Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is provided to assist readers in understanding our financial performance during the periods presented and significant trends that may impact our future performance. This discussion should be read in conjunction with our Consolidated Financial Statements and the related notes thereto.
OVERVIEW
General—Sterling Construction Company, Inc. is a construction company that has been involved in the construction industry since its founding in 1955. The Company operates through a variety of subsidiaries within three operating groups specializing in heavy civil, specialty services, and residential projects in the United States (the “U.S.”), primarily across the southern U.S., the Rocky Mountain states, California and Hawaii, as well as other areas with strategic construction opportunities. Heavy civil includes infrastructure and rehabilitation projects for highways, roads, bridges, airfields, ports, light rail, water, wastewater and storm drainage systems. Specialty services projects include construction site excavation and drainage, drilling and blasting for excavation, foundations for multi-family homes, parking structures and other commercial concrete projects. Residential projects include concrete foundations for single-family homes.
On October 2, 2019, the Company consummated the acquisition of Plateau and entered into a credit agreement with the financial institutions from time to time party thereto as lenders, BMO Harris Bank N.A., as administrative agent, Bank of America, N.A., as syndication agent, and BMO Capital Markets Corp. and BofA Securities, Inc., as joint lead arrangers and joint book runners. The Credit Agreement provides the Company with senior secured debt financing in an amount up to $475 million in the aggregate with a maturity date of October 2, 2024. We have determined that with the acquisition of Plateau we now have three reportable segments: Heavy Civil, Specialty Services and Residential. Refer to Note 9 - Debt for a discussion of our financing arrangements and Note 21 - Segment Information for a discussion of reportable segments and related financial information.
MARKET OUTLOOK AND TRENDS
Heavy Civil—Sterling’s heavy civil construction business is primarily driven by federal, state and municipal funding. Federal funds, on average, provide 50% of annual State Department of Transportation (DOT) capital outlays for highway and bridge projects. Several of the states in Sterling’s key markets have instituted actions to further increase annual spending. In November 2018, various state and local transportation measures were passed securing, and in some cases increasing, funding of $1.57 billion in California, $1.27 billion in Texas, $528.5 million in Arizona, $128.2 million in Colorado and $87 million in Utah. In October 2018, the Federal Aviation Administration reauthorized $3.35 billion annually for the next five years. This reauthorization also includes more than $1 billion a year for airport infrastructure grants and about $1.7 billion for disaster relief. In addition to the state locally funded actions, this is in the fourth year of the five-year $305 billion 2015 federally funded Fixing America’s Surface Transportation (“FAST”) Act that increased the annual federal highway investment by 15.1% over the five-year period from 2016 to 2020. With the FAST Act set to expire next year, the federal government is currently working towards a bipartisan Federal Infrastructure Bill (America’s Transportation Infrastructure Act) that would both increase and solidify funding for the next five years. Should the federal government approve this incremental infrastructure investment, it would be an additional growth catalyst; however, it would be unlikely to create a significant business impact before late 2020 or 2021.
Specialty Services—Sterling’s specialty services business is primarily driven by investments from end users and developers. Key end users, including Amazon and Home Depot, have begun implementing publicly announced multi-year capital infrastructure campaigns. In our primary market in the southeastern United States, and specifically Georgia, the availability rate is at 11% and for six consecutive quarters over 20 million square feet of new construction has commenced. In our key commercial markets forecasted net absorption continues to be positive, with more space leased than supplied to the market. The outlook for multifamily vacancy rate continues to be below its long-term average, supporting continued growth and specifically strong markets in our footprint. Additionally, the positive lending environment has sustained continued new development within our specialty services space.
Residential—Continuing revenue growth of the Company’s residential construction business is directly related to the growth of new home starts in its key markets. The Company’s core customer base is primarily made up of leading national home builders as well as regional and custom home builders. The Company has continued its expansion of the residential business into the Houston market and surrounding areas.
BACKLOG
At December 31, 2019, our Backlog of construction projects, made up of our Heavy Civil and Specialty Services segments, was $1.1 billion, as compared to $850.7 million at December 31, 2018. The contracts in Backlog are typically completed in 6 to 36 months. Contracts in which we are the apparent low bidder for projects (“Unsigned Low-bid Awards”) are excluded from Backlog until the contract is executed by our customer. Unsigned Low-bid Awards were $273.5 million at December 31, 2019 and $292.7 million at the end of 2018. The combination of our Backlog and Unsigned Low-bid Awards, which we refer to as “Combined Backlog” totaled $1.3 billion and $1.1 billion as of December 31, 2019 and 2018, respectively. Backlog includes $161.4 million and $33.6 million attributable to our share of estimated revenues related to joint ventures where we are a noncontrolling joint venture partner at December 31, 2019 and 2018, respectively. We anticipate that approximately 70% of our Backlog will be recognized as revenues during 2020, with substantially all remaining recognized in the twelve months following.
Contracts-in-progress which were not substantially complete totaled approximately 200 and 150 at December 31, 2019 and 2018, respectively. These contracts are of various sizes, of different expected profitability and in various stages of completion. The nearer a contract progresses toward completion, the more visibility we have in refining our estimate of total revenues (including incentives, delay penalties and change orders), costs and gross profit. Thus, gross profit as a percent of revenues can increase or decrease from comparable and sequential quarters due to variations among contracts and depending upon the stage of completion of contracts.
We anticipate that our markets will continue to improve, driven by the conditions discussed in Item 1. “Business.” Furthermore, we believe that the Company is well established in our particular markets and has the management depth and experience which gives us the ability to perform a broad range of work that will allow us to succeed in current market conditions and to continue to compete successfully for projects as they become available at acceptable profit margin levels.
Backlog and gross margin:
|
|
|
|
(In thousands)
|
Backlog
|
Gross Margin in Backlog
|
Fourth quarter of 2019
|
$1,068,025
|
11.5%
|
Third quarter of 2019
|
$881,428
|
9.3%
|
Second quarter of 2019
|
$909,030
|
8.8%
|
First quarter of 2019
|
$808,740
|
8.3%
|
Fourth quarter of 2018
|
$850,725
|
8.5%
|
Our total margin in Backlog has increased approximately 300 basis points, from 8.5% at December 31, 2018 to 11.5% at December 31, 2019, primarily due to the $159 million of Plateau backlog acquired at the Acquisition closing date. Our Combined Backlog margin increased from 8.9% at December 31, 2018 to 11.0% at December 31, 2019. The increases noted above are primarily the result of the Plateau Acquisition, improving market conditions, and actions that we have taken to improve bid discipline.
RESULTS OF OPERATIONS
Consolidated Results
Summary—For 2019, the Company had operating income of $37.8 million, income before income taxes of $14.5 million, net income attributable to Sterling common stockholders of $39.9 million and net income per diluted share attributable to Sterling common stockholders of $1.47.
Consolidated financial highlights for 2019 as compared to 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
(In thousands)
|
2019
|
|
2018
|
|
% Change
|
Revenues
|
$
|
1,126,278
|
|
|
$
|
1,037,667
|
|
|
8.5
|
%
|
Gross profit
|
107,794
|
|
|
110,332
|
|
|
(2.3
|
)%
|
General and administrative expenses
|
(49,200
|
)
|
|
(48,220
|
)
|
|
2.0
|
%
|
Intangible asset amortization
|
(4,695
|
)
|
|
(2,400
|
)
|
|
95.6
|
%
|
Acquisition related costs
|
(4,311
|
)
|
|
—
|
|
|
NM
|
|
Other operating expense, net
|
(11,837
|
)
|
|
(17,101
|
)
|
|
(30.8
|
)%
|
Operating income
|
37,751
|
|
|
42,611
|
|
|
(11.4
|
)%
|
Interest income
|
1,142
|
|
|
1,017
|
|
|
12.3
|
%
|
Interest expense
|
(16,686
|
)
|
|
(12,350
|
)
|
|
35.1
|
%
|
Loss on extinguishment of debt
|
(7,728
|
)
|
|
—
|
|
|
NM
|
|
Income before income taxes and noncontrolling interests in earnings
|
14,479
|
|
|
31,278
|
|
|
(53.7
|
)%
|
Income tax benefit (expense)
|
26,216
|
|
|
(1,738
|
)
|
|
NM
|
|
Net income
|
40,695
|
|
|
29,540
|
|
|
37.8
|
%
|
Noncontrolling interests in earnings
|
(794
|
)
|
|
(4,353
|
)
|
|
(81.8
|
)%
|
Net income attributable to Sterling common stockholders
|
$
|
39,901
|
|
|
$
|
25,187
|
|
|
58.4
|
%
|
|
|
|
|
|
|
Gross margin
|
9.6
|
%
|
|
10.6
|
%
|
|
|
|
|
|
|
|
|
|
Operating margin
|
3.4
|
%
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
|
Backlog, end of year
|
$
|
1,068,025
|
|
|
$
|
850,725
|
|
|
|
|
NM – Not meaningful.
Revenues—Revenues increased $88.6 million, or 8.5% in 2019 compared to the prior year. The increase is primarily attributable to the inclusion of three months of revenue totaling $84.6 million from the acquired Plateau operations in 2019.
Gross profit—Gross profit decreased $2.5 million, or 2.3%, in 2019 compared to the prior year. The Company’s gross margin as a percent of revenue decreased to 9.6% in 2019, as compared to 10.6% in the prior year.
In December 2019, Sterling was able to come to an interim agreement related to a 2014 project involving the construction of three separate bridges in Texas that had suffered from significant schedule delays and cost overruns due to major owner design flaws. This agreement enabled Sterling to recover approximately $17 million in costs to date related to these delays and defined a better dispute resolution process along with agreed upon rates for potential future delays. As part of this agreement, Sterling agreed to work on all three bridges simultaneously (versus doing one at a time) to accelerate the final completion schedule. This revised schedule has significantly increased the amount of labor, equipment and infrastructure required to complete the project under the new terms of the agreement and resulted in a reduction of gross profit in the quarter of $10.2 million, or $0.36 per diluted share.
The decrease in gross margin during 2019, when compared to the prior year, was driven by the aforementioned $10.2 million charge and a lower margin revenue mix due to the completion of two large design-build projects at the end of 2018. The company expects the margin mix to improve in 2020 with the ramp up of several large design-build projects which are now in backlog. The decrease was partly offset by an increase of 131 basis points from the inclusion of three months of gross profit from Plateau operations in 2019.
General and administrative expenses—General and administrative expenses increased $1.0 million during 2019 to $49.2 million from $48.2 million in the prior year. This increase is primarily from the inclusion of three months of cost associated with Plateau operations, partly offset by lower business development costs in the current year. As a percentage of revenues, general and administrative expenses decreased to 4.4% in 2019 from 4.6% in the prior year. The decrease in general and administrative expenses, as a percentage of revenue, is primarily the result of the leverage generated from generally fixed costs and increases in revenues.
Intangible asset amortization—Intangible asset amortization increased $2.3 million during 2019 to $4.7 million from $2.4 million in the prior year, as a result of the Plateau Acquisition.
Acquisition related costs—The Company had acquisition related costs of $4.3 million in 2019, related to the Plateau Acquisition.
Other operating expense, net—Other operating expense, net, includes the elimination of 50% of earnings and losses related to Members’ interest of consolidated 50% owned subsidiaries, earn-out expense, and other miscellaneous operating income or expense. Members’ interest earnings are treated as an expense and increase the liability account. The change in other operating expense, net, was a decrease of $5.3 million during 2019 compared to the prior year. Earn-out expense was $2.0 million for 2019, compared to $1.9 million in the prior year. Members’ interest earnings decreased by $5.3 million during 2019 to $9.8 million from $15.1 million in the prior year, reflecting decreased revenue driven by the completion of a project in Hawaii in the prior year, and project mix.
Interest expense—Interest expense was $16.7 million in 2019 compared to $12.4 million in the prior year. The increase is due to increased borrowings to complete the Plateau Acquisition.
Loss on extinguishment of debt—As part of the replacement of the Oaktree Facility, $7.7 million in debt extinguishment costs were expensed for the year ended December 31, 2019.
Income taxes—We had an income tax rate benefit for 2019. In 2019, our effective income tax rate varied from the 21% federal statutory rate primarily as a result of the reversal of the valuation allowance on our deferred tax assets. See Note 13 - Income Taxes for more information.
Net income attributable to noncontrolling interests—Net income attributable to noncontrolling interests decreased in 2019 due to the two joint venture projects in the Rocky Mountain region becoming substantially complete at the end of 2018. The Company expects joint venture revenues to increase in 2020 due to several joint venture projects signed in the fourth quarter of 2019 and the first quarter of 2020.
Segment Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(In thousands)
|
|
2019
|
|
% of
Revenue
|
|
2018
|
|
% of
Revenue
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
Heavy Civil
|
|
$
|
760,325
|
|
|
67%
|
|
$
|
765,638
|
|
|
73%
|
Specialty Services
|
|
212,824
|
|
|
19%
|
|
120,333
|
|
|
12%
|
Residential
|
|
153,129
|
|
|
14%
|
|
151,696
|
|
|
15%
|
Total Revenue
|
|
$
|
1,126,278
|
|
|
|
|
$
|
1,037,667
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
Heavy Civil
|
|
$
|
3,316
|
|
|
0.4%
|
|
$
|
17,044
|
|
|
2.2%
|
Specialty Services
|
|
18,207
|
|
|
8.6%
|
|
4,629
|
|
|
3.8%
|
Residential
|
|
20,539
|
|
|
13.4%
|
|
20,938
|
|
|
13.8%
|
Subtotal
|
|
42,062
|
|
|
3.7%
|
|
42,611
|
|
|
4.1%
|
Acquisition related costs
|
|
(4,311
|
)
|
|
|
|
—
|
|
|
|
Total Operating Income
|
|
$
|
37,751
|
|
|
3.4%
|
|
$
|
42,611
|
|
|
4.1%
|
Heavy Civil
Revenues—Revenues were $760.3 million for 2019, a decrease of $5.3 million or 0.7%, compared to the prior year. The decrease was driven by lower revenue of $80.6 million related to two large heavy highway design-build construction joint venture projects that were substantially complete by the end of 2018. This decline was partially offset by increased revenues of $75.3 million related to fully controlled heavy highway work and increased aviation work. The two large design-build construction joint venture projects’ revenues totaled $4.6 million for 2019 compared to $85.2 million in the prior year. The company expects joint venture revenues to increase in 2020 due to several joint venture projects signed in the fourth quarter of 2019 and the first quarter of 2020.
Operating income—Operating income was $3.3 million for 2019, a decrease of $13.7 million, compared to the prior year. The decrease was primarily the result of the aforementioned $10.2 million charge related to extended delays on a bridge project in Texas, and to a lesser extent, volume driven decreases from heavy highway work and negative weather impacts across our regions in the first half of 2019.
Specialty Services
Revenues—Revenues were $212.8 million for 2019, an increase of $92.5 million or 76.9%, compared to the prior year. The increase is primarily attributable to the inclusion of three months of revenue totaling $84.6 million from Plateau operations in 2019.
Operating income—Operating income was $18.2 million for 2019, an increase of $13.6 million, compared to the prior year. The increase was primarily due to operating income generated from Plateau operations in 2019.
Residential
Revenues—Revenues were $153.1 million for 2019, an increase of $1.4 million or 0.9%, compared to the prior year. The increase in 2019 revenue is due to underlying growth from the continuing expansion in the Houston market. This increase was partly offset by smaller square foot slabs which generate less revenue per slab. Completed slabs increased approximately 4.2% for the year ended December 31, 2019, as compared to the prior year, due to expansion in the Houston market.
Operating income—Operating income was $20.5 million for 2019, a decrease of $0.4 million, compared to the prior year. The decrease was driven by the recent expansion into the Houston market. As we ramp-up operations and continue to build scale in Houston, we expect margins to improve for us in 2020.
LIQUIDITY AND SOURCES OF CAPITAL
The following tables set forth information about our cash flows and liquidity:
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(In thousands)
|
2019
|
|
2018
|
Net cash provided by (used in):
|
|
|
|
|
|
Operating activities
|
$
|
41,093
|
|
|
$
|
39,474
|
|
Investing activities
|
(410,386
|
)
|
|
(11,382
|
)
|
Financing activities
|
320,931
|
|
|
(17,950
|
)
|
Net change in cash and cash equivalents
|
$
|
(48,362
|
)
|
|
$
|
10,142
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(In thousands)
|
2019
|
|
2018
|
Cash and cash equivalents
|
$
|
45,733
|
|
|
$
|
94,095
|
|
Working capital (Current Assets Minus Current Liabilities)
|
$
|
64,017
|
|
|
$
|
123,442
|
|
Operating Activities—During 2019, net cash provided by operating activities was $41.1 million compared to net cash provided of $39.5 million in the prior year. Cash flows provided by operating activities were driven by net income, adjusted for various non-cash items and changes in accounts receivable, net contracts in progress and accounts payable balances (collectively, “Contract Capital”), as discussed below.
