ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2019
Dear Shareholders,
We sincerely want to thank all our employees for their hard work and dedication and our shareholders for
their continued support which made 2019 another monumental year for Sterling. It also marked the last
year of the three year strategic plan developed in 2016. I think it is important to look back at what we have
accomplished over the last three years, how much the company has changed and how those changes have
positioned the company for future growth. In 2016, the management team put together a strategy focused
on growing the bottom line, reducing risk, shoring up the balance sheet and building a platform for future
growth. The plan consisted of three key elements, solidifying the base, growing high margin products and
expansion into adjacent markets. We set out to take the company from a loss of $0.40 per share to a gain of
over $1 per share, while reducing risk and building a platform for accretive future growth. I’m proud to
say, the Sterling team has met or exceeded all the goals we established in that plan. Since 2016, our revenue
has grown 63%, our gross margin has grown over 300bps, our G&A has been reduced over 100bps and our
EBITDA has grown dramatically. We have built a platform of three diverse sectors with lower risk, higher
growth and better margins. Additionally, since 2016, we refreshed the Board with four new highly qualified
Directors (two of whom joined in 2019), completed two successful acquisitions and produced sizable gains
for our shareholders. During this period, our stock has outperformed the S&P 500 by 50%.
In 2019, we saw our revenue grow 8.5%, our margin in backlog hit an all-time high of 11.5% and our
EBITDA grow 13%. We completed another significant acquisition that diversifies us into additional
markets that includes end customers like Amazon, Facebook, Fed-Ex and Home Depot. In addition to
customer diversification, we picked up geographic diversification and added the “fast growing” Southeast
to our footprint that we believe positions the company very well for the upcoming year.
We have certainly come a long way since putting that original strategy together, but feel as if we are still
in the early stages of this transformation. As we go forward our strategy will not change. We will continue
to drive the three key elements and grow our bottom line at a faster rate than the top line while further
reducing risks. Our outlook for 2020 shows we have opportunities for additional growth. For 2020, our
markets remain strong as we enter the year with record backlog and record margins. We have strengthened
the organization by adding talent and creating three distinct business sectors: Heavy Civil, Residential and
Specialty Services. Our goal in 2020 is to keep this trend going and have another all-time record year for
the company.
Sincerely,
Joseph A. Cutillo
Chief Executive Officer
The Woodlands, Texas
March 25, 2020
Thomas M. White
Chairman of the Board
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File Number 1-31993
STERLING CONSTRUCTION COMPANY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation
or organization)
1800 Hughes Landing Blvd.
The Woodlands, Texas
(Address of principal executive offices)
25-1655321
(I.R.S. Employer
Identification No.)
77380
(Zip Code)
Registrant’s telephone number, including area code: (281) 214-0800
Common Stock, $0.01 par value per share
(Title of each class)
Securities registered pursuant to Section 12(b) of the Act:
STRL
(Trading Symbol)
NASDAQ
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files).
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
Aggregate market value of the voting and non-voting common equity held by non-affiliates, based on a NASDAQ closing price of $13.42 on June 28,
2019 was approximately $349.1 million.
The number of shares outstanding of the registrant’s common stock as of February 28, 2020 – 27,787,903
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held on May 6, 2020 are incorporated by reference into Part III of this Form 10-K.
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Sterling Construction Company, Inc.
Annual Report on Form 10-K
Table of Contents
PART I
PART II
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
Selected Financial Data
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART III
Item 15. Exhibits, and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
PART IV
2
Cautionary Statement Regarding Forward-Looking Statements
PART I
This annual report on Form 10-K, including the documents incorporated herein by reference, contains statements that are, or may
be considered to be, “forward-looking statements” regarding the Company which represent our expectations and beliefs concerning future
events. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the
Private Securities Litigation Reform Act of 1995 as set forth in Section 27A of the Securities Act of 1933, as amended, or the Securities
Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The forward-looking statements included
herein or incorporated herein by reference relate to matters that are predictive in nature, such as our industry, business strategy, goals and
expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources
and other financial and operating information, and may use or contain words such as “anticipate,” “assume,” “believe,” “budget,”
“continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,”
“would” and similar terms and phrases.
Forward-looking statements reflect our current expectations as of the date of this annual report on Form 10-K regarding future events,
results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or
judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which
are beyond our control, that could result in our expectations not being realized or otherwise could materially affect our financial condition,
results of operations and cash flows.
Actual events, results and outcomes may differ materially from those anticipated, projected or assumed in the forward-looking
statements due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, the following:
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factors that affect the accuracy of estimates inherent in the bidding for contracts, estimates of backlog, over time recognition
accounting policies, including onsite conditions that differ materially from those assumed in the original bid, contract
modifications, mechanical problems with machinery or equipment and effects of other risks discussed herein;
actions of suppliers, subcontractors, design engineers, joint venture partners, customers, competitors, banks, surety companies
and others which are beyond our control, including suppliers’, subcontractors’ and joint venture partners’ failure to perform;
cost escalations associated with our contracts, including changes in availability, proximity and cost of materials such as steel,
cement, concrete, aggregates, oil, fuel and other construction materials, including changes in U.S. trade policies and retaliatory
responses from other countries, and cost escalations associated with subcontractors and labor;
change in cost to lease, acquire or maintain our equipment;
our dependence on a limited number of significant customers;
the presence of competitors with greater financial resources or lower margin requirements than ours, and the impact of competitive
bidders on our ability to obtain new backlog at reasonable margins acceptable to us;
a shutdown of the federal government;
our ability to qualify as an eligible bidder under government contract criteria;
changes in general economic conditions, including recessions, reductions in federal, state and local government funding for
infrastructure services, changes in those governments’ budgets, practices, laws and regulations and adverse economic conditions
in our geographic markets;
delays or difficulties related to the completion of our projects, including additional costs, reductions in revenues or the payment
of liquidated damages, or delays or difficulties related to obtaining required governmental permits and approvals;
design/build contracts which subject us to the risk of design errors and omissions;
our ability to obtain bonding or post letters of credit;
our ability to raise additional capital on favorable terms;
our ability to attract and retain key personnel;
increased unionization of our workforce or labor costs and any work stoppages or slowdowns;
adverse weather conditions;
our ability to successfully identify, finance, complete and integrate acquisitions, including the Plateau Acquisition;
citations issued by any governmental authority, including the Occupational Safety and Health Administration;
federal, state and local environmental laws and regulations where non-compliance can result in penalties and/or termination of
contracts as well as civil and criminal liability; and
the other factors discussed in more detail in Item 1A. “Risk Factors.”
In reading this annual report on Form 10-K, you should consider these factors carefully in evaluating any forward-looking statements
and you are cautioned not to place undue reliance on any forward-looking statements. Investors are cautioned that many of the assumptions
upon which our forward-looking statements are based are likely to change after the forward-looking statements are made. Further, we
may make changes to our business plans that could affect our results. Although we believe that our plans, intentions and expectations
reflected in, or suggested by, the forward-looking statements that we make in this annual report on Form 10-K are reasonable, we can
provide no assurance that they will be achieved.
The forward-looking statements included herein are made only as of the date hereof, and we undertake no obligation to update any
information contained herein or to publicly release the results of any revisions to any forward-looking statements to reflect events or
circumstances that occur, or that we become aware of after the date of this annual report on Form 10-K.
3
Item 1. Business
Overview of the Company’s Business
Sterling Construction Company, Inc. (“Sterling” or “the Company”), 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.
In this report, unless the context otherwise indicates, “Sterling,” “the Company,” “we,” “our” or “us” mean Sterling and its
consolidated subsidiaries. In addition, references to “Note” or “Notes” refer to the Notes to the Consolidated Financial Statements,
included in Item 8 of Part II of this annual report on Form 10-K, unless indicated otherwise.
Recent Acquisitions
Plateau Acquisition—On October 2, 2019, we completed our 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 (collectively referred to as “Plateau”) for aggregate consideration of $427.7 million, consisting of $375
million in cash, a working capital adjustment of $21.3 million, 1.24 million shares of the Company’s common stock, a $10 million
subordinated promissory note with a fair value discount rate of 8%, and a tax basis election of $5.1 million. To finance the cash
purchase price, in conjunction with refinancing and extinguishing all of the outstanding indebtedness of the Company under our
previous Oaktree Facility (established during the Tealstone Acquisition, described below), we entered into a Credit Agreement,
which is further described in Note 9 - Debt.
Plateau is engaged in engineering and executing site development, and their services include 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. The results of Plateau are included within our Specialty Services
segment. See Note 3 - Plateau Acquisition for further discussion.
Tealstone Acquisition—On April 3, 2017, we consummated our acquisition of all of the outstanding stock of Tealstone
Commercial, Inc., a Texas corporation and Tealstone Residential Concrete, Inc., a Texas corporation, (collectively, “Tealstone”)
(the “Tealstone Acquisition”) from the stockholders thereof (the “Tealstone Sellers”) for consideration totaling $84 million and
aggregate of $15 million in earn-out payments based upon achievement of specified financial performance levels. In conjunction
with the Tealstone Acquisition, on April 3, 2017, the Company, as borrower, and certain of its subsidiaries, as guarantors, had
entered into a Loan and Security Agreement with Wilmington Trust, National Association, as agent, and the lenders party thereto
(the “Oaktree Facility”), providing for a term loan of $85 million (the “Loan”) with a maturity date of April 4, 2022, which had
replaced the then existing debt facility. As noted above, the Credit Agreement entered into in connection with the Plateau Acquisition
replaced the Oaktree Facility. See Note 9 - Debt for further discussion of our financing arrangements. For further discussion
regarding the Tealstone Acquisition see Note 2 - Tealstone Acquisition to the Consolidated Financial Statements included in Item
8 of Part II of our annual report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on March 5, 2019.
Segments, Markets and Customers
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. See Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” Note 21 - Segment Information and Note 22 - Quarterly Financial
Information for further discussion of our business segments, including the realignment of our business segments after the Plateau
Acquisition.
Heavy Civil—Our Heavy Civil segment relies heavily on federal and state infrastructure spending. The principal markets of
this segment are Arizona, California, Colorado, Hawaii, Nevada, Texas and Utah. Within these principal markets, our core customers
are the Departments of Transportation (“DOT(s)”) in various states, regional transit authorities, airport authorities, port authorities,
water authorities and railroads.
