Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Comment Regarding
Forward-Looking Statements
This Report includes statements that are, or
may be considered to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933,
as amended, or the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These
forward-looking statements are included throughout this Report, including in this section, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” and relate to matters such as our industry, business strategy,
goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity
and capital resources and other financial and operating information. We have used the words “anticipate,” “assume,”
“believe,” “budget,” “continue,” “could,” “estimate,” “expect,”
“forecast,” “future,” “intend,” “may,” “plan,” “potential,”
“predict,” “project,” “should,” “will,” “would” and similar terms and
phrases to identify forward-looking statements in this Report.
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. In addition, our business and
operations involve numerous risks and uncertainties, many of which are beyond our control, that could result in our expectations
not being realized or otherwise could materially affect our financial condition, results of operations and cash flows.
Actual events, results and outcomes may differ
materially from our expectations due to a variety of factors. Although it is not possible to identify all of these factors, they
include, among others, the following:
|
·
|
changes in general economic conditions, including recessions, reductions in federal, state and
local government funding for infrastructure services and changes in those governments’ budgets, practices, laws and regulations;
|
|
·
|
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;
|
|
·
|
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;
|
|
·
|
factors that affect the accuracy of estimates inherent in our bidding for contracts, estimates
of backlog, percentage-of-completion accounting policies, including onsite conditions that differ materially from those assumed
in our original bid, contract modifications, mechanical problems with our machinery or equipment and effects of other risks discussed
in this document;
|
|
·
|
design/build contracts which subject us to the risk of design errors and omissions;
|
|
·
|
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 and cost escalations
associated with subcontractors and labor;
|
|
·
|
our dependence on a limited number of significant customers;
|
|
·
|
adverse weather conditions; although we prepare our budgets and bid contracts based on historical
rain and snowfall patterns, the incidence of rain, snow, hurricanes, etc., may differ materially from these expectations;
|
|
·
|
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;
|
|
·
|
our ability to successfully identify, finance, complete and integrate acquisitions;
|
|
·
|
citations issued by any governmental authority, including the Occupational Safety and Health Administration;
|
|
·
|
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;
|
|
·
|
adverse economic conditions in our markets; and
|
|
·
|
the other factors discussed in more detail in our Annual Report on Form 10-K for the year ended
December 31, 2015 (“2015 Form 10-K”) under “Part I, Item 1A. Risk Factors.”
|
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. 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 included in this Report are made only as of the date of this Report and we undertake no obligation
to update any information contained in this Report or to publicly release the results of any revisions to any forward-looking
statements to reflect events or circumstances that occur, or that we become aware of after the date of this Report, except as
may be required by applicable securities laws.
Overview
Sterling Construction Company, Inc. (“Sterling”
or “the Company”), is a leading heavy civil construction company that specializes in building and reconstruction of
transportation and water infrastructure projects in Texas, Utah, Nevada, Colorado, Arizona, California, Hawaii and other states
in which there are construction opportunities. Its transportation infrastructure projects include highways, roads, bridges, airfields,
ports and light rail. Its water infrastructure projects include water, wastewater and storm drainage systems.
Although
we describe our business in this Report in terms of the services we provide, our base of customers and the geographic areas in
which we operate, we have concluded that our operations consist of one reportable segment, one operating segment and one reporting
unit component: heavy civil construction. In making this determination, the Company considered the discrete financial information
used by our Chief Operating Decision Maker (“CODM”). Based on this approach, the Company noted that the CODM organizes,
evaluates and manages the financial information around each heavy civil construction project when making operating decisions and
assessing the Company’s overall performance. Furthermore, we considered that each heavy civil construction project has similar
characteristics, includes similar services, has similar types of customers and is subject to similar economic and regulatory environments.
Market Outlook and Trends
Market outlook: Our core business
is primarily driven by Federal and state funding. The recent passage of the federally funded five-year $305 billion surface transportation
bill will increase the annual federal highway investment by 15.1% over the five-year period from 2016 to 2020. In addition to the
Federal program, several of the states in our key markets have instituted actions to further increase annual spending. In Texas,
two constitutional amendments were passed, which will increase the annual funds allocated to transportation projects by $4.0 billion
to $4.5 billion per year. In Utah, a 20% gas tax increase was put into effect January 1, 2016, which is the first state gas tax
increase in 18 years. In addition, California is currently trying to pass a $3.6 billion per year transportation bill. See “Item
1. Business—Our Markets, Competition and Customers” in our 2015 Form 10-K for a more detailed discussion of our markets
and their funding sources.
