterling's key markets have instituted actions to further increase annual spending, shorter project cycles and continued fluctuations in pricing are causing delays in project awards. Building Solutions-OurBuilding Solutions segment is comprised of our residential and commercial businesses. The continued revenue growth of our residential business is directly related to the growth of new home starts in its key market ofDallas-Fort Worth , the continued expansion in theHouston market, and the mid-2021 entry into thePhoenix market. 21 -------------------------------------------------------------------------------- Residential's core customer base is primarily made up of leading national home builders as well as regional and custom home builders. Over the last several quarters, the residential market has experienced significant price volatility and availability for key materials including concrete, steel and lumber, as well as increases in subcontractor labor cost. While the Company has worked with customers to pass on the increases in material and labor cost, the Company may not be successful in recouping these additional costs in the future. For our commercial business, 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. BACKLOG Our backlog ("Backlog") of construction projects is the remaining amount of contracts that we expect to recognize as revenue in future periods. The contracts in Backlog are typically completed in 6 to 36 months. Our unsigned low-bid awards ("Unsigned Low-bid Awards") are excluded from Backlog until the contract is executed by our customer. We refer to the combination of our Backlog and Unsigned Low-bid Awards as "Combined Backlog." Our book-to-burn ratio, a non-GAAP measure, is determined by taking our additions to Backlog and dividing it by revenue for the applicable period. This metric allows management to monitor the Company's business development efforts to ensure we grow our Backlog and our business over time, and management believes that this measure is useful to investors for the same reason. AtMarch 31, 2022 , our Backlog was$1.53 billion , as compared to$1.49 billion atDecember 31, 2021 , with a book-to-burn ratio of 1.1X for the three months endedMarch 31, 2022 . Unsigned Low-bid Awards were$142.3 million atMarch 31, 2022 and$22.5 million atDecember 31, 2021 . Combined Backlog totaled$1.67 billion and$1.52 billion atMarch 31, 2022 andDecember 31, 2021 , with a book-to-burn ratio of 1.4X for the three months endedMarch 31, 2022 . The Company's margin in Backlog has increased to 12.8% atMarch 31, 2022 from 12.2% atDecember 31, 2021 and the Combined Backlog margin increased to 12.6% atMarch 31, 2022 from 12.2% atDecember 31, 2021 , driven by a greater mix of E-Infrastructure Solutions backlog.
RESULTS OF OPERATIONS
Consolidated Results
Summary-For the first quarter of 2022, the Company had operating income of$28.3 million , income before income taxes of$26.1 million , net income attributable to Sterling common stockholders of$19.3 million and net income per diluted share attributable to Sterling common stockholders of$0.64 .
Consolidated financial highlights for the three months ended
Three Months Ended March 31,
(In thousands) 2022 2021
Revenues $ 410,320 $ 315,316
Gross profit 56,139 45,032
General and administrative expenses (23,072) (17,099)
Intangible asset amortization (3,568) (2,866)
Acquisition related costs (255) -
Other operating expense, net (975) (2,312)
Operating income 28,269 22,755
Interest, net (4,577) (5,990)
Gain (loss) on extinguishment of debt, net 2,428 (337)
Income before income taxes and noncontrolling interests 26,120 16,428
Income tax expense (6,597) (4,760)
Less: Net income attributable to noncontrolling interests (271) (1,113)
Net income attributable to Sterling common stockholders $ 19,252 $ 10,555
Gross margin 13.7 % 14.3 %
22-------------------------------------------------------------------------------- Revenues-Revenues were$410.3 million for the first quarter of 2022, an increase of$95.0 million or 30.1% compared with the first quarter of 2021. The increase in the first quarter of 2022 was driven by a$72.4 million increase in E-Infrastructure Solutions (including$47.3 million from Petillo), a$13.4 million increase in Transportation Solutions and a$9.2 million increase inBuilding Solutions . Gross profit-Gross profit was$56.1 million for the first quarter of 2022, an increase of$11.1 million or 24.7% compared to the first quarter of 2021. The Company's gross margin as a percent of revenue decreased to 13.7% in the first quarter of 2022, as compared to 14.3% in the first quarter of 2021. The increase in gross profit and decrease in margin as a percent of revenue was primarily driven by higher volume, partly offset by continued headwinds from inflation, labor and material supply issues in E-Infrastructure Solutions andBuilding Solutions . Contracts in progress which were not substantially completed totaled approximately 259 and 201 atMarch 31, 2022 and 2021, respectively. 