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Currently, our largest customers are Utah, Texas and California DOTs. The Utah DOT contributed more than 10% of our
consolidated revenues in 2019. We routinely construct projects for these customers. If we lost any of these customers, it could
have a material adverse effect on our financial results. Refer to Item 1A “Risk Factors” and Note 19 - Concentration of Risk and
Enterprise Wide Disclosures for the Company’s major customers that represent a concentration of risk due to their significant
revenue contributions.
Specialty Services—Our Specialty Services segment serves large, blue-chip end users in the e-commerce, data center,
distribution center and warehousing, energy, mixed use and multi-family sectors. We are a leading provider of large-scale site
infrastructure improvement contracting services and believe we are the largest excavating contractor in the Southeastern U.S. Our
largest customers in this segment are The Conlan Company, Braesfield & Gorrie and FCL Builders.
Residential—Our Residential segment’s principal market is Texas, specifically the Dallas-Fort Worth and Houston areas and
the surrounding communities. The core customer base for our Residential segment is primarily made up of leading national home
builders as well as regional and custom home builders. Our largest customers are Pulte Group, Inc., D.R. Horton, Inc., Lennar and
HISTORYMAKER Homes.
Competition
Competition for our segments ranges from small local contractors to large international construction companies. We
traditionally try to position ourselves to bid on work too large for the small local contractors yet too small for the large national
and international construction companies. However, if market conditions became less favorable, we would tend to see migration
from both the small local contractors and large international players into that mid-level market. This, in return, could increase
competitive bidding pressure and reduce both revenue growth and margins. See Item 1A “Risk Factors” for further discussion of
risks associated with our competitive environment.
Seasonality
Operations for our segments are typically affected by weather conditions primarily during the first and fourth quarters of our
fiscal year, which may alter construction schedules and can create variability in our revenues, profitability and the required number
of employees.
Source and Availability of Raw Materials
We purchase raw materials for our segments, including but not limited to, cement, aggregate, concrete, liquid asphalt, steel,
diesel and gasoline fuel, natural gas and propane from numerous sources. The price and availability of raw materials may vary
from year to year due to fluctuations in market conditions and production capacities. We do not foresee a lack of availability of
any necessary raw materials over the next twelve months.
Backlog
Our remaining performance obligations on our projects are referred to as “Backlog” and represent the amount of revenues
we expect to recognize in the future from our contract commitments on Heavy Civil and Specialty Services projects. The value
of our Backlog was $1.1 billion at December 31, 2019, as compared to $850.7 million at December 31, 2018. We exclude from
Backlog contracts for our Heavy Civil segment where we are the apparent low bidder for projects (“Unsigned Low-bid Awards”)
until the contract is executed by our customer (approximately $273.5 million at December 31, 2019). Our Residential revenue is
recognized upon completion at a point in time and therefore is never reflected in our backlog. See Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Market Outlook and Trends” for discussion and quantification
of our Backlog. See also Item 1A “Risk Factors”.
Contracts
Our contracts are awarded on a competitively bid basis or negotiated bid basis using a range of contracting options, including
fixed-unit price, lump sum and cost-reimbursable. Each contract is designed to optimize the balance between risk and reward. At
December 31, 2019, approximately 70% of our backlog was contracted on a fixed-unit price or lump sum basis. We occasionally
present claims or change orders to our clients for additional costs exceeding a contract price or for costs not included in the original
contract price.
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Substantially all of the contracts in our Backlog contain “termination for convenience” clauses which allow the customer to
cancel the contract at their election but require that the Company be paid for work performed through the date of termination. As
part of our business, we are a party to joint venture arrangements, pursuant to which we typically jointly bid on and execute
particular projects with other companies in the construction industry. See Item 1A “Risk Factors” and Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of our types of risk and how we
mitigate cancellation and credit risk.
Insurance and Bonding
Our buildings and equipment are covered by insurance, at levels our management believes to be adequate. In addition, we
maintain general liability, excess liability, workers’ compensation and auto insurance all in amounts consistent with our risk of
loss and industry practice.
As a normal part of the Heavy Civil business and occasionally with the Specialty Services business, we are required to provide
various types of surety and payment bonds that provide an additional measure of security for our performance under the contract.
Typically, a bidder for a contract must post a bid bond, generally for 5% to 10% of the bid amount, and on being awarded the bid,
must post a performance and payment bond for up to 100% of the costs to construct. Usually, upon posting of the performance
bond, a contractor must also post a maintenance bond for generally 1% of the contract amount for one to two years. Our ability
to obtain bonds depends upon our capitalization, working capital, aggregate contract size, past performance, management expertise
and external factors, including the capacity of the overall surety market. Bonding companies consider such factors in light of the
amount of our backlog that we have currently bonded and their current underwriting standards, which may change from time to
time. 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.
Government and Environmental Regulations
Our operations are subject to compliance with numerous regulatory requirements of federal, state and local agencies and
authorities, including regulations concerning safety, wage and hour, and other labor issues, immigration controls, vehicle and
equipment operations and other aspects of our business. For example, our construction operations are subject to the requirements
of the Occupational Safety and Health Act (“OSHA”) and comparable state laws directed toward the protection of employees. In
addition, most of our construction contracts are entered into with public authorities, and these contracts frequently impose additional
governmental requirements, including requirements regarding labor relations and subcontracting with designated classes of
disadvantaged businesses.
All of our operations are also subject to federal, state and local laws and regulations relating to the environment, including
those relating to discharges into air, water and land, climate change, the handling and disposal of solid and hazardous waste, the
handling of underground storage tanks and the cleanup of properties affected by hazardous substances. For example, we must
apply water or chemicals to reduce dust on road construction projects and to contain contaminants in storm run-off water at
construction sites. In certain circumstances, we may also be required to hire subcontractors to dispose of hazardous wastes
encountered on a project in accordance with a plan approved in advance by the customer. Certain environmental laws impose
substantial penalties for non-compliance and others, such as the federal Comprehensive Environmental Response, Compensation
and Liability Act, or CERCLA, impose strict and retroactive joint and several liability upon persons responsible for releases of
hazardous substances.
CERCLA and comparable state laws impose liability, without regard to fault or the legality of the original conduct, on certain
classes of persons that contributed to the release of a “hazardous substance” into the environment. These persons include the owner
or operator of the site where the release occurred and companies that disposed or arranged for the disposal of the hazardous
substances found at the site. Under CERCLA, these persons may be subject to joint and several liability for the costs of cleaning
up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of
certain health studies. CERCLA also authorizes the Federal Environmental Protection Agency, or EPA, and, in some instances,
third parties, to act in response to threats to the public health or the environment and to seek to recover from the responsible classes
of persons the costs they incur.
Solid wastes, which may include hazardous wastes, are subject to the requirements of the Federal Solid Waste Disposal Act,
the Federal Resource Conservation and Recovery Act, referred to as RCRA, and comparable state statutes. Although we do not
generate solid waste, we occasionally dispose of solid waste on behalf of customers. From time to time, the EPA considers the
adoption of stricter disposal standards for non-hazardous wastes. Moreover, it is possible that additional wastes will in the future
be designated as “hazardous wastes.” Hazardous wastes are subject to more rigorous and costly disposal requirements than are
non-hazardous wastes.
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We continually evaluate whether we must take additional steps at our locations to ensure compliance with environmental
laws. While compliance with applicable regulatory requirements has not materially adversely affected our operations in the past,
there can be no assurance these requirements will not change and compliance will not adversely affect our operations in the future.
In addition, tighter regulation for the protection of the environment and other factors may make it more difficult to obtain new
permits and renewal of existing permits may be subject to more restrictive conditions than currently exist.
Employees
At December 31, 2019, the Company had approximately 2,800 employees, comprised of approximately 700 salaried employees
and approximately 2,100 hourly employees. The percentage of our employees represented by unions at December 31, 2019 was
approximately 15%. We have agreements, which we customarily renew periodically, with various unions representing groups of
employees at project sites. We consider our relationships with our employees and the applicable labor unions to be satisfactory.
Our business is dependent upon a readily available supply of management, supervisory and field personnel. Substantially all
of our employees are hired on a full-time basis; however, as is typical in the construction industry, we experience a high degree
of turnover as construction projects are completed. In the past, we have been able to attract sufficient numbers of personnel to
support the growth of our operations, however, we continue to face competition for experienced workers in all our markets.
We focus on our safety processes which have allowed us to maintain a high level of safety at our work sites. All employees
receive hazard specific training and our newly-hired employees undergo an initial safety orientation and receive follow-up trainings
during their first 90 days of employment. Our project managers and superintendents work closely with the safety department to
ensure safety is planned into all of our operations before they begin. Daily, our project foremen are required to conduct safety
briefings with employees. Regular safety walkthroughs are conducted by our managers, supervisors and safety staff to evaluate
project conditions and observe employee safety behavior.
Access to Company’s Filings
The Company maintains a website at www.strlco.com on which our latest annual report on Form 10-K, recent quarterly reports
on Form 10-Q, recent current reports on Form 8-K, any amendments to those filings, and other filings may be accessed free of
charge; some directly on the website and others through a link to the Securities and Exchange Commission’s (“SEC”) website
(www.sec.gov) where those reports are filed. Our website also has recent press releases, the Company’s code of business conduct,
the charters of the audit committee, compensation and talent development committee, and corporate governance and nominating
committee of the Board of Directors and information on the Company’s “whistleblower” procedures. Our website content is made
available for information purposes only. It should not be relied upon for investment purposes, and none of the information on the
website is incorporated into this annual report on Form 10-K by this reference to it.
Item 1A. Risk Factors
The following discussion of risk factors contains forward-looking statements. These risk factors may be important to
understanding other statements in this annual report on Form 10-K. The following information should be read in conjunction with
Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated
Financial Statements and related Notes in Part II, Item 8, “Financial Statements and Supplementary Data” of this annual report
on Form 10-K.
Our business, financial condition and operating results can be affected by a number of factors, whether currently known or
unknown, including but not limited to those described below; any one or more of which could, directly or indirectly, cause our
actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and
operating results. Any of these factors, in whole or in part, could materially and adversely affect our business, prospects, financial
condition, results of operations, stock price and cash flows. These could also be affected by additional factors that apply to all
companies generally which are not specifically mentioned below.