Bid discipline and project execution:
To ensure that we take full advantage of the improved market conditions and maximize profitability we have completed an extensive
evaluation of our projects’ historical success based on project size, end customer, product delivered and geography. The
knowledge gained has now been incorporated into a more formal and rigorous bid evaluation and approval process, which along with
the institution of common processes, we believe will enable us to focus our resources on the most beneficial projects and significantly
reduce our risk. In addition, in order to strengthen these processes and capitalize further on the improved market conditions,
we appointed a Chief Operating Officer late in the first quarter of 2016.
Backlog, backlog gross margin and
gross margin trends:
|
Backlog
|
Gross Margin in Backlog
|
|
(Dollar amounts in thousands)
|
Second quarter of 2016
|
$810,000
|
7.8%
|
First quarter of 2016
|
$854,000
|
7.7%
|
Fourth quarter of 2015
|
$761,000
|
7.0%
|
Third quarter of 2015
|
$718,000
|
6.5%
|
Second quarter of 2015
|
$743,000
|
6.3%
|
Our total
margin in backlog has increased approximately 150 basis points, from 6.3% at June 30, 2015 to 7.8% at June 30, 2016. During the
last two quarters, we have won approximately $255 million worth of new projects at an average margin of more than 8.5%. In addition,
once we complete approximately $40 million worth of legacy projects with small or zero margins, we expect that our overall backlog
margins will be in the 8.5% to 9.0% range by December 31, 2016. The increases noted above are primarily the result of the improving
market conditions and actions that we have taken to improve bid discipline.
Our gross
margin has increased 66.7%, 8.8% and 5.6% from the second quarter of 2015 to the second quarter of 2016, from the first quarter
of 2015 to the first quarter of 2016 and from the fourth quarter of 2014 to the fourth quarter of 2015, respectively. These increases
are a result of the improving market conditions, our bid discipline and our improving project execution.
For
purposes of the discussions which follow, “Current Quarter” refers to the three-month period ended June 30, 2016,
“Prior Quarter” refers to the three-month period ended June 30, 2015, Current Period” refers to the six-month
period ended June 30, 2016 and “Prior Period” refers to the six-month period ended June 30, 2015.
Summary of Financial Results
for the Current Quarter and Current Period
In the Current Quarter and Current
Period, we had operating income of $3.4 million and an operating loss of $3.1 million, respectively, income before income taxes
and earnings attributable to noncontrolling interest owners of $2.6 million and a loss of $4.8 million, respectively, net income
attributable to Sterling common stockholders of $2.0 million and a loss attributable to Sterling common stockholders of $5.3 million,
respectively, and net income per diluted share attributable to Sterling common stockholders of $0.09 and a net loss per diluted
share attributable to Sterling common stockholders of $0.25 million, respectively.
Revenues for the Current Quarter
and Current Period increased 6.9 % and 7.1 % from the Prior Quarter and Prior Period, respectively. The increase in the Current
Quarter as compared to the Prior Quarter is primarily the result of increased project activity in Nevada, Hawaii and Utah which
was slightly offset with lower project activity in Texas as a result of heavy rainfall which caused flooding in the Houston and
surrounding areas and the winding down of a large project in California which was ongoing in the Prior Quarter. The increase in
the Current Period as compared to the Prior Period is primarily the result of downward percent-complete revisions made to certain
projects in the Prior Period, largely related to construction projects in Texas and a $2.8 million out-of-period decrease in revenue
that was recorded in the Prior Period as a result of our review of projects. Current Period revenues increased in-line with the
Current Quarter results with increases in project activity largely in Nevada, Hawaii and Utah which was slightly offset with lower
project activity in Texas as a result of heavy rainfall which caused flooding in the Houston and surrounding areas and the winding
down of a large project in California which was ongoing in the Prior Period.
