NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
($ and share values in thousands, except per share data)
(Unaudited)
Nature of Operations
—Sterling Construction Company, Inc. (“Sterling” or “the Company”), a Delaware corporation,
is a construction company that specializes in heavy civil infrastructure construction and infrastructure rehabilitation as well as residential construction projects. We operate primarily in Arizona, California, Colorado, Hawaii, Nevada, Texas and Utah, as well as other states in which there are feasible construction opportunities. Heavy civil construction projects include highways, roads, bridges, airfields, ports, light rail, water, wastewater and storm drainage systems, foundations for multi-family homes, commercial concrete projects and parking structures.
Residential construction projects include concrete foundations for single-family homes.
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2.
|
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation—
The Condensed Consolidated Financial Statements included herein have been prepared by the Company, without audit, in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). 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, 2019
and the results of operations and cash flows for the periods presented. The
December 31, 2018
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 quarters presented are not necessarily indicative of the results expected for the full year or subsequent quarters. Values presented within tables, excluding per share data, are in thousands.
Principles of Consolidation—
The accompanying Condensed Consolidated Financial Statements reflect all wholly owned subsidiaries and those entities the Company is required to consolidate. See the “Consolidated 50% Owned Subsidiaries” and “Construction Joint Ventures” section of this footnote for further discussion of the Company’s consolidation policy for those entities that are not wholly owned. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. All significant intercompany accounts and transactions have been eliminated in consolidation.
Consolidated 50% Owned Subsidiaries—
The accompanying Condensed Consolidated Financial Statements include the accounts of two subsidiaries in which the Company has 50% ownership interest and exercises control over such entities. Therefore, the Company has consolidated these two entities. Both subsidiaries have individual provisions which, under circumstances that are certain to occur, obligate the Company to purchase each partner’s 50% interests. The Company has classified these obligations as mandatorily redeemable and has recorded a liability in “Members’ interest subject to mandatory redemption and undistributed earnings” on the Condensed Consolidated Balance Sheets. Each partner’s portion of net income (loss) is reflected in the Condensed Consolidated Statements of Operations line item “Other operating expense, net”.
Construction Joint Ventures—
In the ordinary course of business, the Company executes specific projects and conducts certain operations through joint venture arrangements (referred to as “joint ventures”). The Company has various ownership interests in these joint ventures, with such ownership typically proportionate to the Company’s decision making and distribution rights.
Each joint venture is assessed at inception and on an ongoing basis as to whether it qualifies as a Variable Interest Entity (“VIE”) under the consolidations guidance in ASC Topic 810. If at any time a joint venture qualifies as a VIE, the Company performs a qualitative assessment to determine whether the Company is the primary beneficiary of the VIE and therefore needs to consolidate the VIE.
If the Company determines it is not the primary beneficiary of the VIE or only has the ability to significantly influence, rather than control the joint venture, it is not consolidated. The Company accounts for unconsolidated joint ventures using 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 a permissible modification of the equity method of accounting which is a common practice in the construction industry.
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 from construction contracts over time and the valuation of goodwill, other intangibles 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 the Company’s Condensed Consolidated Financial Statements to conform to the Company’s current year presentation.
Heavy Civil Construction Revenue Recognition—
The Company engages in various types of heavy civil construction projects principally for public (government) owners. Revenues are recognized as performance obligations are satisfied over time (formerly known as percentage-of-completion method), using the ratio of costs incurred 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 determined to relate 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, estimated profitability and associated change orders and claims, 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.
Change orders, claims and incentives are generally not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as a modification of the existing contract and performance obligation. Change orders may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work. Either the Company or its customers may initiate change orders. Change orders that are unapproved as to both price and scope are evaluated as claims. The Company estimates variable consideration for a performance obligation at the most likely amount to which the Company expects to be entitled (or the most likely amount the Company expects to incur in the case of liquidated damages), utilizing estimation methods that best predict the amount of consideration to which the Company will be entitled (or will be incurred in the case of liquidated damages). The Company includes variable consideration in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in transaction price are based largely on an assessment of its anticipated performance and all information (historical, current and forecasted) that is reasonably available to the Company.