Cash—Cash at December 31, 2019, was $45.7 million, and includes the following components:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(In thousands)
|
2019
|
|
2018
|
Generally Available
|
$
|
29,659
|
|
|
$
|
42,605
|
|
Consolidated 50% Owned Subsidiaries
|
12,004
|
|
|
31,026
|
|
Construction Joint Ventures
|
4,070
|
|
|
20,464
|
|
Total Cash
|
$
|
45,733
|
|
|
$
|
94,095
|
|
The decrease in total cash is primarily due to the Company’s acquisition of Plateau (including the associated repayment of the Oaktree Facility). The decrease in consolidated 50% owned subsidiaries and construction joint venture cash levels were driven by the substantial completion of two large construction joint venture projects in the prior year.
Working and Contract Capital—Sterling’s working capital decreased $59.4 million to $64.0 million at December 31, 2019 from $123.4 million at December 31, 2018, primarily due to the Plateau Acquisition. The need for working capital for our business varies due to fluctuations in operating activities and investments in our Contract Capital. The changes in components of Contract Capital at December 31, 2019 and 2018 and variances were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Components of
Contract Capital
|
(In thousands)
|
2019
|
|
2018
|
|
Variance
|
Costs and estimated earnings in excess of billings
|
$
|
(39
|
)
|
|
$
|
(4,430
|
)
|
|
$
|
4,391
|
|
Billings in excess of costs and estimated earnings
|
6,062
|
|
|
33
|
|
|
6,029
|
|
Contracts in progress, net
|
6,023
|
|
|
(4,397
|
)
|
|
10,420
|
|
Accounts receivable, including retainage
|
(21,300
|
)
|
|
(11,094
|
)
|
|
(10,206
|
)
|
Receivables from and equity in construction joint ventures
|
1,524
|
|
|
659
|
|
|
865
|
|
Accounts payable
|
10,987
|
|
|
1,969
|
|
|
9,018
|
|
Contract Capital, net
|
$
|
(2,766
|
)
|
|
$
|
(12,863
|
)
|
|
$
|
10,097
|
|
During 2019, the change in Contract Capital had an impact of $2.8 million. Fluctuations in the Contract Capital balance and its components are not unusual and are impacted by the size of projects and changing type and mix of projects in Backlog. The Company’s Contract Capital is particularly impacted by seasonality, the timing of new awards, and related payments of performing work and the contract billings to the customer as projects are completed. Contract Capital is also impacted at period-end by the timing of accounts receivable collections and accounts payable payments for projects.
Investing Activities—During 2019, net cash used in investing activities was $410.4 million, compared to net cash used of $11.4 million in the prior year. In 2019, the cash used in investing activities was driven by the Plateau Acquisition, and to a lesser extent, purchases of capital equipment less cash proceeds from the sale of property and equipment.
The cash used in the Plateau Acquisition consisted of $375 million of cash consideration transferred, net of cash acquired, and $21.3 million of cash paid for the target working capital adjustment. See Note 3 - Plateau Acquisition for further discussion of the Plateau Acquisition.
Capital equipment is acquired as needed to support changing levels of production activities and to replace retiring equipment. Expenditures for the replacement of certain equipment and to expand our construction fleet totaled $15.4 million in 2019. Proceeds from the sale of property and equipment totaled $1.3 million for 2019 with an associated net gain of $0.5 million, reflecting our continuing initiative to optimize utilization of our existing fleet of equipment based on current and projected workloads, while supplementing our fleet with leased and financed equipment as needed.
Financing Activities—During 2019, net cash provided by financing activities was $320.9 million compared to net cash used of $18.0 million in the prior year. In 2019, the cash provided by financing activities was driven by the $430 million of cash received from our credit facility, which was utilized, in part, to fund the Plateau Acquisition, the repayment of our $67.1 million remaining balance on our Oaktree facility, and to pay $10.7 million of debt issuance costs. The financing cash inflow was partially offset by the use of cash for an additional $20.5 million of repayments on debt (primarily consisting of a $10 million repayment on the Revolving Credit Facility, $7.5 million of repayments on the Oaktree Facility and $2.4 million of deferred cash payments for the Tealstone Acquisition), $7.4 million of distributions to the Company’s noncontrolling interest partners, and $3.2 million for the purchase of treasury stock.
Credit Facilities, Debt, and Other Capital
General—In addition to our available cash, cash equivalents and cash provided by operations, from time to time we use borrowings to finance acquisitions, our capital expenditures and working capital needs.
Credit Facility—On October 2, 2019, the Company, as borrower, and certain of its subsidiaries, as guarantors, entered into a Credit Agreement (the “Credit Agreement”) with BMO Harris Bank N.A., as administrative agent (the “Agent”), Bank of America, N.A., as syndication agent, and BMO Capital Markets Corp. and BofA Securities, Inc., as joint lead arrangers and joint book runners. The Credit Agreement provides the Company with senior secured debt financing in an amount up to $475 million in the aggregate, consisting of (i) a senior secured first lien revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of $75 million (with a $75 million limit for the issuance of letters of credit and a $15 million sublimit for swing line loans) and (ii) a senior secured first lien term loan facility (the “Term Loan Facility”) in the amount of $400 million (collectively, the “Credit Facility”). The obligations under the Credit Facility are secured by substantially all assets of the Company and the subsidiary guarantors, subject to certain permitted liens and interests of other parties. The Credit Facility will mature on October 2, 2024.
The Company obtained the Credit Facility in order to facilitate the transactions contemplated by the Plateau Acquisition, including refinancing existing indebtedness of the Company, finance capital expenditures, finance working capital, finance acquisitions permitted under the Credit Agreement, finance other general corporate purposes and fund certain fees and expenses associated with the closing of the Credit Facility and the Plateau Acquisition.
On December 2, 2019, the Credit Agreement was amended to modify (i) the applicable margins with respect to Base Rate and LIBOR borrowings under the Credit Facility, (ii) the required amounts of mandatory prepayments of the Credit Facility with excess cash flow, (iii) the amounts of scheduled principal payments quarterly and at maturity on the Term Loan Facility, and (iv) the applications of partial prepayments of the Term Loan Facility on a ratable, weighted basis among all remaining scheduled principal payments on the Term Loan Facility. The modifications in (i)-(iii) mentioned above were pursuant to the customary “market flex” rights contained in the fee letter related to the Credit Agreement.
The Revolving Credit Facility bears interest at either the Base Rate plus a margin (4.75% and 3.50% per annum, respectively at December 31, 2019), or one-, two-, three-, six- or, if available, twelve-month LIBOR plus an applicable margin (1.74% and 4.50% per annum, respectively at December 31, 2019, using a one-month LIBOR rate), at the Company’s election. In addition to interest on debt borrowings, we are assessed quarterly commitment fees on the unutilized portion of the facility as well as letter of credit fees on outstanding instruments. Interest under the Revolving Credit Facility is payable (i) with respect to LIBOR borrowings, on the last day of each applicable interest period (one, two, three, six or twelve months), unless the applicable interest period is longer than three months, then on each day occurring every three months after the commencement of such interest period, and on the maturity date, and (ii) with respect to Base Rate borrowings, on the last day of every calendar quarter and on the maturity date. At December 31, 2019, we had $20 million of outstanding borrowings under the facility, providing $55 million of available capacity. During 2019, our weighted average interest rate on borrowings under the facility was approximately 5.73%. The Revolving Credit Facility may be repaid in whole or in part at any time, with final payment of all principal and interest then outstanding due on October 2, 2024.
Interest under the Term Loan Facility is payable at the same frequencies and bears interest at the same rate options as the Revolving Credit Facility. In connection with entering into the Credit Facility, on December 5, 2019 we entered into an interest rate swap to hedge against $350 million of the outstanding Term Loan Facility, which resulted in a weighted average interest rate of approximately 5.70% per annum during 2019. At December 31, 2019, we had $400 million of outstanding borrowings under the facility. Quarterly principal payments on the Term Loan Facility total $30 million, $50 million, $50 million, $50 million and $220 million for each of the years ending 2020, 2021, 2022, 2023, and 2024, respectively. A final payment of all principal and interest then outstanding on the Term Loan Facility is due on October 2, 2024.
The Company is required to make mandatory prepayments on the Credit Facility with proceeds received from issuances of debt, events of loss and certain dispositions. The Company also is required to prepay the Credit Facility with its excess cash flow in an amount equal to (a) if the Total Leverage Ratio (as defined in the Credit Agreement) is greater than or equal to 2.50 to 1.00, 75% of excess cash flow, (b) if the Total Leverage Ratio is greater than or equal to 2.00 to 1.00 but less than 2.50 to 1.00, 50% of excess cash flow, (c) if the Total Leverage Ratio is greater than or equal to 1.50 to 1.00 but less than 2.00 to 1.00, 25% of excess cash flow and (d) if the Total Leverage Ratio is less than 1.50 to 1.00, 0% of excess cash flow, within 5 days after receipt of its annual audited financial statements.
The Credit Agreement contains various affirmative and negative covenants that may, subject to certain exceptions, restrict the ability of us and our subsidiaries to, among other things, grant liens, incur additional indebtedness, make loans, advances or other investments, make non-ordinary course asset sales, declare or pay dividends or make other distributions with respect to equity interests, purchase, redeem or otherwise acquire or retire capital stock or other equity interests, or merge or consolidate
with any other person, among various other things. In addition, the Company is required to maintain the following financial covenants:
|
|
•
|
a Total Leverage Ratio (as defined in the Credit Agreement) at the last day of each fiscal quarter not to be greater than 4.00 to 1.00 ending on December 31, 2019 through and including June 30, 2020, 3.75 to 1.00 ending on September 30, 2020, 3.50 to 1.00 ending on December 31, 2020 through and including March 31, 2021, 3.25 to 1.00 ending on June 30, 2021 through and including September 30, 2021, and 3.00 to 1.00 ending on December 31, 2021 and thereafter; and
|
|
|
•
|
a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of not less than 1.20 to 1.00 as of the last day of each fiscal quarter of the Company, commencing with the fiscal quarter ending December 31, 2019.
|
Debt issuance costs—The Company incurred approximately $10.7 million of fees relating to the establishment of the Credit Facility. The costs associated with the Term Loan Facility and Revolving Credit Facility are reflected on the Balance Sheets as a direct reduction from the related debt liability and amortized over the terms of the respective facilities.
Oaktree Facility—On October 2, 2019, concurrently with the Company’s entry into the Credit Agreement, the Company terminated the Loan and Security Agreement, dated April 3, 2017, with Wilmington Trust, National Association, as agent, and the lenders party thereto (the “Oaktree Facility”), which provided for a $85 million term loan. The Company used a portion of the proceeds of the Credit Agreement to pay in full all outstanding borrowings of $67.1 million under the Oaktree Facility. Interest on the Oaktree Facility was equal to the one-, two-, three- or six-month LIBOR, plus 8.75% per annum.
Debt extinguishment costs—As part of the replacement of the Oaktree Facility, $7.7 million in debt extinguishment costs were expensed and included as a “Loss on extinguishment of debt” on the Company’s Statement of Operations for the year ended December 31, 2019. Debt extinguishment costs primarily consist of a prepayment premium of approximately $3.4 million (which amount is equal to 5% of the aggregate principal amount, including any interest and fees, of the Oaktree Facility repaid) and the write-off of the Oaktree Facility unamortized debt issuance costs of approximately $4.3 million.
Note Payable to Seller, Plateau Acquisition—As part of the Plateau Acquisition, the Company issued a $10 million subordinated promissory note to one of the Plateau sellers that bears interest at 8% with interest payments due quarterly beginning January 1, 2020. The subordinated promissory note has no scheduled payments, however, it may be repaid in whole or in part at any time, subject to certain payment restrictions under a subordination agreement with the Agent under our Credit Agreement, without premium or penalty, with final payment of all principal and interest then outstanding due on April 2, 2025. At inception, the subordinated promissory note’s interest rate approximated market.
Notes and deferred Payments to Sellers, Tealstone Acquisition—At December 31, 2019 the Company had $12.2 million outstanding, net of debt discounts, of the combined promissory notes and deferred cash payments issued as part of the Tealstone Acquisition. During the year ended December 31, 2019, the Company paid approximately $2.4 million of the deferred cash payments. The remaining principal amounts of $5 million of promissory notes and $7.5 million of deferred cash payments are due on April 3, 2020. Accreted interest for the period was approximately $1.1 million and $1.2 million for the years ended December 31, 2019 and 2018, respectively, and was recorded as interest expense.
Notes Payable for Transportation and Construction 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 $805 thousand and $612 thousand at December 31, 2019 and 2018, respectively. The purchases have payment terms ranging from 3 to 5 years and the associated interest rates range from 2.99% to 6.92%.
Compliance and other—As of December 31, 2019, we were in compliance with all of our restrictive and financial covenants. The Company’s debt is recorded at its carrying amount in the Consolidated Balance Sheets. As of December 31, 2019 and 2018, the carrying values of our debt outstanding approximated the fair values.
Borrowings—Based on our average borrowings for 2019 and our 2020 forecasted cash needs, we continue to believe that the Company has sufficient liquid financial resources to fund our requirements for the next year of operations. Furthermore, the Company is continually assessing ways to increase revenues and reduce costs to improve liquidity. However, in the event of a substantial cash constraint and if we were unable to secure adequate debt financing, our liquidity could be materially and adversely affected. Refer to Item 1A “Risk Factors” for further discussion of liquidity related risks.
Issuance Common Stock—On October 2, 2019, in connection with the Plateau Acquisition, the Company issued 1,244,813 shares of the Company’s stock as consideration paid to the Plateau sellers. The value of the shares issued was $16.2 million based on Sterling’s closing stock price on October 1, 2019. See Note 3 - Plateau Acquisition for further discussion of the Plateau Acquisition purchase consideration.
Capital Strategy—The Company will continue to explore additional revenue growth and capital alternatives to improve leverage and strengthen its financial position in order to take advantage of the improving civil infrastructure market. The Company expects to pursue strategic uses of its cash, such as, investing in projects or businesses that meet its gross margin targets and overall profitability and managing its debt balances.
Contractual Obligations
The following table sets forth our fixed, non-cancelable obligations at December 31, 2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
(In thousands)
|
Total
|
|
<1
Year
|
|
1 - 3
Years
|
|
4 – 5
Years
|
|
>5
Years
|
Operating leases (1)
|
$
|
15,680
|
|
|
$
|
6,813
|
|
|
$
|
8,038
|
|
|
$
|
829
|
|
|
$
|
—
|
|
Credit Facility
|
420,000
|
|
|
30,000
|
|
|
100,000
|
|
|
290,000
|
|
|
—
|
|
Credit Facility interest
|
108,217
|
|
|
25,451
|
|
|
49,123
|
|
|
33,643
|
|
|
—
|
|
Notes payable to Sellers, Plateau Acquisition (inclusive of outstanding interest)
|
14,400
|
|
|
800
|
|
|
1,600
|
|
|
1,600
|
|
|
10,400
|
|
Notes and deferred payments to Sellers, Tealstone Acquisition (inclusive of outstanding interest)
|
12,600
|
|
|
12,600
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Notes payable for equipment
|
805
|
|
|
243
|
|
|
338
|
|
|
224
|
|
|
—
|
|
Earn-out Liability (2)
|
1,027
|
|
|
1,027
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Members' interest subject to mandatory redemption and undistributed earnings (3)
|
49,003
|
|
|
49,003
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
621,732
|
|
|
$
|
125,937
|
|
|
$
|
159,099
|
|
|
$
|
326,296
|
|
|
$
|
10,400
|
|
|
|
(1) Operating leases are stated at minimum annual rentals for all operating leases having initial non-cancelable lease terms in excess of one year.
|
(2) The Tealstone earn-out arrangement requires the Company to pay up to an aggregate of $15 million 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.
|
(3) Mandatory redemption is based on the death or disability of the interest holders. Undistributed earnings can be distributed upon unanimous consent from the members and for tax distributions. At this time we cannot predict when such distributions will be made. The Company has purchased two separate $20 million death and permanent total disability insurance policies to mitigate the Company’s cash draw if such events were to occur.
|
Bonding—As is customary in the construction business, we are required to provide surety bonds to secure our performance under construction contracts. Our ability to obtain surety bonds primarily depends upon our capitalization, working capital, past performance, management expertise and reputation and certain external factors, including the overall capacity of the surety market. Surety companies consider such factors in relationship to the amount of our backlog and their underwriting standards, which may change from time to time. We have pledged all proceeds and other rights under our construction contracts to our bond surety company. Events that affect the insurance and bonding markets may result in bonding becoming more difficult to obtain in the future, or being available only at a significantly greater cost. To date, we have not encountered difficulties or material cost increases in obtaining new surety bonds.
Capital Expenditures—Capital equipment is acquired as needed by increased levels of production and to replace retiring equipment. Capital expenditures incurred in 2019 were $15.4 million. Management expects capital expenditures in 2020 to be in the range of $22 to $27 million due to the full year impact of the Plateau Acquisition; however, the award of a project requiring significant purchases of equipment or other factors could result in increased expenditures.