Our
gross margins increased to 8.5% and 6.3% in the Current Quarter and Current Period, respectively, as compared to 5.1% and 0.8%
in the Prior Quarter and Prior Period, respectively. The increase in gross margin during the Current Quarter as compared to the
Prior Quarter was primarily related to the change in the project margin mix as we have less zero or near zero margin projects
allowing us to burn off more profitable backlog. The increase in the gross margin during the Current Period as compared to the
Prior Period is primarily a result of downward revision of gross profits related to construction projects in Texas in the Prior
Period as well as improved project margin mix as noted above. Current Period gross margin was adversely affected by a California
project which recorded an additional loss of approximately $1.0 million. This loss was attributable to unfavorable developments
relating to a subcontractor claim. This project was substantially completed at December 31, 2015. Excluding this claim, gross
margin for the Current Period would have been approximately 6.6%.
Results of Operations
Backlog at June 30, 2016
At June
30, 2016, our backlog of construction projects was $810 million, as compared to $761 million at December 31, 2015. Our contracts
are typically completed in 12 to 36 months. At June 30, 2016 and December 31, 2015, approximately $109 million and $197 million,
respectively, was excluded from our consolidated backlog for projects in which we were the apparent low bidder, but had not yet
been formally awarded the contract or the contract price had not been finalized (“Unsigned Low-bid Awards”). Total
backlog, including Unsigned Low-bid Awards, at June 30, 2016 and December 31, 2015, were $919 million and $958 million, respectively.
Backlog at June 30, 2016 includes $46 million attributable to our share of estimated revenues related to joint ventures where
we are a noncontrolling joint venture partner
.
Results of Operations for the Current
Quarter as Compared to the Prior Quarter and for the Current Period as compared to the Prior Period
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
% Change
|
|
2016
|
|
2015
|
|
% Change
|
|
|
(Dollar amounts in thousands)
|
|
|
Revenues
|
|
$
|
189,582
|
|
|
$
|
177,425
|
|
|
|
6.9
|
%
|
|
$
|
316,149
|
|
|
$
|
295,107
|
|
|
|
7.1
|
%
|
Gross profit
|
|
$
|
16,089
|
|
|
$
|
9,111
|
|
|
|
76.6
|
|
|
$
|
19,919
|
|
|
$
|
2,275
|
|
|
|
NM
|
|
General and administrative expenses
|
|
|
(9,104
|
)
|
|
|
(9,598
|
)
|
|
|
(5.1
|
)
|
|
|
(19,646
|
)
|
|
|
(21,201
|
)
|
|
|
(7.3
|
)
|
Other operating income (expense), net
|
|
|
(3,604
|
)
|
|
|
325
|
|
|
|
NM
|
|
|
|
(3,358
|
)
|
|
|
2,086
|
|
|
|
NM
|
|
Operating income (loss)
|
|
|
3,381
|
|
|
|
(162
|
)
|
|
|
NM
|
|
|
|
(3,085
|
)
|
|
|
(16,840
|
)
|
|
|
(81.7
|
)
|
Interest income
|
|
|
1
|
|
|
|
69
|
|
|
|
(98.6
|
)
|
|
|
4
|
|
|
|
432
|
|
|
|
(99.1
|
)
|
Interest expense
|
|
|
(812
|
)
|
|
|
(634
|
)
|
|
|
28.1
|
|
|
|
(1,685
|
)
|
|
|
(1,016
|
)
|
|
|
65.8
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
(240
|
)
|
|
|
NM
|
|
|
|
-
|
|
|
|
(240
|
)
|
|
|
NM
|
|
Income (loss) before taxes and earnings attributable to noncontrolling interests
|
|
|
2,570
|
|
|
|
(967
|
)
|
|
|
NM
|
|
|
|
(4,766
|
)
|
|
|
(17,664
|
)
|
|
|
(73.0
|
)
|
Income tax expense
|
|
|
(27
|
)
|
|
|
(28
|
)
|
|
|
NM
|
|
|
|
(27
|
)
|
|
|
(31
|
)
|
|
|
(12.9
|
)
|
Net income (loss)
|
|
|
2,543
|
|
|
|
(995
|
)
|
|
|
NM
|
|
|
|
(4,793
|
)
|
|
|
(17,695
|
)
|
|
|
(72.9
|
)
|
Noncontrolling owners’ interests in earnings of subsidiaries and joint ventures
|
|
|
(520
|
)
|
|
|
(1,547
|
)
|
|
|
(66.4
|
)
|
|
|
(512
|
)
|
|
|
(1,839
|
)
|
|
|
(72.2
|
)
|
Net income (loss) attributable to Sterling common stockholders
|
|
$
|
2,023
|
|
|
$
|
(2,542
|
)
|
|
|
NM
|
|
|
$
|
(5,305
|
)
|
|
$
|
(19,534
|
)
|
|
|
(72.8
|
)
|
Gross margin
|
|
|
8.5
|
%
|
|
|
5.1
|
%
|
|
|
66.7
|
|
|
|
6.3
|
%
|
|
|
0.8
|
%
|
|
|
NM
|
|
Operating margin (deficit)
|
|
|
1.8
|
%
|
|
|
(0.1
|
)%
|
|
|
NM
|
|
|
|
(1.0
|
)%
|
|
|
(5.7
|
)%
|
|
|
(82.5
|
)
|
NM
– Not meaningful.