The Company considers claims to be amounts in excess of approved contract prices that the Company seeks to collect from its 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. The effect of variable consideration on the transaction price of a performance obligation is recognized as an adjustment to revenue on a cumulative catch-up basis. To the extent unapproved change orders and claims reflected in transaction price (or excluded from transaction price in the case of liquidated damages) are not resolved in the Company’s favor, or to the extent incentives reflected in transaction price are not earned, there could be reductions in, or reversals of, previously recognized revenue.
The Company has projects that it is in the process of negotiating, or awaiting final approval of, unapproved change orders and claims with its 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 the Company’s customers and negotiations with the customers are ongoing. If additional progress with an acceptable resolution is not reached, legal action will be taken.
Contract modifications are routine in the performance of the Company’s contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct, and, therefore, are accounted for as part of the existing contract.
Assurance-type warranties are the only warranties provided by the Company and, as such, the Company does not recognize revenue on warranty-related work. The Company generally provides a
one
to
two
year warranty for workmanship under its contracts when completed. Warranty claims historically have been insignificant.
Pre-contract costs are generally charged to expense as incurred, but in certain cases their recognition may be deferred if specific probability criteria are met. The Company had no significant deferred pre-contract costs at
June 30, 2019
.
Residential Construction Revenue Recognition—
Residential construction revenue and related profit are recognized when construction on the concrete foundation unit is completed (i.e., at a point in time). The time from starting construction to finishing is typically less than one month.
Leases—
Effective January 1, 2019, the Company determines if an arrangement is a lease at inception. The operating lease right-of-use (“ROU”) assets are included within the Company’s other non-current assets and lease liabilities are included in current or non-current liabilities on the Company’s Condensed Consolidated Balance Sheets. Finance leases are included in property and equipment, current maturities of long-term debt, and long-term debt on the Company’s Condensed Consolidated Balance Sheets.
ROU assets represent the Company’s right to use, or control the use of, a specified asset for the lease term. Lease liabilities are the Company’s obligation to make lease payments arising from a lease, and are measured on a discounted basis. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term on the commencement date. As most of the Company’s leases do not provide an implicit rate, the Company’s incremental borrowing rate was used based on the information available on the commencement date in determining the present value of lease payments. For future leases, the implied rate in the lease will be used to determine the present value. The operating lease ROU asset includes any lease payments made and initial direct costs incurred and excludes lease incentives. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments continues to be recognized on a straight-line basis over the lease term.
Restricted cash—
Restricted cash of approximately
$3,200
and
$3,900
is included in “
Other current assets
” on the Condensed Consolidated Balance Sheets at
June 30, 2019
and
December 31, 2018
. This represents cash deposited by the Company into separate accounts and designated as collateral for standby letters of credit in the same amount in accordance with contractual agreements.
Recently Adopted Accounting Guidance
Leases—
In February 2016, the Financial Accounting Standards Board (“FASB”) issued its new lease accounting guidance in ASU 2016-2, “Leases” (ASC 842). Under the new guidance, lessees are required to recognize all leases (with the exception of short-term leases) on the balance sheet. The Company adopted ASC 842 effective January 1, 2019 using the modified retrospective method. The new guidance has been applied to leases that exist or were entered into on or after January 1, 2019 without adjusting comparative periods in the financial statements. As an accounting policy, the Company has elected not to apply the recognition requirements to short-term leases (leases with terms of 12 months or less). Instead, the Company recognizes the lease payments in the Condensed Consolidated Statement of Operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. The Company has elected to utilize the package of practical expedients that allows entities to not reassess 1) the classification of leases existing at the date of adoption 2) the initial direct costs for any existing leases and 3) whether any expired or existing contracts are or contain leases.
At January 1, 2019, the Company recorded an ROU asset, current maturity of operating lease liability and long-term operating lease liability of
$13,600
,
$6,200
and
$7,400
, respectively on its Condensed Consolidated Balance Sheet, related to its existing operating leases. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Statements of Operations. As of
June 30, 2019
, the weighted average remaining lease terms for the Company’s various operating leases extends out over the next
2.8 years
. The weighted average discount rate used to determine the present value of the Company’s operating leases’ future payments was approximately
6.0%
.
