NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
1.
|
Business Summary and Significant Accounting Policies
|
Business Summary
Sterling Construction Company, Inc. (“Sterling”
or “the Company”), a Delaware corporation, is a leading heavy civil construction company that specializes in the building
and reconstruction of transportation infrastructure, water infrastructure, and residential and commercial concrete projects in
Texas, Utah, Nevada, Colorado, Arizona, California, Hawaii and other states in which there are construction opportunities. Its
heavy civil construction projects include highways, roads, bridges, airfields, ports, light rail, water, wastewater and storm
drainage systems, multi-family homes, commercial projects and parking structures. Its residential concrete construction projects
include concrete foundations for single-family homes.
Presentation
The condensed consolidated financial
statements included herein have been prepared by Sterling, without audit, in accordance with the rules and regulations of the Securities
and Exchange Commission (“SEC”) and should be read in conjunction with the Annual Report on Form 10-K for the year
ended December 31, 2016 (“2016 Form 10-K”). Certain information and note disclosures prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) have been either condensed or omitted pursuant
to SEC rules and regulations. The condensed consolidated financial statements reflect, in the opinion of management, all normal
recurring adjustments necessary to present fairly the Company’s financial position at June 30, 2017 and the results of operations
and cash flows for the periods presented. The December 31, 2016 condensed consolidated balance sheet data herein was derived from
audited financial statements, but as discussed above, does not include all disclosures required by GAAP. Interim results may be
subject to significant seasonal variations and the results of operations for the three and six months ended June 30, 2017 are not
necessarily indicative of the results expected for the full year or subsequent quarters.
On April 3, 2017, the Company consummated
the acquisition of 100% of the outstanding stock of Tealstone Residential Concrete, Inc. and Tealstone Commercial, Inc. (collectively,
“
Tealstone
”) and entered into a Loan and Security Agreement providing for a term loan of $85,000,000 with a
maturity date of April 4, 2022, which replaced the then existing debt facility. We have determined that with the acquisition of
Tealstone there are two reportable segments: heavy civil construction and residential construction. Refer to Note 13 for a discussion
of reportable segments and related financial information.
Significant Accounting Policies
The Company’s significant
accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements in the 2016 Form 10-K.
These accounting policies include, but are not limited to, those related to:
|
·
|
contracts receivable, including retainage
|
|
·
|
valuation of property and equipment, goodwill and other long-lived assets
|
There have been no material changes
to significant accounting policies since December 31, 2016.
Principles of Consolidation
The accompanying condensed consolidated
financial statements include the accounts of subsidiaries and construction joint ventures in which the Company has a greater than
50% ownership interest or otherwise controls such entities. For investments in subsidiaries and construction joint ventures that
are not wholly-owned, but where the Company exercises control, the equity held by the remaining owners and their portions of net
income (loss) are reflected in the balance sheet line item “Noncontrolling interests” in “Equity” and the
statement of operations line item “Noncontrolling owners’ interests in earnings of subsidiaries and joint ventures,”
respectively. For investments in subsidiaries that are not wholly-owned, but where the Company exercises control and where the
Company has a mandatorily redeemable interest, the equity held by the remaining owners and their portion of net income (loss) is
reflected in the balance sheet line item “Members’ interest subject to mandatory redemption and undistributed earnings”
and the statement of operations line item “Other operating income (expense), net,” respectively. All significant intercompany
accounts and transactions have been eliminated in consolidation. For all years presented, the Company had no subsidiaries where
its ownership interests were less than 50%. Refer to Note 4 for further information regarding the Company’s Subsidiaries
and Joint Ventures with Noncontrolling Owners’ Interest.
Where the Company is a noncontrolling joint
venture partner, and otherwise not required to consolidate the joint venture entity, its share of the operations of such construction
joint venture is accounted for on a pro rata basis in the condensed consolidated statements of operations and as a single line
item (“Receivables from and equity in construction joint ventures”) in the condensed consolidated balance sheets. This
method is an acceptable modification of the equity method of accounting which is a common practice in the construction industry.
Refer to Note 5 for further information regarding the Company’s construction joint ventures.
Under GAAP, the Company must determine
whether each entity, including joint ventures in which it participates, is a variable interest entity (“VIE”). This
determination focuses on identifying which owner or joint venture partner, if any, has the power to direct the activities of the
entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity disproportionate to its
interest in the entity, which could have the effect of requiring the Company to consolidate the entity in which it has a noncontrolling
variable interest. Refer to Note 6 for further information regarding the Company’s consolidated VIE.
Use of Estimates
The preparation of the accompanying condensed
consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Certain of the Company’s accounting policies
require higher degrees of judgment than others in their application. These include the recognition of revenue and earnings from
construction contracts under the percentage-of-completion method, the valuation of long-term assets, purchase accounting, including
intangibles and goodwill, and income taxes. Management continually evaluates all of its estimates and judgments based on available
information and experience; however, actual results could differ from these estimates.
Reclassification
Reclassifications have been made
to historical financial data on our condensed consolidated financial statements to conform to our current year presentation.
Revenue Recognition
Heavy Civil Construction
The Company engages in various types of heavy civil construction projects principally for public (government)
owners. Credit risk is minimal with public owners since the Company ascertains that funds have been appropriated by the governmental
project owner prior to commencing work on such projects. While most public contracts are subject to termination at the election
of the government entity, in the event of termination the Company is entitled to receive the contract price for completed work
and reimbursement of termination-related costs. Credit risk with private owners is minimized because of statutory mechanic’s
liens, which give the Company high priority in the event of lien foreclosures following financial difficulties of private owners.
Our contracts generally take 12 to 36 months
to complete. The Company generally provides a one to two-year warranty for workmanship under its contracts when completed. Warranty
claims historically have been insignificant.
Revenues are recognized on the percentage-of-completion
method, measured by the ratio of costs incurred up to a given date to estimated total costs for each contract. This cost to cost
measure is used because management considers it to be the best available measure of progress on these contracts. Contract costs
include all direct material, labor, subcontract and other costs and those indirect costs related to contract performance, such
as indirect salaries and wages, equipment repairs and depreciation, insurance and payroll taxes. Administrative and general expenses
are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions and estimated profitability, including those changes arising
from contract penalty provisions and final contract settlements may result in revisions to costs and income and are recognized
in the period in which the revisions are determined.