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 the Company has in refining its 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 subsequent quarters due to variations among contracts and depending upon the stage of completion of contracts. General and administrative expenses-General and administrative expenses were$23.1 million , or 5.6% of revenue, for the first quarter of 2022, compared to$17.1 million , or 5.4% of revenue, for the first quarter of 2021. The increase was primarily driven by the inclusion of$3.1 million of general and administrative expense generated from Petillo operations in the first quarter of 2022, as well as a continued impact due to inflation and supply-chain issues. The Company anticipates that general and administrative expense will be approximately 5% of revenue for the full year 2022. Interest expense-Interest expense was$4.6 million for the first quarter of 2022 compared to$6.0 million for the first quarter of 2021. The decrease is due to a 2% lower applicable interest rate provided under the amended Credit Agreement, which was amended in the second quarter of 2021. The decrease was partly offset by the additional borrowings related to the Petillo Acquisition. Income taxes-The effective income tax rate was 25.3% for the first quarter of 2022. The effective income tax rate for first quarter of 2022 benefited primarily from the non-taxed PPP loan forgiveness. See Note 9 - Debt for more information. The Company anticipates an effective income tax rate for the full year 2022 of 28% to 29%. Due to its net operating loss carryforwards, the Company expects no cash payments for federal income taxes for 2022 or 2021. See Note 13 - Income Taxes for more information. Segment Results With theDecember 30, 2021 acquisition of Petillo, the Company realigned its operating groups to reflect management's present oversight of operations. After realignment, the Company's operations consist of three reportable segments: E-Infrastructure Solutions, Transportation Solutions andBuilding Solutions , with the commercial business reclassified from the previously reported Specialty Services operating group into the newly formedBuilding Solutions operating group. The segment information for the prior period has been recast to conform to the current presentation. (In thousands) Three Months Ended March 31, Revenues 2022 % of Revenue 2021 % of Revenue E-Infrastructure Solutions$ 168,927 41%$ 96,572 31% Transportation Solutions 160,499 39% 147,054 46% Building Solutions 80,894 20% 71,690 23% Total Revenues$ 410,320 $ 315,316 Operating Income E-Infrastructure Solutions$ 21,285 12.6%$ 17,812 18.4% Transportation Solutions 3,686 2.3% 2,666 1.8% Building Solutions 9,358 11.6% 7,361 10.3% Segment Operating Income 34,329 8.4% 27,839 8.8% Corporate (5,805) (5,084) Acquisition Related Costs (255) - Total Operating Income$ 28,269 6.9%$ 22,755 7.2% 23
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E-Infrastructure Solutions
Revenues-Revenues were$168.9 million for the first quarter of 2022, an increase of$72.4 million or 74.9% compared to the first quarter of 2021. The increase was primarily driven by the inclusion of$47.3 million of revenue generated from Petillo operations in the first quarter of 2022, as well as higher volume. Operating income-Operating income was$21.3 million for the first quarter of 2022, an increase of$3.5 million , compared to the first quarter of 2021. The increase was primarily driven by the inclusion of three months of operating income generated from Petillo operations in the first quarter of 2022, partly offset by continued headwinds from inflation, supply chain issues and the related impact on productivity and efficiency. The operating income and margin in the first quarter of 2022 were impacted by Petillo's seasonality of weather in the Northeastern and Mid-AtlanticU.S. region.
Transportation Solutions
Revenues-Revenues were$160.5 million for the first quarter of 2022, an increase of$13.5 million or 9.1% compared to the first quarter of 2021. The increase was primarily driven by higher heavy highway, water containment and treatment and other revenue, partly offset by lower aviation revenue. The increase in heavy highway revenue was primarily due to the ramp up of construction on large design-build projects. During the first quarter of 2022, our low-bid heavy highway revenue decreased by$0.2 million , which was offset by an increase of$13.5 million from heavy highway design build and other revenues compared to the first quarter of 2021. Operating Income-Operating income was$3.7 million for the first quarter of 2022, an increase of$1.0 million , compared to the first quarter of 2021. The increase was the result of improved margin mix with the ramp up of construction on large design-build projects and the continuation of our planned revenue reduction from lower margin low-bid heavy highway work.
Building Solutions
Revenues-Revenues were$80.9 million for the first quarter of 2022, an increase of$9.2 million or 12.8%, compared to the first quarter of 2021. The revenue increased due to a higher volume of slabs poured in the first quarter of 2022, compared to the first quarter of 2021. We continue to see strong demand for new housing in ourTexas footprint and our expansion into theArizona market. Operating income-Operating income was$9.4 million for the first quarter of 2022, an increase of$2.0 million , compared to the first quarter of 2021. The increase in operating income and margin was driven by the aforementioned higher volume; however, operating margins have continued to be impacted by higher material costs for concrete, steel and lumber, and the lack of consistent availability of these materials, as well as labor shortages and increased subcontractor labor costs. While the Company continues to work with customers to pass on the increases in material and labor cost, the Company may not be successful in recouping these additional costs in the future.