Revenues
Revenues increased $12.2 million, or 6.9%,
in the Current Quarter compared with the Prior Quarter and increased $21.0 million, or 7.1%, in the Current Period compared with
the Prior Period. The increase in the Current Quarter as compared to the Prior Quarter is primarily the result of increased project
activity in Nevada, Hawaii and Utah which was slightly offset with lower project activity in Texas as a result of heavy rainfall
which caused flooding in the Houston and surrounding areas and the winding down of a large project in California which was ongoing
in the Prior Quarter. The increase in the Current Period as compared to the Prior Period is primarily the result of downward percent-complete
revisions made to certain projects in the Prior Period, largely related to construction projects in Texas and a $2.8 million out-of-period
decrease in revenue that was recorded in the Prior Period as a result of our review of projects. Current Period revenues increased
in line with the Current Quarter results with increases in project activity largely in Nevada, Hawaii and Utah which was slightly
offset with lower project activity in Texas as a result of heavy rainfall which caused flooding in the Houston and surrounding
areas and the winding down of a large project in California which was ongoing in the Prior Period.
Gross profit
Gross profit increased $7.0 million
for the Current Quarter compared with the Prior Quarter and $17.6 million for the Current Period compared with the Prior Period.
Our gross margins increased to 8.5% and 6.3% in the Current Quarter and Current Period, respectively, as compared to 5.1% and 0.8%
in the Prior Quarter and Prior Period, respectively. The increase in gross margin during the Current Quarter as compared to the
Prior Quarter was primarily related to the change in the project margin mix as we have less zero or near zero margin projects allowing
us to burn off more profitable backlog. The increase in the gross margin during the Current Period as compared to the Prior Period
is primarily a result of downward revision of gross profits related to construction projects in Texas in the Prior Period as well
as improved project margin mix as noted above. Current Period gross margin was adversely affected by a California project which
recorded an additional loss of approximately $1.0 million. This loss was attributable to unfavorable developments relating to a
subcontractor claim. This project was substantially completed at December 31, 2015. Excluding this claim, gross margin for the
Current Period would have been approximately 6.6%.
At June 30, 2016 and 2015, we had approximately
124 and 143 contracts-in-progress, respectively, which were less than 90% complete. 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 we are
able to refine our estimate of total revenues (including incentives, delay penalties, change orders and claims), 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.
Claims are included in the calculation of revenue
when realization is probable and amounts can be reliably determined to the extent costs are incurred. Revenue in excess of contract
costs incurred on claims is recognized when an agreement is reached with customers as to the value of the claims. We have a Texas
project where we are in the process of negotiating a claim. If negotiations are not successful, we intend to pursue legal avenues
to resolve this claim. The claim is primarily related to a change in project timeline due to customer caused delays. The project
began late in 2011 and was substantially completed in late 2014. We believe it will be resolved without a material adverse effect on
our financial statements. However, claim amounts are subject to negotiations which may cause actual results to differ materially
from estimated and recorded amounts.