Because of the following factors, as well as other factors affecting our financial condition and operating results, our past
financial performance should not be considered to be a reliable indicator of our future performance, and investors should not use
historical trends to anticipate results or trends in future periods.
7
Risks Relating to Our Business
If we do not accurately estimate the overall risks, requirements or costs related to either a Heavy Civil or Specialty Services
project when we bid for a contract that is ultimately awarded to us, we may achieve a lower than anticipated profit or incur a
loss on the contract.
The majority of our revenues and backlog are derived from fixed-unit price contracts and from lump sum contracts. Fixed-
unit price contracts require us to provide materials and services at a fixed-unit price based on agreed quantities irrespective of our
actual per unit costs. Lump sum contracts require the contract work to be completed for a single price irrespective of our actual
costs incurred. Given that our revenues per contract are fixed, our ability to achieve contract profitability is dependent upon our
ability to avoid cost overruns by accurately estimating our costs and then successfully controlling our actual costs. If our cost
estimates for a contract are inaccurate, or if we do not perform the contract within our cost estimates, then cost overruns may cause
us to incur losses or cause the contract not to be as profitable as we expected. As a result, these types of contracts could negatively
affect our cash flow, earnings and financial position.
The costs incurred and gross profit realized on our contracts can vary, sometimes substantially, from our original estimates
due to a variety of factors, including, but not limited to:
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onsite conditions that differ from those assumed in the original bid or contract;
failure to include required materials or work in a bid, or the failure to estimate properly the quantities or costs needed to
complete a lump sum contract;
delays caused by weather conditions;
contract or project modifications creating unanticipated costs not covered by change orders or contract price adjustments;
changes in availability, proximity and costs of materials, including steel, concrete, aggregates and other construction
materials (such as stone, gravel, sand and oil for asphalt paving), as well as fuel and lubricants for our equipment;
higher than anticipated costs to lease, acquire and maintain equipment;
inability to predict the costs of accessing and producing aggregates and purchasing oil required for asphalt paving projects;
availability and skill level of workers in the geographic location of a project;
rapidly increasing labor costs;
failure by our suppliers, subcontractors, designers, engineers, joint venture partners or customers to perform their
obligations;
fraud, theft or other improper activities by our suppliers, subcontractors, designers, engineers, joint venture partners,
customers or our own personnel;
• mechanical problems with our machinery or equipment;
•
•
•
•
citations issued by any governmental authority, including OSHA;
difficulties in obtaining required governmental permits or approvals;
changes in applicable laws and regulations;
delays in quickly identifying and taking measures to address issues which arise during execution of a project; and
•
claims or demands from third parties for alleged damages arising from the design, construction or use and operation of
a project of which our work is a part.
Many of our contracts with public sector customers contain provisions that purport to shift some or all of the above risks from
the customer to us, even in cases where the customer is partly at fault. Public sector customers may seek to impose contractual
risk-shifting provisions more aggressively, which could increase risks and adversely affect our cash flow, earnings and financial
position.
Substantially all of the contracts in our Backlog contain “termination for convenience” clauses which allow the customer to
cancel the contract at their election but require that the Company be remunerated for work performed through the date of termination;
we have not been materially adversely affected by contract cancellations or modifications in the past.
8
Our dependence on subcontractors and suppliers of materials (including petroleum-based products) could increase our costs
and impair our ability to complete contracts on a timely basis or at all.
We rely on third-party subcontractors to perform some of the work on many of our projects and third party suppliers to provide
substantially all of the materials (including aggregates, cement, asphalt, concrete, steel, oil and fuel) for our contracts. We generally
do not bid on contracts unless we have the key subcontractors committed for the anticipated scope of the contract and commitments
from suppliers for the significant materials required to complete the contract, in each case at prices that we have included in our
bid. To the extent that we are unable to engage subcontractors or obtain commitments from our suppliers for materials, our ability
to bid for contracts may be impaired. In addition, if a subcontractor or supplier is unable to deliver its services or materials, in
accordance with the agreed terms for any reason, including the deterioration of its financial condition, we may suffer delays and
be required to purchase the services or materials from another source at a higher price or incur other unanticipated costs. This may
reduce the profit to be realized, or result in a loss, on a contract.
Diesel fuel and other petroleum-based products are utilized to operate the plants and equipment on which we rely to perform
our construction contracts. In addition, our asphalt plants and suppliers use oil in combination with aggregates to produce asphalt
used in our road and highway construction projects. Decreased supplies of such products relative to demand, unavailability of
petroleum supplies due to refinery turnarounds, higher prices charged for petroleum-based products and other factors can increase
the cost of such products. Future increases in the costs of fuel and other petroleum-based products used in our business, particularly
if a bid has been submitted for a contract and the costs of such products have been estimated at amounts less than the actual costs
thereof, could result in a lower profit, or a loss, on a contract.
Recent and potential changes in U.S. trade policies and retaliatory responses from other countries may significantly increase
the costs or limit supplies of materials and products used in our construction projects involving concrete.
The federal government has imposed new or increased tariffs or duties on an array of imported materials and goods that are
used in connection with our construction business, including steel, raising our costs for these items (or products made with them),
and has threatened to impose further tariffs, duties and/or trade restrictions on imports. Foreign governments, including China and
Canada, and trading blocs, such as the European Union, have responded by imposing or increasing tariffs, duties and/or trade
restrictions on U.S. goods, and are reportedly considering other measures. These trading conflicts and related escalating
governmental actions that result in additional tariffs, duties and/or trade restrictions could increase our construction costs further,
cause disruptions or shortages in our supply chains and/or negatively impact the U.S., regional or local economies, and, individually
or in the aggregate, materially and adversely affect our business and result of operations.
We may not accurately assess the quality, and we may not accurately estimate the quantity, availability and cost, of aggregates
we need to complete a project, particularly for projects in rural areas.
Particularly for projects in rural areas, we may estimate the quality, quantity, availability and cost for aggregates (such as
sand, gravel, crushed stone, slag and recycled concrete) from sources that we have not previously used as suppliers, which increases
the risk that our estimates may be inaccurate. Inaccuracies in our estimates regarding aggregates could result in significantly higher
costs to supply aggregates needed for our projects, as well as potential delays and other inefficiencies. If we fail to accurately
assess the quality, quantity, availability and cost of aggregates, it could cause us to incur losses, which could materially adversely
affect our results of operations.
We may incur higher costs to lease, acquire and maintain equipment necessary for our operations, and the market value of
our owned equipment may decline.
We service a significant portion of our contracts with our own construction equipment rather than leased or rented equipment.
To the extent that we are unable to buy construction equipment necessary for our needs, either due to a lack of available funding
or equipment shortages in the marketplace, we may be forced to rent equipment on a short-term basis, which could increase the
costs of performing our contracts.
The equipment that we own or lease requires continuous maintenance, for which we maintain our own repair facilities. If we
are unable to utilize our own facilities to maintain the equipment in our fleet, we may be forced to obtain third-party repair services,
which could increase our costs.
9
We are dependent on a limited number of significant customers.
Heavy Civil and Specialty Services—Due to the size and nature of our contracts, one or a few customers have in the past and
may in the future represent a substantial portion of our consolidated revenues and gross profits in any one year or over a period
of several consecutive years. Similarly, our backlog frequently reflects multiple contracts for certain customers; therefore, one
customer may comprise a significant percentage of backlog at a certain point in time. Our significant Heavy Civil customers (i.e.,
those greater than 10% of our consolidated revenues) accounted for approximately 12% of our revenue in 2019, 15% of our revenue
in 2018 and 25% of our revenue in 2017. There were no Specialty Services customers with revenue greater than 10% of our
consolidated revenues in 2019. The loss of business from any one of such customers could have a material adverse effect on our
business or results of operations. Also, a default or delay in payment on a significant scale by a customer could materially adversely
affect our business, results of operations, cash flows and financial condition. See Note 19 - Concentration of Risk and Enterprise
Wide Disclosures for the Company’s major customers that represent a concentration of risk due to their significant revenue
contributions. See also Note 3 - Plateau Acquisition for additional detail regarding the Plateau Acquisition during 2019 and the
creation of our Specialty Services segment.
Residential—Customers for our residential business are leading Residential homebuilders. Several of these customers
individually account for a significant portion of our Residential business’s sales in a normal year. In our Residential business, D.R.
Horton Inc., Pulte Homes Inc., HISTORYMAKER Homes, and Lennar, including their respective affiliates, accounted for
approximately 75%, 72% and 67% of our revenue for the residential segment for the years ended December 31, 2019, 2018 and
2017, respectively. In addition, homebuilders are reliant upon growth in the housing market and the continued ability to purchase
and develop land, which ultimately impact customers’ demand for our Residential services. The loss of any one or more of our
significant customers could have a material adverse effect on our results of operations.
The industry is highly competitive, with a variety of companies competing against us, and our failure to compete effectively
could reduce the number of new contracts awarded to us or adversely affect our margins on contracts awarded.
In the past, a majority of the contracts on which we bid were awarded through a competitive bid process, with awards generally
being made to the lowest bidder, but sometimes recognizing other considerations, such as shorter contract schedules or prior
experience with the customer and reputation. Within our geographic markets, we compete with many international, national,
regional and local construction firms. Several of these competitors have achieved greater geographic market penetration than we
have in the geographic markets in which we compete, and several of our competitors have greater financial and other resources
than we do. In addition, a number of international and national companies in our industry that are larger than we are and that
currently do not have a significant presence in our geographic markets, if they so desire, could establish a presence in our geographic
markets and compete with us for contracts.
In addition, if the use of design-build, CM/GC and other alternative project delivery methods continues to increase and we
are not able to further develop our capabilities and reputation in connection with these alternative delivery methods, we will be
at a competitive disadvantage, which may have a material adverse effect on our financial position, results of operations, cash flows
and prospects. If we are unable to compete successfully in our markets, our relative market share and profits could also be reduced.
A prolonged government shutdown may adversely affect our Heavy Civil business.
We derive a significant portion of our Heavy Civil revenue from governmental agencies and programs. A prolonged government
shutdown could impact inspections, regulatory review and certifications, grants, approvals, or cause other situations that could
result in our incurring substantial labor or other costs without reimbursement under government contracts, or the delay or
cancellation of key government programs in which we are involved, all of which could have a material adverse effect on our
business and results of operations.