Changes in estimated revenues and gross
margin resulted in a net charge of $1.8 million and a net charge of $1.1 million during the three months and six months ended
June 30, 2017, respectively, included in “operating income (loss)” on the condensed consolidated statements of operations
.
Changes in estimated revenues and gross margin resulted in a net gain of $0.7 million and a net charge of $0.5 million
during the three months and six months ended June 30, 2016, respectively, included in “operating income (loss)” on
the condensed consolidated statements of operations
.
Change orders are modifications of an original
contract that effectively change the existing provisions of the contract without adding new provisions or terms. Change orders
may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of
completion of the work. Either we or our customers may initiate change orders.
The Company considers unapproved
change orders to be contract variations for which we have customer approval for a change of scope but a price change associated
with the scope change has not yet been agreed upon. Costs associated with unapproved change orders are included in the estimated
costs to complete the contracts and are treated as project costs as incurred. The Company recognizes revenue equal to costs incurred
on unapproved change orders when realization of price approval is probable. Unapproved change orders involve the use of estimates,
and it is reasonably possible that revisions to the estimated costs and recoverable amounts may be required in future reporting
periods to reflect changes in estimates or final agreements with customers. Change orders that are unapproved as to both price
and scope are evaluated as claims.
The Company considers claims to
be amounts in excess of agreed contract prices that we seek to collect from our customers or others for customer-caused delays,
errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to
both scope and price, or other causes of unanticipated additional contract costs. Claims are included in the calculation of revenue
when realization is probable and amounts can be reliably determined to the extent costs are incurred. To support these requirements,
the existence of the following items must be satisfied: (i) The contract or other evidence provides a legal basis for the claim;
or a legal opinion has been obtained, stating that under the circumstances there is a reasonable basis to support the claim; (ii)
Additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies
in the contractor’s performance; (iii) Costs associated with the claim are identifiable or otherwise determinable and are
reasonable in view of the work performed; and (iv) The evidence supporting the claim is objective and verifiable, not based on
management’s feel for the situation or on unsupported representations. 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, which in some instances may not occur
until after completion of work under the contract. Costs associated with claims are included in the estimated costs to complete
the contracts and are treated as project costs when incurred.
The Company has projects where we
are in the process of negotiating, or awaiting final approval of, unapproved change orders and claims with our customers. The Company
is proceeding with its contractual rights to recoup additional costs incurred from its customers based on completing work associated
with change orders, including change orders with pending change order pricing, or claims related to significant changes in scope
which resulted in substantial delays and additional costs in completing the work. Unapproved change order and claim information
has been provided to our customers and negotiations with the customers are ongoing. If additional progress with an acceptable resolution
is not reached, legal action will be taken.
Based upon our review of the provisions
of our contracts, specific costs incurred and other related evidence supporting the unapproved change orders, claims and our entitled
unpaid project price, together with the views of the Company’s outside claim consultants, we concluded that including the
unapproved change order, claim and entitled unpaid project price amounts of $1.4 million, $12.0 million and $3.9 million, respectively,
at June 30, 2017, and $2.2 million, $9.2 million and $3.9 million, respectively, at December 31, 2016, in “Costs and estimated
earnings in excess of billings on uncompleted contracts” on our condensed consolidated balance sheets was in accordance with
GAAP. We expect these matters will be resolved without a material adverse effect on our financial statements. However, unapproved
change order and claim amounts are subject to negotiations which may cause actual results to differ materially from estimated and
recorded amounts.
Residential Construction
Residential construction revenue
and related profit is recognized when construction is completed. The time from starting construction to finishing is typically
one month or less.
Financial Instruments and Fair Value
The fair value of financial instruments
is the amount at which the instrument could be exchanged in a current transaction between willing parties. The Company’s
financial instruments are cash and cash equivalents, restricted cash used as collateral for a letter of credit and restricted
cash maintained in an escrow account, short-term contracts receivable, accounts payable, notes payable, and a term loan (the “Loan”)
with Oaktree Capital Management, L.P.
The recorded values of cash and
cash equivalents, restricted cash, short-term contracts receivable and accounts payable approximate their fair values based on
their liquidity and/or short-term nature.
Refer to Note 8 regarding the fair
value of the Loan and notes payable. The Company does not have any off-balance sheet financial instruments other than operating
leases (refer to Note 10 of the Notes to Consolidated Financial Statements in the 2016 Form 10-K).
In order to assess the fair value
of the Company’s financial instruments, the Company uses the fair value hierarchy established by GAAP which prioritizes the
inputs used in valuation techniques into the following three levels:
Level 1 Inputs – Based
upon quoted prices for identical assets in active markets that the Company has the ability to access at the measurement date.
Level 2 Inputs – Based
upon quoted prices (other than Level 1) in active markets for similar assets, quoted prices for identical or similar assets in
markets that are not active, inputs other than quoted prices that are observable for the asset such as interest rates, yield curves,
volatilities and default rates and inputs that are derived principally from or corroborated by observable market data.
Level 3 Inputs – Based
on unobservable inputs reflecting the Company’s own assumptions about the assumptions that market participants would use
in pricing the asset based on the best information available.
For each financial instrument, the
Company uses the highest priority level input that is available in order to appropriately value that particular instrument. In
certain instances, Level 1 inputs are not available and the Company must use Level 2 or Level 3 inputs. In these cases, the Company
provides a description of the valuation techniques used and the inputs used in the fair value measurement.
Recently Adopted Accounting
Pronouncements
In January 2017, the Financial Accounting
Standards Board (“FASB”) issued guidance in Accounting Standards Update (“ASU”) No. 2017-04 “Intangibles-Goodwill
and Other” (Topic 350) which simplifies and eliminates step 2 of the current two step goodwill impairment test. This guidance
is effective for public business entities for annual or any interim goodwill impairment tests in fiscal years beginning after December
15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January
1, 2017. The Company early adopted this ASU on January 1, 2017. The adoption did not have a material impact on our consolidated
financial statements or related disclosures.