General and administrative expenses
General and administrative expenses decreased
$0.5 million to $9.1 million during the Current Quarter from $9.6 million in the Prior Quarter and decreased $1.6 million to $19.6
million during the Current Period from $21.2 million in the Prior Period. The decrease in the Current Quarter compared to the Prior
Quarter is primarily the result of a decrease in employee benefit costs. The decrease in the Current Period as compared to the
Prior Period is primarily the result of certain non-recurring costs related to employee severance payments of $2.4 million in the
Prior Period offset by an increase in certain employee and employee benefit costs in the Current Period.
As a percent of revenues, general and administrative
expenses decreased 0.6% to 4.8% and 1.0% to 6.2% in the Current Quarter and Current Period, respectively, compared with 5.4% and
7.2% in the Prior Quarter and Prior Period, respectively. The decrease in general and administrative expenses, as a percentage
of revenue, for the Current Quarter and Current Period is primarily the result of the decrease in employee benefit costs and the
non-recurring employee severance costs paid in the Prior Period as mentioned above, along with an increase in revenue in both periods.
Other operating income (expense), net
Other
operating income (expense), net, includes 50% of earnings and losses related to members’ interests, gains and losses
from sales of property, plant and equipment and other miscellaneous operating income or expense. Members’ interest
earnings are treated as an expense and increases our liability account “Members’ interest subject to mandatory
redemption and undistributed earnings.” The change in other operating income (expense), net was primarily due to
increased Members’ interest expense of $3.9 million for the Current Quarter and the Current Period and $0.7 million for
the Prior Quarter and Prior Period.
Income taxes
Our
effective income tax rates for the Current and Prior Quarters were less than 1%. The Company is not expecting a current federal
tax liability. We may incur current state tax liabilities in states in which we do not have sufficient net operating loss carry
forwards. A minimal tax expense was recorded for the Current and Prior Quarters. The effective income tax rate varied from the
statutory rate primarily as a result of the change in the valuation allowance, net income attributable to noncontrolling interest
owners which is taxable to those owners rather than to the Company, state income taxes and other permanent differences.
Liquidity and Sources of Capital
The following table sets forth information
about our cash flows and liquidity (amounts in thousands):
|
|
Six Months Ended
June 30,
|
|
|
2016
|
|
2015
|
Net cash (used in) provided by:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
26,735
|
|
|
$
|
(3,624
|
)
|
Investing activities
|
|
|
(4,676
|
)
|
|
|
(2,939
|
)
|
Financing activities
|
|
|
16,150
|
|
|
|
(1,944
|
)
|
Total increase (decrease) in cash and cash equivalents
|
|
$
|
38,209
|
|
|
$
|
(8,507
|
)
|
|
|
June 30,
2016
|
|
December 31,
2015
|
Cash and cash equivalents
|
|
$
|
42,635
|
|
|
$
|
4,426
|
|
Working capital
|
|
$
|
43,767
|
|
|
$
|
30,610
|
|
Operating Activities.
During the Current
Period, net cash provided by operating activities was $26.7 million compared to net cash used of $3.6 million in the Prior Period.
The drivers of operating activities cash flows were primarily the result of our net loss discussed above, non-cash items, the change
in our accounts receivable, inventory, net contracts in progress and accounts payable balances (collectively, “Contract Capital”)
as discussed below.
The significant non-cash items included in
operating activities include depreciation and amortization expense, which were $8.1 million in the Current Period and $8.4 million
in the Prior Period. Depreciation expense has decreased from the Prior Period to the Current Period as a result of our efforts
to maintain our current fleet of equipment and supplement it as necessary with more economical project specific leased equipment.
The
need for working capital for our business varies due to fluctuations in operating activities and investments in our Contract Capital.
