NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
($ and share values in thousands, except per share data)
(Unaudited)
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.
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2.
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BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
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Basis of Presentation
Presentation Basis—The accompanying Condensed 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 Condensed Consolidated Financial Statements to conform to the current year presentation.
Estimates and Judgments—The preparation of the accompanying Condensed 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 Accounting Standards Update (“ASU”) 2014-09 (Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers), is as follows:
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•
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Performance Obligations Satisfied Over Time (Heavy Civil and Specialty Services)
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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).
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 of services 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 the 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 the transaction price (or excluded from the transaction price in the case of liquidated damages) are not resolved in the Company’s favor, or to the extent incentives reflected in the transaction price are not earned, there could be reductions in, or reversals of, previously recognized revenue.
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•
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Performance Obligations Satisfied at a Point-in-Time (Residential)
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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 March 31, 2020 and December 31, 2019, receivables included $73,400 and $79,400 of retainage.
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 March 31, 2020 and December 31, 2019, our allowance for doubtful accounts against contracts receivable was zero.
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 Condensed 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 Condensed 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 Condensed Consolidated Statements of Operations and an associated liability is established within “Members’ interest subject to mandatory redemption and undistributed earnings” within the Condensed 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 Condensed 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 Condensed Consolidated Statements of Operations and as a single line item (“Receivables from and equity in construction joint ventures”) in the Condensed Consolidated Balance Sheets. This method is a permissible modification of the equity method of accounting which is a common practice in the construction industry.
Cash and Restricted cash—Our cash is comprised of highly liquid investments with maturities of three months or less. Restricted cash of approximately $4,700 and $4,800 is included in “Other current assets” on the Condensed Consolidated Balance Sheets at March 31, 2020 and December 31, 2019. 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 and finance leases.
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Operating & Finance Leases—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 Condensed Consolidated Balance Sheets. Finance leases are included in “Property and equipment”, “Current maturities of long-term debt”, and “Long-term debt” on the Company’s Condensed Consolidated Balance Sheets. ROU assets represent the Company’s right to use, or control the use of, a specified asset
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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.
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.
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 - 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
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 adopted this guidance effective January 1, 2020 as required and noted no material impact to the Company’s Condensed 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, as well as 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:
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Cash consideration transferred, net of $2,425 of cash acquired
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$
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375,000
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Target working capital adjustment
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21,323
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Equity consideration transferred (1,245 shares at $13.01 per share(1))
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16,195
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Note payable to seller (See Note 9 - Debt)
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10,000
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Estimated tax basis election
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5,141
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Total consideration
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$
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427,659
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(1) Sterling’s closing stock price on October 1, 2019
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 $106,661, was recorded as goodwill.
The following table summarizes our purchase price allocation at the acquisition closing date, net of cash acquired:
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Net tangible assets:
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Accounts receivable, including retainage
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$
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81,921
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Costs and estimated earnings in excess of billings
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974
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Other current assets
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249
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Property and equipment, net
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65,492
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Other non-current assets, net
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10
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Accounts payable
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(22,039
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)
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Billings in excess of costs and estimated earnings
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(16,540
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)
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Other current liabilities
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(7,669
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)
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Total net tangible assets
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102,398
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Identifiable intangible assets
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218,600
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Goodwill
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106,661
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Total consideration transferred
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$
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427,659
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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.
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Weighted Average Life (Years)
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October 2, 2019
Fair Value
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Customer relationships
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25
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$
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191,800
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Trade name
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25
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24,800
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Non-compete agreements
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5
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2,000
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Total
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$
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218,600
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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 period ended March 31, 2019. This pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the pro forma events taken place on the dates indicated. Further, the pro forma financial information does not purport to project the future operating results of the combined company following the Plateau Acquisition.
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Three Months Ended March 31, 2019
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Pro forma revenue
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$
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282,609
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Pro forma net income attributable to Sterling
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$
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7,331
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4.