Our Heavy Civil business relies on highly competitive and highly regulated government contracts.
Government funding for public works projects is limited, thus creating a highly competitive environment for the limited
number of public projects available. In addition, government contracts are subject to specific procurement regulations, contract
provisions and a variety of regulatory requirements relating to their formation, administration, performance and accounting. Many
of these contracts include express or implied certifications of compliance with applicable laws and contract provisions. As a result,
any violations of these regulations could bring about litigation, including the possibility of qui tam (“Whistleblower”) litigation
brought by private individuals on behalf of the government under the Federal Civil False Claims Act, and could cause termination
of other existing government contracts and result in the loss of future government contracts. Due to the significant competition in
the marketplace and the level of regulations on government contracts, we could suffer reductions in new projects and see lower
revenues and profit margins on those projects, which could have a material adverse effect on the business, operating results and
financial condition.
10
Our Heavy Civil business depends on our ability to qualify as an eligible bidder under government contract criteria and to
compete successfully against other qualified bidders in order to obtain government contracts.
The U.S. government and various state and local government agencies conduct rigorous competitive processes for awarding
many contracts. Some contracts include multiple award task order contracts in which several contractors are selected as eligible
bidders for future work. We will face strong competition and pricing pressures for any additional Heavy Civil contract awards
from the U.S. government and other government agencies, and we may be required to qualify or continue to qualify under various
multiple award task order contract criteria. Our inability to qualify as an eligible bidder under government contract criteria could
preclude us from competing for certain government contract awards. In addition, our inability to qualify as an eligible bidder, or
to compete successfully when bidding for certain government contracts and to win those Heavy Civil contracts, could materially
adversely affect our business, operations, revenues and profits.
Our Heavy Civil business is susceptible to economic downturns and reductions in government funding of infrastructure projects.
Our business is highly dependent on the amount and timing of infrastructure work funded by various governmental entities,
which, in turn, depends on the overall condition of the economy, the need for new or replacement infrastructure, the priorities
placed on various projects funded by governmental entities and federal, state or local government spending levels. Spending on
infrastructure could decline for numerous reasons, including decreased revenues received by state and local governments for
spending on such projects. For example, state spending on highway and other projects can be adversely affected by decreases or
delays in, or uncertainties regarding, federal highway funding, which could adversely affect us since we are reliant upon contracts
with state transportation departments for a significant portion of our revenues.
Refer to our “Business—Segments, Markets and Customers” section within Item 1 for a more detailed discussion of our
geographic markets.
Our Specialty Services business, as well as the industries of many of our customers upon whom we are dependent, is susceptible
to economic downturns, including periods of slower than anticipated economic growth and the risk of a new recession.
Demand for our Specialty Services business is cyclical and may be vulnerable to economic downturns, interest rate fluctuations
or other adverse developments in the credit markets, and reductions in private industry spending, the effects of which may cause
our customers to delay, curtail or cancel proposed and existing projects. A number of factors can adversely affect the industries
we serve, including, among other things, financing or credit availability, potential bankruptcies, global and U.S. trade relationships
or other geopolitical events. A reduction in cash flow or the lack of availability of debt or equity financing for our customers could
cause our customers to reduce their spending for our services or affect the ability of our customers to pay amounts owed to us.
Most of our significant contracts can be canceled on short notice.
Our contracts generally have clauses that permit the cancellation of the contract unilaterally and at any time as long as the
customer pays for the work already completed. A cancellation of an unfinished contract could cause our equipment and work
crews to be idle for a significant period of time until other comparable work becomes available, which could have a material
adverse effect on our business and results of operations.
The homebuilding industry is cyclical and susceptible to downward changes in general economic or other business conditions
which could adversely affect our Residential projects, including foundations for single-family and multi-family homes.
The Residential homebuilding industry is sensitive to changes in economic conditions and other factors, such as the level of
employment, consumer confidence, consumer income, availability of financing, and interest rate levels. Adverse changes in any
of these conditions generally, or in the markets where we operate, could decrease demand and pricing for new homes in these
areas or result in customer cancellations of pending contracts, which could adversely affect the number of Residential concrete
projects we have or reduce the prices we can charge for these projects, either of which could result in a decrease in our revenues
and earnings that could materially adversely affect our results of operations.
Although the U.S. housing market continues to recover, especially in the markets currently served by us, we cannot predict
with certainty the overall trajectory of these markets or the duration of this trend due to changes in conditions that are beyond our
control, including, but not limited to:
• Rising interest rates;
•
Shortage of lots available for development;
• Changes in demographics and population migration that impair the demand for new housing;
• Labor shortages, especially craft labor, and rising costs of labor; and
• Changes in the tax laws that reduce the benefits of home ownership.
11
Our participation in Heavy Civil joint ventures exposes us to liability and/or harm to our reputation for failures of our partners.
As part of our business, we are a party to joint venture arrangements, pursuant to which we typically jointly bid on and execute
particular projects with other companies in the construction industry. Success on these joint projects depends in part on whether
our joint venture partners satisfy their contractual obligations.
We and our joint venture partners are generally jointly and severally liable for all liabilities and obligations of our joint ventures.
If a joint venture partner fails to perform or is financially unable to bear its portion of required capital contributions or other
obligations, including liabilities stemming from lawsuits, we could be required to make additional investments, provide additional
services or pay more than our proportionate share of a liability to make up for our partner’s shortfall. Furthermore, if we are unable
to adequately address our partner’s performance issues, the customer may terminate the project, which could result in legal liability
to us, harm to our reputation and reduce our profit on a project.
In connection with acquisitions, certain counterparties to joint venture arrangements, which may include our historical direct
competitors, may not desire to continue such arrangements with us and may terminate the joint venture arrangements or not enter
into new arrangements. Any termination of a joint venture arrangement could cause us to reduce our backlog and could materially
and adversely affect our business, results of operations and financial condition.
We may not be able to recover on claims or change orders against clients for payment or on claims against subcontractors for
performance.
We occasionally present claims or change orders to our clients for additional costs exceeding a contract price or for costs not
included in the original contract price. Change orders are modifications of an original contract that effectively change the provisions
of the contract without adding new provisions. They generally include changes in specifications or design, facilities, equipment,
materials, sites and periods for completion of work. Claims are amounts in excess of the agreed contract price (or amounts not
included in the original contract price) that we seek to collect for customer-caused delays, errors in specifications and designs,
contract terminations or other causes of unanticipated additional costs. These costs may or may not be recovered until the claim
is resolved. In addition, we may have claims against subcontractors for performance or non-performance related issues which
resulted in additional costs on a project. In some instances, these claims can be the subject of lengthy legal proceedings, and it is
difficult to accurately predict when they will be fully resolved. A failure to promptly document and negotiate a recovery for change
orders and claims could have a negative impact on our cash flows and overall ability to recover change orders and claims, which
would have a negative impact on our financial condition, results of operations and cash flows.
We may fail to meet schedule or performance requirements of our contracts.
In most cases, our contracts require completion by a scheduled acceptance date. Failure to timely complete a project could
result in additional costs, penalties or liquidated damages being assessed against us, and these could exceed projected profit margins
on the contract.
The design-build project delivery method subjects us to the risk of design errors and omissions.
We could be liable for a design error or omission that causes or contributes to damages with respect to one of our design-
build projects. Although by contract we pass design responsibility on to the engineering firms that we engage to perform design
services on our behalf for these projects, in the event of a design error or omission causing damages, there is risk that the engineering
firm, its professional liability insurance, and the errors and omissions insurance that they and we purchase will not fully protect
us from costs or liabilities. Any liabilities resulting from an asserted design defect with respect to our Heavy Civil projects may
have a material adverse effect on our financial position, results of operations and cash flows. Performance problems on existing
and future Heavy Civil contracts could cause actual results of operations to differ materially from those anticipated by us and
could cause us to suffer damage to our reputation within the industry and among our customers.
An inability to obtain bonding could limit the aggregate dollar amount of contracts that we are able to pursue.
As is customary in the construction business, we are required to provide bonding to our customers to secure our performance
under our contracts. Our ability to obtain bonding primarily depends upon our capitalization, working capital, borrowing capacity
under our credit facilities, past performance, management expertise and reputation and certain external factors, including the
overall capacity of the credit market. Bonding companies and banks consider such factors in relationship to the amount of our
backlog and their underwriting standards, which may change from time to time. Events that adversely affect the financial markets
generally may result in bonding becoming more difficult to obtain in the future, or being available only at a significantly greater
cost. Our inability to obtain adequate bonding would limit the amount that we can bid on new contracts and could have a material
adverse effect on our future revenues and business prospects.
12
Timing of the award and performance of new contracts may fluctuate.
It is generally very difficult to predict whether and when new contracts will be offered for tender, as our contracts frequently
involve a lengthy and complex design and bidding process, which is affected by a number of factors, such as market conditions,
funding arrangements and governmental approvals. Because of these factors, our results of operations and cash flows may fluctuate
from quarter to quarter and year to year, and the fluctuation may be substantial.
The uncertainty of the timing of contract awards may also present difficulties in matching the size of our equipment fleet and
work crews with contract needs. In some cases, we may maintain and bear the cost of more equipment and ready work crews than
are currently required, in anticipation of future needs for existing contracts or expected future contracts. If a contract is delayed
or an expected contract award is not received, we would incur costs that could have a material adverse effect on our anticipated
profit.
We may be unable to attract and retain project managers, skilled labor and other key personnel.
Our ability to attract and retain reliable, qualified personnel is a significant factor that enables us to successfully bid for and
profitably complete our work. This includes management, project managers, estimators, supervisors, foremen, equipment operators
and laborers for each of our subsidiaries. The loss of the services of any of our subsidiaries’ management-level personnel could
have a material adverse effect on us. Our future success will also depend on our ability to hire and retain, or to attract when needed,
highly-skilled personnel. If competition for these employees is intense, we could experience difficulty hiring and retaining the
personnel necessary to support our business. If we do not succeed in retaining our current employees and attracting, developing
and retaining new highly-skilled employees, our reputation may be harmed and our operations and future earnings may be negatively
impacted.