The Components of Contract Capital at June 30, 2016 and December 31, 2015 and changes during the Current Period were as follows
(amounts in thousands):
|
|
June 30,
2016
|
|
December 31,
2015
|
|
Change
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
35,391
|
|
|
$
|
26,905
|
|
|
$
|
(8,486
|
)
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(56,914
|
)
|
|
|
(30,556
|
)
|
|
|
26,358
|
|
Contracts in progress, net
|
|
|
(21,523
|
)
|
|
|
(3,651
|
)
|
|
|
20,028
|
|
Contracts receivable, including retainage
|
|
|
106,595
|
|
|
|
82,112
|
|
|
|
(24,483
|
)
|
Receivables from and equity in construction joint ventures
|
|
|
7,365
|
|
|
|
12,930
|
|
|
|
5,565
|
|
Inventories
|
|
|
3,725
|
|
|
|
2,535
|
|
|
|
(1,190
|
)
|
Accounts payable
|
|
|
(79,853
|
)
|
|
|
(58,959
|
)
|
|
|
18,738
|
|
Contract Capital, net
|
|
$
|
16,309
|
|
|
$
|
34,967
|
|
|
$
|
18,658
|
|
The
Current Period change in Contract Capital increased liquidity by $18.7 million. Fluctuations in our Contract Capital balance and
its components are not unusual in our business and are impacted by the size of our projects and changing type and mix of projects
in our backlog. Our Contract Capital is particularly impacted by the timing of new awards and related payments of performing work
and the contract billings to the customer as we complete our projects. Contract Capital is also impacted at period-end by the
timing of accounts receivable collections and accounts payable payments for our projects.
Investing Activities.
During the Current
Period, net cash used in investing activities was $4.7 million compared to $2.9 million in the Prior Period. The primary driver
of investing activities cash flows was investments in capital equipment as discussed below.
Capital equipment is acquired as needed to
support changing levels of production activities and to replace retiring equipment. Expenditures for the replacement of certain
equipment and to expand our construction fleet totaled $6.1 million for the Current Period. Proceeds from the sale of property
and equipment totaled $1.4 million for the Current Period with an associated net gain of $0.3 million. For the Prior Period, expenditures
totaled $3.3 million, while proceeds from the sale of property and equipment totaled $3.3 million with an associated net gain of
$1.0 million. The level of expenditures in the Current Period increased by $2.8 million compared to the Prior Period. This increase
was the result of the need to replace and expand our construction fleet in strategic areas of our markets in order to position
ourselves to take advantage of our growing backlog in those areas.
Financing Activities.
During the Current
Period, net cash provided by financing activities was $16.2 million compared to cash used of $1.9 million in the Prior Period.
The increase in cash provided by financing activities was primarily a result of net proceeds of $19.1 million received from the
issuance of common stock, compared to a net repayment of $34.6 million of our prior credit facility offset by a drawdown of our
Equipment-based Facility of the same amount and $2.5 million of distributions to noncontrolling interest owners in the Prior Period.
Cash and Working Capital.
Cash at June 30, 2016, was $42.6 million, which
increased based on the items mentioned above. Cash includes $8.7 million that was held by our VIE and $14.9 million belonging to
a majority-owned joint venture which generally cannot be used for purposes outside the joint venture. Our working capital increased
$13.2 million to $43.8 million at June 30, 2016 from $30.6 million at December 31, 2015, primarily due to our $18.7 million increase
in contract capital in the Current Period offset by our net loss attributable to Sterling common stockholders of $5.3 million in
the Current Period.
Credit Facility and Other Sources
of Capital
In addition to our available cash, cash equivalents
and cash provided by operations, from time to time, we use borrowings under our Equipment-based Facility to finance our capital
expenditures and working capital needs.
In May
2015, the Company and its wholly-owned subsidiaries entered into a $40.0 million loan and security agreement with Nations Fund
I, LLC and Nations Equipment Finance, LLC, as the administrative agent and collateral agent for the lender (“Nations”),
consisting of a $20.0 million term loan (the “Term Loan”) and a $20.0 million revolving loan (the “Revolving
Loan” and combined with the Term Loan, the “Equipment-based Facility”), which replaced its prior credit facility.
The amount of the Revolving Loan that may be borrowed from time to time is determined quarterly and may not exceed $20.0 million.
In addition, the sum of the outstanding balance of the Equipment-based Facility may not exceed the lesser of $40.0 million or 65%
of the appraised value of the collateral pledged for the loans. At June 30, 2016, the Company had a borrowing base of approximately
$27.0 million, which was the result of calculating 65% of the appraised value (where appraised value equals net operating liquidated
value) of the Company’s collateral. At June 30, 2016, we had $15.6 million outstanding on the Term Loan and no outstanding
balance on the Revolving Loan.