Recently Issued Accounting Pronouncements
In May 2017, the FASB issued guidance
in ASU No. 2017-09 “Compensation—Stock Compensation” (Topic 718): Scope of Modification Accounting, which provides
guidance to assist entities with evaluating which changes to the terms or conditions of a share-based payment award require an
entity to apply modification accounting. The amendments in this update provide a screen to determine when an entity should account
for the effects of a modification. This guidance is effective for all entities for annual periods and interim periods within those
annual periods, beginning after December 15, 2017. The Company expects to adopt this guidance as required and does not expect
a material impact to the Company’s consolidated financial statements.
In January 2017, the FASB issued
guidance in ASU No. 2017-01 “Business Combinations” (Topic 805): Clarifying the Definition of a Business, which adds
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets
or businesses. The amendments in this update provide a screen to determine when a set of assets and activities is not a business,
provide a framework to assist entities in evaluating whether both an input and a substantive process are present and narrow the
definition of the term output to be consistent with Topic 606. This guidance is effective for public business entities for annual
periods beginning after December 15, 2017 including interim periods within those periods. The Company expects to adopt this guidance
as required and does not expect a material impact to the Company’s consolidated financial statements.
In November 2016, the FASB issued
guidance in ASU No. 2016-18 “Statement of Cash Flows” (Topic 230): Restricted Cash (a consensus of the FASB Emerging
Issues Task Force). The amendments in this Update require that a statement of cash flows explain the change during the period in
the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore,
amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents
when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is
effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal
years. Early adoption is permitted, including adoption in an interim period. The Company expects to adopt this guidance as required
and does not expect a material impact to the Company’s consolidated financial statements other than to the presentation of
restricted cash on our consolidated statements of cash flows.
In August 2016, the FASB issued
guidance in ASU No. 2016-15 (Topic 230): “Classification of Certain Cash Receipts and Cash Payments.” This update addresses
specific cash flow issues with the objective of reducing existing diversity in practice. Early adoption is permitted for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the
impact of the adoption of this guidance to the Company’s consolidated financial statements and related disclosures.
In February 2016, the FASB issued its new
lease accounting guidance in ASU No. 2016-02, “Leases” (Topic 842). Under the new guidance, lessees will be required
to recognize for all leases (with the exception of short-term leases) a lease liability, which is a lessee’s obligation to
make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents
the lessee’s right to use, or control the use of, a specified asset for the lease term. The new standard is effective for
annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently
evaluating the impact of the adoption of this ASU to the Company’s consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU 2014-09,
“Revenue from Contracts with Customers.” The core principle of the guidance is that an entity should recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity
expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following
five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine
the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue
when (or as) the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14 which deferred the effective
date of ASU 2014-09 by one year. As a result, the amendments in ASU 2014-09 are effective for public companies for annual reporting
periods beginning after December 15, 2017, including interim periods within that reporting period. Additional ASUs have been issued
that are part of the overall new revenue guidance, including: ASU No. 2016-08, “Principal versus Agent Considerations (Reporting
Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” and ASU 2016-12,
“Narrow Scope Improvements and Practical Expedients.”
The new revenue recognition standard prescribes a five-step model that focuses on transfer of control
and entitlement to payment when determining the amount of revenue to be recognized. The new model requires companies to identify
contractual performance obligations and determine whether revenue should be recognized at a point in time or over time for each
of these obligations. We expect that revenue generated from our fixed unit price contracts, which represent a significant portion
of our total contracts, will continue to be recognized over time utilizing the cost-to-cost measure of progress consistent with
our current practice. Therefore, we do not expect a material impact to the Company’s Consolidated Financial Statements related
to fixed unit price contracts. We also expect our revenue recognition disclosures to significantly expand due to the new qualitative
and quantitative requirements under the standard. The Company is currently determining the impact of the new standard on our lump-sum,
cost-plus and other than fixed unit price contracts. Because the standards will impact our business processes, systems and controls,
the Company is also developing a comprehensive change management project plan to guide the implementation.
We
will adopt the requirements of the new standard effective January 1, 2018 and intend to use the modified retrospective adoption
approach, but will not make a final decision on the adoption method until later in 2017.
On April 3, 2017, the Company consummated
the acquisition (the “Tealstone Acquisition”) of 100% of the outstanding stock of Tealstone Residential Concrete,
Inc. and Tealstone Commercial, Inc. (collectively, “
Tealstone
”) from the stockholders thereof (the “Sellers”)
for consideration consisting of $55,000,000 in cash, 1,882,058 shares of the Company’s common stock (the “
Placement
Shares
”), and $5,000,000 of promissory notes issued to the Sellers. In addition, the Company will make $2,500,000 and
$7,500,000 of deferred cash payments on the second and third anniversaries of the closing date, respectively, and up to an aggregate
of $15,000,000 in earn-out payments may be made on the first, second, third and fourth anniversaries of the closing date to continuing
Tealstone management or their affiliates if specified financial performance levels are achieved. Tealstone focuses on concrete
construction of residential foundations, parking structures, elevated slabs and other concrete work for leading homebuilders,
multi-family developers and general contractors in both residential and commercial markets. This acquisition enables expansion
into adjacent markets and diversification of revenue streams and customer base with higher margin work.
The preliminary acquisition-date fair
value of the consideration transferred totaled $83.7 million, which consisted of the following:
Fair value of consideration transferred
(amounts in thousands):
Cash
|
|
$
|
55,000
|
|
Common stock (1,882,058 shares)
|
|
|
17,061
|
|
Promissory notes
|
|
|
4,436
|
|
Deferred payments
|
|
|
7,211
|
|
Total
|
|
$
|
83,708
|
|
The fair value of the 1,882,058
common shares issued was determined based on the average market price of the Company’s common shares on the acquisition date.
The promissory notes and deferred
payments have been discounted using a preliminary 12% fair value discount rate. The earn-out arrangement requires the Company
to pay up to an aggregate of $15,000,000 in earn-out payments on the first, second, third and fourth anniversaries of the closing
date to continuing Tealstone management or their affiliates if specified financial performance levels are achieved. The Company’s
preliminary analysis indicates that the compensation is tied to the continuing employment of certain key employees and executives
of Tealstone and will be treated as additional compensation and not as additional contingent consideration.