Inflation—Inflation generally has not had a material impact on our financial results; however, from time to time increases in oil, fuel, and steel prices have affected our cost of operations. Anticipated cost increases and reductions are considered in our bids to customers on proposed new construction projects.
Where we are the successful bidder on a Heavy Civil or Specialty Services project, we execute purchase orders with material suppliers and contracts with subcontractors covering the prices of most materials and services, other than oil and fuel products, thereby mitigating future price increases and supply disruptions. These purchase orders and contracts do not contain quantity guarantees and we have no obligation for materials and services beyond those required to complete the contracts with our customers. There can be no assurance that increases in prices of oil and fuel used in our business will be adequately covered by the estimated escalation we have included in our bids and there can be no assurance that all of our vendors will fulfill their pricing and supply
commitments under their purchase orders and contracts with the Company. We adjust our total estimated costs on our projects when we believe it is probable that we will have cost increases which will not be recovered from customers, vendors or re-engineering.
Inflation affects our Residential projects minimally, as the time from starting construction to finishing is typically less than one month.
Off-Balance Sheet Arrangements and Joint Ventures
We participate in various construction joint venture partnerships in order to share expertise, risk and resources for certain highly complex projects. The joint venture’s contract with the project owner typically requires joint and several liability among the joint venture partners. Although our agreements with our joint venture partners provide that each party will assume and fund its share of any losses resulting from a project, if one of our partners was unable to pay its share, we would be fully liable for such share under our contract with the project owner. Circumstances that could lead to a loss under these guarantee arrangements include a partner’s inability to contribute additional funds to the venture in the event that the project incurred a loss or additional costs that we could incur should the partner fail to provide the services and resources toward project completion that had been committed to in the joint venture agreement. See Item 1A “Risk Factors.”
At December 31, 2019, there was approximately $392.0 million of construction work to be completed on unconsolidated construction joint venture contracts, of which $161.4 million represented our proportionate share. Due to the joint and several liability under our joint venture arrangements, if one of our joint venture partners fails to perform, we and the remaining joint venture partners would be responsible for completion of the outstanding work. As of December 31, 2019, we are not aware of any situation that would require us to fulfill responsibilities of our joint venture partners pursuant to the joint and several liability under our contracts.
NEW ACCOUNTING STANDARDS
See the applicable section of Note 2 - Basis of Presentation and Significant Accounting Policies for a discussion of new accounting standards.
CRITICAL ACCOUNTING ESTIMATES
The discussion and analysis of the financial condition and results of operations are based on the Company’s Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these Consolidated Financial Statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. The Company continually evaluates its estimates based on historical experience and various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies involve more significant judgments and estimates used in the preparation of the Consolidated Financial Statements.
Revenue Recognition
Performance Obligations Satisfied Over Time—Revenue for contracts that satisfy the criteria for over time recognition is recognized as the work progresses. The Company measures transfer of control of the performance obligation utilizing the cost-to-cost measure of progress, with cost of revenue including direct costs, such as materials and labor, and indirect costs that are attributable to contract activity. Under the cost-to-cost approach, the use of estimated costs to complete each performance obligation is a significant variable in the process of determining recognized revenue and is a significant factor in the accounting for such performance obligations. Significant estimates that impact the cost to complete each performance obligation are: materials, components, equipment, labor and subcontracts; labor productivity; schedule durations, including subcontractor or supplier progress; contract disputes, including claims; achievement of contractual performance requirements; and contingency, among others. The cumulative impact of revisions in total cost estimates during the progress of work is reflected in the period in which these changes become known, including, to the extent required, the reversal of profit recognized in prior periods and the recognition of losses expected to be incurred on performance obligations in progress. Due to the various estimates inherent in our contract accounting, actual results could differ from those estimates, which could result in material changes to the Company’s Condensed Consolidated Financial Statements and related disclosures.
Valuation of Long-Lived Assets
Long-lived assets, which include property, equipment and acquired intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If a recoverability assessment is required, the estimated future cash flow associated with the asset or asset group will be compared to their respective carrying amounts to determine if an impairment exists. Actual useful lives and cash flows could be different from those estimated by management, and this could have a material effect on operating results and financial position. For the years ended December 31, 2019 and 2018, there were no events or changes in circumstances that would indicate a material impairment of our long-lived assets.
Goodwill
At December 31, 2019 and 2018, we had goodwill with carrying amounts of $191.9 million and $85.2 million, respectively. Goodwill is not amortized to earnings, but instead is reviewed for impairment at least annually, absent any indicators of impairment or when other actions require an impairment assessment. The Company performs the annual impairment assessment during the fourth quarter of each year based on balances as of October 1. During the fourth quarter of 2019, 2018 and 2017, the Company performed a qualitative assessment of goodwill to determine if it is more likely than not that an impairment exists. Factors considered include macroeconomic, industry and competitive conditions, financial performance and reporting unit specific events. These are discussed in a number of places including Item 1A “Risk Factors.” Our annual assessments indicated there was no impairment of goodwill during the years ended December 31, 2019, 2018 and 2017.
Income Taxes
Deferred Tax Realization Assessments—The Company performs an analysis at the end of each reporting period to determine whether it is more likely than not deferred tax assets will be realized in future years. In performing its assessments in prior periods, a full valuation allowance was recorded as a result of objective negative evidence existing which included historical losses from 2013 to 2016 and the first quarter of 2017 and associated limits on ability to consider other subjective evidence such as projections for future growth. During 2019, the Company achieved eleven of the last twelve consecutive quarters of pre-tax income and is projecting sufficient future taxable income to be available to utilize all NOLs prior to their expiration. 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. As a result of this analysis, the Company now believes sufficient positive evidence outweighs any negative evidence and, therefore released the full valuation allowance in the fourth quarter of 2019, resulting in $29.4 million being recorded as a reduction to income tax expense.
As a result of the Company’s analysis, management has determined that the Company does not have any material uncertain tax positions. If our estimates or assumptions regarding our current and deferred tax items are inaccurate or are modified, these changes could have potentially material impacts on our earnings.
Purchase Accounting Estimates
The aggregate purchase price for the Plateau Acquisition was allocated to the major categories of assets and liabilities acquired based upon their estimated fair values as of October 2, 2019, which were based, in part, upon external preliminary appraisal and valuation of certain assets, including specifically identified intangible assets and property and equipment. The excess of the purchase price over the preliminary estimated fair value of the net tangible and identifiable intangible assets acquired, totaling $106.7 million, was recorded as goodwill. The purchase price allocation is subject to further change when additional information is obtained. We intend to finalize the purchase price allocation as soon as practicable within the measurement period, but in no event later than one year following the closing date of the Plateau Acquisition. Our final purchase price allocation may result in additional adjustments to various other assets and liabilities, including the residual amount allocated to goodwill during the measurement period. See Note 3 - Plateau Acquisition to our Consolidated Financial Statements for further discussion.
Item 8. Financial Statements and Supplementary Data
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Sterling Construction Company, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Sterling Construction Company, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 3, 2020 expressed an unqualified opinion.
Change in accounting principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2001.
Houston, Texas
March 3, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Sterling Construction Company, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Sterling Construction Company, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Consolidated Financial Statements of the Company as of and for the year ended December 31, 2019, and our report dated March 3, 2020 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting (“Managements Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of Plateau Excavation, Inc., DeWitt Excavation, LLC and LK Gregory Construction, Inc. (collectively, “the Plateau entities”), wholly-owned subsidiaries, whose financial statements reflect total assets and revenues constituting 51% and 8% percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2019. As indicated in Management’s Report, the Plateau entities were acquired during 2019. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of the Plateau entities.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Houston, Texas
March 3, 2020
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Revenues
|
$
|
1,126,278
|
|
|
$
|
1,037,667
|
|
|
$
|
957,958
|
|
Cost of revenues
|
(1,018,484
|
)
|
|
(927,335
|
)
|
|
(868,866
|
)
|
Gross profit
|
107,794
|
|
|
110,332
|
|
|
89,092
|
|
General and administrative expense
|
(49,200
|
)
|
|
(48,220
|
)
|
|
(46,552
|
)
|
Intangible asset amortization
|
(4,695
|
)
|
|
(2,400
|
)
|
|
(1,799
|
)
|
Acquisition related costs
|
(4,311
|
)
|
|
—
|
|
|
—
|
|
Other operating expense, net
|
(11,837
|
)
|
|
(17,101
|
)
|
|
(14,565
|
)
|
Operating income
|
37,751
|
|
|
42,611
|
|
|
26,176
|
|
Interest income
|
1,142
|
|
|
1,017
|
|
|
314
|
|
Interest expense
|
(16,686
|
)
|
|
(12,350
|
)
|
|
(9,800
|
)
|
Loss on extinguishment of debt
|
(7,728
|
)
|
|
—
|
|
|
(755
|
)
|
Income before income taxes
|
14,479
|
|
|
31,278
|
|
|
15,935
|
|
Income tax benefit (expense)
|
26,216
|
|
|
(1,738
|
)
|
|
(118
|
)
|
Net income
|
40,695
|
|
|
29,540
|
|
|
15,817
|
|
Less: Net income attributable to noncontrolling interests
|
(794
|
)
|
|
(4,353
|
)
|
|
(4,200
|
)
|
Net income attributable to Sterling common stockholders
|
$
|
39,901
|
|
|
$
|
25,187
|
|
|
$
|
11,617
|
|
|
|
|
|
|
|
Net income per share attributable to Sterling common stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.50
|
|
|
$
|
0.94
|
|
|
$
|
0.44
|
|
Diluted
|
$
|
1.47
|
|
|
$
|
0.93
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
Basic
|
26,671
|
|
|
26,903
|
|
|
26,274
|
|
Diluted
|
27,119
|
|
|
27,194
|
|
|
26,712
|
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net income
|
$
|
40,695
|
|
|
$
|
29,540
|
|
|
$
|
15,817
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
Loss on interest rate swap
|
(209
|
)
|
|
—
|
|
|
—
|
|
Total comprehensive income
|
40,486
|
|
|
29,540
|
|
|
15,817
|
|
Less: Comprehensive income attributable to noncontrolling interests
|
(794
|
)
|
|
(4,353
|
)
|
|
(4,200
|
)
|
Comprehensive income attributable to Sterling common stockholders
|
$
|
39,692
|
|
|
$
|
25,187
|
|
|
$
|
11,617
|
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents ($7,538 and $8,750 related to variable interest entities (“VIEs”))
|
$
|
45,733
|
|
|
$
|
94,095
|
|
Accounts receivable, including retainage ($24,642 and $24,108 related to VIEs)
|
248,247
|
|
|
145,026
|
|
Costs and estimated earnings in excess of billings ($8,328 and $8,180 related to VIEs)
|
42,555
|
|
|
41,542
|
|
Receivables from and equity in construction joint ventures ($7,406 and $6,984 related to VIEs)
|
9,196
|
|
|
10,720
|
|
Other current assets ($503 and $32 related to VIEs)
|
11,790
|
|
|
11,233
|
|
Total current assets
|
357,521
|
|
|
302,616
|
|
Property and equipment, net ($5,619 and $7,219 related to VIEs)
|
116,030
|
|
|
51,999
|
|
Operating lease right-of-use assets ($3,817 and $0 related to VIEs)
|
13,979
|
|
|
—
|
|
Goodwill ($1,501 and $1,501 related to VIEs)
|
191,892
|
|
|
85,231
|
|
Other intangibles, net
|
256,323
|
|
|
42,418
|
|
Deferred tax asset, net
|
26,012
|
|
|
—
|
|
Other non-current assets, net
|
183
|
|
|
309
|
|
Total assets
|
$
|
961,940
|
|
|
$
|
482,573
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable ($18,213 and $22,859 related to VIEs)
|
$
|
137,593
|
|
|
$
|
99,426
|
|
Billings in excess of costs and estimated earnings ($9,649 and $6,585 related to VIEs)
|
85,011
|
|
|
62,407
|
|
Current maturities of long-term debt ($39 and $174 related to VIEs)
|
42,473
|
|
|
2,899
|
|
Current portion of long-term lease obligations ($1,838 and $0 related to VIEs)
|
7,095
|
|
|
—
|
|
Income taxes payable
|
1,212
|
|
|
318
|
|
Accrued compensation ($1,521 and $1,566 related to VIEs)
|
13,727
|
|
|
9,448
|
|
Other current liabilities ($1,429 and $1,485 related to VIEs)
|
6,393
|
|
|
4,676
|
|
Total current liabilities
|
293,504
|
|
|
179,174
|
|
Long-term debt ($2 and $1,976 related to VIEs)
|
390,627
|
|
|
79,117
|
|
Long-term lease obligations ($1,979 and $0 related to VIEs)
|
6,976
|
|
|
—
|
|
Members’ interest subject to mandatory redemption and undistributed earnings
|
49,003
|
|
|
49,343
|
|
Deferred taxes
|
—
|
|
|
1,450
|
|
Other long-term liabilities
|
619
|
|
|
1,229
|
|
Total liabilities
|
740,729
|
|
|
310,313
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
Common stock, par value $0.01 per share; 38,000 shares authorized, 28,290 and 27,064 shares issued, 27,772 and 26,597 shares outstanding
|
283
|
|
|
271
|
|
Additional paid in capital
|
251,019
|
|
|
233,795
|
|
Treasury Stock, at cost: 518 and 467 shares
|
(6,142
|
)
|
|
(4,731
|
)
|
Retained deficit
|
(25,033
|
)
|
|
(64,934
|
)
|
Accumulated other comprehensive loss
|
(209
|
)
|
|
—
|
|
Total Sterling stockholders’ equity
|
219,918
|
|
|
164,401
|
|
Noncontrolling interests
|
1,293
|
|
|
7,859
|
|
Total stockholders’ equity
|
221,211
|
|
|
172,260
|
|
Total liabilities and stockholders’ equity
|
$
|
961,940
|
|
|
$
|
482,573
|
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
40,695
|
|
|
$
|
29,540
|
|
|
$
|
15,817
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
20,740
|
|
|
16,770
|
|
|
16,994
|
|
Amortization of deferred debt costs
|
3,393
|
|
|
3,250
|
|
|
2,563
|
|
(Gain) loss on disposal of property and equipment
|
(527
|
)
|
|
(580
|
)
|
|
171
|
|
Loss on debt extinguishment
|
4,334
|
|
|
—
|
|
|
755
|
|
Deferred taxes
|
(27,398
|
)
|
|
1,450
|
|
|
—
|
|
Stock-based compensation
|
3,788
|
|
|
3,064
|
|
|
2,843
|
|
Unrealized gain on hedge
|
(30
|
)
|
|
—
|
|
|
—
|
|
Changes in operating assets and liabilities (Note 18)
|
(3,902
|
)
|
|
(14,020
|
)
|
|
(14,376
|
)
|
Net cash provided by operating activities
|
41,093
|
|
|
39,474
|
|
|
24,767
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
Plateau Acquisition, net of cash acquired
|
(396,323
|
)
|
|
—
|
|
|
—
|
|
Tealstone Acquisition, net of cash acquired
|
—
|
|
|
—
|
|
|
(54,861
|
)
|
Capital expenditures
|
(15,397
|
)
|
|
(13,171
|
)
|
|
(9,420
|
)
|
Proceeds from sale of property and equipment
|
1,334
|
|
|
1,789
|
|
|
8,384
|
|
Net cash used in investing activities
|
(410,386
|
)
|
|
(11,382
|
)
|
|
(55,897
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Cash received from credit facility
|
430,000
|
|
|
—
|
|
|
85,000
|
|
Repayments of long-term debt
|
(87,621
|
)
|
|
(11,555
|
)
|
|
(4,710
|
)
|
Distributions to noncontrolling interest owners
|
(7,360
|
)
|
|
(1,350
|
)
|
|
—
|
|
Purchase of treasury stock
|
(3,201
|
)
|
|
(4,731
|
)
|
|
—
|
|
Debt issuance costs
|
(10,688
|
)
|
|
—
|
|
|
(6,871
|
)
|
Other
|
(199
|
)
|
|
(314
|
)
|
|
(1,121
|
)
|
Net cash provided by (used in) financing activities
|
320,931
|
|
|
(17,950
|
)
|
|
72,298
|
|
Net change in cash and cash equivalents
|
(48,362
|
)
|
|
10,142
|
|
|
41,168
|
|
Cash and cash equivalents at beginning of period
|
94,095
|
|
|
83,953
|
|
|
42,785
|
|
Cash and cash equivalents at end of period
|
$
|
45,733
|
|
|
$
|
94,095
|
|
|
$
|
83,953
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Cash paid during the period for interest
|
$
|
11,566
|
|
|
$
|
10,829
|
|
|
$
|
9,800
|
|
Cash paid during the period for income taxes
|
$
|
94
|
|
|
$
|
276
|
|
|
$
|
279
|
|
Non-cash items:
|
|
|
|
|
|
Share consideration given for acquisitions
|
$
|
16,195
|
|
|
$
|
—
|
|
|
$
|
17,601
|
|
Notes and deferred payments to sellers
|
$
|
10,000
|
|
|
$
|
—
|
|
|
$
|
11,588
|
|
Estimated tax basis election
|
$
|
5,141
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Warrants issued to lenders (1,000 Warrants)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,500
|
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STERLING CONSTRUCTION COMPANY, INC. STOCKHOLDERS
|
|
|
|
|
|
Common Stock
|
|
Additional Paid in Capital
|
|
Treasury Stock
|
|
Retained Deficit
|
|
Accumulated Other Comprehensive Loss
|
|
Total Sterling Stockholders’ Equity
|
|
Non-controlling interests
|
|
|
|
Shares
|
|
Amount
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
Total
|
Balance at December 31, 2016
|
24,987
|
|
|
$
|
250
|
|
|
$
|
208,922
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
(101,738
|
)
|
|
$
|
—
|
|
|
$
|
107,434
|
|
|
$
|
656
|
|
|
$
|
108,090
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,617
|
|
|
—
|
|
|
11,617
|
|
|
4,200
|
|
|
15,817
|
|
Stock-based compensation
|
248
|
|
|
3
|
|
|
2,840
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,843
|
|
|
—
|
|
|
2,843
|
|
Stock issued for Tealstone Acquisition
|
1,882
|
|
|
19
|
|
|
17,042
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17,061
|
|
|
—
|
|
|
17,061
|
|
Distribution to owners
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Warrants issued to lenders
|
—
|
|
|
—
|
|