We may be subject to unionization, work stoppages, slowdowns or increased labor costs.
In Arizona, California, Hawaii and Nevada a substantial number of our equipment operators and laborers are unionized.
Additional groups of our employees may also unionize in the future. If at any time, a significant amount of our employees unionized,
it could limit the flexibility of the workforce and could result in demands that might increase our operating expenses and adversely
affect our profitability. Each of our different employee groups could unionize at any time and would require separate collective
bargaining agreements. If any group of our employees were to unionize and we were unable to agree on the terms of their collective
bargaining agreement or we were to experience widespread employee dissatisfaction, we could be subject to work slowdowns or
stoppages. In addition, we may be subject to disruptions by organized labor groups protesting our non-union status. Any of these
events would be disruptive to our operations and could have a material adverse effect on our business, operating results and
financial condition.
Our operations are subject to hazards that may cause personal injury or property damage, thereby subjecting us to liabilities
and possible losses, which may not be covered by insurance as well as negative reputational impacts relating to health and
safety matters.
Our workers are subject to the usual hazards associated with providing construction and related services on construction sites,
plants and quarries. Operating hazards can cause personal injury and loss of life, damage to or destruction of property, plant and
equipment and environmental damage. We maintain general liability and excess liability insurance, workers’ compensation
insurance, auto insurance and other types of insurance all in amounts consistent with our risk of loss and industry practice, but
this insurance may not be adequate to cover all losses or liabilities that we may incur in our operations. In addition, if our safety
record were to substantially deteriorate over time or were to suffer substantial penalties or criminal prosecution for violation of
health and safety regulations, our customers could cancel our contracts or not award us future business.
Insurance liabilities are difficult to assess and quantify due to unknown factors, including the severity of an injury, the
determination of our liability in proportion to other parties, the number of incidents not reported and the effectiveness of our safety
program. If we were to experience insurance claims or costs above our estimates, we might be required to use working capital to
satisfy these claims rather than to maintain or expand our operations. To the extent that we experience a material increase in the
frequency or severity of accidents or workers’ compensation and health claims, or unfavorable developments on existing claims,
our results of operations and financial condition could be materially and adversely affected.
13
If we are unable to comply with applicable immigration laws, our ability to successfully complete contracts may be negatively
impacted.
We rely heavily on immigrant labor. We have taken steps that we believe are sufficient and appropriate to ensure compliance
with immigration laws. However, we cannot provide assurance that we have identified, or will identify in the future, all
undocumented immigrants who work for us. Our failure to identify undocumented immigrants who work for us may result in fines
or other penalties being imposed upon us, which could have a material adverse effect on our results of operations and financial
condition.
Environmental and other regulatory matters could adversely affect our ability to conduct our business and could require
expenditures that could have a material adverse effect on our results of operations and financial condition.
Our operations are subject to various environmental laws and regulations relating to the management, disposal and remediation
of hazardous substances and the emission and discharge of pollutants into the air and water. We could be held liable for such
contamination created not only from our own activities but also from the historical activities of others on our project sites or on
properties that we acquire or lease. Our operations are also subject to laws and regulations relating to workplace safety and worker
health, which, among other things, regulate employee exposure to hazardous substances. Violations of such laws and regulations
could subject us to substantial fines and penalties, cleanup costs, third-party property damage or personal injury claims. In addition,
growing concerns about climate change may result in the imposition of additional environmental regulations. Such legislation or
restrictions could increase the costs of projects for us and our clients or, in some cases, prevent a project from going forward,
thereby potentially reducing the need for our services which could in turn have a material adverse effect on our operations and
financial condition. Generally, environmental laws and regulations have become, and enforcement practices and compliance
standards are becoming, increasingly stringent. Moreover, we cannot predict the nature, scope or effect of legislation or regulatory
requirements that could be imposed, or how existing or future laws or regulations will be administered or interpreted, with respect
to products or activities to which they have not been previously applied. Compliance with more stringent laws or regulations, as
well as more vigorous enforcement policies of the regulatory agencies, could require us to make substantial expenditures for,
among other things, pollution control systems and other equipment that we do not currently possess, or the acquisition or
modification of permits applicable to our activities.
Our aggregate quarry leases in Utah and Nevada could subject us to costs and liabilities. As lessee and operator of the quarries,
we could be held responsible for any contamination or regulatory violations resulting from activities or operations at the quarries.
Any such costs and liabilities could be significant and could materially and adversely affect our business, operating results and
financial condition.
Adverse weather conditions may cause delays, which could slow completion of our construction activity.
Because all of our construction projects are performed outdoors, work on our contracts is subject to unpredictable weather
conditions, which could become more frequent or severe if general climatic changes occur. For example, in 2017 Hurricane Harvey
caused damage and disruption that resulted in our inability to perform work on all Houston-area contracts for several days and in
some cases several weeks. Future evacuations due to hurricanes along the coastal areas can delay our performance of work on
contracts for several days or weeks or longer. Lengthy periods of wet or cold winter weather will generally interrupt construction,
and this can lead to under-utilization of crews and equipment, resulting in less efficient rates of overhead recovery. Extreme heat
can prevent us from performing certain types of operations. During the late fall to the early spring months of each year, our work
on construction projects in the Rocky Mountain states may also be curtailed because of snow and other work-limiting weather.
While revenues can be recovered following a period of bad weather, it is generally impossible to recover the cost of inefficiencies,
and significant periods of bad weather typically reduce profitability of affected contracts both in the current period and during the
future life of affected contracts. Such reductions in contract profitability negatively affect our results of operations in current and
future periods until the affected contracts are completed.
We rely on information technology systems to conduct our business, which are subject to disruption, failure or security breaches.
We rely on information technology (“IT”) systems in order to achieve our business objectives. We also rely upon industry
accepted security measures and technology to securely maintain confidential information on our IT systems. However, our portfolio
of hardware and software products, solutions and services and our enterprise IT systems may be vulnerable to damage or disruption
caused by circumstances beyond our control such as catastrophic events, power outages, natural disasters, computer system or
network failures, computer viruses, cyber-attacks or other malicious software programs. The failure or disruption of our IT systems
to perform as anticipated for any reason could disrupt our business and result in decreased performance, significant remediation
costs, transaction errors, loss of data, processing inefficiencies, downtime, litigation and the loss of suppliers or customers. A
significant disruption or failure could have a material adverse effect on our business operations, financial performance and financial
condition.
14
Risks Related to Our Financial Results, Financing and Liquidity
Our use of over time revenue recognition (formally known as percentage-of-completion method) accounting related to our
Heavy Civil and Specialty Services projects could result in a reduction or elimination of previously reported revenue and profits.
As is more fully discussed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Estimates,” we recognize Heavy Civil and Specialty Services contract revenue over time. This
method is used because management considers the cost-to-cost measure of progress to be the best measure of progress on these
contracts.
Under this method, estimated contract revenue is recognized by applying the cost-to-cost measure of progress for the period
(based on the ratio of costs incurred to total estimated costs of a contract) to the total estimated revenue for 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. These adjustments could result in both increases and decreases in profit margins
or losses. Actual results could differ from estimated amounts and could result in a reduction or elimination of previously recognized
earnings. In certain circumstances, it is possible that such adjustments could be significant and could have an adverse effect on
our business. To the extent that these adjustments result in an increase, a reduction or an elimination of previously reported contract
profit, we recognize a credit or a charge against current earnings, which could be material.
We may not be able to fully realize the revenue value reported in our Backlog.
Backlog as of December 31, 2019 totaled $1.1 billion for our Heavy Civil and Specialty Services segments. Backlog develops
as a result of new awards, which represent the potential revenue value realizable pursuant to new project commitments received
by us during a given period. Backlog is measured and defined differently by companies within our industry. We refer to “Backlog”
as the unearned revenue we expect to earn in future periods on our executed Heavy Civil and Specialty Services contracts. As the
construction on our projects progresses, we increase or decrease Backlog to take into account newly signed contracts, revenue
earned during the period and our estimates of the effects of changes in estimated quantities, changed conditions, change orders
and other variations from previously anticipated contract revenues, including completion penalties and incentives. We cannot
guarantee that the revenue projected in our Backlog will be realized, or if realized, will result in earnings.
Given these factors, our Backlog at any point in time may not accurately represent the revenue that we expect to realize during
any period, and our Backlog as of the end of a fiscal year may not be indicative of the revenue we expect to earn in the following
fiscal year. Inability to realize revenue from our Backlog could have an adverse effect on our business.
We may need to raise additional capital in the future for working capital, capital expenditures and/or acquisitions, and we may
not be able to do so on favorable terms or at all, which would impair our ability to operate our business or achieve our growth
objectives.
Our ability to obtain additional financing in the future will depend in part upon prevailing credit and equity market conditions,
as well as the condition of our business and our operating results; such factors may adversely affect our efforts to arrange additional
financing on terms satisfactory to us and makes us more vulnerable to adverse economic and competitive conditions.
We have pledged the proceeds and other rights under our Heavy Civil and Specialty Services contracts to our bonding agent,
and we have pledged substantially all of our other assets as collateral in connection with our Credit Agreement. As a result, we
may have difficulty in obtaining additional financing in the future if such financing requires us to pledge assets as collateral. In
addition, under our Credit Agreement, we must obtain the consent of our lenders to incur additional debt from other sources (subject
to certain limited exceptions).
If adequate funds are not available, or are not available on acceptable terms, we may not be able to make future investments,
take advantage of acquisitions or other opportunities, or respond to competitive challenges.
In connection with the Plateau Acquisition, we incurred a substantial amount of indebtedness, and the agreements governing
such indebtedness contain various covenants and other provisions that impose restrictions on our ability to operate and manage
our business.
As a result of borrowing funds for the Plateau Acquisition, we have a higher level of indebtedness; specifically, as of
December 31, 2019, our aggregate principal amount outstanding under the Credit Facility was $420 million. The Credit Facility
will mature on October 2, 2024. While we currently believe we will have the financial resources to meet or refinance our obligations
15
when they come due, we cannot fully anticipate our future performance or financial condition, the future condition of the credit
markets or the economy generally.