Preliminary Purchase Price Allocation
The aggregate purchase price noted
above was allocated to the major categories of assets and liabilities acquired based upon their estimated fair values at the acquisition
closing date, which were based, in part, upon outside preliminary appraisals for certain assets, including specifically-identified
intangible assets. The excess of the purchase price over the preliminary estimated fair value of the net tangible and identifiable
intangible assets acquired totaling $36.2 million, was recorded as goodwill.
The following table summarizes our preliminary
goodwill addition (in thousands):
Balance at January 1, 2016 and 2017
|
|
$
|
54,820
|
|
Additional goodwill related to acquisition
|
|
|
36,151
|
|
Balance at June 30, 2017
|
|
$
|
90,971
|
|
The following table summarizes our
preliminary purchase price allocation at the acquisition closing date (in thousands):
Cash
|
|
$
|
--
|
|
Accounts receivable
|
|
|
13,618
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
2,944
|
|
Inventory
|
|
|
1,218
|
|
Other current assets
|
|
|
54
|
|
Property, plant and equipment
|
|
|
565
|
|
Other assets, net
|
|
|
1
|
|
Identifiable intangible assets and Goodwill
|
|
|
76,151
|
|
Accounts payable
|
|
|
(9,449
|
)
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(303
|
)
|
Accrued expenses
|
|
|
(823
|
)
|
State income tax payable
|
|
|
(268
|
)
|
Total Consideration
|
|
$
|
83,708
|
|
The purchase price allocation and related amortization periods are based upon preliminary information
and are subject to change when additional information concerning final asset and liability valuations is obtained. We have not
completed our final assessment of the fair value of purchased intangible assets, property and equipment, inventory, tax balances,
contingent liabilities, long-term leases or acquired contracts. Our final purchase price allocation may result in adjustments to
certain assets and liabilities, including the residual amount allocated to goodwill. We have preliminarily assigned an asset value
of $40.0 million for identified intangible assets and have amortized $0.5 million which is included in general and administrative
expenses on our statement of operations for the three months ended June 30, 2017. We believe that a majority of the intangible
amount will be allocated to customer relationships. A 10% change in the valuation of intangible assets would cause a corresponding
increase or decrease in the balance of goodwill and annual amortization expense of approximately $4.0 million and $0.2 million
respectively.
Supplemental Pro Forma Information
(Unaudited)
The following unaudited pro forma condensed
combined financial information (“the pro forma financial information”) gives effect to the acquisition of Tealstone
by Sterling, accounted for as a business combination using the purchase method of accounting. To give effect to the Tealstone
Acquisition for pro forma financial information purposes, Tealstone’s commercial historical results were brought to within
one month of Sterling’s interim results for the three and six month period ended June 30, 2017, and included the three and
six months ended May 31, 2017, respectively. The pro forma financial information reflects the Tealstone Acquisition and related
events as if they occurred at the beginning of the period, and gives effect to pro forma events that are: directly attributable
to the acquisition, factually supportable, and expected to have a continuing impact on the combined results of Sterling and Tealstone
following the acquisition. The pro forma financial information includes adjustments to: (1) exclude transaction costs that
were included in Sterling’s and Tealstone’s historical results and are expected to be non-recurring; (2) include
additional intangibles amortization and net interest expense associated with the Tealstone Acquisition; and (3) include the
pro forma results of Tealstone for the three and six month periods ended June 30, 2017. This pro forma financial information has
been presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been
achieved had the pro forma events taken place on the dates indicated. Further, the pro forma financial information does not purport
to project the future operating results of the combined company following the Tealstone Acquisition. The Pro Forma consists of
the following (amounts in thousands):
|
|
Three Months
Ended
June 30,
|
|
Six Months
Ended
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Pro forma Revenue
|
|
$
|
250,032
|
|
|
$
|
236,712
|
|
|
$
|
444,957
|
|
|
$
|
402,771
|
|
Pro forma net income attributable to Sterling
|
|
$
|
3,190
|
|
|
$
|
6,536
|
|
|
$
|
1,716
|
|
|
$
|
3,046
|
|
3.
|
Cash and Cash Equivalents and Restricted Cash
|
The Company considers all highly
liquid investments with original or remaining maturities of three months or less at the time of purchase to be cash equivalents.
Cash and cash equivalents include cash balances held by our wholly-owned and less than wholly-owned subsidiaries and majority-owned
joint ventures, as well as the Company’s VIE. Refer to Note 6 for more information regarding the Company’s consolidated
VIE. At June 30, 2017 and December 31, 2016, cash and cash equivalents included $19.7 million and $24.1 million, respectively,
belonging to our less than wholly-owned subsidiaries. At June 30, 2017 and December 31, 2016, cash and cash equivalents included
$19.6 million and $10.9 million, respectively, belonging to majority-owned joint ventures. Joint venture cash balances are limited
to joint venture activities and are not available for other projects, general cash needs or distribution to us without approval
of the board of directors, or equivalent body, of the respective joint ventures.
Restricted cash of approximately
$3.0 million is included in “other assets, net” on the condensed consolidated balance sheets as of June 30, 2017 and
December 31, 2016 and represents cash deposited by the Company into a separate account and designated as collateral for a standby
letter of credit in the same amount in accordance with contractual agreements. Refer to Note 9 for more information about
our standby letter of credit. In addition, restricted cash of approximately $2.0 million is included in “other current assets”
on the condensed consolidated balance sheets as of June 30, 2017 and December 31, 2016 and represents cash deposited by a customer,
for the benefit of the Company, in an escrow account which is restricted until the customer releases the restriction upon the completion
of the job.
The Company holds cash on deposit in U.S.
banks, at times, in excess of federally insured limits. Management does not believe that the risk associated with keeping cash
deposits in excess of federal deposit insurance limits represents a material risk.