|
3,500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,500
|
|
|
—
|
|
|
3,500
|
|
Other
|
(66
|
)
|
|
(1
|
)
|
|
(1,121
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,122
|
)
|
|
—
|
|
|
(1,122
|
)
|
Balance at December 31, 2017
|
27,051
|
|
|
271
|
|
|
231,183
|
|
|
—
|
|
|
—
|
|
|
(90,121
|
)
|
|
—
|
|
|
141,333
|
|
|
4,856
|
|
|
146,189
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,187
|
|
|
—
|
|
|
25,187
|
|
|
4,353
|
|
|
29,540
|
|
Stock-based compensation
|
40
|
|
|
—
|
|
|
3,064
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,064
|
|
|
—
|
|
|
3,064
|
|
Distribution to owners
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,350
|
)
|
|
(1,350
|
)
|
Purchase of Treasury Stock
|
(467
|
)
|
|
—
|
|
|
—
|
|
|
467
|
|
|
(4,731
|
)
|
|
—
|
|
|
—
|
|
|
(4,731
|
)
|
|
—
|
|
|
(4,731
|
)
|
Shares withheld for taxes
|
(27
|
)
|
|
—
|
|
|
(452
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(452
|
)
|
|
—
|
|
|
(452
|
)
|
Balance at December 31, 2018
|
26,597
|
|
|
271
|
|
|
233,795
|
|
|
467
|
|
|
(4,731
|
)
|
|
(64,934
|
)
|
|
—
|
|
|
164,401
|
|
|
7,859
|
|
|
172,260
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39,901
|
|
|
—
|
|
|
39,901
|
|
|
794
|
|
|
40,695
|
|
Loss on interest rate swap
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(209
|
)
|
|
(209
|
)
|
|
—
|
|
|
(209
|
)
|
Stock-based compensation
|
(1
|
)
|
|
—
|
|
|
3,788
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,788
|
|
|
—
|
|
|
3,788
|
|
Distributions to owners
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,360
|
)
|
|
(7,360
|
)
|
Purchase of Treasury Stock
|
(250
|
)
|
|
—
|
|
|
—
|
|
|
250
|
|
|
(3,201
|
)
|
|
—
|
|
|
—
|
|
|
(3,201
|
)
|
|
—
|
|
|
(3,201
|
)
|
Stock issued for Plateau Acquisition
|
1,245
|
|
|
12
|
|
|
16,183
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,195
|
|
|
—
|
|
|
16,195
|
|
Issuance of stock
|
273
|
|
|
—
|
|
|
(2,599
|
)
|
|
(273
|
)
|
|
2,751
|
|
|
—
|
|
|
—
|
|
|
152
|
|
|
—
|
|
|
152
|
|
Shares withheld for taxes
|
(92
|
)
|
|
—
|
|
|
(148
|
)
|
|
74
|
|
|
(961
|
)
|
|
—
|
|
|
—
|
|
|
(1,109
|
)
|
|
—
|
|
|
(1,109
|
)
|
Balance at December 31, 2019
|
27,772
|
|
|
$
|
283
|
|
|
$
|
251,019
|
|
|
518
|
|
|
$
|
(6,142
|
)
|
|
$
|
(25,033
|
)
|
|
$
|
(209
|
)
|
|
$
|
219,918
|
|
|
$
|
1,293
|
|
|
$
|
221,211
|
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
($ and share values in thousands, except per share data)
Business Summary
Sterling Construction Company, Inc., (“Sterling,” “the Company,” “we,” “our” or “us”), a Delaware corporation, is a construction company that has been involved in the construction industry since its founding in 1955. The Company operates through a variety of subsidiaries within three operating groups specializing in heavy civil, specialty services, and residential projects in the United States (the “U.S.”), primarily across the southern U.S., the Rocky Mountain states, California and Hawaii, as well as other areas with strategic construction opportunities. Heavy civil includes infrastructure and rehabilitation projects for highways, roads, bridges, airfields, ports, light rail, water, wastewater and storm drainage systems. Specialty services projects include construction site excavation and drainage, drilling and blasting for excavation, foundations for multi-family homes, parking structures and other commercial concrete projects. Residential projects include concrete foundations for single-family homes. See Note 3 - Plateau Acquisition for discussion of the acquisition of Plateau on October 2, 2019 and Note 21 - Segment Information for discussion of changes to the historical presentation of the Company’s business segments during 2019.
|
|
|
2.
|
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation
Presentation Basis—The accompanying Consolidated Financial Statements are presented in accordance with accounting policies generally accepted in the United States (“GAAP”) and 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 Note 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. Values presented within tables (excluding per share data) are in thousands. Reclassifications have been made to historical financial data in the Consolidated Financial Statements to conform to the current year presentation. See Note 21 - Segment Information for discussion of changes to the historical presentation of the Company’s business segments during 2019.
Estimates and Judgments—The preparation of the accompanying Consolidated Financial Statements in conformity with GAAP requires management to make estimates and judgments 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 accounting estimates of the Company require a higher degree of judgment than others in their application. These include the recognition of revenue and earnings from construction contracts over time, the valuation of long-lived assets, goodwill, income taxes, and purchase accounting estimates, including goodwill and other intangible assets. Management continually evaluates all of its estimates and judgments based on available information and experience; however, actual results could differ from these estimates.
Significant Accounting Policies
Revenue Recognition—Our revenue is derived from long-term contracts for customers in our heavy civil and specialty services business segments, as well as short-term projects for customers in our residential business segment. Accounting treatment for these contracts in accordance with ASU 2014-09 (Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers), is as follows:
|
|
•
|
Performance Obligations Satisfied Over Time (Heavy Civil and Specialty Services)
|
Recognition of Performance Obligations—A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the new revenue standard. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Heavy civil projects typically span between 12 to 36 months, and specialty services projects are between 6 to 24 months. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. Some contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the project life cycle (design and construction).
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenues are recognized as our obligations are satisfied over time, using the ratio of project costs incurred to estimated total costs for each contract because of the continuous transfer of control to the customer as all of the work is performed at the customer’s site and, therefore, the customer controls the asset as it is being constructed. This continuous transfer of control to the customer is further supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay the Company for costs incurred plus a reasonable profit and take control of any work in process. 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.
Items excluded from cost-to-cost—Pre-contract costs are generally not material and are charged to expense as incurred, but in certain cases pre-contract recognition may be deferred if specific probability criteria are met. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Remaining Performance Obligations (“RPOs”)—RPOs represent the amount of revenues we expect to recognize in the future from our contract commitments on projects and are hereafter referred to as “Backlog”. Backlog includes the entire expected revenue values for joint ventures we consolidate and our proportionate value for those we proportionately consolidate. Backlog may not be indicative of future operating results, and projects included in Backlog may be canceled, modified or otherwise altered by customers. See Note 4 - Revenue from Customers, for further discussion.
Variable Consideration—Contract modifications through change orders, claims and incentives are routine in the performance of the Company’s contracts to account for changes in the contract specifications or requirements. In most instances, contract modifications are not distinct from the existing contract due to the significant integration service provided in the contract and are accounted for as a modification of the existing contract and performance obligation. Either the Company or its customers may initiate change orders, which may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work. 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 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 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 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.
|
|
•
|
Performance Obligations Satisfied at a Point-in-Time (Residential)
|
Revenue for our residential contracts 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. completion of concrete foundation). The time from starting construction to completion is typically two weeks or less. Upon fulfillment of the performance obligation, the customer is provided an invoice (or equivalent) demonstrating transfer of control to the customer.
Receivables, including Retainage—Receivables are generally based on amounts billed to the customer in accordance with contractual provisions. Many of the contracts under which the Company performs work also contain retainage provisions. Retainage refers to that portion of our billings held for payment by the customer pending satisfactory completion of the project. Unless reserved, the Company assumes that all amounts retained by customers under such provisions are fully collectible. Retainage on active contracts is classified as a current asset regardless of the term of the contract and is generally collected within one year of the completion of a contract. At December 31, 2019 and 2018, receivables included $79,400 and $47,400 of retainage. We anticipate collecting approximately 75% of our December 31, 2019 of retainage in 2020.
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Receivables are written off based on individual credit evaluation and specific circumstances of the customer, when such treatment is warranted. The Company performs a review of outstanding receivables, historical collection information and existing economic conditions to determine if there are potential uncollectible receivables. At December 31, 2019 and 2018, our allowance for doubtful accounts against contracts receivable was minimal.
As is customary, we have agreed to indemnify our bonding company for all losses incurred by it in connection with bonds that are issued, and we have granted our bonding company a security interest in certain assets, including accounts receivable, as collateral for such obligation.
Contracts in Progress—The timing of revenue recognition, billings and costs incurred results in billed accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts (contract assets) on the Consolidated Balance Sheet. For performance obligations satisfied over time, 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. Typically, Sterling bills for 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). However, the Company occasionally bills subsequent to revenue recognition, resulting in contract assets. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period.
Consolidated 50% Owned Subsidiaries—The Company has 50% ownership interests in two subsidiaries that it fully consolidates as a result of its exercise of control of the entities. The results attributable to the 50% portions that the Company does not own are eliminated within “Other operating expense, net” within the Consolidated Statements of Operations and an associated liability is established within “Members’ interest subject to mandatory redemption and undistributed earnings” within the Consolidated Balance Sheets. These subsidiaries also have individual mandatory redemption provisions which, under circumstances that are certain to occur, obligate the Company to purchase the remaining 50% interests. These purchase obligations are also recorded in “Members’ interest subject to mandatory redemption and undistributed earnings” on the Consolidated Balance Sheets.
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 Consolidated Statements of Operations and as a single line item (“Receivables from and equity in construction joint ventures”) in the Consolidated Balance Sheets. This method is a permissible modification of the equity method of accounting which is a common practice in the construction industry.
Cash and Restricted cash—Our cash is comprised of highly liquid investments with maturities of three months or less. Restricted cash of approximately $4,800 and $3,900 is included in “Other current assets” on the Consolidated Balance Sheets at December 31, 2019 and 2018. This primarily 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.
Property and equipment—Property and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives, including buildings and improvements (5 to 39 years) and plant and field equipment (5 to 20 years). Renewals and betterments that substantially extend the useful life of an asset are capitalized and depreciated. Leasehold improvements are depreciated over the lesser of the useful life of the asset or the applicable lease term. See Note 7 - Property and Equipment for disclosure of the components of property and equipment.
Lease Arrangements— In the ordinary course of business, the Company enters into a variety of lease arrangements, including operating, finance and capital leases.
|
|
•
|
Operating & Finance 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 non-current assets and lease liabilities are included in current or non-current liabilities on the Company’s 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 Consolidated Balance Sheets. ROU assets represent the Company’s right to use, or control the use of, a specified asset
|
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
|
|
•
|
Capital Leases—The Company accounts for capital leases, which transfer substantially all the benefits and risks incident to the ownership of the leased property to the Company, as the acquisition of an asset and the incurrence of an obligation. Under this method of accounting, the recorded value of the leased asset is amortized principally using the straight-line method over its estimated useful life and the obligation, including interest thereon, is reduced through payments over the life of the lease. Depreciation expense on equipment subject to capital leases and the related accumulated depreciation is included with that of owned equipment. Capital leases are recorded in “Long-term debt, net of current maturities” and “Current maturities of long-term debt,” as applicable, in our Consolidated Balance Sheets.
|
Goodwill—Goodwill represents the excess of the cost of companies acquired over the fair value of their net assets at the dates of acquisition. Goodwill is not amortized, but instead is reviewed for impairment at least annually at a reporting unit level, absent any interim indicators of impairment. Interim testing for impairment is performed if indicators of potential impairment exist. We perform our annual impairment assessment during the fourth quarter of each year. We identify a potential impairment by comparing the fair value of the applicable reporting unit to its net book value, including goodwill. To determine the fair value of our reporting units and test for impairment, we utilize an income approach (discounted cash flow method) as we believe this is the most direct approach to incorporate the specific economic attributes and risk profiles of our reporting units into our valuation model. We generally do not utilize a market approach, given the lack of relevant information generated by market transactions involving comparable businesses. However, to the extent market indicators of fair value become available, we consider such market indicators in our discounted cash flow analysis and determination of fair value. Refer to Note 3 - Plateau Acquisition and Note 8 - Goodwill and Other Intangible Assets for our disclosure regarding goodwill impairment testing.
Evaluating Impairment of Other Intangible Assets and Other Long-Lived Assets—Our finite-lived intangible assets are amortized over their estimated remaining useful economic lives. Our project-related intangible assets are amortized as the applicable projects progress, customer relationships are amortized utilizing an accelerated method based on the pattern of cash flows expected to be realized, taking into consideration expected revenues and customer attrition, and our other intangibles are amortized utilizing a straight-line method. When events or changes in circumstances indicate that finite-lived intangible and other long-lived assets may be impaired, an evaluation is performed. If the asset or asset group fails the recoverability test, we will perform a fair value measurement to determine and record an impairment charge. See Note 8 - Goodwill and Other Intangible Assets for further discussion.
Federal and State Income Taxes—We determine deferred income tax assets and liabilities using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We recognize the financial statement benefit of a tax position only after determining the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Refer to Note 13 - Income Taxes for further information regarding our federal and state income taxes.
Recently Adopted Accounting Pronouncements
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 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
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 “Operating lease right-of-use assets”, “Current portion of long-term lease obligations” and “Long-term lease obligations” of $13,600, $6,200 and $7,400, respectively on its Consolidated Balance Sheet, related to its existing operating leases. The adoption of this standard did not have a material impact on the Company’s Consolidated Statements of Operations. As of December 31, 2019, the weighted average remaining lease terms for the Company’s various operating leases extends out over the next 2.5 years. The weighted average discount rate used to determine the present value of the Company’s operating leases’ future payments was approximately 6.0%. Refer to Note 10 - Lease Obligations for further information regarding leases.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13 to add the guidance in ASC 326 on the impairment of financial instruments. The ASU introduces an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. The amendments in the ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company expects to adopt this guidance as required and does not expect a material impact to the Company’s Consolidated Financial Statements.
General—On October 2, 2019, pursuant to the Equity Purchase Agreement with Greg K. Rogers, Philip T. Travis, as trustee of the Lorin L. Rogers 2018 Trust, Kimberlin Rogers 2018 Trust, Gregory K. Rogers 2018 Trust and Mary A. Rogers 2018 Trust, LK Gregory Construction, Inc., Plateau Excavation, Inc. and DeWitt Excavation, LLC (collectively “Plateau”), Sterling consummated the acquisition (the “Plateau Acquisition”) of all of the issued and outstanding shares of capital stock of LK Gregory Construction, Inc. and Plateau Excavation, Inc., and all of the issued and outstanding equity interests in DeWitt Excavation, LLC. Plateau is engaged in the business of surveying, clearing and grubbing, erosion control, grading, grassing, site excavation, storm drainage, sanitary sewer and water main installation, drilling and blasting, curb and gutter, paving, concrete work and landfill services, in each case to general contractors and developers engaged in construction services, and engineering services relating thereto.
Acquisition Accounting—The Plateau Acquisition is accounted for using the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations.