The Credit Agreement governing the indebtedness incurred by us in connection with the Plateau Acquisition contains certain
subsidiary guarantees, which are secured by a first priority security interest in substantially all assets directly owned by such
subsidiaries and us, subject to certain exceptions and limitations. 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 Credit Agreement contains financial covenants that require us and certain of our subsidiaries to maintain
certain financial ratios and to prepay outstanding loans under the Credit Agreement in certain cases with proceeds from the issuance
of additional debt, asset dispositions, events of loss and excess cash flows. These requirements could limit our cash flow or impair
our ability to conduct business and pursue business strategies, which could have a material adverse effect on our results of operations,
cash flows or financial condition. The ability of us and our subsidiaries to comply with these provisions may be affected by events
beyond our and their control. Failure to comply with these covenants could result in an event of default, which, if not cured or
waived, could accelerate our debt repayment obligations, which in turn may trigger cross-acceleration or cross-default provisions
in other debt or bonding agreements. The Credit Agreement also contains a cross-default provision. This provision could have a
wider impact on liquidity than might otherwise arise from a default of a single debt instrument. Our available cash and liquidity
would not be sufficient to fully repay borrowings under all of our debt instruments that could be accelerated upon such an event
of default.
Further, our level of indebtedness could have important other consequences to our business, including the following:
•
•
•
•
•
•
limiting our flexibility in planning for, or reacting to, changes in the industry in which we operate;
increasing our vulnerability to general adverse economic and industry conditions;
limiting our ability to fund future working capital and capital expenditures because of the need to dedicate a substantial
portion of our cash flows from operations to payments on our debt service;
placing us at a competitive disadvantage compared to our competitors that have less debt;
limiting our ability to borrow additional funds or refinance existing debt; or
requiring that we pledge substantial collateral, which may limit flexibility in operating our business and restrict our ability
to sell assets.
We may elect to borrow, continue or convert certain term or revolving loans under our Credit Agreement to bear interest at
an annual rate of one-, two-, three-, six- or, if available, twelve-month London Interbank Offered Rate (“LIBOR”), plus 4.5% per
annum. Accordingly, increases in interest rates could have a material adverse effect on our business operations, financial
performance and financial condition.
The financial industry is currently transitioning away from LIBOR as a benchmark for the interbank lending market. While
an orderly transition to a new benchmark is expected, a universal approach has not been adopted. It is uncertain as to the nature
of any replacement rate and whether it will gain widespread market acceptance. Because certain loans under our Credit Agreement
may bear interest calculated by reference to LIBOR, we may be impacted by this transition, including by:
•
•
the effect of uncertainty regarding the interest rate calculation before replacement benchmark is published regularly and
gains widespread market acceptance; or
the risk that differences in the administration or determination methodology of the replacement benchmark may affect
the amount of interest payments.
Our strategy, which includes growing through strategic acquisitions, may not be successful.
We may pursue growth through the acquisition of companies or assets that will enable us to broaden the types of projects we
execute and also expand into new markets. We have completed several acquisitions and plan to consider strategic acquisitions in
the future. We may be unable to implement this growth strategy if we cannot identify suitable companies or assets or reach
agreement on potential strategic acquisitions on acceptable terms. Moreover, an acquisition involves certain risks, including:
•
•
difficulties in the integration of operations, systems, policies and procedures;
enhancements in our controls and procedures including those necessary for a public company may make it more difficult
to integrate operations and systems;
16
•
•
•
•
•
•
failure to implement proper overall business controls, including those required to support our growth, resulting in
inconsistent operating and financial practices at companies we acquire or have acquired;
termination of relationships with the key personnel and customers of an acquired company;
additional financial and accounting challenges and complexities in areas such as tax planning, treasury management,
financial reporting and internal controls;
the incurrence of environmental and other liabilities, including liabilities arising from the operation of an acquired business
or asset prior to our acquisition for which we are not indemnified or for which the indemnity is inadequate;
disruption of or receipt of insufficient management attention to our ongoing business; and
inability to realize the cost savings or other financial benefits that we anticipate.
To service our indebtedness and to fund working capital, we will require a significant amount of cash. Our ability to generate
cash depends on many factors that are beyond our control, including the fact that adverse capital and credit market conditions
may affect our ability to meet liquidity needs, access to capital and cost of capital.
Our ability to generate cash, outside of funds available through our Revolving Credit Facility, is subject to our operational
performance, as well as general economic, financial, competitive, legislative, regulatory and other factors that are beyond our
control. We may be unable to expand our credit capacity, which could adversely affect our operations and business. Earnings from
our operations and our working capital requirements can vary from period to period based primarily on the mix of our projects
underway and the percentage of project work completed during the period. Capital expenditures may also vary significantly from
period to period. We cannot provide assurance that our business will generate sufficient cash flow from operations or asset sales
or that we can obtain future borrowing capacity in an amount sufficient to enable us to pay our indebtedness, to fund working
capital requirements or to fund our other liquidity needs. Without sufficient liquidity, we will be forced to curtail our operations,
and our business will suffer.
In the event we cannot generate enough cash to satisfy our liquidity needs, we may have to seek additional financing. The
Credit Agreement, subject to certain exceptions, restricts our ability to incur additional financing indebtedness. The availability
of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the volume
of trading activities, our credit ratings and credit capacity, as well as the possibility that customers or lenders could develop a
negative perception of our long- or short-term financial prospects if the level of our business activity decreased due to a market
downturn. The domestic and worldwide capital and credit markets may experience significant volatility, disruptions and dislocations
with respect to price and credit availability. Should we need additional funds or to refinance our existing indebtedness, we may
not be able to obtain such additional funds. If internal sources of liquidity prove to be insufficient, we may not be able to successfully
obtain additional financing on favorable terms, or at all.
We may need to refinance all or a portion of our indebtedness on or before maturity. We cannot provide assurance that we
will be able to refinance any of our indebtedness on commercially reasonable terms or at all. Our inability to refinance our debt
on commercially reasonable terms also could have a material adverse effect on our business. If we experience operational difficulties,
we may need to increase our available borrowing capacity or seek amendments to the terms of our Credit Agreement. There can
be no assurance that we will be able to secure any additional capacity or amendment to our Credit Agreement or to do so on terms
that are acceptable to us, in which case, our costs of borrowing could rise and our business and results of operations could be
materially adversely affected.
We must manage our liquidity carefully to fund our working capital.
The need for working capital for our business varies due to fluctuations in the following amounts, among other factors:
•
•
•
•
•
receivables and contract retentions;
costs and estimated earnings in excess of billings;
billings in excess of costs and estimated earnings;
the size and status of contract mobilization payments and progress billings; and
the amounts owed to suppliers and subcontractors.
We may have limited cash on hand and the timing of payments on our contract receivables is difficult to predict. If the timing
of payments on our receivables is delayed or the amount of such payments is less than expected, our liquidity and ability to fund
working capital could be materially and adversely affected.
17
We may be required to write down all or part of our goodwill and intangibles.
We had $192 million of goodwill and $256 million of intangibles recorded on our Consolidated Balance Sheet at December 31,
2019. Goodwill represents the excess of cost over the fair value of net assets acquired in business combinations reduced by any
impairments recorded subsequent to the date of acquisition. Intangible assets are recognized as an asset apart from goodwill if it
arises from contractual or other legal rights or if it is separable, that is, it is capable of being separated or divided from the acquired
business and sold, transferred, licensed, rented or exchanged (whether there is intent to do so). A shortfall in our revenues or net
income or changes in various other factors from that expected by securities analysts and investors could significantly reduce the
market price of our common stock. If our market capitalization drops significantly below the amount of net equity recorded on
our balance sheet, it might indicate a decline in our fair value and would require us to further evaluate whether our goodwill or
intangible assets have been impaired. We perform an annual test of our goodwill and periodic assessments of intangible assets to
determine if they have become impaired. On an interim basis, we also review the factors that have or may affect our operations
or market capitalization for events that may trigger impairment testing. Write downs of goodwill and intangible assets may be
substantial. If we were required to write down all or a significant part of our goodwill and/or intangible assets in future periods,
our net earnings and equity could be materially adversely affected.
Risks Related to the Plateau Acquisition
We expect to continue to incur substantial expenses related to the Plateau Acquisition.
We have incurred substantial expenses in connection with completing the Plateau Acquisition on October 2, 2019, and we
expect to continue to incur substantial expenses in connection with integrating our business, operations, networks, systems,
technologies, policies and procedures with those of Plateau. While we have assumed that a certain level of transaction and integration
expenses would be incurred, there are a number of factors beyond our control that could affect the total amount or the timing of
our integration expenses.
We may be unable to successfully integrate Plateau’s business with ours and realize the anticipated benefits of the Plateau
Acquisition.
The Plateau Acquisition previously operated as a private enterprise, whereas we are a public company. We will be required
to devote significant management attention and resources to integrating the business practices and operations of Plateau with the
Company. Potential difficulties we may encounter in the integration process include the following:
•
•
•
•
•
lost sales and customers as a result of certain customers of the Company or Plateau deciding to terminate or reduce their
business with the Company or Plateau following the Plateau Acquisition;
the complexities of combining multiple companies with different histories, regulatory restrictions, operating structures
and markets, including geographic location and operating geography;
the failure to retain key employees of the Company or Plateau;
potential unknown liabilities and unforeseen increased expenses associated with the Plateau Acquisition; and
performance shortfalls at the Company or Plateau as a result of the diversion of management’s attention caused by
completing the Plateau Acquisition and integrating the companies’ operations.
For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of
management, the disruption of our ongoing business or inconsistencies in our products, services, standards, controls, procedures
and policies, any of which could adversely affect the ability of the Company to maintain relationships with customers, vendors
and employees or to achieve the anticipated benefits of the Plateau Acquisition, or could otherwise adversely affect our business
and financial results.
We may be unable to retain key employees.
Our success following the Plateau Acquisition will depend in part upon our ability to retain key employees of the Company
and Plateau. Key employees may depart because of issues relating to uncertainty, changes in workplace responsibilities or demands,
or difficulty of integration. Accordingly, we cannot assure you that we will be able to retain key employees to the same extent as
in the past.
Item 1B. Unresolved Staff Comments
None.