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3.
|
REVENUE FROM CONTRACTS WITH CUSTOMERS
|
Performance Obligations Satisfied Over Time
—Revenue for the heavy civil construction segment contracts that satisfy the criteria for over time recognition is recognized as the work progresses. The majority of the revenue is derived from long-term, heavy civil construction contracts and projects that typically span between
12 months
to
36 months
. Revenue from products and services transferred to customers over time accounted for
86%
and
84%
of revenue for the
three and six months ended
June 30, 2019
, respectively. Revenue from products and services transferred to customers over time accounted for
83%
and
84%
of revenue for the
three and six months ended
June 30, 2018
, respectively.
Performance Obligations Satisfied at a Point in Time
—Revenue for the residential construction segment contracts that do not satisfy the criteria for over time recognition is recognized at a point in time and utilizes an output measure for performance based on the completion of a unit of work (e.g., residential foundation). The typical time frame for completion of a residential foundation is less than one month. Revenue from products and services transferred to customers at a point in time accounted for
14%
and
16%
of revenue for the
three and six months ended
June 30, 2019
, respectively. Revenue from products and services transferred to customers at a point in time accounted for
17%
and
16%
of revenue for the
three and six months ended
June 30, 2018
, respectively.
Backlog
—On
June 30, 2019
, the Company had approximately
$909,000
of remaining performance obligations (which is also referred to as “backlog”) in its heavy civil construction segment. The Company expects to recognize approximately
70%
of its backlog as revenue during the next twelve months, and the balance thereafter.
Contract Estimates
—Contract estimates are based on various assumptions to project the outcome of future events that often span several years. These assumptions include labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials and the performance of subcontractors. 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 increase of approximately
$3,500
and
$3,300
for the
three and six months ended
June 30, 2019
, respectively, and a net increase of approximately
$300
and
$1,700
for the
three and six months ended
June 30, 2018
, respectively, included in “Operating income” on the Condensed Consolidated Statements of Operations. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Variable Consideration
—The transaction price for contracts may include variable consideration, which includes increases to transaction price for approved and unapproved change orders, claims and incentives, and reductions to transaction price for liquidated damages. Based upon the Company’s review of the provisions of its contracts, specific costs incurred, and other related evidence supporting the unapproved change orders and claims, the Company concluded that it was appropriate to include amounts of approximately
$15,700
and
$9,300
at
June 30, 2019
and
December 31, 2018
, respectively, in project price. These amounts, reflected in “Costs and estimated earnings in excess of billings on uncompleted contracts” on the Condensed Consolidated Balance Sheets, primarily relate to extended delays on a bridge project in Texas due to design errors in the original owner provided project plan. However, unapproved change order and claim amounts are subject to negotiations which may cause actual results to differ materially from estimated and recorded amounts.
Revenue by Heavy Civil Construction Category
—The Company’s heavy civil construction segment’s portfolio of products and services consists of approximately
150
active contracts. The following series of tables presents the Company’s heavy civil construction revenue disaggregated by several categories:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by major end market
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Heavy Highway
|
$
|
129,964
|
|
|
$
|
126,554
|
|
|
$
|
223,574
|
|
|
$
|
233,962
|
|
Commercial
|
28,575
|
|
|
29,109
|
|
|
59,425
|
|
|
57,628
|
|
Aviation
|
37,061
|
|
|
27,832
|
|
|
66,998
|
|
|
51,084
|
|
Water Containment and Treatment
|
15,515
|
|
|
15,521
|
|
|
30,749
|
|
|
30,516
|
|
Other
|
17,015
|
|
|
24,267
|
|
|
28,568
|
|
|
37,334
|
|
Total Heavy Civil Construction Revenue
|
$
|
228,130
|
|
|
$
|
223,283
|
|
|
$
|
409,314
|
|
|
$
|
410,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by contract type
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Fixed Unit Price
|
$
|
185,297
|
|
|
$
|
194,485
|
|
|
$
|
326,516
|
|
|
$
|
354,721
|
|
Lump Sum and Other
|
42,833
|
|
|
28,798
|
|
|
82,798
|
|
|
55,803
|
|
Total Heavy Civil Construction Revenue
|
$
|
228,130
|
|
|
$
|
223,283
|
|
|
$
|
409,314
|
|
|
$
|
410,524
|
|
Each of these contract types presents advantages and disadvantages. Typically, the Company assumes more risk with lump-sum contracts. However, these types of contracts offer additional profits when the work is completed for less than originally estimated. Under fixed-unit price contracts, the Company’s profit may vary if actual labor-hour costs vary significantly from the negotiated rates. Also, because some contracts can provide little or no fee for managing material costs, the components of contract cost can impact profitability.