Purchase Consideration—Sterling completed the Plateau Acquisition for a purchase price of $427,659, net of cash acquired, detailed as follows:
|
|
|
|
|
Cash consideration transferred, net of $2,425 of cash acquired
|
$
|
375,000
|
|
Target working capital adjustment
|
21,323
|
|
Equity consideration transferred (1,245 shares at $13.01 per share(1))
|
16,195
|
|
Note payable to seller (See Note 9 - Debt)
|
10,000
|
|
Estimated tax basis election
|
5,141
|
|
Total consideration
|
$
|
427,659
|
|
(1) Sterling’s closing stock price on October 1, 2019
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Preliminary Purchase Price Allocation—The aggregate purchase price noted above was allocated to the assets and liabilities acquired based upon their estimated fair values at the acquisition closing date, which were based, in part, upon external preliminary appraisal and valuation of 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 $106,661, was recorded as goodwill.
The following table summarizes our purchase price allocation at the acquisition closing date, net of cash acquired:
|
|
|
|
|
Net tangible assets:
|
|
Accounts receivable, including retainage
|
$
|
81,921
|
|
Costs and estimated earnings in excess of billings
|
974
|
|
Other current assets
|
249
|
|
Property and equipment, net
|
65,492
|
|
Other non-current assets, net
|
10
|
|
Accounts payable
|
(22,039
|
)
|
Billings in excess of costs and estimated earnings
|
(16,540
|
)
|
Other current liabilities
|
(7,669
|
)
|
Total net tangible assets
|
102,398
|
|
Preliminary identifiable intangible assets
|
218,600
|
|
Goodwill
|
106,661
|
|
Total consideration transferred
|
$
|
427,659
|
|
The purchase price allocation above is subject to further change when additional information is obtained. We have not finalized our assessment of the fair values primarily for intangible assets and property and equipment. We intend to finalize the purchase price allocation as soon as practicable within the measurement period, but in no event later than one year following the closing date of the Plateau Acquisition. Our final purchase price allocation may result in additional adjustments to various other assets and liabilities, including the residual amount allocated to goodwill during the measurement period.
Identifiable Intangible Assets—Intangible assets identified as part of the Plateau Acquisition are reflected in the table below and are recorded at their estimated fair value, as determined by the Company’s management, based on available information which includes a preliminary valuation from external experts. The estimated useful lives for intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows.
|
|
|
|
|
|
|
|
Weighted Average Life (Years)
|
|
October 2, 2019
Fair Value
|
Customer relationships
|
25
|
|
$
|
191,800
|
|
Trade name
|
25
|
|
24,800
|
|
Non-compete agreements
|
5
|
|
2,000
|
|
Total
|
|
|
$
|
218,600
|
|
Acquired Backlog—Plateau backlog totaled approximately $159,000 at the Plateau Acquisition closing date.
Impact of the Acquisition on Statements of Operations—From October 2, 2019 (the Plateau Acquisition closing date), through December 31, 2019, revenue and income from operations (net of acquisition related costs) associated with the Acquisition totaled $84,637 and $10,921, respectively.
Supplemental Pro Forma Information (Unaudited)—The following unaudited pro forma combined financial information (“the pro forma financial information”) gives effect to the Plateau Acquisition, accounted for as a business combination using the purchase method of accounting. The pro forma financial information reflects the Plateau 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 Plateau following the Plateau Acquisition. The pro forma financial information includes adjustments to: (1) exclude transaction costs that were included in historical results and are expected to be non-recurring, (2) include additional intangibles amortization and net interest expense associated with the Plateau Acquisition and (3) include the pro forma results of Plateau for the years ended December 31, 2019 and 2018. 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
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
pro forma financial information does not purport to project the future operating results of the combined company following the Plateau Acquisition.
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
Pro forma revenue
|
$
|
1,358,736
|
|
|
$
|
1,326,854
|
|
Pro forma net income attributable to Sterling
|
$
|
90,408
|
|
|
$
|
54,282
|
|
|
|
|
4.
|
REVENUE FROM CUSTOMERS
|
Backlog
The Company had the following backlog, by segment:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Heavy Civil Backlog
|
|
$
|
834,049
|
|
|
$
|
780,706
|
|
Specialty Services Backlog
|
|
233,976
|
|
|
70,019
|
|
Total Heavy Civil and Specialty Services Backlog
|
|
$
|
1,068,025
|
|
|
$
|
850,725
|
|
The Company expects to recognize approximately 70% of its backlog as revenue during the next twelve months, and the balance thereafter.
Revenue Disaggregation
The following tables present the Company’s revenue disaggregated by major end market and contract type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Revenue by major end market
|
|
2019
|
|
2018
|
|
2017
|
Heavy Highway
|
|
$
|
483,175
|
|
|
$
|
513,376
|
|
|
$
|
579,157
|
|
Aviation
|
|
141,371
|
|
|
111,824
|
|
|
77,399
|
|
Water Containment and Treatment
|
|
65,795
|
|
|
66,928
|
|
|
59,593
|
|
Other
|
|
69,984
|
|
|
73,510
|
|
|
85,503
|
|
Heavy Civil Revenue
|
|
$
|
760,325
|
|
|
$
|
765,638
|
|
|
$
|
801,652
|
|
|
|
|
|
|
|
|
Land Development
|
|
$
|
84,637
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial
|
|
128,187
|
|
|
120,333
|
|
|
48,314
|
|
Specialty Services Revenue
|
|
$
|
212,824
|
|
|
$
|
120,333
|
|
|
$
|
48,314
|
|
|
|
|
|
|
|
|
Residential Revenue
|
|
$
|
153,129
|
|
|
$
|
151,696
|
|
|
$
|
107,992
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,126,278
|
|
|
$
|
1,037,667
|
|
|
$
|
957,958
|
|
|
|
|
|
|
|
|
Revenue by contract type
|
|
|
|
|
|
|
Fixed-Unit Price
|
|
$
|
708,638
|
|
|
$
|
733,047
|
|
|
$
|
755,840
|
|
Lump Sum
|
|
262,237
|
|
|
146,874
|
|
|
57,823
|
|
Residential and Other
|
|
155,403
|
|
|
157,746
|
|
|
144,295
|
|
Revenues
|
|
$
|
1,126,278
|
|
|
$
|
1,037,667
|
|
|
$
|
957,958
|
|
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 if 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.
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Variable Consideration
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.
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, together in some cases as necessary with the views of the Company’s outside claim consultants, the Company concluded it was appropriate to include in project price amounts of $3,000 and $9,300, at December 31, 2019 and 2018, respectively. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Contract Estimates
Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, the Company estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognizes such profit over the life of the contract.
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.
In December 2019, Sterling was able to come to an interim agreement related to a 2014 project involving the construction of three separate bridges in Texas that had suffered from significant schedule delays and cost overruns due to major owner design flaws. This agreement enabled Sterling to recover approximately $17,000 in costs to date related to these delays and defined a better dispute resolution process along with agreed upon rates for future work if there are further delays. As part of this agreement, Sterling agreed to work on all three bridges simultaneously (versus doing one at a time) to accelerate the final completion schedule. This revised schedule has significantly increased the amount of labor, equipment and infrastructure required to complete the project under the new terms of the agreement and resulted in a reduction of gross profit in the quarter of $10,200.
Changes in estimated revenues and gross margin resulted in a net decrease of $9,044 for the year ended December 31, 2019, and net increases of $7,098 and $923 for the years ended December 31, 2018 and 2017 respectively, included in “Operating income” on the Consolidated Statements of Operations. The 2019 decrease primarily related to the aforementioned bridge project in Texas.
|
|
|
5.
|
CONSOLIDATED 50% OWNED SUBSIDIARIES
|
The Company has 50% ownership interests in two subsidiaries (“Myers” and “RHB”) that it fully consolidates as a result of its exercise of control over the entities. The earnings attributable to the 50% portions the Company does not own were $9,800, $15,100 and $11,500 for 2019, 2018 and 2017, respectively, and are eliminated within “Other operating expense, net” in the Consolidated Statements of Operations. Any undistributed earnings for partners are included in “Members’ interest subject to mandatory redemption and undistributed earnings” within the Consolidated Balance Sheets and are mandatorily payable at the time of the noncontrolling owners’ death or permanent disability. The Company has 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.
These two subsidiaries also have individual mandatory redemption provisions which, under circumstances outlined in the partner agreements, are certain to occur and obligate the Company to purchase each partner’s remaining 50% interests for $20,000 ($40,000 in the aggregate). These purchase obligations are also recorded in “Members’ interest subject to mandatory redemption and undistributed earnings” on the Consolidated Balance Sheets.
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The liability consists of the following:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Members’ interest subject to mandatory redemption
|
$
|
40,000
|
|
|
$
|
40,000
|
|
Net accumulated earnings
|
9,003
|
|
|
9,343
|
|
Total liability
|
$
|
49,003
|
|
|
$
|
49,343
|
|
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 the Company 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.
Summary financial information for Myers is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Revenues
|
$
|
205,615
|
|
|
$
|
193,677
|
|
|
$
|
181,589
|
|
Operating income
|
$
|
6,372
|
|
|
$
|
8,819
|
|
|
$
|
9,069
|
|
Net income attributable to Sterling common stockholders
|
$
|
3,196
|
|
|
$
|
4,415
|
|
|
$
|
4,531
|
|
|
|
|
6.
|
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 Consolidated Balance Sheets line item “Noncontrolling interests” in “Stockholders’ equity” and the Consolidated Statements of Operations line item “Net income attributable to noncontrolling interests,” respectively.
The following table summarizes the changes in the noncontrolling owners’ interests in subsidiaries and consolidated joint ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Balance, beginning of period
|
$
|
7,859
|
|
|
$
|
4,856
|
|
|
$
|
656
|
|
Net income attributable to noncontrolling interest included in equity
|
794
|
|
|
4,353
|
|
|
4,200
|
|
Distributions to noncontrolling interest owners
|
(7,360
|
)
|
|
(1,350
|
)
|
|
—
|
|
Balance, end of period
|
$
|
1,293
|
|
|
$
|
7,859
|
|
|
$
|
4,856
|
|
Joint ventures with a noncontrolling interest—Where the Company has a noncontrolling joint interest in a venture, the Company accounts for its share of the operations of such construction joint ventures on a pro-rata basis using proportionate consolidation on its Consolidated Statements of Operations and as a single line item in “Receivables from and equity in construction joint ventures” in the 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 Consolidated Financial Statements are shown below:
Generally, each construction joint venture is formed to accomplish a specific project and is jointly controlled by the joint venture partners. The joint venture agreements typically provide that our interests in any profits and assets, and our respective share in any losses and liabilities that may result from the performance of the contract are limited to our stated percentage interest in the venture. We have no significant commitments beyond completion of the contract with the customer.
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Joint venture contracts with project owners typically impose joint and several liability on the joint venture partners. Although our agreements with our joint venture partners provide that each party will assume and pay its share of any losses resulting from a project, if one of our partners is unable to pay its share, we would be fully liable under our contract with the project owner. Circumstances that could lead to a loss under these guarantee arrangements include a partner’s inability to contribute additional funds to the venture in the event that the project incurs a loss or additional costs that we could incur should the partner fail to provide the services and resources toward project completion that had been committed to in the joint venture agreement. Historically, the Company has not incurred a liability related to the nonperformance of a joint venture partner.
Under a joint venture agreement, one partner is typically designated as the sponsor or manager. The sponsoring partner typically provides all administrative, accounting and most of the project management support for the project and generally receives a fee from the joint venture for these services. We have been designated as the sponsoring partner in certain of our current joint venture projects and are a non-sponsoring partner in others.
The Company must determine whether each joint venture in which it participates is a variable interest entity. This determination focuses on identifying which joint venture partner, if any, has the power to direct the activities of a joint venture and the obligation to absorb losses of the joint venture or the right to receive benefits from the joint venture in excess of their ownership interests and could have the effect of requiring us to consolidate joint ventures in which we have a noncontrolling variable interest.
The Company determined that the joint venture between RLW (51% owner) and SEMA Construction Inc (“SEMA”) (49% owner) is a VIE as the Company is the primary beneficiary, as pursuant to the terms of the SEMA Operating Agreement the Company is exposed to the majority of potential losses of the partnership. At December 31, 2018 and 2017 we had no participation in a joint venture where we have a material non-majority variable interest.
Summary financial information for SEMA is as follows:
|
|
|
|
|
|
Year Ended December 31, 2019
|
Revenues
|
$
|
6,903
|
|
Operating income
|
$
|
467
|
|
Net income attributable to Sterling common stockholders
|
$
|
471
|
|
Where we are a noncontrolling venture partner, we account for our share of the operations of such construction joint ventures on a pro-rata basis using proportionate consolidation on our Consolidated Statements of Operations and as a single line item in “Receivables from and equity in construction joint ventures” in the Consolidated Balance Sheets. This method is an acceptable modification of the equity method of accounting which is a common practice in the construction industry. 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 Consolidated Financial Statements are shown below:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Current assets
|
$
|
92,710
|
|
|
$
|
64,815
|
|
Current liabilities
|
$
|
(86,705
|
)
|
|
$
|
(74,543
|
)
|
Sterling’s receivables from and equity in construction joint ventures
|
$
|
9,196
|
|
|
$
|
10,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Revenues
|
$
|
158,291
|
|
|
$
|
115,441
|
|
|
$
|
93,848
|
|
Income before tax
|
$
|
20,449
|
|
|
$
|
8,097
|
|
|
$
|
7,827
|
|
Sterling’s noncontrolling interest:
|
|
|
|
|
|
Revenues
|
$
|
76,419
|
|
|
$
|
55,134
|
|
|
$
|
44,948
|
|
Income before tax
|
$
|
8,170
|
|
|
$
|
4,104
|
|
|
$
|
3,847
|
|
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 completed and any warranty period, if any, has passed.
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
7.
|
PROPERTY AND EQUIPMENT
|
Property and equipment are summarized as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Construction and transportation equipment
|
$
|
217,945
|
|
|
$
|
144,630
|
|
Buildings and improvements
|
14,641
|
|
|
11,072
|
|
Land
|
3,891
|
|
|
2,720
|
|
Office equipment
|
2,767
|
|
|
2,711
|
|
Total property and equipment
|
239,244
|
|
|
161,133
|
|
Less accumulated depreciation
|
(123,214
|
)
|
|
(109,134
|
)
|
Total property and equipment, net
|
$
|
116,030
|
|
|
$
|
51,999
|
|
Depreciation Expense—Depreciation expense is primarily included within cost of revenues and was approximately $15,900, $14,200 and $15,100 for 2019, 2018 and 2017, respectively.
|
|
|
8.
|
GOODWILL AND OTHER INTANGIBLE ASSETS
|
Goodwill
Reporting Units—In combination with the completion of the Plateau Acquisition during the fourth quarter of 2019, the Company realigned its operating segments and reporting units to reflect management’s present oversight of the business. The Company’s reporting units now consist of its heavy civil, specialty services and residential operating groups. The specialty services operating segment was added and includes the newly acquired Plateau operations and its associated goodwill. Goodwill is not amortized, but instead is reviewed for impairment at least annually during the fourth quarter of each year at the reporting level, absent any interim indicators of impairment or other factors requiring an assessment.
Annual Impairment Assessment—For our 2019 annual impairment test of the heavy civil and residential reporting units, we performed a qualitative assessment, using information as of October 1. Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. We determined there were no factors indicating the need to perform a quantitative goodwill impairment test and concluded that it is more likely than not the fair value of our reporting units is greater than their carrying value and thus there was no impairment to goodwill. Due to the proximity of the timing of the Plateau Acquisition, its purchase price and associated carrying value included in the specialty services reporting unit approximated its fair value. Other adjustments to our reporting units resulting from the realignment were not material.
In addition to our annual review, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value of a reporting unit may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant adverse changes in the business climate which may be indicated by a decline in our market capitalization or decline in operating results. No impairments were recorded to our goodwill during the years ended December 31, 2019, 2018 or 2017. No such events or changes occurred between the testing date and year end to trigger a subsequent impairment review.
At December 31, 2019 and 2018, we had goodwill with a carrying amount of $191,892 and $85,231, respectively, with the increase attributable to the Plateau Acquisition. See Note 3 - Plateau Acquisition for further information regarding goodwill from the acquisition.
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents goodwill by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
Goodwill
|
|
|
|
|
Heavy Civil
|
|
$
|
54,806
|
|
|
$
|
54,806
|
|
Specialty Services
|
|
106,661
|
|
|
—
|
|
Residential
|
|
30,425
|
|
|
30,425
|
|
Total Goodwill
|
|
$
|
191,892
|
|
|
$
|
85,231
|
|
Other Intangible Assets
The following table presents our acquired finite-lived intangible assets, including the weighted-average useful lives for each major intangible asset category and in total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Weighted
Average
Life (Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Customer relationships
|
25
|
|
$
|
232,623
|
|
|
$
|
(6,911
|
)
|
|
$
|
40,823
|
|
|
$
|
(3,159
|
)
|
Trade name
|
23
|
|
30,107
|
|
|
(1,692
|
)
|
|
5,307
|
|
|
(919
|
)
|
Non-compete agreements
|
5
|
|
2,487
|
|
|
(291
|
)
|
|
487
|
|
|
(121
|
)
|
Total
|
24
|
|
$
|
265,217
|
|
|
$
|
(8,894
|
)
|
|
$
|
46,617
|
|
|
$
|
(4,199
|
)
|
During the year ended December 31, 2019, 2018 and 2017, we have amortized approximately $4,700, $2,400, and $1,800 respectively. Amortization expense is anticipated to be approximately $11,500, $11,500, $11,300, $11,200, and $10,900 for 2020, 2021, 2022, 2023 and 2024, respectively. See Note 3 - Plateau Acquisition for further information regarding intangibles from the acquisition.