18
Item 2. Properties
We own or lease properties in locations throughout the United States to conduct our business. We believe these facilities are
adequate to meet our current and near-term requirements. The following list summarizes our principal properties by segment for
which they are primarily utilized: Heavy Civil, Specialty Services, Residential, and Corporate:
Location
Type of Facility
Interest
Operating Segment(s)
The Woodlands, TX
Administrative
San Antonio, TX
Administrative and equipment yard
Dallas, TX
Sparks, NV
Phoenix, AZ
Administrative and equipment yard
Administrative and operations
Administrative and operations
Leased
Owned
Leased
Leased
Leased
Corporate
Heavy Civil
Heavy Civil
Heavy Civil
Heavy Civil
Sacramento, CA
Administrative, operations and repair facility
Owned/Leased
Heavy Civil
Houston, TX
Draper, UT (1)
Austell, GA
Administrative and equipment yard
Administrative and operations
Owned
Leased
Heavy Civil
Heavy Civil and Specialty Services
Administrative, operations and equipment yard
Owned
Specialty Services
Winter Garden, FL
Administrative and operations
Owned/Leased
Specialty Services
Denton, TX (2)
Administrative and operations
Leased
Residential and Specialty Services
(1) The leased office space in Draper, UT and the repair facilities in West Jordan City, UT are owned by companies which are
principally owned by our Chief Operations Officer and his family members.
(2) The leased Denton, TX facilities are owned by certain officers of Tealstone.
Refer to Note 20 - Related Party Transactions for additional information.
In order to complete most contracts, we also lease small parcels of real estate near contract job sites to store materials, equipment
and provide offices for the contracting customer, its representatives and our employees.
All of our wholly-owned assets are encumbered, see Note 9 - Debt for further discussion on debt and the Company’s current
credit agreements.
Item 3. Legal Proceedings
We are and may in the future be involved as a party to various legal proceedings that are incidental to the ordinary course of
business. We regularly analyze current information about these proceedings and, as necessary, provide accruals for probable
liabilities on the eventual disposition of these matters.
In the opinion of management, after consultation with legal counsel, there are currently no threatened or pending legal matters
that would reasonably be expected in the future to have a material adverse impact on our Consolidated Results of Operations,
financial position or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
19
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is traded on the NASDAQ Global Select Market under the trading symbol “STRL”. On
February 28, 2020, there were 741 holders of record of our common stock.
Dividend Policy
We have never paid any cash dividends on our common stock. For the foreseeable future, we intend to retain any earnings,
and we do not anticipate paying any cash dividends. Additionally, our Credit Agreement restricts the payout of dividends. Whether
or not we declare any dividends will be at the discretion of our Board of Directors considering then-existing conditions, including
our financial condition and results of operations, capital requirements, bonding prospects, contractual restrictions (including those
under our Credit Agreement), business prospects and other factors that our Board of Directors considers relevant.
Equity Compensation Plan Information
Certain information about the Company’s equity compensation plans is incorporated into Item 12. “Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters” from the Company’s proxy statement for its 2020
Annual Meeting of Stockholders.
Stock Repurchase Plan Information
On November 2, 2018, the Board of Directors approved a plan that authorized stock repurchases of up to 2 million 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. The Company repurchased 250 thousand and 467 thousand shares
of its common stock during fiscal years 2019 and 2018, respectively, leaving approximately 1.3 million shares remaining for
repurchase under the plan. There were no shares repurchased in the fourth quarter of 2019. 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.
Performance Graph
The following graph compares the percentage change in the Company’s cumulative total stockholder return on its common
stock for the last five years with the Dow Jones US Total Return Index, a broad market index, and the Dow Jones US Heavy
Construction Index, a group of companies whose marketing strategy is focused on a limited product line, such as civil construction.
Both indices are published in The Wall Street Journal.
The returns are calculated assuming an investment with a value of $100 was made in the Company’s common stock and in
each index at the end of 2014 and that all dividends were reinvested in additional shares of common stock; however, the Company
has paid no dividends during the periods shown. The graph lines merely connect the measuring dates and do not reflect fluctuations
between those dates. The stock performance shown on the graph is not intended to be indicative of future stock performance.
20
Copyright© 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
The table below depicts the five-year performance of $100 invested on December 31, 2014 in stock or index, including reinvestment
of dividends.
$
Sterling Construction Company, Inc.
$
Dow Jones US Total Return Index
Dow Jones US Heavy Construction Index $
December
2014
100.00
100.00
100.00
December
2015
$
$
$
95.15
100.63
88.48
December
2016
132.39
112.96
109.14
$
$
$
December
2017
254.77
137.24
115.00
$
$
$
December
2018
170.42
130.42
84.97
$
$
$
December
2019
220.34
171.04
113.99
$
$
$
Issuer Purchases of Equity Securities
The following table shows the monthly number of shares of the Company’s common stock the Company repurchased from
employees in the quarter ended December 31, 2019. These shares were repurchased from employees holding shares of the
Company’s common stock that had been awarded to them by the Company and that were released from Company-imposed transfer
restrictions. The repurchase was to enable the employees to satisfy the Company’s tax withholding obligations triggered by the
release of the restrictions. The repurchase was made at the election of the employees pursuant to a procedure adopted by the
Compensation and Talent Development Committee of the Board of Directors.
Period
October 1 – October 31, 2019
November 1 – November 30, 2019
December 1 – December 31, 2019
Total Number of
Shares Purchased
Average Price Paid per
Share
2,029 $
1,071 $
— $
16.87
14.57
—
21
Item 6. Selected Financial Data
The following table sets forth selected financial and other data of the Company and its subsidiaries and should be read
in conjunction with both Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
which follows, and Item 8. “Financial Statements and Supplementary Data.”
(In thousands, except per share data)
2019
2018
2017
2016
2015
Years Ended December 31,
Revenues
Acquisition related costs
Operating income
Interest expense
Income (loss) before income taxes
Income tax benefit (expense)
Net income (loss)
Less: Net income attributable to noncontrolling
interests
Net income (loss) attributable to Sterling
common stockholders before noncontrolling
interest revaluation
Revaluation of noncontrolling interest
Net income (loss) attributable to Sterling
common stockholders
Net income (loss) per share attributable to
Sterling common stockholders:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
Balance sheet:
Total assets
Long-term debt
Equity attributable to Sterling common
stockholders
Shares outstanding
$ 1,126,278
$ 1,037,667
$
957,958
$
690,123
$
623,595
(4,311)
37,751
(16,686)
14,479
26,216
40,695
—
42,611
(12,350)
31,278
(1,738)
29,540
—
26,176
(9,800)
15,935
(118)
15,817
—
(4,279)
(2,628)
(7,324)
(88)
(7,412)
—
(14,387)
(3,012)
(17,179)
(7)
(17,186)
(794)
(4,353)
(4,200)
(1,826)
(3,216)
39,901
—
25,187
—
11,617
—
(9,238)
—
(20,402)
(18,774)
$
39,901
$
25,187
$
11,617
$
(9,238) $
(39,176)
$
$
$
$
$
1.50
1.47
$
$
0.94
0.93
$
$
0.44
0.43
$
$
(0.40) $
(0.40) $
(2.02)
(2.02)
26,671
27,119
26,903
27,194
26,274
26,712
23,140
23,140
19,375
19,375
$
$
$
961,940
390,627
219,918
27,772
$
$
$
482,573
79,117
164,401
26,597
$
$
$
463,298
86,160
141,333
27,051
$
$
$
301,823
1,549
107,434
24,987
266,165
15,324
95,845
19,753
22
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.
23
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)
Fourth quarter of 2019
Third quarter of 2019
Second quarter of 2019
First quarter of 2019
Fourth quarter of 2018
Backlog
$1,068,025
$881,428
$909,030
$808,740
$850,725
Gross Margin in Backlog
11.5%
9.3%
8.8%
8.3%
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.
24
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:
(In thousands)
Revenues
Gross profit
General and administrative expenses
Intangible asset amortization
Acquisition related costs
Other operating expense, net
Operating income
Interest income
Interest expense
Loss on extinguishment of debt
Income before income taxes and noncontrolling interests in earnings
Income tax benefit (expense)
Net income
Noncontrolling interests in earnings
Net income attributable to Sterling common stockholders
Gross margin
Operating margin
Backlog, end of year
NM – Not meaningful.
Years Ended December 31,
2019
2018
% Change
8.5 %
(2.3)%
2.0 %
95.6 %
NM
(30.8)%
(11.4)%
12.3 %
35.1 %
NM
(53.7)%
NM
37.8 %
(81.8)%
58.4 %
$ 1,126,278
$ 1,037,667
107,794
(49,200)
(4,695)
(4,311)
(11,837)
37,751
1,142
(16,686)
(7,728)
14,479
26,216
40,695
(794)
39,901
$
110,332
(48,220)
(2,400)
—
(17,101)
42,611
1,017
(12,350)
—
31,278
(1,738)
29,540
(4,353)
25,187
$
9.6%
3.4%
10.6%
4.1%
$ 1,068,025
$
850,725
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.
25
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
(In thousands)
Revenue
Heavy Civil
Specialty Services
Residential
Total Revenue
Operating Income
Heavy Civil
Specialty Services
Residential
Subtotal
Acquisition related costs
Total Operating Income
Years Ended December 31,
2019
% of
Revenue
2018
% of
Revenue
$
760,325
212,824
153,129
67%
19%
14%
$
765,638
120,333
151,696
73%
12%
15%
$ 1,126,278
$ 1,037,667
$
$
3,316
18,207
20,539
42,062
(4,311)
37,751
$
0.4%
8.6%
13.4%
3.7%
2.2%
3.8%
13.8%
4.1%
17,044
4,629
20,938
42,611
—
3.4%
$
42,611
4.1%
26
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:
(In thousands)
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net change in cash and cash equivalents
(In thousands)
Cash and cash equivalents
Working capital (Current Assets Minus Current Liabilities)
Years Ended December 31,
2019
2018
$
41,093
(410,386)
320,931
(48,362) $
39,474
(11,382)
(17,950)
10,142
As of December 31,
2019
2018
45,733
64,017
$
$
94,095
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.