The Equipment-based Facility bears
interest at an initial fixed annual rate of 12%, which is subject to (i) a decrease of up to two percentage points based on the
Company's fixed charge coverage ratio for each of the most recently ended four quarters beginning with the four quarters ended
June 30, 2016; and (ii) an increase of two percentage points beginning December 31, 2015 based on the fixed charge coverage ratio
at the end of the following two quarters. There have been no interest rate changes during the three and six months ended June 30,
2016. Principal on the Term Loan is payable in 47 monthly installments (with accrued interest) with a final payment of the then
outstanding principal amount on May 29, 2019. Up to $5.0 million of the Term Loan may be prepaid in any year, but subject to a
pre-payment fee that declines as the Term Loan nears maturity. The outstanding Revolving Loan is payable in full on May 29, 2019.
The Equipment-based Facility is
secured by all of the Company's personal property, including all of its construction equipment, which forms the basis of availability
under the Revolving Loan. The Equipment-based Facility is also secured by specified equipment of the Company's 50%-owned affiliates,
Road and Highway Builders, LLC and Myers & Sons Construction, L.P. pursuant to a separate security agreement with those entities.
If a default occurs, Nations may exercise the Company's rights in the collateral, with all of the rights of a secured party under
the Uniform Commercial Code, including, among other things, the right to sell the collateral at public or private sale.
The Company’s Equipment-based Facility
has no financial covenants; however, it contains restrictions on the Company’s ability to incur liens and encumbrances or
dispose of a material portion of assets or merge with a third party.
Average borrowings
under our Equipment-based Facility for the Current Quarter and Current Period were $22.8 million and $26.2 million, respectively,
and the largest amount of borrowings was $31.6 million from January 5, 2016 to January 31, 2016. Average combined borrowings under
the prior credit facility and the Equipment-based Facility during the year ended December 31, 2015, were $25.9 million and the
largest amount of borrowings was under the Equipment-based Facility of $34.6 million from June 5, 2015 to June 30, 2015.
Based on our average borrowings
for 2015 and our 2016 forecasted cash needs, we continue to believe that the Company has sufficient liquid financial resources
to fund our requirements for the next twelve months of operations, including our bonding requirements. 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, or we continue to incur losses, our working capital could
be materially and adversely affected. Refer to “Part I, Item 1A. Risk Factors” in the 2015 Form 10-K for further discussion
of liquidity related risks.
On May
9, 2016, the Company completed an underwritten public offering of 5,175,000 shares of the Company’s common stock, which
included the full exercise of the sole underwriter’s over-allotment option, at a price to the public of $4.00 per share
($3.77 per share net of underwriting discounts). The net proceeds from the offering of $19.1 million, after deducting underwriting
discounts and other offering expenses, were used for working capital, repayment of our indebtedness under the revolving loan portion
of our Equipment-based Facility and for general corporate purposes.
Inflation
Inflation generally has not had a material
impact on our financial results; however, from time to time, increases in oil, fuel and steel prices have affected our cost of
operations. Anticipated cost increases and reductions are considered in our bids to customers on proposed new construction projects.
Where
we are the successful bidder on a project, we execute purchase orders with material suppliers and contracts with subcontractors
covering the prices of most materials and services, other than oil and fuel products, thereby mitigating future price increases
and supply disruptions. These purchase orders and contracts do not contain quantity guarantees and we have no obligation for materials
and services beyond those required to complete the contracts with our customers. There can be no assurance that increases in prices
of oil and fuel used in our business will be adequately covered by the estimated escalation we have included in our bids and there
can be no assurance that all of our vendors will fulfill their pricing and supply commitments under their purchase orders and
contracts with the Company. We adjust our total estimated costs on our projects when we believe it is probable that we will have
cost increases which will not be recovered from customers, vendors or re-engineering.
Off-Balance Sheet Arrangements
and Joint Ventures
We participate in various construction joint
ventures in order to share expertise, risk and resources for certain highly complex projects. The 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 is 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 incurs a loss or additional costs that we could incur should the partner fail
to provide the services and resources toward project completion that had been committed to in the joint venture agreement.
At June 30, 2016, there was approximately $100
million of construction work to be completed on unconsolidated construction joint venture contracts, of which $46 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 of June 30, 2016, 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 provisions under our contracts.
Off-balance
sheet arrangements related to operating leases are discussed in “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations –Liquidity and Sources of Capital− Contractual Obligations” in our 2015
Form 10-K.