The Company’s outstanding debt was as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Credit Facility
|
$
|
420,000
|
|
|
$
|
—
|
|
Oaktree Facility
|
—
|
|
|
74,571
|
|
Note payable to seller, Plateau Acquisition
|
10,000
|
|
|
—
|
|
Notes and deferred payments to sellers, Tealstone Acquisition
|
12,230
|
|
|
13,572
|
|
Notes payable for transportation and construction equipment and other
|
805
|
|
|
612
|
|
Total debt
|
443,035
|
|
|
88,755
|
|
|
|
|
|
Less - Current maturities of long-term debt
|
(42,473
|
)
|
|
(2,899
|
)
|
Less - Unamortized debt issuance costs
|
(9,935
|
)
|
|
(6,739
|
)
|
Total long-term debt
|
$
|
390,627
|
|
|
$
|
79,117
|
|
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Credit Facility—On October 2, 2019, the Company, as borrower, and certain of its subsidiaries, as guarantors, entered into a Credit Agreement (the “Credit Agreement”) with BMO Harris Bank N.A., as administrative agent (the “Agent”), Bank of America, N.A., as syndication agent, and BMO Capital Markets Corp. and BofA Securities, Inc., as joint lead arrangers and joint book runners. The Credit Agreement provides the Company with senior secured debt financing in an amount up to $475,000 in the aggregate, consisting of (i) a senior secured first lien revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of $75,000 (with a $75,000 limit for the issuance of letters of credit and a $15,000 sublimit for swing line loans) and (ii) a senior secured first lien term loan facility (the “Term Loan Facility”) in the amount of $400,000 (collectively, the “Credit Facility”). The obligations under the Credit Facility are secured by substantially all assets of the Company and the subsidiary guarantors, subject to certain permitted liens and interests of other parties. The Credit Facility will mature on October 2, 2024.
The Company obtained the Credit Facility in order to facilitate the transactions contemplated by the Plateau Acquisition, including refinancing existing indebtedness of the Company, finance capital expenditures, finance working capital, finance acquisitions permitted under the Credit Agreement, finance other general corporate purposes and fund certain fees and expenses associated with the closing of the Credit Facility and the Plateau Acquisition.
On December 2, 2019, the Credit Agreement was amended to modify (i) the applicable margins with respect to Base Rate and LIBOR borrowings under the Credit Facility, (ii) the required amounts of mandatory prepayments of the Credit Facility with excess cash flow, (iii) the amounts of scheduled principal payments quarterly and at maturity on the Term Loan Facility, and (iv) the applications of partial prepayments of the Term Loan Facility on a ratable, weighted basis among all remaining scheduled principal payments on the Term Loan Facility. The modifications in (i)-(iii) mentioned above were pursuant to the customary “market flex” rights contained in the fee letter related to the Credit Agreement.
The Revolving Credit Facility bears interest at either the Base Rate plus a margin (4.75% and 3.50% per annum, respectively at December 31, 2019), or one-, two-, three-, six- or, if available, twelve-month LIBOR plus an applicable margin (1.74% and 4.50% per annum, respectively at December 31, 2019, using a one-month LIBOR rate), at the Company’s election. In addition to interest on debt borrowings, we are assessed quarterly commitment fees on the unutilized portion of the facility as well as letter of credit fees on outstanding instruments. Interest under the Revolving Credit Facility is payable (i) with respect to LIBOR borrowings, on the last day of each applicable interest period (one, two, three, six or twelve months), unless the applicable interest period is longer than three months, then on each day occurring every three months after the commencement of such interest period, and on the maturity date, and (ii) with respect to Base Rate borrowings, on the last day of every calendar quarter and on the maturity date. At December 31, 2019, we had $20,000 of outstanding borrowings under the facility, providing $55,000 of available capacity. During 2019, our weighted average interest rate on borrowings under the facility was approximately 5.73%. The Revolving Credit Facility may be repaid in whole or in part at any time, with final payment of all principal and interest then outstanding due on October 2, 2024.
Interest under the Term Loan Facility is payable at the same frequencies and bears interest at the same rate options as the Revolving Credit Facility. In connection with entering into the Credit Facility, on December 5, 2019 we entered into an interest rate swap to hedge against $350,000 of the outstanding Term Loan Facility, which resulted in a weighted average interest rate of approximately 5.70% per annum during 2019. At December 31, 2019, we had $400,000 of outstanding borrowings under the facility. Quarterly principal payments on the Term Loan Facility total $30,000, $50,000, $50,000, $50,000 and $220,000 for each of the years ending 2020, 2021, 2022, 2023, and 2024, respectively. A final payment of all principal and interest then outstanding on the Term Loan Facility is due on October 2, 2024.
The Credit Agreement contains various affirmative and negative covenants that may, subject to certain exceptions, restrict the ability of us and our subsidiaries to, among other things, grant liens, incur additional indebtedness, make loans, advances or other investments, make non-ordinary course asset sales, declare or pay dividends or make other distributions with respect to equity interests, purchase, redeem or otherwise acquire or retire capital stock or other equity interests, or merge or consolidate with any other person, among various other things. In addition, the Company is required to maintain the following financial covenants:
|
|
•
|
a Total Leverage Ratio (as defined in the Credit Agreement) at the last day of each fiscal quarter not to be greater than 4.00 to 1.00 ending on December 31, 2019 through and including June 30, 2020, 3.75 to 1.00 ending on September 30, 2020, 3.50 to 1.00 ending on December 31, 2020 through and including March 31, 2021, 3.25 to 1.00 ending on June 30, 2021 through and including September 30, 2021, and 3.00 to 1.00 ending on December 31, 2021 and thereafter; and
|
|
|
•
|
a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of not less than 1.20 to 1.00 as of the last day of each fiscal quarter of the Company, commencing with the fiscal quarter ending December 31, 2019.
|
Debt issuance costs—The Company incurred $10,688 of fees relating to the establishment of the Credit Facility. The costs associated with the Term Loan Facility and Revolving Credit Facility are reflected on the Balance Sheets as a direct reduction from the related debt liability and amortized over the terms of the respective facilities.
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Oaktree Facility—On October 2, 2019, concurrently with the Company’s entry into the Credit Agreement, the Company terminated the Loan and Security Agreement, dated April 3, 2017, with Wilmington Trust, National Association, as agent, and the lenders party thereto (the “Oaktree Facility”), which provided for a $85,000 term loan. The Company used a portion of the proceeds of the Credit Agreement to pay in full all outstanding borrowings of $67,100 under the Oaktree Facility. Interest on the Oaktree Facility was equal to the one-, two-, three- or six-month LIBOR, plus 8.75% per annum.
Debt extinguishment costs—As part of the replacement of the Oaktree Facility, $7,728 in debt extinguishment costs were expensed and included as a “Loss on extinguishment of debt” on the Company’s Statement of Operations for the year ended December 31, 2019. Debt extinguishment costs primarily consist of a prepayment premium of $3,394 (which amount is equal to 5% of the aggregate principal amount, including any interest and fees, of the Oaktree Facility repaid) and the write-off of the Oaktree Facility unamortized debt issuance costs of $4,334.
Note Payable to Seller, Plateau Acquisition—As part of the Plateau Acquisition, the Company issued a $10,000 subordinated promissory note to one of the Plateau sellers that bears interest at 8% with interest payments due quarterly beginning January 1, 2020. The subordinated promissory note has no scheduled payments, however, it may be repaid in whole or in part at any time, subject to certain payment restrictions under a subordination agreement with the Agent under our Credit Agreement, without premium or penalty, with final payment of all principal and interest then outstanding due on April 2, 2025. At inception, the subordinated promissory note’s interest rate approximated market.
Notes and deferred Payments to Sellers, Tealstone Acquisition—At December 31, 2019 the Company had $12,230 outstanding, net of debt discounts, of the combined promissory notes and deferred cash payments issued as part of the Tealstone Acquisition. During the year ended December 31, 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. Accreted interest for the period was approximately $1,100 and $1,200 for the years ended December 31, 2019 and 2018, respectively, and was recorded as interest expense.
Notes Payable for Transportation and Construction 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 $805 and $612 at December 31, 2019 and 2018, respectively. The purchases have payment terms ranging from 3 to 5 years and the associated interest rates range from 2.99% to 6.92%.
Compliance and other—As of December 31, 2019, we were in compliance with all of our restrictive and financial covenants. The Company’s debt is recorded at its carrying amount in the Consolidated Balance Sheets. As of December 31, 2019 and 2018, the carrying values of our debt outstanding approximated the fair values.
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 are as follows:
|
|
|
|
|
|
Twelve Months Ended December 31, 2019
|
Operating lease cost
|
$
|
8,594
|
|
Short-term lease cost
|
$
|
18,032
|
|
|
|
Finance lease cost:
|
|
Amortization of right-of-use assets
|
$
|
213
|
|
Interest on lease liabilities
|
20
|
|
Total finance lease cost
|
$
|
233
|
|
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Supplemental cash flow information related to leases is as follows:
|
|
|
|
|
|
Twelve Months Ended December 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
8,127
|
|
Operating cash flows from finance leases
|
$
|
20
|
|
Financing cash flows from finance leases
|
$
|
213
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations (non-cash):
|
|
Operating leases
|
$
|
8,955
|
|
Finance leases
|
$
|
816
|
|
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
December 31, 2019
|
Operating Leases
|
|
Operating lease right-of-use assets
|
$
|
13,979
|
|
|
|
Current portion of long-term lease obligations
|
$
|
7,095
|
|
Long-term lease obligations
|
6,976
|
|
Total operating lease liabilities
|
$
|
14,071
|
|
|
|
Finance Leases
|
|
Property and equipment, at cost
|
$
|
1,479
|
|
Accumulated depreciation
|
(482
|
)
|
Property and equipment, net
|
$
|
997
|
|
|
|
Current maturities of long-term debt
|
$
|
204
|
|
Long-term debt
|
560
|
|
Total finance lease liabilities
|
$
|
764
|
|
|
|
Weighted Average Remaining Lease Term
|
|
Operating leases
|
2.5
|
|
Finance leases
|
4.0
|
|
|
|
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,
|
|
|
|
2020
|
$
|
6,813
|
|
|
$
|
233
|
|
2021
|
5,180
|
|
|
208
|
|
2022
|
2,858
|
|
|
161
|
|
2023
|
784
|
|
|
154
|
|
2024
|
45
|
|
|
77
|
|
Thereafter
|
—
|
|
|
—
|
|
Total lease payments
|
$
|
15,680
|
|
|
$
|
833
|
|
Less imputed interest
|
(1,609
|
)
|
|
(69
|
)
|
Total
|
$
|
14,071
|
|
|
$
|
764
|
|
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
11.
|
FINANCIAL INSTRUMENTS
|
Derivatives
Interest Rate Derivative—On December 5, 2019, the Company entered into a three year interest rate swap agreement with Bank of America in order to mitigate exposure to the market risk associated with the variable interest on the $400,000 term loan. The Company has designated its interest rate swap agreement as a cash flow hedging derivative. To the extent the derivative instrument is effective and the documentation requirements have been met, changes in fair value are recognized in other comprehensive income until the underlying hedged item is recognized in earnings. As of December 31, 2019, the notional value of the swap contract was $350,000 and the fair value of the swap contract was loss of $243. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of the swap contract.
Financial Instruments Disclosures
Fair Value—Financial instruments are required to be categorized within a valuation hierarchy based upon the lowest level of
input that is significant to the fair value measurement. The three levels of the valuation hierarchy are as follows:
• Level 1—Fair value is based on quoted prices in active markets.
|
|
•
|
Level 2—Fair value is based on internally developed models that use, as their basis, readily observable market parameters. Our derivative positions are classified within level 2 of the valuation hierarchy as they are valued using quoted market prices for similar assets and liabilities in active markets. These level 2 derivatives are valued utilizing an income approach, which discounts future cash flow based on current market expectations and adjusts for credit risk.
|
|
|
•
|
Level 3—Fair value is based on internally developed models that use, as their basis, significant unobservable market parameters. The Company did not have any level 3 classifications at December 31, 2019.
|
The following table presents the fair value of the interest rate derivative by valuation hierarchy and balance sheet classification:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Derivative Assets
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
—
|
|
|
$
|
216
|
|
|
$
|
—
|
|
|
$
|
216
|
|
Other non-current assets
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total assets at fair value
|
|
$
|
—
|
|
|
$
|
216
|
|
|
$
|
—
|
|
|
$
|
216
|
|
Derivative Liabilities
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
$
|
—
|
|
|
$
|
(61
|
)
|
|
$
|
—
|
|
|
$
|
(61
|
)
|
Other non-current liabilities
|
|
—
|
|
|
(398
|
)
|
|
—
|
|
|
(398
|
)
|
Total liabilities at fair value
|
|
$
|
—
|
|
|
$
|
(459
|
)
|
|
$
|
—
|
|
|
$
|
(459
|
)
|
The carrying values of the Company's cash and cash equivalents (primarily consisting of bank deposits), accounts receivable and accounts payable approximate their fair values because of the short-term nature of these instruments. At December 31, 2019, the fair value of the term loan, based upon the current market rates for debt with similar credit risk and maturities, approximated its carrying value as interest is based on LIBOR plus an applicable margin.
Derivatives Disclosures
AOCI/Other—The following table presents the total value recognized in other comprehensive income (“OCI”) and reclassified from AOCI to interest expense during 2019 for derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in OCI
|
|
Gain (Loss) Reclassified from AOCI into Earnings (1)
|
Interest rate cash flow hedge
|
|
(273
|
)
|
|
30
|
|
(1) Net unrealized gains totaling $135 are anticipated to be reclassified from AOCI into interest expense during the next 12 months due to settlement of the associated underlying obligations.
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
12.
|
COMMITMENTS AND CONTINGENCIES
|
Insurance
The Company carries insurance policies to cover various risks, primarily general liability, automobile liability, workers’ compensation and employee medical expenses under which we are liable to reimburse the insurance company for a portion of each claim paid.
Property and Casualty—Payments for general liability and workers’ compensation claim amounts generally range from the first $2 to $250 per occurrence for Workers’ Compensation, and $25 per occurrence for General Liability. We accrue for probable losses, both reported and unreported, that are reasonably estimable using actuarial methods based on historic trends, modified, if necessary, by recent events. Changes in our loss assumptions caused by changes in actual experience would affect our assessment of the ultimate liability and could have an effect on our operating results and financial position for payments up to $275 per occurrence collective for general liability and workers’ compensation, with a maximum aggregate liability of $4,000 combined casualty losses per year. The Company also maintains commercial insurance coverage in excess of the limits of our primary commercial automobile, general liability and employers liability policies, in the amount of $75,000. The Company also maintains guaranteed cost program for Workers’ Compensation, General Liability, and Automobile Liability. Utilizing internal actuarial models, the insurance carriers established, and applied to the exposure base, a fixed rate to ascertain the premium cost to the Company. These premium costs are auditable at the conclusion of the policy term to account for discrepancies in the estimated and actual policy exposure, however not for any losses incurred during the policy term. The guaranteed cost program maintained by the Company does carry a deductible, however in a small enough amount as to expose the Company to unsubstantial and immaterial risk for any one loss incurred.
Medical—The Company maintains fully insured and self-insured medical benefit plans, which provides medical benefits to employees electing coverage under the plans. Under its self-insured plans, the Company has stop-loss coverage to limit the exposure arising from these claims. Self-insured claims filed and claims incurred but not reported are accrued based upon management’s estimates of the ultimate cost of claims incurred using actuarial assumptions followed in the insurance industry and historical experience. Although management believes it has the ability to reasonably estimate losses related to claims, it is possible that actual results could differ from recorded self-insured liabilities.
Guarantees
The Company obtains bonding on construction contracts through Travelers Casualty and Surety Company of America (“Travelers”). As is customary in the construction industry, the Company indemnifies Travelers for any losses incurred by it in connection with bonds that are issued. The Company has granted Travelers a security interest in accounts receivable and contract rights for that obligation.
The Company typically indemnifies contract owners for claims arising during the construction process and carries insurance coverage for such claims, which in the past have not been material.
The Company’s Certificate of Incorporation provides for indemnification of its officers and directors. The Company has a directors and officers insurance policy that limits their exposure to litigation against them in their capacities as such.