Contract Balances
—The timing of revenue recognition, billings and cash collections results in billed accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts (contract assets) on the Condensed Consolidated Balance Sheet. In the Company’s heavy civil construction segment, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, the Company occasionally receives advances or deposits from its customers, before revenue is recognized, resulting in billings in excess of costs and estimated earnings on uncompleted contracts (contract liabilities). These assets and liabilities are reported on the Condensed Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period. Changes in the contract asset and liability balances during the
six
month period ended
June 30, 2019
, were not materially impacted by any other factors.
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4.
|
CONSOLIDATED 50% OWNED SUBSIDIARIES
|
The Company has a
50%
interest in two subsidiaries (Myers and RHB); both subsidiaries have individual provisions which obligate the Company to purchase each partner’s
50%
interests for
$20,000
(
$40,000
in the aggregate), due to circumstances outlined in the partner agreements that are certain to occur. Therefore, the Company has consolidated these two entities and classified these obligations 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 addition, all undistributed earnings at the time of the noncontrolling owners’ death or permanent disability are also mandatorily payable. In the event of either Mr. Buenting’s or Mr. Myers’s death, the Company purchased two separate
$20,000
death and permanent total disability insurance policies to mitigate the Company’s cash draw if such events were to occur.
The liability consists of the following:
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|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
Members’ interest subject to mandatory redemption
|
$
|
40,000
|
|
|
$
|
40,000
|
|
Net accumulated earnings
|
8,831
|
|
|
9,343
|
|
Total liability
|
$
|
48,831
|
|
|
$
|
49,343
|
|
Fifty percent of the earnings of these consolidated
50%
owned subsidiaries for the
three and six months ended
June 30, 2019
were approximately
$1,500
and
$2,700
, respectively and for the
three and six months ended
June 30, 2018
were
$4,700
and
$5,300
, respectively. These amounts were included in “Other operating expense, net” on the Company’s Condensed Consolidated Statements of Operations.
The Company must determine whether any of its entities, including these two
50%
owned subsidiaries, in which it participates, is a variable interest entity (“VIE”). The Company determined Myers is a VIE, as Sterling is the primary beneficiary, as pursuant to the terms of the Myers Operating Agreement, the Company is exposed to the majority of potential losses of the partnership.
The following tables present the condensed financial information of Myers, which is reflected in the Company’s Condensed Consolidated Balance Sheets and Statements of Operations:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
6,195
|
|
|
$
|
8,745
|
|
Accounts receivable, including retainage
|
27,011
|
|
|
24,109
|
|
Other current assets
|
14,959
|
|
|
14,533
|
|
Total current assets
|
48,165
|
|
|
47,387
|
|
Property and equipment, net
|
6,369
|
|
|
7,219
|
|
Operating lease right-of-use assets
|
3,232
|
|
|
—
|
|
Goodwill
|
1,501
|
|
|
1,501
|
|
Total assets
|
$
|
59,267
|
|
|
$
|
56,107
|
|
Liabilities
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
23,672
|
|
|
$
|
22,211
|
|
Other current liabilities
|
10,583
|
|
|
9,811
|
|
Total current liabilities
|
34,255
|
|
|
32,022
|
|
Other long-term liabilities
|
1,680
|
|
|
1,976
|
|
Total liabilities
|
$
|
35,935
|
|
|
$
|
33,998
|
|
|
|
|
5.
|
CONSTRUCTION JOINT VENTURES
|
The Company participates in joint ventures with other major construction companies and other partners, typically for large, technically complex projects, including design-build projects, when it is desirable to share risk and resources in order to seek a competitive advantage. Joint venture partners typically provide independently prepared estimates, furnish employees and equipment, enhance bonding capacity and often also bring local knowledge and expertise. These projects generally have joint and several liability. The Company selects its joint venture partners based on its analysis of their construction and financial capabilities, expertise in the type of work to be performed and past working relationships with the Company, among other criteria.