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REVENUE FROM CUSTOMERS
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Backlog
The Company had the following backlog, by segment:
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March 31,
2020
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December 31,
2019
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Heavy Civil Backlog
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$
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886,575
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$
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834,049
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Specialty Services Backlog
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303,545
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233,976
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Total Heavy Civil and Specialty Services Backlog
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$
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1,190,120
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$
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1,068,025
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The Company expects to recognize approximately 65% 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:
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Three Months Ended March 31,
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Revenue by major end market
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2020
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2019
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Heavy Highway
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$
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96,374
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$
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93,610
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Aviation
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28,457
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29,937
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Water Containment and Treatment
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21,809
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15,234
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Other
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8,975
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11,724
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Heavy Civil Revenue
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$
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155,615
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$
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150,505
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|
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Land Development
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$
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76,245
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|
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$
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—
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Commercial
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28,478
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30,679
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Specialty Services Revenue
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$
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104,723
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$
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30,679
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Residential Revenue
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$
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36,350
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|
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$
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42,765
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|
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Revenues
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$
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296,688
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|
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$
|
223,949
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Revenue by contract type
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Fixed-Unit Price
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$
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141,739
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|
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$
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141,219
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Lump Sum
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114,252
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|
|
39,132
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Residential and Other
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40,697
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|
43,598
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Revenues
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$
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296,688
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|
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$
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223,949
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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.
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 $7,100 and $3,000, at March 31, 2020 and December 31, 2019, 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.
Changes in estimated revenues and gross margin resulted in a net increase of $95 for the three months ended March 31, 2020, and net decrease of $200 for the three months ended March 31, 2019, included in “Operating income” on the Condensed Consolidated Statements of Operations.
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5.
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CONSOLIDATED 50% OWNED SUBSIDIARIES
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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 $1,700 and $1,300 for the three months ended March 31, 2020 and 2019, respectively, and are eliminated within “Other operating expense, net” in the Condensed Consolidated Statements of Operations. Any undistributed earnings for partners are included in “Members’ interest subject to mandatory redemption and undistributed earnings” within the Condensed Consolidated Balance Sheets and are mandatorily payable at the time of the noncontrolling owners’ death or permanent disability.
These two subsidiaries 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). The Company has purchased two separate $20,000 death and permanent total disability insurance policies to mitigate the Company’s cash draw if such events were to occur. These purchase obligations are recorded in “Members’ interest subject to mandatory redemption and undistributed earnings” on the Condensed Consolidated Balance Sheets.
The liability consists of the following:
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|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
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Members’ interest subject to mandatory redemption
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$
|
40,000
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|
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$
|
40,000
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Net accumulated earnings
|
9,186
|
|
|
9,003
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Total liability
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$
|
49,186
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|
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$
|
49,003
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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:
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|
|
|
|
|
|
|
|
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Three Months Ended March 31,
|
|
2020
|
|
2019
|
Revenues
|
$
|
44,362
|
|
|
$
|
42,414
|
|
Operating income
|
$
|
155
|
|
|
$
|
277
|
|
Net income
|
$
|
158
|
|
|
$
|
282
|
|
|
|
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6.
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CONSTRUCTION JOINT VENTURES
|
The Company participates in joint ventures with other major construction companies and other partners, typically for large, technically complex projects, including design-build projects, when it is desirable to share risk and resources in order to seek a competitive advantage. Joint venture partners typically provide independently prepared estimates, furnish employees and equipment, enhance bonding capacity and often also bring local knowledge and expertise. These projects generally have joint and several liability. The Company selects its joint venture partners based on its analysis of their construction and financial capabilities, expertise in the type of work to be performed and past working relationships with the Company, among other criteria.
Joint ventures with a controlling interest—For these joint ventures, the equity held by the remaining owners and their portions of net income (loss) are reflected in the Condensed Consolidated Balance Sheets line item “Noncontrolling interests” in “Stockholders’ equity” and the Condensed Consolidated Statements of Operations line item “Net income attributable to noncontrolling interests,” respectively.