Litigation
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 other actions will have a material impact on the financial statements of the Company. There are no significant unresolved legal issues as of December 31, 2019 and 2018.
Purchase Commitments
To manage the risk of changes in material prices and subcontracting costs used in tendering bids for construction contracts, most of the time, we obtain firm quotations from suppliers and subcontractors before submitting a bid. These quotations do not include any quantity guarantees. As soon as we are advised that our bid is the lowest, we enter into firm contracts with most of our materials suppliers and sub-contractors, thereby mitigating the risk of future price variations affecting the contract costs.
Earn-out Liabilities
The Company has earn-out agreements with JBC’s and Tealstone’s former owners. The JBC earn-out performance period ended December 31, 2017. The JBC earn-out liability was determined based on its performance against established benchmarks. In 2017, JBC’s actual performance surpassed the benchmarks which resulted in an earn-out expense of $1,300, recorded in “Other
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
operating expense, net” on the Consolidated Statements of Operations. The earn-out agreement with Tealstone’s former owners extends through March 31, 2021 and is subject to a maximum earn-out of $15,000 over that period. The initial annual performance period for the Tealstone earn-out ended March 31, 2018. The Tealstone earn-out liability is determined based on the Company’s net income performance against established benchmarks. In 2019, 2018, and 2017 we recorded an earn-out obligation of $2,000, $1,900, and $400, respectively, recorded in “Other operating expense, net” on the Consolidated Statements of Operations. This liability is included in other current liabilities on the accompanying Consolidated Balance Sheets.
Provision For Income Taxes
The Company and its subsidiaries are based in the U.S. and file federal and various state income tax returns. The components of the provision for income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Current tax expense
|
$
|
1,182
|
|
|
$
|
288
|
|
|
$
|
118
|
|
Deferred tax (benefit) expense
|
(27,398
|
)
|
|
1,450
|
|
|
—
|
|
Income tax (benefit) expense
|
$
|
(26,216
|
)
|
|
$
|
1,738
|
|
|
$
|
118
|
|
Due to the net operating loss carryforwards described below, the Company has not had current federal tax expense for any of the years presented. The Company has incurred current expense in states in which the Company does not have net operating loss carry forwards.
Effective Tax Rate
The items comprising the difference between income taxes computed at the U.S. federal statutory rates in effect for 2019, 2018 an 2017 and our effective tax rates were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Tax expense (recovery) at the U.S. federal statutory rate
|
$
|
3,041
|
|
|
21.0
|
%
|
|
$
|
6,568
|
|
|
21.0
|
%
|
|
$
|
5,577
|
|
|
35.0
|
%
|
State tax based on income, net of refunds and federal benefits
|
1,670
|
|
|
11.5
|
|
|
364
|
|
|
1.2
|
|
|
(264
|
)
|
|
(1.7
|
)
|
Taxes on subsidiaries’ and joint ventures’ earnings allocated to noncontrolling interests owners
|
(2,241
|
)
|
|
(15.5
|
)
|
|
(4,097
|
)
|
|
(13.1
|
)
|
|
(5,504
|
)
|
|
(34.5
|
)
|
Valuation allowance
|
(29,375
|
)
|
|
(202.9
|
)
|
|
(1,013
|
)
|
|
(3.3
|
)
|
|
(18,006
|
)
|
|
(113.0
|
)
|
Tax credits
|
(397
|
)
|
|
(2.7
|
)
|
|
(286
|
)
|
|
(0.9
|
)
|
|
(349
|
)
|
|
(2.2
|
)
|
Tax rate change
|
—
|
|
|
—
|
|
|
(281
|
)
|
|
(0.9
|
)
|
|
19,545
|
|
|
122.7
|
|
Return to provision
|
48
|
|
|
0.3
|
|
|
21
|
|
|
0.1
|
|
|
(62
|
)
|
|
(0.4
|
)
|
Earn-out liability
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
460
|
|
|
2.9
|
|
Equity compensation
|
805
|
|
|
5.6
|
|
|
26
|
|
|
0.1
|
|
|
(1,371
|
)
|
|
(8.6
|
)
|
Other permanent differences
|
233
|
|
|
1.6
|
|
|
436
|
|
|
1.4
|
|
|
92
|
|
|
0.6
|
|
Income tax (benefit) expense
|
$
|
(26,216
|
)
|
|
(181.1
|
)%
|
|
$
|
1,738
|
|
|
5.6
|
%
|
|
$
|
118
|
|
|
0.8
|
%
|
The decrease from the U.S. federal statutory rate in 2019 was primarily a result of the reversal of the valuation allowance on our net deferred tax assets. The 2018 effective income rate varied from the statutory rate primarily as a result of a change in the valuation allowance on our net deferred tax assets exclusive of deferred tax liabilities on indefinite lived assets and net income attributable to noncontrolling interest owners, which is taxable to those owners rather than the Company. The 2017 effective income rate varied from the statutory rate primarily as a result of the change in federal tax rate under the U.S. government Tax Cuts and Jobs Act (the “Act”), offset by a change in the valuation allowance, net income attributable to noncontrolling interest owners, and equity compensation. The Act was enacted on December 22, 2017 and resulted in the U.S. federal corporate tax rate decreasing from 35 percent in 2017 to 21 percent thereafter and primarily resulted in a reduction in the value of deferred tax assets by $19,300 and corresponding reduction in valuation allowance in 2017.
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred Tax Assets and Liabilities
The components of deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
Long Term
|
|
As of December 31,
|
|
2019
|
|
2018
|
Assets related to:
|
|
|
|
Accrued compensation and other
|
$
|
3,981
|
|
|
$
|
3,707
|
|
Goodwill
|
—
|
|
|
—
|
|
Noncontrolling interests
|
1,812
|
|
|
1,687
|
|
Deferred revenue
|
922
|
|
|
232
|
|
Members interest liabilities
|
11,328
|
|
|
11,570
|
|
Right of use liabilities
|
3,253
|
|
|
—
|
|
Net operating loss carryforwards
|
19,801
|
|
|
22,818
|
|
Total deferred tax assets
|
41,097
|
|
|
40,014
|
|
Valuation allowance for deferred tax assets
|
—
|
|
|
(31,718
|
)
|
Net deferred tax assets
|
$
|
41,097
|
|
|
$
|
8,296
|
|
|
|
|
|
Liabilities related to:
|
|
|
|
Depreciation of property and equipment
|
(7,911
|
)
|
|
(7,709
|
)
|
Right of use assets
|
(3,232
|
)
|
|
—
|
|
Amortization of tax basis goodwill
|
(3,091
|
)
|
|
(1,450
|
)
|
Other
|
(851
|
)
|
|
(587
|
)
|
Net deferred tax liabilities
|
$
|
(15,085
|
)
|
|
$
|
(9,746
|
)
|
|
|
|
|
Net total deferred tax asset (liability)
|
$
|
26,012
|
|
|
$
|
(1,450
|
)
|
Net Operating Loss—We have federal and state net operating loss (“NOL”) carryforwards of $83,270 and $44,857, respectively, which expire at various dates in the next 18 years for U.S. federal income tax and in the next 8 to 18 years for the various state jurisdictions where we operate. Such NOL carryforwards expire beginning in 2028 through 2038.
Valuation Allowance—The Company performs an analysis at the end of each reporting period to determine whether it is more likely than not deferred tax assets will be realized in future years. In performing its assessments in prior periods, a full valuation allowance was recorded as a result of objective negative evidence which included historical losses from 2013 to 2016 and the first quarter of 2017 and associated limits on ability to consider other subjective evidence such as projections for future growth. During 2019, the Company achieved eleven of the last twelve consecutive quarters of pre-tax income and is projecting sufficient future taxable income to be available to utilize all NOLs prior to their expiration. Deferred tax liabilities were 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. As a result of this analysis, the Company now believes sufficient positive evidence outweighs any negative evidence and therefore released the full valuation allowance in the fourth quarter of 2019, resulting in $29,375 being recorded as a reduction to income tax expense.
Uncertain Tax Positions
As a result of the Company’s analysis, management has determined that the Company does not have any material uncertain tax positions. The Company’s U.S. federal income tax returns for 2016 and later years are open and subject to examination by the I.R.S. In addition, the Company’s state income tax returns for 2015 and later years are open and subject to examination.
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
General—Holders of common stock are entitled to one vote for each share on all matters voted upon by the stockholders, including the election of directors and do not have cumulative voting rights. Holders of common stock are entitled to share ratably in net assets upon any dissolution or liquidation after payment of provision for all liabilities and any preferential liquidation rights of our preferred stock then outstanding. Common stock shares are not subject to any redemption provisions and are not convertible into any other shares of capital stock. The rights, preferences and privileges of holders of common stock are subject to those of the holders of any shares of preferred stock that may be issued in the future.
The Board of Directors may authorize the issuance of one or more classes or series of preferred stock without stockholder approval and may establish the voting powers, designations, preferences and rights and restrictions of such shares. No preferred shares have been issued.
Treasury Stock—On November 2, 2018, the Board of Directors approved a plan that authorized stock repurchases of up to 2,000 shares of the Company’s common stock. Under the plan, the Company may repurchase its common stock in the open market or through privately negotiated transactions at such times and at such prices as determined to be in the Company’s best interest. The Company accounts for the repurchase of treasury shares under the cost method. This repurchase program expires on June 30, 2020 and may be modified, extended or terminated by the Board at any time. As mentioned in Note 9 - Debt, the Company’s Credit Agreement entered into on October 2, 2019 contains various usual and customary covenants including one that limits the repurchase of common shares. The Company repurchased 250 and 467 shares of its common stock during fiscal years 2019 and 2018, respectively. See Note 15 - Stock Incentive Plan, for a discussion of share repurchases transferred into treasury stock resulting from tax withholding requirements under our stock incentive plan.
AOCI—The following tables presents changes in AOCI, net of tax, and reclassifications of AOCI into earnings, net of tax:
|
|
|
|
|
|
Unrealized Fair Value of Swap (Cash Flow Hedge)
|
Balance at December 31, 2018
|
$
|
—
|
|
OCI before reclassifications
|
(186
|
)
|
Amounts reclassified from AOCI
|
(23
|
)
|
Net OCI
|
(209
|
)
|
Balance at December 31, 2019
|
$
|
(209
|
)
|
|
|
|
|
|
|
Amount Reclassified from AOCI (1)
|
Interest rate derivatives (interest expense)
|
$
|
(30
|
)
|
Tax
|
7
|
|
Total net of tax
|
$
|
(23
|
)
|
(1) See Note 11 - Financial Instruments for further discussion of our cash flow hedges, including the total value reclassified from AOCI to earnings.
Stock Offerings—On October 2, 2019, in connection with the Plateau Acquisition, the Company issued 1,245 shares of the Company’s stock as consideration paid to the Plateau sellers. The value of the shares issued was $16,195 based on Sterling’s closing stock price on October 1, 2019. See Note 3 - Plateau Acquisition for further discussion of the Plateau Acquisition purchase consideration.
On April 3, 2017, in connection with the Tealstone Acquisition, the Company issued 1,882 shares of the Company’s stock as consideration paid to the Tealstone sellers. The value of the shares issued was $17,061 based on the average fair value of the shares on the date of acquisition.
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
General—The Company has equity-based incentive plans (the “Stock Incentive Plans”) administered by the Compensation and Talent Development Committee of the Board of Directors. Under the Stock Incentive Plans, the Company can issue shares to employees and directors in the form of restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and performance based units (“PSUs”). Compensation expense recognized related to the Company’s Stock Incentive Plans was $3,761, $3,064 and $2,843 for 2019, 2018 and 2017, respectively. At December 31, 2019, 133 authorized shares remained available under our Stock Incentive Plans for future grants, assuming PSU vestings occur at maximum payout with vesting dates through 2024.
During 2019, the Company implemented an Employee Stock Purchase Plan (“ESPP”). Under the ESPP, employees may make quarterly purchases of shares at a discount through regular payroll deductions for up to 15% of their compensation ($25 maximum per year). The shares are purchased at 85% of the closing price per share on the last trading day of the calendar quarter. Included within total stock-based compensation expense for 2019 is $27 of expense related to the ESPP. ESPP expense, represents the difference between the fair value on the date of purchase and the price paid. At December 31, 2019, 787 authorized shares remained available for issuance under the ESPP.
Total equity-based compensation expense recognized related to the Company’s Stock Incentive Plans was $3,788, $3,064 and $2,843 for 2019, 2018, and 2017, respectively, primarily recognized within general and administrative expenses. At December 31, 2019, there was $16,300 of unrecognized compensation cost related to equity-based grants, which is expected to be recognized over a weighted-average period of 3.2 years. The Company recognizes forfeitures as they occur, rather than estimating expected forfeitures.
RSAs—The Company’s RSA awards may not be sold or otherwise transferred until certain restrictions have lapsed, which is generally over a three-year graded vesting period for employees and over one year for Directors. The total initial fair value for these awards is determined based upon the market price of our stock at the grant date, and is expensed on a straight-line basis over the vesting period. During 2019, we recognized $1,092 of compensation expense, primarily within “General and administrative expense”. The following table presents employee and director RSA activity:
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average
Fair Value Per Share
|
Employee’s RSAs
|
|
|
|
Balance at December 31, 2018
|
147
|
|
|
11.16
|
|
Granted
|
52
|
|
|
12.06
|
|
Vested
|
(114
|
)
|
|
11.04
|
|
Forfeited
|
(2
|
)
|
|
9.64
|
|
Balance at December 31, 2019
|
83
|
|
|
11.91
|
|
Director’s RSAs
|
|
|
|
Balance at December 31, 2018
|
42
|
|
|
11.67
|
|
Granted
|
52
|
|
|
12.06
|
|
Vested
|
(52
|
)
|
|
$
|
11.69
|
|
Forfeited
|
—
|
|
|
—
|
|
Balance at December 31, 2019
|
42
|
|
|
12.12
|
|
During 2018, 49 RSAs were granted with a weighted-average grant-date fair value per share of $11.64. During 2017, 217 RSAs were granted with a weighted-average grant-date fair value per share of $10.69. The total fair value of RSAs that vested during 2019, 2018 and 2017 was $1,261, $1,107 and $3,117, respectively.
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
RSUs—The Company’s RSU awards may not be sold or otherwise transferred until certain restrictions have lapsed, which is generally over a three-year graded vesting period. The total initial fair value for these awards is determined based upon the market price of our stock at the grant date, and is expensed on a straight-line basis over the vesting period. During 2019, we recognized $1,573 of compensation expense, primarily within selling and administrative expense. The following table presents RSU activity:
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average
Fair Value Per Share
|
Nonvested RSUs
|
|
|
|
Balance at December 31, 2018
|
217
|
|
|
12.40
|
|
Granted
|
261
|
|
|
12.14
|
|
Vested
|
(120
|
)
|
|
14.30
|
|
Forfeited
|
(14
|
)
|
|
16.14
|
|
Balance at December 31, 2019
|
344
|
|
|
13.78
|
|
During 2018, 248 RSUs were granted with a weighted-average grant-date fair value per share of $16.08. During 2017, there were not any RSUs granted. The total fair value of RSUs that vested during 2019 and 2018 were $1,709 and $392, respectively. There were no RSUs vested in 2017.
PSUs—The Company’s performance-based share awards are subject to the achievement of specified financial based performance targets and are generally based upon EPS and vest over three years. The total initial fair value for these awards is determined based upon the market price of our stock at the grant date applied to the total number of shares. This fair value is expensed and adjusted over the vesting period based on the level of payout expected to be achieved. As a result of financial performance conditions met during 2019, we recognized $1,096 of compensation expense.
During 2019 and 2018, PSU shares totaling 310 and 890, respectively, were granted with a weighted-average grant-date fair value per share of $11.81 and $11.64, respectively. There were no PSUs granted in 2017. During 2019, upon vesting and achievement of certain performance goals, we distributed 63 PSUs with a weighted-average grant-date fair value per share of $15.15. The total fair value of PSU awards that vested during 2019 was $948. There were no PSUs awarded in 2018 and 2017.
Share Repurchases for Tax Withholdings—Upon the vesting of shares, the Company allows employees to withhold shares to satisfy tax withholding requirements. For RSA vestings, the shares repurchased by the Company are considered constructively received and are retired thereafter. The Company repurchased 17, 28 and 66 shares for taxes withheld on RSA vestings for $255, $361 and $1,075 during 2019, 2018 and 2017, respectively. For RSU and PSU vestings, the employee is issued shares net of the requested tax withholding, and the Company transfers the withheld shares to Treasury Stock. The Company withheld 74 and 8 shares for taxes on RSU and PSU vestings for $964 and $92 during 2019 and 2018, respectively. There were no shares withheld for taxes on RSU and PSU vestings in 2017.