4.
|
Subsidiaries and Joint Ventures with Noncontrolling Owners’ Interests
|
The amended agreements, as described
in Note 4 of the Notes to Consolidated Financial Statements in the 2016 Form 10-K, resulted in an obligation to purchase Mr. Buenting’s
and Mr. Myers’ 50% members’ interest that the Company is certain to incur, either because of Mr. Buenting’s
or Mr. Myers’ death; therefore, the Company has classified the noncontrolling interest as mandatorily redeemable and has
recorded a liability in “Members’ interest subject to mandatory redemption and undistributed earnings” on the
condensed consolidated balance sheets. In the event of either Mr. Buenting’s or Mr. Myers’ death, the Company has
purchased death and permanent disability insurance of $40.0 million to mitigate the Company’s cash draw if such events were
to occur. The liability consists of the following (amounts in thousands):
|
|
June 30,
2017
|
|
December 31,
2016
|
Members’ interest subject to mandatory redemption
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
Net accumulated earnings
|
|
|
6,346
|
|
|
|
5,230
|
|
Total liability
|
|
$
|
46,346
|
|
|
$
|
45,230
|
|
Earnings, which were included in
net accumulated earnings and represent 50% of total earnings, for the three and six months ended June 30, 2017 were $2.6 million
and $2.5 million, respectively, and were $3.9 million for both periods in June 30, 2016. These amounts were included in “other
operating income (expense), net” on the Company’s condensed consolidated statements of operations.
Changes in Noncontrolling Interests
The following table summarizes the changes
in the noncontrolling owners’ interests in subsidiaries and joint ventures (amounts in thousands):
|
|
Six Months Ended
June 30,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
656
|
|
|
$
|
(91
|
)
|
Net income attributable to noncontrolling interest included in equity
|
|
|
1,272
|
|
|
|
512
|
|
Distributions to noncontrolling interest owners
|
|
|
-
|
|
|
|
-
|
|
Balance, end of period
|
|
$
|
1,928
|
|
|
$
|
(421
|
)
|
The increase in net income attributable
to noncontrolling interest included in equity is due to the Company’s the addition of a Utah based majority-owned joint
venture which was not ongoing during the same prior year period.
5.
|
Construction Joint Ventures
|
The Company participates in various
construction joint ventures. Generally, each construction joint venture is formed to construct a specific project and is jointly
controlled by the joint venture partners. Refer to Note 5 of the Notes to Consolidated Financial Statements in the 2016 Form 10-K
for further information about our joint ventures. Condensed combined financial amounts of joint ventures in which the Company has
a noncontrolling interest and the Company’s share of such amounts which are included in the Company’s condensed consolidated
financial statements are shown below (amounts in thousands):
|
|
June 30,
2017
|
|
December 31,
2016
|
Total combined:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
45,034
|
|
|
$
|
32,592
|
|
Less current liabilities
|
|
|
(64,672
|
)
|
|
|
(57,598
|
)
|
Net assets
|
|
$
|
(19,638
|
)
|
|
$
|
(25,006
|
)
|
Backlog
|
|
$
|
75,670
|
|
|
$
|
107,333
|
|
|
|
|
|
|
|
|
|
|
Sterling’s noncontrolling interest in backlog
|
|
$
|
38,751
|
|
|
$
|
52,992
|
|
Sterling’s receivables from and equity in construction joint ventures
|
|
$
|
7,463
|
|
|
$
|
7,130
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Total combined:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
18,897
|
|
|
$
|
19,750
|
|
|
$
|
33,507
|
|
|
$
|
28,554
|
|
Income before tax
|
|
|
1,497
|
|
|
|
1,379
|
|
|
|
2,670
|
|
|
|
1,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sterling’s noncontrolling interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
8,674
|
|
|
$
|
7,684
|
|
|
$
|
15,163
|
|
|
$
|
11,464
|
|
Income before tax
|
|
|
718
|
|
|
|
593
|
|
|
|
1,271
|
|
|
|
851
|
|
Approximately $39 million of the Company’s
backlog at June 30, 2017 was attributable to projects performed by joint ventures. The majority of this amount is attributable
to the Company’s joint venture with Steve P. Rados, Inc., where the Company has a 50% interest.
The caption “Receivables from
and equity in construction joint ventures” includes undistributed earnings and receivables owed to the Company. Undistributed
earnings are typically released to the joint venture partners after the customer accepts the project as complete and the warranty
period, if any, has passed.
6.
|
Variable Interest Entities
|
The Company owns a 50% interest in
Myers & Sons Construction, L.P. (“Myers”), of which it is the primary beneficiary and has consolidated Myers into
the Company’s financial statements. Because the Company exercises primary control over activities of the partnership and
it is exposed to the majority of potential losses of the partnership, the Company has consolidated Myers within the Company’s
financial statements since August 1, 2011, the date of acquisition. Refer to Note 6 of the Notes to Consolidated Financial Statements
included in the 2016 Form 10-K for additional information on the acquisition of this limited partnership.
The condensed financial information of Myers, which
is reflected in the Company’s condensed consolidated balance sheets and statements of operations, is as follows (amounts
in thousands):
|
|
June 30,
2017
|
|
December 31,
2016
|
Assets:
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,348
|
|
|
$
|
9,655
|
|
Contracts receivable, including retainage
|
|
|
25,991
|
|
|
|
15,046
|
|
Other current assets
|
|
|
11,702
|
|
|
|
10,208
|
|
Total current assets
|
|
|
40,041
|
|
|
|
34,909
|
|
Property and equipment, net
|
|
|
9,077
|
|
|
|
9,824
|
|
Goodwill
|
|
|
1,501
|
|
|
|
1,501
|
|
Total assets
|
|
$
|
50,619
|
|
|
$
|
46,234
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
20,160
|
|
|
$
|
21,274
|
|
Other current liabilities
|
|
|
17,504
|
|
|
|
8,782
|
|
Total current liabilities
|
|
|
37,664
|
|
|
|
30,056
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
321
|
|
|
|
5,373
|
|
Total liabilities
|
|
$
|
37,985
|
|
|
$
|
35,429
|
|
|
|
Three
Months Ended
June 30,
|
|
Six
Months Ended
June
30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
38,783
|
|
|
$
|
43,967
|
|
|
$
|
62,067
|
|
|
$
|
70,910
|
|
Operating income
|
|
|
2,246
|
|
|
|
1,982
|
|
|
|
2,640
|
|
|
|
2,174
|
|
Net
income attributable to Sterling common stockholders
|
|
|
1,121
|
|
|
|
989
|
|
|
|
1,316
|
|
|
|
1,083
|
|
|
7.