The following table summarizes the changes in the noncontrolling owners’ interests in subsidiaries and consolidated joint ventures:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Balance, beginning of period
|
$
|
1,293
|
|
|
$
|
7,859
|
|
Net income attributable to noncontrolling interest
|
100
|
|
|
46
|
|
Distributions to noncontrolling interest owners
|
—
|
|
|
(5,100
|
)
|
Balance, end of period
|
$
|
1,393
|
|
|
$
|
2,805
|
|
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 Condensed Consolidated Statements of Operations and as a single line item in “Receivables from and equity in construction joint ventures” in the Condensed Consolidated Balance Sheets. This method is an acceptable modification of the equity method of accounting which is a common practice in the construction industry. Condensed combined financial amounts of joint ventures in which the Company has a noncontrolling interest and the Company’s share of such amounts which are included in the Company’s Condensed Consolidated Financial Statements are shown below:
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
Current assets
|
$
|
60,517
|
|
|
$
|
92,710
|
|
Current liabilities
|
$
|
(77,164
|
)
|
|
$
|
(86,705
|
)
|
Sterling’s receivables from and equity in construction joint ventures
|
$
|
10,789
|
|
|
$
|
9,196
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Revenues
|
$
|
26,846
|
|
|
$
|
31,384
|
|
Income before tax
|
$
|
2,157
|
|
|
$
|
1,969
|
|
Sterling’s noncontrolling interest:
|
|
|
|
Revenues
|
$
|
13,082
|
|
|
$
|
15,684
|
|
Income before tax
|
$
|
1,049
|
|
|
$
|
984
|
|
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 the warranty period, if any, has passed.
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 51% of potential losses of the partnership.
Summary financial information for SEMA is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Revenues
|
$
|
4,064
|
|
|
$
|
602
|
|
Operating income
|
$
|
296
|
|
|
$
|
38
|
|
Net income
|
$
|
299
|
|
|
$
|
38
|
|
|
|
|
7.
|
PROPERTY AND EQUIPMENT
|
Property and equipment are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
Construction and transportation equipment
|
|
$
|
221,336
|
|
|
$
|
217,945
|
|
Buildings and improvements
|
|
15,711
|
|
|
14,641
|
|
Land
|
|
3,891
|
|
|
3,891
|
|
Office equipment
|
|
2,607
|
|
|
2,767
|
|
Total property and equipment
|
|
243,545
|
|
|
239,244
|
|
Less accumulated depreciation
|
|
(125,727
|
)
|
|
(123,214
|
)
|
Total property and equipment, net
|
|
$
|
117,818
|
|
|
$
|
116,030
|
|
Depreciation Expense—Depreciation expense is primarily included within cost of revenues and was $5,448 and $3,702 for the three months ended March 31, 2020 and 2019, respectively.
|
|
|
8.
|
OTHER INTANGIBLE ASSETS
|
The following table presents the Company’s acquired finite-lived intangible assets at March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Weighted
Average
Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Customer relationships
|
25 years
|
|
$
|
232,623
|
|
|
$
|
(9,251
|
)
|
|
$
|
232,623
|
|
|
$
|
(6,911
|
)
|
Trade name
|
23 years
|
|
30,107
|
|
|
(2,071
|
)
|
|
30,107
|
|
|
(1,692
|
)
|
Non-competition agreements
|
5 years
|
|
2,487
|
|
|
(409
|
)
|
|
2,487
|
|
|
(291
|
)
|
Total
|
24 years
|
|
$
|
265,217
|
|
|
$
|
(11,731
|
)
|
|
$
|
265,217
|
|
|
$
|
(8,894
|
)
|
The Company's intangible amortization expense was $2,837 and $600 for the three months ended March 31, 2020 and 2019, respectively.
The Company’s outstanding debt was as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
Term Loan Facility
|
$
|
395,000
|
|
|
$
|
400,000
|
|
Revolving Credit Facility
|
50,000
|
|
|
20,000
|
|
Credit Facility
|
445,000
|
|
|
420,000
|
|
Note payable to seller, Plateau Acquisition
|
10,000
|
|
|
10,000
|
|
Notes and deferred payments to sellers, Tealstone Acquisition
|
12,500
|
|
|
12,230
|
|
Notes payable for transportation and construction equipment and other
|
723
|
|
|
805
|
|
Total debt
|
468,223
|
|
|
443,035
|
|
|
|
|
|
Less - Current maturities of long-term debt
|
(50,211
|
)
|
|
(42,473
|
)
|
Less - Unamortized debt issuance costs
|
(9,184
|
)
|
|
(9,935
|
)
|
Total long-term debt
|
$
|
408,828
|
|
|
$
|
390,627
|
|
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 Revolving Credit Facility bears interest at either the Base Rate plus a margin (4.25% and 3.50% per annum, respectively at March 31, 2020), or one-, two-, three-, six- or, if available, twelve-month LIBOR plus an applicable margin (0.93% and 4.50% per annum, respectively at March 31, 2020, 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 March 31, 2020, we had $50,000 of outstanding borrowings under the facility, providing $25,000 of available capacity. During the three months ended March 31, 2020, our weighted average interest rate on borrowings under the facility was approximately 6.17%. 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 6.05% per annum during the three months ended March 31, 2020. At March 31, 2020, we had $395,000 of outstanding borrowings under the facility. 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 in 2019. 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. Amortization of debt issuance costs was $752 and $833 for the three months ended March 31, 2020 and 2019, respectively, and was recorded as interest expense.