Joint ventures with a controlling interest
—For these joint ventures, the equity held by the remaining owners and their portions of net income (loss) are reflected in the Condensed Consolidated Balance Sheets line item “
Noncontrolling interests
” in “Stockholders’ equity” and the Condensed Consolidated Statements of Operations line item “Net income attributable to noncontrolling interests”, respectively.
Joint ventures with a noncontrolling interest
—Where the Company is a noncontrolling venture partner, the Company accounts for their share of the operations of such construction joint ventures on a pro-rata basis using proportionate consolidation on its 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. 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:
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|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
Total combined:
|
|
|
|
|
Current assets
|
$
|
95,991
|
|
|
$
|
64,815
|
|
Less current liabilities
|
(98,192
|
)
|
|
(74,543
|
)
|
Net liabilities
|
$
|
(2,201
|
)
|
|
$
|
(9,728
|
)
|
|
|
|
|
Sterling’s receivables from and equity in noncontrolling construction joint ventures
|
$
|
14,381
|
|
|
$
|
10,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Total combined:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
55,306
|
|
|
$
|
25,463
|
|
|
$
|
86,690
|
|
|
$
|
56,820
|
|
Income before tax
|
8,844
|
|
|
2,192
|
|
|
10,813
|
|
|
5,596
|
|
Sterling’s noncontrolling interest:
|
|
|
|
|
|
|
|
Revenues
|
$
|
25,971
|
|
|
$
|
12,564
|
|
|
$
|
41,655
|
|
|
$
|
27,629
|
|
Income before tax
|
3,116
|
|
|
1,167
|
|
|
4,100
|
|
|
2,858
|
|
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.
|
PROPERTY AND EQUIPMENT
|
Property and equipment are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
Construction and transportation equipment
|
|
$
|
147,796
|
|
|
$
|
144,630
|
|
Buildings and improvements
|
|
11,195
|
|
|
11,072
|
|
Land
|
|
2,720
|
|
|
2,720
|
|
Office equipment
|
|
2,627
|
|
|
2,711
|
|
Total property and equipment
|
|
164,338
|
|
|
161,133
|
|
Less accumulated depreciation
|
|
(115,121
|
)
|
|
(109,134
|
)
|
Total property and equipment, net
|
|
$
|
49,217
|
|
|
$
|
51,999
|
|
|
|
|
7.
|
OTHER INTANGIBLE ASSETS
|
The following table presents the Company’s acquired finite-lived intangible assets at
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Weighted
Average
Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Customer relationships
|
23 years
|
|
$
|
40,823
|
|
|
$
|
(4,062
|
)
|
|
$
|
40,823
|
|
|
$
|
(3,159
|
)
|
Trade name
|
13 years
|
|
5,307
|
|
|
(1,181
|
)
|
|
5,307
|
|
|
(919
|
)
|
Non-competition agreements
|
7 years
|
|
487
|
|
|
(156
|
)
|
|
487
|
|
|
(121
|
)
|
Total
|
22 years
|
|
$
|
46,617
|
|
|
$
|
(5,399
|
)
|
|
$
|
46,617
|
|
|
$
|
(4,199
|
)
|
The Company's intangible amortization expense was
$600
and
$1,200
for the
three and six months ended
June 30, 2019
.
The Company’s outstanding debt at
June 30, 2019
and
December 31, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
Oaktree Facility
|
$
|
71,602
|
|
|
$
|
74,571
|
|
Notes and deferred payments to sellers (Tealstone Acquisition)
|
11,710
|
|
|
13,572
|
|
Notes payable for construction and transportation equipment
|
1,015
|
|
|
612
|
|
Total debt
|
84,327
|
|
|
88,755
|
|
|
|
|
|
Less - Current maturities of long-term debt
|
(12,128
|
)
|
|
(2,899
|
)
|
Less - Unamortized deferred debt costs
|
(5,702
|
)
|
|
(6,739
|
)
|
Total long-term debt, net of unamortized debt costs
|
$
|
66,497
|
|
|
$
|
79,117
|
|
Oaktree Facility
—At
June 30, 2019
, the Company had
$71,602
outstanding under an
$85,000
term loan with Wilmington Trust, National Association, as agent, and the lenders party thereto (the “Oaktree Facility”). The five-year Oaktree Facility, which matures in April, 2022, is secured by substantially all of the assets of the Company and its subsidiaries. Interest on the Oaktree Facility is equal to the one-, two-, three- or six-month London Interbank Offered Rate, or LIBOR, plus
8.75%
per annum on the unpaid principal amount of the Oaktree Facility, subject to adjustment under certain circumstances, and is generally payable monthly. There are no amortized principal payments; however, the Company is required to prepay the Oaktree Facility, 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 Oaktree Facility in an amount equal to
75%
of its excess cash flow, plus accrued and unpaid interest thereon and a prepayment premium.