|
Property and Equipment
|
Property and equipment are summarized
as follows (amounts in thousands):
|
|
June 30,
2017
|
|
December 31,
2016
|
Construction equipment
|
|
$
|
120,991
|
|
|
$
|
121,441
|
|
Transportation equipment
|
|
|
19,060
|
|
|
|
19,017
|
|
Buildings
|
|
|
8,713
|
|
|
|
12,771
|
|
Office equipment
|
|
|
3,108
|
|
|
|
3,108
|
|
Leasehold improvement
|
|
|
914
|
|
|
|
914
|
|
Construction in progress
|
|
|
317
|
|
|
|
313
|
|
Land
|
|
|
3,509
|
|
|
|
3,509
|
|
Water rights
|
|
|
200
|
|
|
|
200
|
|
|
|
|
156,812
|
|
|
|
161,273
|
|
Less accumulated depreciation
|
|
|
(95,537
|
)
|
|
|
(93,146
|
)
|
Total property and equipment, net
|
|
$
|
61,275
|
|
|
$
|
68,127
|
|
During the quarter ended June 30,
2017, we entered into a definitive agreement to sell one of our Texas subsidiary’s office, equipment shop and yard facility,
which is in Texas. The property had a net book value of $4.1 million, and we expect to receive $3.2 million, after selling costs,
once the transaction has closed in the third quarter of 2017. As such, we have reclassified and included in “other current
assets” in our condensed consolidated balance sheet and recorded a $0.9 million write-down to fair value that has been recorded
in “other operating income (expense), net” for the quarter ended June 30, 2017.
Debt consists of the following (in thousands):
|
|
June 30,
2017
|
|
December 31,
2016
|
Loan
|
|
$
|
85,000
|
|
|
$
|
3.532
|
|
Less deferred loan costs and discount
|
|
|
(9,869
|
)
|
|
|
(803
|
)
|
Total Loan, net
|
|
|
75,131
|
|
|
|
2,729
|
|
Notes and deferred payments to sellers, Tealstone acquisition
|
|
|
11,909
|
|
|
|
-
|
|
Notes payable for transportation and construction equipment and other
|
|
|
2,124
|
|
|
|
2,665
|
|
|
|
|
89,164
|
|
|
|
5,394
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
|
1,039
|
|
|
|
4,648
|
|
Less current deferred loan costs
|
|
|
-
|
|
|
|
(803
|
)
|
Less current maturities of long-term debt, net
|
|
|
(1,039
|
)
|
|
|
(3,845
|
)
|
Total long-term debt
|
|
$
|
88,125
|
|
|
$
|
1,549
|
|
On April 3, 2017, the Company, as
borrower, and certain of its subsidiaries, as guarantors, entered into a Loan and Security Agreement with Wilmington Trust, National
Association, as agent, and the lenders party thereto (the “Loan Agreement”), providing for a term loan of $85,000,000
(the “Loan”) with a maturity date of April 4, 2022, which replaced the then existing debt facility. The Loan is secured
by substantially all of the assets of the Company and its subsidiaries.
Interest on the Loan is equal to
the one-, two-, three- or six-month London interbank rate, or LIBOR, plus 8.75% per annum on the unpaid principal amount of the
Loan, subject to adjustment under certain circumstances. Interest on the Loan is generally payable monthly. There are no amortized
principal payments; however, the Company is required to prepay the Loan, and in certain cases pay a prepayment premium thereon,
with proceeds received from the issuances of debt or equity, transfers, events of loss and extraordinary receipts. The Company
is required to make an offer quarterly to the lenders to prepay the Loan in an amount equal to 75% of its excess cash flow, plus
accrued and unpaid interest thereon and a prepayment premium.
The Loan Agreement contains various
covenants that limit, among other things, the Company’s ability and certain of its subsidiaries’ ability to incur certain
indebtedness, grant certain liens, merge or consolidate, sell assets, make certain loans, enter into acquisitions, incur capital
expenditures, make investments, and pay dividends. In addition, the Company is required to maintain the following principal financial
covenants:
|
·
|
a ratio of secured indebtedness to EBITDA of not more than 3.10
to 1.00 beginning with the four consecutive quarters ending June 30, 2017, reducing to 1.80 to 1.00 by the four consecutive quarters
ending September 30, 2019;
|
|
·
|
daily cash collateral of not less than $10,000,000 commencing
on June 30, 2017, increasing to $15,000,000 on October 1, 2017, and potentially further increasing to $18,000,000 beginning on
April 4, 2018;
|
|
·
|
a rolling four quarter gross margin in contract backlog of not
less than $60,000,000 commencing June 30, 2017, increasing to $70,000,000 by March 31, 2019;
|
|
·
|
the incurrence of net capital expenditures during each four consecutive
fiscal quarters shall not exceed $15,000,000;
|
|
·
|
bonding capacity shall be maintained at all times in an amount
not less than $1,000,000,000; and
|
|
·
|
the EBITDA of Tealstone Residential Concrete, Inc. shall not
be less than $12,000,000 during each four consecutive fiscal quarters, commencing June 30, 2017.
|
The Company is in compliance with
these covenants at June 30, 2017.
The Loan Agreement also includes
customary events of default, including events of default relating to non-payment of principal or interest, inaccuracy of representations
and warranties, breaches of covenants, cross-defaults, bankruptcy and insolvency events, certain unsatisfied judgments, loan documents
not being valid, calls under the Company’s bonds, failure of specified individuals to remain employed by the Company, and
a change of control. If an event of default occurs, the lenders will be able to accelerate the maturity of the Loan Agreement and
exercise other rights and remedies.