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.
Notes and deferred Payments to Sellers, Tealstone Acquisition—At March 31, 2020 the Company had $12,500 outstanding, net of debt discounts, of the combined promissory notes and deferred cash payments issued as part of the Tealstone Acquisition. During the three months ended March 31, 2020, the Company did not make any 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.
Notes Payable for Transportation and Construction Equipment and Other—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 $723 and $805 at March 31, 2020 and December 31, 2019, 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 March 31, 2020, we were in compliance with all of our restrictive and financial covenants. The Company’s debt is recorded at its carrying amount in the Condensed Consolidated Balance Sheets. As of March 31, 2020 and December 31, 2019, 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 were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Operating lease cost
|
$
|
2,159
|
|
|
$
|
2,211
|
|
Short-term lease cost
|
$
|
3,281
|
|
|
$
|
4,743
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
Amortization of right-of-use assets
|
$
|
56
|
|
|
$
|
32
|
|
Interest on lease liabilities
|
8
|
|
|
2
|
|
Total finance lease cost
|
$
|
64
|
|
|
$
|
34
|
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows from operating leases
|
$
|
2,105
|
|
|
$
|
2,383
|
|
Operating cash flows from finance leases
|
$
|
8
|
|
|
$
|
2
|
|
Financing cash flows from finance leases
|
$
|
56
|
|
|
$
|
32
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations (noncash):
|
|
|
|
Operating leases
|
$
|
3,540
|
|
|
$
|
3,101
|
|
Finance leases
|
$
|
—
|
|
|
$
|
76
|
|
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
Operating Leases
|
|
|
|
Operating lease right-of-use assets
|
$
|
14,790
|
|
|
$
|
13,979
|
|
|
|
|
|
Current portion of long-term lease obligations
|
$
|
7,410
|
|
|
$
|
7,095
|
|
Long-term lease obligations
|
7,465
|
|
|
6,976
|
|
Total operating lease liabilities
|
$
|
14,875
|
|
|
$
|
14,071
|
|
|
|
|
|
Finance Leases
|
|
|
|
Property and equipment, at cost
|
$
|
1,479
|
|
|
$
|
1,479
|
|
Accumulated depreciation
|
(537
|
)
|
|
(482
|
)
|
Property and equipment, net
|
$
|
942
|
|
|
$
|
997
|
|
|
|
|
|
Current maturities of long-term debt
|
$
|
198
|
|
|
$
|
204
|
|
Long-term debt
|
509
|
|
|
560
|
|
Total finance lease liabilities
|
$
|
707
|
|
|
$
|
764
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
|
Operating leases
|
2.6
|
|
|
2.5
|
|
Finance leases
|
3.9
|
|
|
4.0
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
Operating leases
|
6.0
|
%
|
|
6.0
|
%
|
Finance leases
|
4.2
|
%
|
|
4.2
|
%
|
Maturities of lease liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
Finance
Leases
|
Year Ending December 31,
|
|
|
|
2020 (excluding the three months ended March 31, 2020)
|
$
|
5,159
|
|
|
$
|
168
|
|
2021
|
5,720
|
|
|
208
|
|
2022
|
3,768
|
|
|
161
|
|
2023
|
1,624
|
|
|
154
|
|
2024
|
198
|
|
|
77
|
|
Thereafter
|
11
|
|
|
—
|
|
Total lease payments
|
$
|
16,480
|
|
|
$
|
768
|
|
Less imputed interest
|
(1,605
|
)
|
|
(61
|
)
|
Total
|
$
|
14,875
|
|
|
$
|
707
|
|
|
|
|
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 March 31, 2020, the notional value of the swap contract was $350,000 and the fair value of the swap contract was a loss of $9,524. 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 March 31, 2020 or December 31, 2019.