Notes and Deferred Payments to Sellers
—At
June 30, 2019
, the Company had
$11,710
outstanding, net of debt discounts, of the combined Promissory Notes and deferred cash payments issued as part of the Tealstone Acquisition. During the
six months ended
June 30, 2019
, the Company paid approximately
$2,400
of the deferred cash payments. The remaining principal amounts of
$5,000
of Promissory Notes and
$7,500
of deferred cash payments are due on April 3, 2020. Based on a
12%
discount rate, the Company recorded
$11,600
as notes and deferred payments to sellers in long-term debt on its Condensed Consolidated Balance Sheet at the acquisition closing date. Accreted interest for the period was approximately
$300
and
$600
for the
three and six months ended
June 30, 2019
and
$300
and
$600
for the
three and six months ended
June 30, 2018
, and was recorded as interest expense.
Notes Payable for Construction and Transportation Equipment
—The Company has purchased and financed various construction and transportation equipment to enhance the Company’s fleet of equipment. The total long-term notes payable related to the purchase of financed equipment was approximately
$1,015
and
$600
at
June 30, 2019
and
December 31, 2018
, respectively. The notes have payment terms ranging from
3
to
5
years and the associated interest rates range from
2.99%
to
6.92%
.
Compliance
—The Oaktree Facility 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
1.9
to 1.00 for the trailing four consecutive fiscal quarters ending March 31, 2019, reducing to
1.8
to 1.00 for the four consecutive quarters ending September 30, 2019 through maturity in 2022;
|
|
|
•
|
daily cash collateral of not less than
$15,000
;
|
|
|
•
|
gross margin in contract backlog of not less than
$70,000
for the average of the trailing four consecutive fiscal quarters;
|
|
|
•
|
net capital expenditures during the trailing four consecutive fiscal quarters shall not exceed
$15,000
;
|
|
|
•
|
bonding capacity shall be maintained at all times in an amount not less than
$1,000,000
; and
|
|
|
•
|
the EBITDA of Tealstone Residential Concrete, Inc. shall not be less than
$12,000
for each of the trailing four consecutive fiscal quarters.
|
The Company is in compliance with these covenants at
June 30, 2019
.
The Company has operating and finance leases primarily for construction and transportation equipment as well as office space. The Company’s leases have remaining lease terms of
1 month
to
5 years
, some of which include options to extend the leases for up to
10 years
.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Six Months Ended June 30, 2019
|
Operating lease cost
|
$
|
1,960
|
|
|
$
|
4,171
|
|
Short-term lease cost
|
$
|
3,269
|
|
|
$
|
8,012
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
Amortization of right-of-use assets
|
$
|
39
|
|
|
$
|
71
|
|
Interest on lease liabilities
|
1
|
|
|
3
|
|
Total finance lease cost
|
$
|
40
|
|
|
$
|
74
|
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
4,466
|
|
Operating cash flows from finance leases
|
$
|
3
|
|
Financing cash flows from finance leases
|
$
|
71
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations (noncash):
|
|
Operating leases
|
$
|
6,311
|
|
Finance leases
|
$
|
770
|
|
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
June 30, 2019
|
Operating Leases
|
|
Operating lease right-of-use assets
|
$
|
14,995
|
|
|
|
Current portion of long-term lease obligations
|
$
|
7,059
|
|
Long-term lease obligations
|
8,030
|
|
Total operating lease liabilities
|
$
|
15,089
|
|
|
|
Finance Leases
|
|
Property and equipment, at cost
|
$
|
1,433
|
|
Accumulated depreciation
|
(347
|
)
|
Property and equipment, net
|
$
|
1,086
|
|
|
|
Current maturities of long-term debt
|
$
|
234
|
|
Long-term debt
|
626
|
|
Total finance lease liabilities
|
$
|
860
|
|
|
|
Weighted Average Remaining Lease Term
|
|
Operating leases