Deferred loan costs and discounts
totaled $10.4 million, which included attorney fees, investment bank fees as well as amounts paid to the lenders and which were
discounted from the loan amount. Warrants valued at $3.5 million were included as well. Refer to Note 11 for additional information
on the warrants. The total amount will be amortized on a straight-line basis, which approximates the effective interest method,
over the five-year life of the Loan. Amortization expense of $0.5 million has been included in interest expense for the three
and six months ended June 30, 2017.
As part of the extinguishment of our
prior credit facility, $0.8 million in debt extinguishment costs was expensed and included as a “loss on extinguishment of
debt” on our statement of operations for the three and six months ended June 30, 2017.
Fair Value
The Company’s debt is recorded at
its carrying amount in the condensed consolidated balance sheets. As of June 30, 2017 and December 31, 2016, the carrying values
of our debt outstanding approximated the fair values and were $85.0 million and $3.5 million, respectively for the Term Loan.
There was no revolver as of June 30, 2017 and no amounts outstanding on the prior revolver as of December 31, 2016.
Notes and Deferred Payments to
Sellers
As part of the Tealstone Acquisition,
the Company issued $5,000,000 of promissory notes to the sellers and $2,500,000, and $7,500,000 of deferred cash payments. Based
on a preliminary 12% discount rate, the Company recorded $11.6 million as notes and deferred payments to sellers in long-term debt
on our condensed consolidated balance sheet at the acquisition closing date. Accreted interest for the period was $0.3 million
for the three and six months ended June 30, 2017, and was recorded as interest expense.
Notes Payable for Transportation
and Construction Equipment
The Company has purchased and financed
various transportation and construction equipment to enhance the Company’s fleet of equipment. The total long-term notes
payable related to the purchase of financed equipment was $2.1 million and $2.7 million at June 30, 2017 and December 31, 2016,
respectively. The purchases have payment terms ranging from 3 to 5 years and the associated interest rates range from 3.15% to
6.92% The fair value of these notes payable approximates their book value.
Interest Expense
Interest expense related to our Loan and
prior credit facility and other debt for the three and six months ended June 30, 2017 was $3.0 million and $3.1 million, respectively
and $0.8 million and $1.7 million for the three and six months ended June 30, 2016, respectively. The increase in interest cost
for both periods is due to our new Loan that has a higher amount of principal outstanding
|
9.
|
Commitments and Contingencies
|
The Company is required by our former
insurance provider to obtain and hold a standby letter of credit. This letter of credit serves as a guarantee by the banking institution
to pay our former insurance provider the incurred claim costs attributable to our general liability, workers compensation and
automobile liability claims, up to the amount stated in the standby letter of credit, in the event that these claims were not
paid by the Company. We have cash collateralized the letter of credit, resulting in the cash being designated as restricted. Since
we have now replaced our insurance provider, the amount required will diminish as claims are processed. Refer to Note 3 for more
information on our restricted cash.
The Company is the subject of certain
other claims and lawsuits occurring in the normal course of business. Management, after consultation with legal counsel, does not
believe that the outcome of these actions will have a material impact on the condensed consolidated financial statements of the
Company.
The Company and its subsidiaries
file U.S. federal and various U.S. state income tax returns. Current income tax expense or (benefit) represents federal and state
taxes based on tax paid or expected to be payable or receivable for the periods shown in the condensed consolidated statements
of operations.
The Company is expecting a current
federal liability for alternative minimum tax. The Company may incur current state tax liabilities in states in which the Company
does not have sufficient net operating loss carry forwards. A minimal income tax expense was recorded for the three and six months
ended June 30, 2017 and also for the three and six months ended June 30, 2016. 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. For interim periods
the Company estimates an annual effective tax rate and applies that rate to year-to-date operating results.
The Company’s deferred tax
expense or (benefit) reflects the change in deferred tax assets or liabilities. The Company performs an analysis at the end of
each reporting period to determine whether it is more likely than not the deferred tax assets are expected to be realized in future
years. Based upon this analysis, a full valuation allowance has been applied to our net deferred tax assets as of June 30, 2017
and December 31, 2016. Therefore, there has been no change in net deferred taxes for the three and six months ended June 30, 2017.
As a result of the Company’s
analysis, management has determined that the Company does not have any material uncertain tax positions.
Stock Offering
On April 3, 2017, in connection
with the Tealstone Acquisition, the Company issued 1,882,058 shares of the Company’s stock as consideration paid to the
sellers. The value of the shares issued was $17.1 million based on the average fair value of the shares on the date of acquisition.
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 then existing equipment-based credit facility and for general corporate purposes.
Warrants
On April 3, 2017, the Company
issued warrants (the “Warrants”) to the lenders under the Loan Agreement (the “Holders”) pursuant to which
such holders have the right to purchase, for a period of five years from the date of issuance, up to an aggregate of 1,000,000
shares of the Company’s common stock (the “Warrant Shares”) at an initial exercise price of $10.25 per share,
subject to adjustment for stock splits, combinations and similar recapitalization events and weighted-average anti-dilution upon
the issuance by the Company of shares of common stock or rights, options or convertible securities exercisable for common stock
in the future at a price below the exercise price of the Warrants.
The Company valued these Warrants
using the Black-Scholes model, which is a type 3 fair value measurement. The key assumptions used in the Black-Scholes Model with
respect to these valuations are summarized in the following table:
|
|
At April 3,
2017
|
Current stock price
|
|
$
|
8.88
|
|
Exercise option price
|
|
$
|
10.25
|
|
Expected term of warrants (in years)
|
|
|
5
|
|
Expected volatility rate
|
|
|
48.29
|
%
|
Risk-free rate
|
|
|
1.88
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
Based on these inputs, the total
fair value of the warrants was $3.5 million, which was recorded as a Loan discount and netted against our new Loan and included
in “additional paid in capital” on our balance sheet.
Stock-Based Compensation
The Company has a stock-based incentive
plan that is administered by the Compensation Committee of the Board of Directors. Refer to Note 14 of the Notes to Consolidated
Financial Statements included in the 2016 Form 10-K for further information.