|
The following table presents the fair value of the interest rate derivative by valuation hierarchy and balance sheet classification:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
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
|
|
$
|
—
|
|
|
$
|
(4,086
|
)
|
|
$
|
—
|
|
|
$
|
(4,086
|
)
|
|
$
|
—
|
|
|
$
|
(61
|
)
|
|
$
|
—
|
|
|
$
|
(61
|
)
|
Other non-current liabilities
|
|
—
|
|
|
(5,438
|
)
|
|
—
|
|
|
(5,438
|
)
|
|
—
|
|
|
(398
|
)
|
|
—
|
|
|
(398
|
)
|
Total liabilities at fair value
|
|
$
|
—
|
|
|
$
|
(9,524
|
)
|
|
$
|
—
|
|
|
$
|
(9,524
|
)
|
|
$
|
—
|
|
|
$
|
(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 March 31, 2020, 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 change in other comprehensive income (“OCI”) during the three months ended March 31, 2020 for derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Amount
|
|
Tax
Amount
|
|
Net of Tax
Amount
|
Net gain (loss) recognized in OCI
|
|
$
|
(9,174
|
)
|
|
$
|
2,064
|
|
|
$
|
(7,110
|
)
|
Net amount reclassified from AOCI into earnings (1)
|
|
63
|
|
|
(14
|
)
|
|
49
|
|
Change in OCI
|
|
$
|
(9,111
|
)
|
|
$
|
2,050
|
|
|
$
|
(7,061
|
)
|
(1) Net unrealized losses totaling $3,946 are anticipated to be reclassified from AOCI into interest expense during the next 12 months due to settlement of the associated underlying obligations.
|
|
|
12.
|
COMMITMENTS AND CONTINGENCIES
|
The Company is required by its insurance providers to obtain and hold a standby letter of credit. These letters of credit serve as a guarantee by the banking institution to pay the Company’s insurance providers the incurred claim costs attributable to its general liability, workers compensation and automobile liability claims, up to the amount stated in the standby letters of credit, in the event that these claims were not paid by the Company. These letters of credit are cash collateralized, resulting in the cash being designated as restricted.
The Company is the subject of certain other claims and lawsuits occurring in the normal course of business. Management, after consultation with legal counsel, does not believe that the outcome of these actions will have a material impact on the Condensed Consolidated Financial Statements of the Company.
The Company and its subsidiaries 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:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Current tax expense
|
$
|
271
|
|
|
$
|
22
|
|
Deferred tax expense
|
913
|
|
|
141
|
|
Income tax expense
|
$
|
1,184
|
|
|
$
|
163
|
|
|
|
|
|
Cash paid for income taxes
|
$
|
44
|
|
|
$
|
—
|
|
The effective income tax rate varied from the 21% federal statutory rate primarily as a result of the change in tax valuation allowance, state income taxes, and net income attributable to noncontrolling interest owners which is taxable to those owners rather than to the Company and other permanent differences. In addition, 2019 included a reduction in the tax valuation allowance that reduced income tax expense by $203 and 2020 includes state taxes related to Plateau of $332.
Due to the net operating loss carryforwards, the Company expects no cash payments for federal income taxes for 2020 or 2019. The Company makes cash payments for state income taxes in states in which the Company does not have net operating loss carry forwards.
At December 31, 2019 the Company had 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.
As a result of the Company’s analysis, management has determined that the Company does not have any material uncertain tax positions.
|
|
|
14.
|
STOCK INCENTIVE PLAN AND OTHER EQUITY ACTIVITY
|
General—The Company has a stock incentive plan (the “Stock Incentive Plan”) that is administered by the Compensation and Talent Development Committee of the Board of Directors. Under the Stock Incentive Plan, the Company can issue shares to employees and directors in the form of restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and performance based shares (“PSUs”). Changes in common stock, additional paid in capital, and treasury stock during the three months ended March 31, 2020 primarily relate to activity associated with the Stock Incentive Plan and share repurchases.