|
2.8
|
|
Finance leases
|
4.4
|
|
|
|
Weighted Average Discount Rate
|
|
Operating leases
|
6.0
|
%
|
Finance leases
|
4.2
|
%
|
Maturities of lease liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
Finance
Leases
|
Year Ending December 31,
|
|
|
|
2019 (excluding the six months ended June 30, 2019)
|
$
|
4,206
|
|
|
$
|
157
|
|
2020
|
5,885
|
|
|
209
|
|
2021
|
4,231
|
|
|
186
|
|
2022
|
2,087
|
|
|
161
|
|
2023
|
399
|
|
|
154
|
|
Thereafter
|
5
|
|
|
77
|
|
Total lease payments
|
$
|
16,813
|
|
|
$
|
944
|
|
Less imputed interest
|
(1,724
|
)
|
|
(84
|
)
|
Total
|
$
|
15,089
|
|
|
$
|
860
|
|
|
|
|
10.
|
COMMITMENT AND CONTINGENCIES
|
The Company is required by its insurance providers to obtain and hold a standby letter of credit. These letters of credit serve as a guarantee by the banking institution to pay the Company’s insurance providers the incurred claim costs attributable to its general liability, workers compensation and automobile liability claims, up to the amount stated in the standby letters of credit, in the event that these claims were not paid by the Company. The Company has cash collateralized the letters of credit, resulting in the cash being designated as restricted.
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 (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.
Due to net operating loss carryforwards, the Company does not expect a current federal liability. The Company may incur current state tax liabilities in states in which the Company does not have net operating loss carry forwards. Current income tax expense of
$86
and
$108
was recorded for the
three and six months ended
June 30, 2019
, respectively and for the
three and six months ended
June 30, 2018
was
$97
and
$138
, respectively.
The Company’s deferred tax expense reflects the change in deferred tax assets and 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 valuation allowance of approximately
$31,700
has been applied to the Company’s net deferred tax assets at both
June 30, 2019
and
December 31, 2018
.
As part of this analysis, the Company monitors its quarterly results. Based on the Company’s continued positive income trend and current forecast for the full year of 2019, we believe that there could be enough positive evidence to remove the valuation allowance in the fourth quarter of 2019. Deferred tax liabilities are a consideration in the analysis of whether to apply a valuation allowance because taxable temporary differences may be used as a source of taxable income to support the realization of deferred tax assets. A deferred tax liability that relates to an asset with an indefinite life, such as goodwill, may not be considered a source of income and should not be netted against deferred tax assets for valuation allowance purposes. The Company expects to have a deferred tax liability for the excess of book over tax basis difference in its goodwill.
A
$620
and
$761
deferred tax expense for the
three and six months ended
June 30, 2019
, respectively has been recorded to reflect this liability.
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.
As a result of the Company’s analysis, management has determined that the Company does not have any material uncertain tax positions.
|
|
|
12.
|
STOCK INCENTIVE PLAN AND OTHER EQUITY ACTIVITY
|
General
—The Company has a stock incentive plan (the “Stock Incentive Plan”) that is administered by the Compensation and Talent Development Committee of the Board of Directors. Under the Stock Incentive Plan, the Company can issue shares to employees and directors in the form of restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and performance based shares (“PSUs”). Changes in common stock, additional paid in capital, and treasury stock during the
six months ended June 30, 2019
primarily relate to activity associated with the Stock Incentive Plan and share repurchases.