Corporate
Operating expense-The corporate overhead element of general and administrative expenses, which is not allocated to the business segments, was$5.8 million for the first quarter of 2022, an increase of$0.7 million compared to the first quarter of 2021. Corporate overhead is primarily comprised of corporate headquarters facility expense, the cost of the executive management team, and expenses pertaining to certain centralized functions that benefit the entire Company but are not directly attributable to the businesses, such as corporate human resources, legal, governance and finance functions.
LIQUIDITY AND SOURCES OF CAPITAL
Cash-Cash atMarch 31, 2022 , was$80.4 million , and includes the following components: March 31, December 31, (In thousands) 2022 2021 Generally Available$ 40,251 $ 29,812 Consolidated 50% Owned Subsidiaries 18,873 30,429 Construction Joint Ventures 21,271 21,599 Total Cash$ 80,395 $ 81,840 24
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The following tables set forth information about our cash flows and liquidity: (In thousands)
Three Months Ended March 31,
Net cash provided by (used in): 2022 2021 Operating activities$ 19,183 $ 38,090 Investing activities (14,563) (11,001) Financing activities (5,928) (32,502) Net change in cash and cash equivalents$ (1,308)
Operating Activities-During the three months endedMarch 31, 2022 , net cash provided by operating activities was$19.2 million compared to net cash provided by operating activities of$38.1 million in the three months endedMarch 31, 2021 . Cash flows provided by operating activities were lower despite higher net income, after adjusting 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
Three Months Ended March 31,
(In thousands) 2022 2021
Contracts in progress, net $ (16,305) $ (7,921)
Accounts receivable 5,703 7,238
Receivables from and equity in construction joint ventures (2,396) (1,513)
Accounts payable (2,876) 12,799
Change in Contract Capital, net $
(15,874)
During the three months endedMarch 31, 2022 , the change inContract Capital decreased liquidity by$15.9 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 the three months endedMarch 31, 2022 , net cash used in investing activities was$14.6 million , compared to net cash used of$11.0 million in the three months endedMarch 31, 2021 . The use of cash was driven by purchases of capital equipment less cash proceeds from the sale of property and equipment. Capital equipment is acquired as needed to support changing levels of production activities and to replace retiring equipment. Financing Activities-During the three months endedMarch 31, 2022 , net cash used in financing activities was$5.9 million , compared to net cash used of$32.5 million in the prior year. The financing cash outflow was driven by$5.9 million of repayments on the Term Loan Facility.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 E-infrastructure 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. Inflation-While inflation did not have a material impact on our financial results for many years, beginning in 2021, supply chain volatility has resulted in price increases in oil, fuel, lumber, concrete and steel which have increased our cost of operations, and inflation has increased our general and administrative expense. Anticipated cost increases are considered in our bids to customers; however, inflation has had, and may continue to have, a negative impact on the Company's financial results.
JOINT VENTURES
We participate in various construction joint venture partnerships in order to
share expertise, risk and resources for certain highly complex projects. The
joint venture's contract with the project owner typically requires joint and
several liability among the joint venture partners. Although our agreements with
our joint venture partners provide that each party will assume and fund its
share of any losses resulting from a project, if one of our partners was unable
to pay its share, we would be fully liable for such share under our contract
with the project owner. Circumstances that could lead to a loss under these
guarantee arrangements include a partner's inability to contribute additional
funds to the venture in the event that the project incurred a loss or additional
costs that we could incur should the partner fail to provide the services and
resources toward project
25
--------------------------------------------------------------------------------completion to which it committed in the joint venture agreement. See the 2021 Form 10-K under "Part I, Item 1A. Risk Factors."
AtMarch 31, 2022 , there was approximately$231.5 million of construction work to be completed on unconsolidated construction joint venture contracts, of which$98.6 million represented our proportionate share. Due to the joint and several liability under our joint venture arrangements, if one of our joint venture partners fails to perform, we and the remaining joint venture partners would be responsible for completion of the outstanding work. As ofMarch 31, 2022 , we are not aware of any situation that would require us to fulfill responsibilities of our joint venture partners pursuant to the joint and several liability under our contracts. NEW ACCOUNTING STANDARDS
There have been no material changes to the Company's discussion of new accounting standards from those described in Note 2 - Basis of Presentation and Significant Accounting Policies of our 2021 Form 10-K.
CRITICAL ACCOUNTING ESTIMATES
There have been no material changes to the Company's discussion of critical accounting estimates from those described in Item 7 of our 2021 Form 10-K.
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