Share Grants—During the three months ended March 31, 2020, the Company had the following share grants associated with the Stock Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant-Date Fair Value per Share
|
RSUs
|
|
127
|
|
|
$
|
14.08
|
|
PSUs
|
|
173
|
|
|
$
|
14.08
|
|
Total shares granted
|
|
300
|
|
|
|
Share Issuances—During the three months ended March 31, 2020, the Company had the following share issuances associated with the Stock Incentive Plan:
|
|
|
|
|
|
|
Shares
|
RSUs (issued upon vesting)
|
|
39
|
|
PSUs (issued upon vesting)
|
|
86
|
|
ESPP (issued upon sale)
|
|
13
|
|
Total shares issued
|
|
138
|
|
Stock-Based Compensation Expense—During the three months ended March 31, 2020 and 2019 the Company recognized $2,234 and $1,021, respectively, of stock-based compensation expense, primarily within general and administrative expenses. The Company recognizes forfeitures as they occur, rather than estimating expected forfeitures. Included within total stock-based compensation expense for the three months ended March 31, 2020 and 2019 is $18 and zero, respectively, of expense related to the Employee Stock Purchase Plan (the “ESPP”). At March 31, 2020, 774 authorized shares remained available for issuance under the ESPP.
Share Withheld for Taxes—The Company withheld 46 shares for taxes on stock-based compensation vestings for $668 during the three months ended March 31, 2020.
Warrants—During the three months ended March 31, 2020, certain holders of warrants elected the cashless exercise option and the Company issued 110 common shares on the exercise of 470 warrants with a market value of $1,477.
Accumulated Other Comprehensive Income (Loss) (“AOCI”)—The following table presents changes in AOCI, net of tax:
|
|
|
|
|
|
Unrealized Fair Value of Swap (Cash Flow Hedge) (1)
|
Balance at December 31, 2019
|
$
|
(209
|
)
|
Net gain (loss) recognized in OCI, net of tax effect of $2,064
|
(7,110
|
)
|
Amount reclassified from AOCI into earnings, net of tax effect of ($14)
|
49
|
|
Change in OCI, net of tax
|
(7,061
|
)
|
Balance at March 31, 2020
|
$
|
(7,270
|
)
|
(1) See Note 11 - Financial Instruments for further discussion of our cash flow hedges.
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:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Numerator:
|
|
|
|
|
|
Net income attributable to Sterling common stockholders
|
$
|
3,115
|
|
|
$
|
1,815
|
|
Denominator:
|
|
|
|
Weighted average common shares outstanding — basic
|
27,736
|
|
|
26,377
|
|
Shares for dilutive unvested stock and warrants
|
256
|
|
|
346
|
|
Weighted average common shares outstanding — diluted
|
27,992
|
|
|
26,723
|
|
Basic net income per share attributable to Sterling common stockholders
|
$
|
0.11
|
|
|
$
|
0.07
|
|
Diluted net income per share attributable to Sterling common stockholders
|
$
|
0.11
|
|
|
$
|
0.07
|
|
The Company’s internal and public segment reporting are aligned based upon the services offered by its operating groups, which represent the reportable segments. The Company’s operations consist of three reportable segments: Heavy Civil, Specialty Services and Residential. 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.
The following table presents total revenue and income from operations by reportable segment for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Revenue
|
|
|
|
Heavy Civil
|
$
|
155,615
|
|
|
$
|
150,505
|
|
Specialty Services
|
104,723
|
|
|
30,679
|
|
Residential
|
36,350
|
|
|
42,765
|
|
Total Revenue
|
$
|
296,688
|
|
|
$
|
223,949
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
|
|
|
Heavy Civil
|
$
|
(3,622
|
)
|
|
$
|
(2,147
|
)
|
Specialty Services
|
11,114
|
|
|
1,048
|
|
Residential
|
5,084
|
|
|
5,819
|
|
Subtotal
|
12,576
|
|
|
4,720
|
|
Acquisition related costs
|
(473
|
)
|
|
—
|
|
Total Operating Income
|
$
|
12,103
|
|
|
$
|
4,720
|
|
|
|
|
17.
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
Operating assets and liabilities—The following table summarizes the changes in the components of operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Accounts receivable, including retainage
|
$
|
26,979
|
|
|
$
|
(1,976
|
)
|
Contracts in progress, net
|
(17,954
|
)
|
|
(9,400
|
)
|
Receivables from and equity in construction joint ventures
|
(1,593
|
)
|
|
(905
|
)
|
Other current and non-current assets
|
1,242
|
|
|
2,084
|
|
Accounts payable
|
(14,421
|
)
|
|
(17,556
|
)
|
Accrued compensation and other liabilities
|
888
|
|
|
2,602
|
|
Members' interest subject to mandatory redemption and undistributed earnings
|
183
|
|
|
(2,211
|
)
|
Changes in operating assets and liabilities
|
$
|
(4,676
|
)
|
|
$
|
(27,362
|
)
|