Share Grants
—During the
six months ended June 30, 2019
, the Company had the following share grants associated with the Stock Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant-Date Fair Value per Share
|
RSAs
|
|
52
|
|
|
$
|
12.06
|
|
RSUs
|
|
138
|
|
|
$
|
10.96
|
|
PSUs
|
|
185
|
|
|
$
|
10.89
|
|
Total shares granted
|
|
375
|
|
|
—
|
|
Share Issuances
—During the
six months ended June 30, 2019
, the Company had the following share issuances associated with the Stock Incentive Plan:
|
|
|
|
|
|
|
Shares
|
RSA (issued upon grant)
|
|
52
|
|
RSUs (issued upon vesting)
|
|
73
|
|
PSUs (issued upon vesting)
|
|
54
|
|
Total shares issued
|
|
179
|
|
Stock-Based Compensation Expense
—During the
three and six months ended
June 30, 2019
the Company recognized
$649
and
$1,670
, respectively, of stock-based compensation expense, and during the
three and six months ended
June 30, 2018
the Company recognized
$766
and
$1,383
of stock-based compensation expense, primarily within general and administrative expenses. The Company recognizes forfeitures as they occur, rather than estimating expected forfeitures.
Share Repurchases
—During the
six months ended June 30, 2019
, the Company repurchased
250
shares of the Company’s outstanding common stock for
$3,201
under the stock repurchase plan, all of which were purchased in the first quarter of 2019. The Company also repurchased
7
and
59
shares for taxes withheld on stock-based compensation vestings for
$98
and
$662
during the
three and six months ended
June 30, 2019
.
The following table reconciles the numerators and denominators of the basic and diluted per common share computations for net income attributable to Sterling common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Sterling common stockholders
|
$
|
7,828
|
|
|
$
|
8,174
|
|
|
$
|
9,643
|
|
|
$
|
10,663
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic
|
26,338
|
|
|
26,887
|
|
|
26,357
|
|
|
26,881
|
|
Shares for dilutive unvested stock and warrants
|
285
|
|
|
238
|
|
|
300
|
|
|
281
|
|
Weighted average common shares outstanding — diluted
|
26,623
|
|
|
27,125
|
|
|
26,657
|
|
|
27,162
|
|
Basic net income per share attributable to Sterling common stockholders
|
$
|
0.30
|
|
|
$
|
0.30
|
|
|
$
|
0.37
|
|
|
$
|
0.40
|
|
Diluted net income per share attributable to Sterling common stockholders
|
$
|
0.29
|
|
|
$
|
0.30
|
|
|
$
|
0.36
|
|
|
$
|
0.39
|
|
Segment reporting is aligned based upon the services offered by
two
operating groups, which represent the following reportable segments: heavy civil construction and residential construction. The Company’s Chief Operating Decision Maker (“CODM”) 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 and six months ended
June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
Heavy Civil Construction
|
$
|
228,130
|
|
|
$
|
223,283
|
|
|
$
|
409,314
|
|
|
$
|
410,524
|
|
Residential Construction
|
35,956
|
|
|
45,451
|
|
|
78,721
|
|
|
80,702
|
|
Total Revenues
|
$
|
264,086
|
|
|
$
|
268,734
|
|
|
$
|
488,035
|
|
|
$
|
491,226
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
Heavy Civil Construction
|
$
|
6,146
|
|
|
$
|
6,395
|
|
|
$
|
5,299
|
|
|
$
|
8,340
|
|
Residential Construction
|
5,038
|
|
|
5,754
|
|
|
10,605
|
|
|
10,488
|
|
Total Operating Income
|
$
|
11,184
|
|
|
$
|
12,149
|
|
|
$
|
15,904
|
|
|
$
|
18,828
|
|
|
|
|
15.
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
Operating assets and liabilities—
The following table summarizes the changes in the components of operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
Accounts receivable, including retainage
|
$
|
(12,787
|
)
|
|
$
|
(30,534
|
)
|
Contracts in progress, net
|
(14,190
|
)
|
|
(3,346
|
)
|
Receivables from and equity in construction joint ventures
|
(3,661
|
)
|
|
(386
|
)
|
Other assets
|
128
|
|
|
1,562
|
|
Accounts payable
|
1,916
|
|
|
(1,073
|
)
|
Accrued compensation and other liabilities
|
2,990
|
|
|
1,761
|
|
Member’s interest subject to mandatory redemption and undistributed earnings
|
(512
|
)
|
|
451
|
|
Changes in operating assets and liabilities
|
$
|
(26,116
|
)
|
|
$
|
(31,565
|
)
|