During the three and six months
ended June 30, 2017, the Company awarded a total of 102,571 and 166,410 shares of common stock, respectively. The Company recorded
stock-based compensation expense of $1.4 million and $2.0 million for the three months and six months ended June 30, 2017, respectively,
which included costs for acceleration of unvested shares related to the departure of our former CEO of $0.7 million. The Company
recorded stock-based compensation expense of $0.4 million and $0.8 million for the three and six months ended June 30, 2016, respectively.
At
June 30, 2017 and 2016, total unrecognized compensation cost related to unvested common stock awards was $1.5 million and $2.7
million respectively. This cost is expected to be recognized over a weighted average period of 2.2 years. At June 30, 2017, there
were 0.5 million shares of common stock covered by outstanding unvested common stock
12.
|
Net Income (Loss) per Share Attributable to Sterling Common Stockholders
|
Basic net income (loss) per share attributable
to Sterling common stockholders is computed by dividing net income (loss) attributable to Sterling common stockholders by the weighted
average number of common shares outstanding during the period. Diluted net income (loss) per common share attributable to Sterling
common stockholders is the same as basic net income (loss) per share attributable to Sterling common stockholders but includes
dilutive unvested stock and warrants using the treasury stock method. The following table reconciles the numerators and denominators
of the basic and diluted per common share computations for net income (loss) attributable to Sterling common stockholders (amounts
in thousands, except per share data):
|
|
Three Months
Ended
June 30,
|
|
Six Months
Ended
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Sterling common stockholders
|
|
$
|
3,662
|
|
|
$
|
2,023
|
|
|
$
|
1,405
|
|
|
$
|
(5,305
|
)
|
Weighted average common shares outstanding — basic
|
|
|
26,978
|
|
|
|
22,762
|
|
|
|
25,972
|
|
|
|
21,261
|
|
Shares for dilutive unvested stock and warrants
|
|
|
358
|
|
|
|
197
|
|
|
|
437
|
|
|
|
-
|
|
Weighted average common shares outstanding and incremental shares assumed repurchased— diluted
|
|
|
27,336
|
|
|
|
22,959
|
|
|
|
26,409
|
|
|
|
21,261
|
|
Basic income (loss) per share attributable to Sterling common stockholders
|
|
$
|
0.14
|
|
|
$
|
0.09
|
|
|
$
|
0.05
|
|
|
$
|
(0.25
|
)
|
Diluted income (loss) per share attributable to Sterling common stockholders
|
|
$
|
0.13
|
|
|
$
|
0.09
|
|
|
$
|
0.05
|
|
|
$
|
(0.25
|
)
|
In accordance with the treasury
stock method approximately 0.2 million shares of unvested common stock were excluded from the diluted weighted average common
shares outstanding for the six months ended June 30, 2016, as the Company incurred a loss during that period and the impact of
such shares would have been antidilutive. Approximately, 1.0 million shares of common stock related to our Warrant issuance were
excluded from the diluted weighted average common shares outstanding for the three months and six months ended June 30, 2017,
as the shares were out of the money and considered anti-dilutive.
Due to the April 3, 2017 acquisition
of Tealstone, the Company has reviewed its reportable segments, operating segments and reporting units. Based on our review, we
have concluded that our operations consist of two reportable segments, two operating segments and two reporting unit components:
heavy civil construction and residential 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 the aggregation of heavy civil construction projects and
the entire residential construction division when making operating decisions and assessing the Company’s overall performance.
Furthermore, we considered the differences between the types of work performed in each reporting unit. 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. Projects in our heavy civil construction segment typically last for several years, involve several
subtasks and are accounted for using the percentage of completion method. Conversely, our residential construction projects typically
consist of a high volume of independent units performed for customers that are billed, paid and accounted for as the individual
units are completed. Each job performed in our residential construction segment typically takes less than one month to complete.
Segment reporting is aligned based
upon the services offered by our two operating groups, which represent our reportable segments: Heavy Civil Construction and Residential
Construction, as mentioned above. Our chief operating decision maker evaluates the performance of the aforementioned operating
groups based upon revenue and income from operations. Each operating group’s income from operations reflects corporate costs,
allocated based primarily upon revenue.
The following table presents total revenue and income from operations by reportable segment
for the three months and six months ended June 30, 2017 and 2016 (in thousands):
|
|
Three Months
Ended
June 30,
|
|
Six Months
Ended
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenue
|
|
|
|
|
|
|
|
|
Heavy Civil Construction
|
|
$
|
209,194
|
|
|
$
|
189,582
|
|
|
$
|
362,610
|
|
|
$
|
316,149
|
|
Residential Construction
|
|
|
37,218
|
|
|
|
-
|
|
|
|
37,218
|
|
|
|
-
|
|
Total Revenue
|
|
$
|
246,412
|
|
|
$
|
189,582
|
|
|
$
|
399,828
|
|
|
$
|
316,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heavy Civil Construction
|
|
$
|
3,141
|
|
|
$
|
3,381
|
|
|
$
|
1,667
|
|
|
$
|
(3,085
|
)
|
Residential Construction
|
|
|
5,215
|
|
|
|
-
|
|
|
|
4,901
|
|
|
|
-
|
|
Total Operating Income
|
|
$
|
8,356
|
|
|
$
|
3,381
|
|
|
$
|
6,568
|
|
|
$
|
(3,085
|
)
|
From the acquisition closing date of April 3, 2017, through June 30, 2017, revenue and income from operations
associated with the Tealstone Acquisition totaled approximately $42.5 million and $5.5 million, respectively.
The following table presents total
assets by reportable segment at June 30, 2017 and December 31, 2016:
|
|
June 30,
2017
|
|
December 31,
2016
|
Assets
|
|
|
|
|
Heavy Civil Construction
|
|
$
|
356,661
|
|
|
$
|
301,823
|
|
Residential Construction
|
|
|
98,792
|
|
|
|
-
|
|
Total Assets
|
|
$
|
455,453
|
|
|
$
|
301,823
|
|
The Company is in the process of finalizing the purchase
accounting, which will affect the allocation of goodwill by reportable segments. Refer to Note 2. However, of the newly acquired
goodwill, with a preliminarily amount of $36.2 million, we believe that almost all will be allocated to the Residential Construction
segment.