Warrants—On April 3, 2017, the Company issued warrants (the “Warrants”) to the lenders under the Oaktree Facility (the “Holders”) pursuant to which such holders have the right to purchase, for a period of 5 years from the date of issuance, up to an aggregate of 1,000 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 and fair value output are summarized in the table below:
|
|
|
|
|
|
April 3, 2017
|
Stock price at grant date
|
$
|
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
|
—
|
%
|
Total fair value
|
$
|
3,500
|
|
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Basic net income per share attributable to Sterling common stockholders is computed by dividing net income attributable to Sterling common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per common share attributable to Sterling common stockholders is the same as basic net income per share attributable to Sterling common stockholders but includes dilutive unvested stock awards 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 attributable to Sterling common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Numerator:
|
2019
|
|
2018
|
|
2017
|
Net income attributable to Sterling common stockholders
|
$
|
39,901
|
|
|
$
|
25,187
|
|
|
$
|
11,617
|
|
Denominator:
|
|
|
|
|
|
Weighted average common shares outstanding — basic
|
26,671
|
|
|
26,903
|
|
|
26,274
|
|
Shares for dilutive unvested stock
|
448
|
|
|
291
|
|
|
438
|
|
Weighted average common shares outstanding and assumed conversions— diluted
|
27,119
|
|
|
27,194
|
|
|
26,712
|
|
Basic net income per share attributable to Sterling common stockholders
|
$
|
1.50
|
|
|
$
|
0.94
|
|
|
$
|
0.44
|
|
Diluted net income per share attributable to Sterling common stockholders
|
$
|
1.47
|
|
|
$
|
0.93
|
|
|
$
|
0.43
|
|
Defined Contribution Plans
The Company maintains a defined contribution profit-sharing plan (401(k) plan) covering substantially all non-union persons employed by the Company, whereby employees may contribute a percentage of compensation, limited to maximum allowed amounts under the Internal Revenue Code. The 401(k) plan provides for a discretionary employer contribution and is determined annually by the Company’s board of directors. With the acquisition of Plateau, the Company made matching contributions for the year ended December 31, 2019 of $2,800, and $2,700 and $2,300 for the years ended December 31, 2018 and 2017, respectively.
Multi-Employer Pension Plans
As of December 31, 2019, the Company had approximately 2,800 employees, including 2,400 field personnel. We had 400 employees, or 17% of total employees, that were union members covered by collective bargaining agreements.
The Company contributes to a number of multi-employer defined benefit pension plans under the terms of collective-bargaining agreements that cover its union-represented employees. The risks of participating in these multi-employer plans are different from single-employer plans in the following aspects:
|
|
•
|
Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
|
|
|
•
|
If the Company chooses to stop participating in some of its multi-employer plans, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
|
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents our participation in these plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan Employer
|
|
Pension Protection Act (“PPA”) Certified Zone Status (1)
|
|
FIP / RP Status Pending/Implemented (2)
|
|
Contributions
|
|
Surcharge
Imposed
|
|
Expiration Date of Collective Bargaining Agreement (3)
|
Pension Trust
Fund
|
Identification Number
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Pension Trust Fund for Operating Engineers Pension Plan
|
94-6090764
|
|
Yellow
|
|
Red
|
|
Yes
|
|
$
|
2,314
|
|
|
$
|
1,932
|
|
|
$
|
2,477
|
|
|
No
|
|
Various
|
Laborers Pension Trust for Northern California
|
94-6277608
|
|
Green
|
|
Yellow
|
|
Yes
|
|
857
|
|
|
880
|
|
|
953
|
|
|
No
|
|
Various
|
Carpenter Funds Administrative Office
|
94-6050970
|
|
Red
|
|
Red
|
|
Yes
|
|
547
|
|
|
748
|
|
|
727
|
|
|
No
|
|
Various
|
Cement Mason Pension Trust Fund For Northern California
|
94-6277669
|
|
Yellow
|
|
Yellow
|
|
Yes
|
|
320
|
|
|
504
|
|
|
423
|
|
|
No
|
|
Various
|
All other funds (4)
|
|
|
|
|
|
|
|
|
7,144
|
|
|
7,283
|
|
|
8,006
|
|
|
|
|
|
|
|
|
|
|
Total Contributions:
|
|
$
|
11,182
|
|
|
$
|
11,347
|
|
|
$
|
12,586
|
|
|
|
|
|
|
|
(1)
|
The most recent PPA zone status available in 2019 and 2018 is for the plan’s year-end during 2018 and 2017, respectively. The zone status is based on information that we received from the plan and is certified by the plan’s actuary. Among other factors, plans in the red zone are generally less than 65 percent funded, plans in the orange zone are less than 80 percent funded and have an Accumulated Funding Deficiency in the current year or projected into the next six years, plans in the yellow zone are less than 80 percent funded and plans in the green zone are at least 80 percent funded.
|
|
|
(2)
|
Indicates whether the plan has a financial improvement plan (“FIP”) or a rehabilitation plan (“RP”) which is either pending or has been implemented.
|
|
|
(3)
|
Lists the expiration date(s) of the collective-bargaining agreement(s) to which the plans are subject.
|
|
|
(4)
|
These funds include multi-employer plans for pensions and other employee benefits. The total individually insignificant multi-employer pension costs contributed were $829, $1,300 and $1,500 for 2019, 2018 and 2017, respectively, and are included in the contributions to all other funds along with contributions to other types of benefit plans. Other employee benefits include certain coverage for medical, prescription drug, dental, vision, life and accidental death and dismemberment, disability and other benefit costs.
|
We currently have no intention of withdrawing from any of the multi-employer pension plans in which we participate.
|
|
|
18.
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
Operating assets and liabilities
The following table summarizes the changes in the components of operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Accounts receivable, including retainage
|
$
|
(21,300
|
)
|
|
$
|
(11,094
|
)
|
|
$
|
(29,923
|
)
|
Contracts in progress, net
|
6,023
|
|
|
(4,397
|
)
|
|
(3,492
|
)
|
Receivables from and equity in construction joint ventures
|
1,524
|
|
|
659
|
|
|
(4,250
|
)
|
Other current and non-current assets
|
43
|
|
|
924
|
|
|
929
|
|
Accounts payable
|
10,987
|
|
|
1,969
|
|
|
13,579
|
|
Accrued compensation and other liabilities
|
(839
|
)
|
|
(4,038
|
)
|
|
6,625
|
|
Members' interest subject to mandatory redemption and undistributed earnings
|
(340
|
)
|
|
1,957
|
|
|
2,156
|
|
Changes in operating assets and liabilities
|
$
|
(3,902
|
)
|
|
$
|
(14,020
|
)
|
|
$
|
(14,376
|
)
|
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
19.
|
CONCENTRATION OF RISK AND ENTERPRISE WIDE DISCLOSURES
|
The following table shows contract revenues generated from customers that accounted for more than 10% of the Company’s consolidated revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Utah Department of Transportation (“UDOT”)
|
|
$
|
135,496
|
|
|
12.0
|
%
|
|
$
|
153,276
|
|
|
14.8
|
%
|
|
$
|
140,529
|
|
|
14.7
|
%
|
Texas Department of Transportation (“TXDOT”)
|
|
*
|
|
|
*
|
|
|
*
|
|
|
*
|
|
|
103,236
|
|
|
10.8
|
%
|
*Represents less than 10% of revenues
At December 31, 2019, The Conlan Company accounted for 11% of the Company’s outstanding contract receivables with a receivable balance of $18,700. There were no individual customers accounting for greater than 10% of the Company’s outstanding contract receivables December 31, 2018.
The Company’s revenue and receivables are entirely derived from the construction of U.S. projects and all of the Company’s assets are held domestically within the U.S.
|
|
|
20.
|
RELATED PARTY TRANSACTIONS
|
The Company has limited related party transactions. The most significant transactions relate to the Company’s Ralph L. Wadsworth Construction (“RLW”) subsidiary and its executive management who own or have an ownership interest in certain real estate and other companies. RLW has historically performed construction contracts, leased properties, or has provided professional and other services for entities owned by the executive managers of RLW. The total RLW related party revenue related to construction contracts totaled $6,400, $15,300 and $700 in 2019, 2018 and 2017, respectively. RLW leases its main office and equipment maintenance shop for its Utah operations for an annual cost of approximately $800. The office and shop leases expire in 2022. RLW had no other miscellaneous related party transactions in 2019, 2018, and 2017.
The Company had other individually insignificant miscellaneous transactions with related parties including facility and equipment leases from executive management who own or have an ownership interest in real estate and equipment companies that totaled $300, $300 and $200 during 2019, 2018 and 2017, respectively.
The Company’s internal and public segment reporting are aligned based upon the services offered by its operating groups, which represent the reportable segments. Due to the October 2, 2019 acquisition of Plateau, the Company realigned its operating groups to reflect management’s present oversight of operations. After realignment, the Company’s operations consist of three reportable segments: Heavy Civil, Specialty Services and Residential, with our commercial business reclassified from the Heavy Civil operating group into our newly formed Specialty Services operating group. The segment information for the prior periods presented has been recast to conform to the current presentation. The Company’s Chief Operating Decision Maker evaluates the performance of the operating groups based upon revenue and income from operations. Each operating group’s income from operations reflects corporate costs, allocated based primarily upon revenue.
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents total revenue, depreciation and amortization, and income from operations by reportable segment for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Revenue
|
|
|
|
|
|
|
Heavy Civil
|
|
$
|
760,325
|
|
|
$
|
765,638
|
|
|
$
|
801,652
|
|
Specialty Services
|
|
212,824
|
|
|
120,333
|
|
|
48,314
|
|
Residential
|
|
153,129
|
|
|
151,696
|
|
|
107,992
|
|
Total Revenue
|
|
$
|
1,126,278
|
|
|
$
|
1,037,667
|
|
|
$
|
957,958
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
Heavy Civil
|
|
$
|
12,839
|
|
|
$
|
13,492
|
|
|
$
|
14,789
|
|
Specialty Services
|
|
6,059
|
|
|
1,439
|
|
|
815
|
|
Residential
|
|
1,842
|
|
|
1,839
|
|
|
1,390
|
|
Total Depreciation and Amortization
|
|
$
|
20,740
|
|
|
$
|
16,770
|
|
|
$
|
16,994
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
|
|
|
|
|
Heavy Civil
|
|
$
|
3,316
|
|
|
$
|
17,044
|
|
|
$
|
8,246
|
|
Specialty Services
|
|
18,207
|
|
|
4,629
|
|
|
2,284
|
|
Residential
|
|
20,539
|
|
|
20,938
|
|
|
15,646
|
|
Subtotal
|
|
42,062
|
|
|
42,611
|
|
|
26,176
|
|
Acquisition related costs
|
|
(4,311
|
)
|
|
—
|
|
|
—
|
|
Total Operating Income
|
|
$
|
37,751
|
|
|
$
|
42,611
|
|
|
$
|
26,176
|
|
The following table presents total assets by reportable segment at December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
Assets
|
|
|
|
|
Heavy Civil
|
|
$
|
287,779
|
|
|
$
|
318,586
|
|
Specialty Services
|
|
587,642
|
|
|
76,170
|
|
Residential
|
|
86,519
|
|
|
87,817
|
|
Total Assets
|
|
$
|
961,940
|
|
|
$
|
482,573
|
|
|
|
|
22.
|
QUARTERLY FINANCIAL INFORMATION
|
The following table summarizes the unaudited quarterly results of operations for 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Quarters Ended (unaudited)
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
Revenues
|
$
|
223,949
|
|
|
$
|
264,086
|
|
|
$
|
291,699
|
|
|
$
|
346,544
|
|
Gross profit
|
19,503
|
|
|
25,496
|
|
|
29,216
|
|
|
33,579
|
|
Income (loss) before income taxes
|
2,024
|
|
|
8,571
|
|
|
9,422
|
|
|
(5,538
|
)
|
Net income attributable to Sterling common stockholders
|
$
|
1,815
|
|
|
$
|
7,828
|
|
|
$
|
7,957
|
|
|
$
|
22,301
|
|
Net income per share attributable to Sterling common stockholders:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.07
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
|
$
|
0.81
|
|
Diluted
|
$
|
0.07
|
|
|
$
|
0.29
|
|
|
$
|
0.30
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 Quarters Ended (unaudited)
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
Revenues
|
$
|
222,492
|
|
|
$
|
268,734
|
|
|
$
|
291,266
|
|
|
$
|
255,175
|
|
Gross profit
|
$
|
19,834
|
|
|
$
|
31,046
|
|
|
$
|
31,279
|
|
|
$
|
28,173
|
|
Income before income taxes
|
$
|
3,721
|
|
|
$
|
9,238
|
|
|
$
|
11,581
|
|
|
$
|
6,738
|
|
Net income attributable to Sterling common stockholders
|
$
|
2,489
|
|
|
$
|
8,174
|
|
|
$
|
8,917
|
|
|
$
|
5,607
|
|
Net income per share attributable to Sterling common stockholders:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.09
|
|
|
$
|
0.30
|
|
|
$
|
0.33
|
|
|
$
|
0.22
|
|
Diluted
|
$
|
0.09
|
|
|
$
|
0.30
|
|
|
$
|
0.33
|
|
|
$
|
0.21
|
|
The Company’s operating revenues tend to be somewhat higher in the summer months which are typically due to holiday schedules and warmer and dryer weather conditions. Our second and third quarter revenues and results of operations typically reflect these seasonal trends. However, from time to time, the Company’s operating results are significantly affected by certain transactions or events that management believes are not indicative or representative of our results. As of October 2, 2019, Plateau’s results are included in the results for the remainder of 2019.
As discussed in Note 21 - Segment Information, during the fourth quarter 2019, the Company realigned the operating groups to reflect the present management oversight of operations. Due to the aforementioned realignment, part the 2019 and 2018 results for our commercial business were reclassified from the Heavy Civil operating group into our newly formed Specialty Services operating group. The following tables represent our 2019 and 2018 quarterly revenue and income from operations adjusted to reflect our operating group realignment and to conform to our 2019 presentation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Quarters Ended (unaudited)
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
Total
|
Revenue
|
|
|
|
|
|
|
|
|
|
Heavy Civil
|
$
|
150,505
|
|
|
$
|
200,236
|
|
|
$
|
218,894
|
|
|
$
|
190,690
|
|
|
$
|
760,325
|
|
Specialty Services
|
30,679
|
|
|
27,894
|
|
|
32,863
|
|
|
121,388
|
|
|
212,824
|
|
Residential
|
42,765
|
|
|
35,956
|
|
|
39,942
|
|
|
34,466
|
|
|
153,129
|
|
Total Revenue
|
$
|
223,949
|
|
|
$
|
264,086
|
|
|
$
|
291,699
|
|
|
$
|
346,544
|
|
|
$
|
1,126,278
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
Heavy Civil
|
$
|
(2,147
|
)
|
|
$
|
5,747
|
|
|
$
|
7,420
|
|
|
$
|
(7,704
|
)
|
|
$
|
3,316
|
|
Specialty Services
|
1,048
|
|
|
865
|
|
|
1,371
|
|
|
14,923
|
|
|
18,207
|
|
Residential
|
5,819
|
|
|
4,834
|
|
|
5,220
|
|
|
4,666
|
|
|
20,539
|
|
Subtotal
|
4,720
|
|
|
11,446
|
|
|
14,011
|
|
|
11,885
|
|
|
42,062
|
|
Acquisition related costs
|
—
|
|
|
(262
|
)
|
|
(1,896
|
)
|
|
(2,153
|
)
|
|
(4,311
|
)
|
Total Operating Income
|
$
|
4,720
|
|
|
$
|
11,184
|
|
|
$
|
12,115
|
|
|
$
|
9,732
|
|
|
$
|
37,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 Quarters Ended (unaudited)
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
Total
|
Revenue
|
|
|
|
|
|
|
|
|
|
Heavy Civil
|
$
|
158,722
|
|
|
$
|
194,174
|
|
|
$
|
222,299
|
|
|
$
|
190,443
|
|
|
$
|
765,638
|
|
Specialty Services
|
28,519
|
|
|
29,109
|
|
|
32,245
|
|
|
30,460
|
|
|
120,333
|
|
Residential
|
35,251
|
|
|
45,451
|
|
|
36,722
|
|
|
34,272
|
|
|
151,696
|
|
Total Revenue
|
$
|
222,492
|
|
|
$
|
268,734
|
|
|
$
|
291,266
|
|
|
$
|
255,175
|
|
|
$
|
1,037,667
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
Heavy Civil
|
$
|
1,092
|
|
|
$
|
4,322
|
|
|
$
|
7,385
|
|
|
$
|
4,245
|
|
|
$
|
17,044
|
|
Specialty Services
|
519
|
|
|
1,480
|
|
|
1,647
|
|
|
983
|
|
|
4,629
|
|
Residential
|
5,068
|
|
|
6,347
|
|
|
5,341
|
|
|
4,182
|
|
|
20,938
|
|
Total Operating Income
|
$
|
6,679
|
|
|
$
|
12,149
|
|
|
$
|
14,373
|
|
|
$
|
9,410
|
|
|
$
|
42,611
|
|