27
Cash—Cash at December 31, 2019, was $45.7 million, and includes the following components:
(In thousands)
Generally Available
Consolidated 50% Owned Subsidiaries
Construction Joint Ventures
Total Cash
As of December 31,
2019
2018
$
$
29,659
12,004
4,070
45,733
$
$
42,605
31,026
20,464
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:
(In thousands)
Costs and estimated earnings in excess of billings
Billings in excess of costs and estimated earnings
Contracts in progress, net
Accounts receivable, including retainage
Receivables from and equity in construction joint ventures
Accounts payable
Contract Capital, net
Changes in Components of
Contract Capital
2019
2018
Variance
$
(39) $
6,062
6,023
(21,300)
1,524
10,987
(2,766) $
$
(4,430) $
33
(4,397)
(11,094)
659
1,969
(12,863) $
4,391
6,029
10,420
(10,206)
865
9,018
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.
28
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
29
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.
30
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:
(In thousands)
Operating leases (1)
Credit Facility
Credit Facility interest
Notes payable to Sellers, Plateau Acquisition (inclusive of
outstanding interest)
Notes and deferred payments to Sellers, Tealstone
Acquisition (inclusive of outstanding interest)
Notes payable for equipment
Earn-out Liability (2)
Members' interest subject to mandatory redemption and
undistributed earnings (3)
Total
Payments due by period
Total
<1
Year
1 - 3
Years
4 – 5
Years
>5
Years
$
15,680
$
6,813
$
8,038
$
829
$
420,000
108,217
30,000
25,451
100,000
49,123
290,000
33,643
—
—
—
14,400
800
1,600
1,600
10,400
12,600
805
1,027
12,600
243
1,027
—
338
—
—
224
—
—
—
—
49,003
$ 621,732
49,003
$ 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
31
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.
32
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.
33
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
On December 5, 2019, the company entered into a three year swap agreement with Bank of America “BOA.” As part of this
agreement, we utilize an interest rate swap to hedge against interest rate variability associated with $350 million of our outstanding
$400 million Term Loan Facility. The swap arrangement has been designated as a cash flow hedge as its critical terms matched
those of the Term Loan Facility at inception and through December 31, 2019. Accordingly, changes in the fair value of the interest
rate swap are recognized in AOCI. The total fair value of the contract was a net loss of approximately $243 thousand at December 31,
2019. The potential change in fair value for our interest rate swap resulting from a hypothetical one percent change in the LIBOR
rate would have been approximately $6.3 million at December 31, 2019. For the $50 million remaining portion of the Term Loan
Facility not associated with the interest rate swap hedge at December 31, 2019, a 1% increase in the interest rate would increase
interest expense by $500 thousand per year.
Other
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.
See “Inflation” above regarding risks associated with materials and fuel purchases required to complete our construction
contracts.
34
Item 8. Financial Statements and Supplementary Data
Table of Contents
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations - For the years ended December 31, 2019, 2018, and 2017
Consolidated Statements of Comprehensive Income - For the years ended December 31, 2019, 2018, and 2017
Consolidated Balance Sheets - As of December 31, 2019 and 2018
Consolidated Statements of Cash Flows - For the years ended December 31, 2019, 2018, and 2017
Consolidated Statements of Changes in Shareholders' Equity - For the years ended December 31, 2019, 2018, and 2017
Notes to Consolidated Financial Statements
Page
36
38
39
40
41
42
43
35
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
36
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
37
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
Revenues
Cost of revenues
Gross profit
General and administrative expense
Intangible asset amortization
Acquisition related costs
Other operating expense, net
Operating income
Interest income
Interest expense
Loss on extinguishment of debt
Income before income taxes
Income tax benefit (expense)
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to Sterling common stockholders
Net income per share attributable to Sterling common stockholders:
Basic
Diluted
Years Ended December 31,
2019
2018
$ 1,126,278
(1,018,484)
107,794
(49,200)
(4,695)
(4,311)
(11,837)
37,751
$ 1,037,667
(927,335)
110,332
(48,220)
(2,400)
—
(17,101)
42,611
1,142
(16,686)
(7,728)
14,479
26,216
40,695
(794)
39,901
1.50
1.47
$
$
$
1,017
(12,350)
—
31,278
(1,738)
29,540
(4,353)
25,187
0.94
0.93
$
$
$
$
$
$
$
2017
957,958
(868,866)
89,092
(46,552)
(1,799)
—
(14,565)
26,176
314
(9,800)
(755)
15,935
(118)
15,817
(4,200)
11,617
0.44
0.43
Weighted average common shares outstanding:
Basic
Diluted
26,671
27,119
26,903
27,194
26,274
26,712
The accompanying Notes are an integral part of these Consolidated Financial Statements.
38
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Net income
Other comprehensive income (loss), net of tax
Loss on interest rate swap
Total comprehensive income
Less: Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Sterling common stockholders
$
Years Ended December 31,
2019
2018
2017
$
40,695
$
29,540
$
15,817
(209)
40,486
(794)
39,692
$
—
29,540
(4,353)
25,187
$
—
15,817
(4,200)
11,617
The accompanying Notes are an integral part of these Consolidated Financial Statements.
39
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
Current assets:
Assets
Cash and cash equivalents ($7,538 and $8,750 related to variable interest entities (“VIEs”))
Accounts receivable, including retainage ($24,642 and $24,108 related to VIEs)
Costs and estimated earnings in excess of billings ($8,328 and $8,180 related to VIEs)
Receivables from and equity in construction joint ventures ($7,406 and $6,984 related to
VIEs)
Other current assets ($503 and $32 related to VIEs)
Total current assets
Property and equipment, net ($5,619 and $7,219 related to VIEs)
Operating lease right-of-use assets ($3,817 and $0 related to VIEs)
Goodwill ($1,501 and $1,501 related to VIEs)
Other intangibles, net
Deferred tax asset, net
Other non-current assets, net
Total assets
Current liabilities:
Liabilities and Stockholders’ Equity
Accounts payable ($18,213 and $22,859 related to VIEs)
Billings in excess of costs and estimated earnings ($9,649 and $6,585 related to VIEs)
Current maturities of long-term debt ($39 and $174 related to VIEs)
Current portion of long-term lease obligations ($1,838 and $0 related to VIEs)
Income taxes payable
Accrued compensation ($1,521 and $1,566 related to VIEs)
Other current liabilities ($1,429 and $1,485 related to VIEs)
Total current liabilities
Long-term debt ($2 and $1,976 related to VIEs)
Long-term lease obligations ($1,979 and $0 related to VIEs)
Members’ interest subject to mandatory redemption and undistributed earnings
Deferred taxes
Other long-term liabilities
Total liabilities
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
Additional paid in capital
Treasury Stock, at cost: 518 and 467 shares
Retained deficit
Accumulated other comprehensive loss
Total Sterling stockholders’ equity
Noncontrolling interests
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2019
December 31,
2018
$
$
$
$
$
$
$
45,733
248,247
42,555
9,196
11,790
357,521
116,030
13,979
191,892
256,323
26,012
183
961,940
137,593
85,011
42,473
7,095
1,212
13,727
6,393
293,504
390,627
6,976
49,003
—
619
740,729
94,095
145,026
41,542
10,720
11,233
302,616
51,999
—
85,231
42,418
—
309
482,573
99,426
62,407
2,899
—
318
9,448
4,676
179,174
79,117
—
49,343
1,450
1,229
310,313
283
251,019
(6,142)
(25,033)
(209)
219,918
1,293
221,211
961,940
$
271
233,795
(4,731)
(64,934)
—
164,401
7,859
172,260
482,573
The accompanying Notes are an integral part of these Consolidated Financial Statements.
40
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization of deferred debt costs
(Gain) loss on disposal of property and equipment
Loss on debt extinguishment
Deferred taxes
Stock-based compensation
Unrealized gain on hedge
Changes in operating assets and liabilities (Note 18)
Net cash provided by operating activities
Cash flows from investing activities:
Plateau Acquisition, net of cash acquired
Tealstone Acquisition, net of cash acquired
Capital expenditures
Proceeds from sale of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Cash received from credit facility
Repayments of long-term debt
Distributions to noncontrolling interest owners
Purchase of treasury stock
Debt issuance costs
Other
Net cash provided by (used in) financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Cash paid during the period for interest
Cash paid during the period for income taxes
Non-cash items:
Share consideration given for acquisitions
Notes and deferred payments to sellers
Estimated tax basis election
Warrants issued to lenders (1,000 Warrants)
Years Ended December 31,
2018
2017
2019
$
40,695
$
29,540
$
15,817
20,740
3,393
(527)
4,334
(27,398)
3,788
(30)
(3,902)
41,093
(396,323)
—
(15,397)
1,334
(410,386)
430,000
(87,621)
(7,360)
(3,201)
(10,688)
(199)
320,931
(48,362)
94,095
45,733
11,566
94
$
$
$
16,770
3,250
(580)
—
1,450
3,064
—
(14,020)
39,474
—
—
(13,171)
1,789
(11,382)
—
(11,555)
(1,350)
(4,731)
—
(314)
(17,950)
10,142
83,953
94,095
10,829
276
$
$
$
16,195
10,000
5,141
$
$
$
— $
— $
— $
— $
— $
$
$
$
$
$
$
$
16,994
2,563
171
755
—
2,843
—
(14,376)
24,767
—
(54,861)
(9,420)
8,384
(55,897)
85,000
(4,710)
—
—
(6,871)
(1,121)
72,298
41,168
42,785
83,953
9,800
279
17,601
11,588
—
3,500
The accompanying Notes are an integral part of these Consolidated Financial Statements.
41
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4
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
($ and share values in thousands, except per share data)
1. NATURE OF OPERATIONS
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).
43
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.
44
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
45
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
46
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.
3.
PLATEAU ACQUISITION
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
Target working capital adjustment
Equity consideration transferred (1,245 shares at $13.01 per share(1))
Note payable to seller (See Note 9 - Debt)
Estimated tax basis election
Total consideration
(1) Sterling’s closing stock price on October 1, 2019
$
$
375,000
21,323
16,195
10,000
5,141
427,659
47
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
Costs and estimated earnings in excess of billings
Other current assets
Property and equipment, net
Other non-current assets, net
Accounts payable
Billings in excess of costs and estimated earnings
Other current liabilities
Total net tangible assets
Preliminary identifiable intangible assets
Goodwill
Total consideration transferred
$
$
81,921
974
249
65,492
10
(22,039)
(16,540)
(7,669)
102,398
218,600
106,661
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.
Customer relationships
Trade name
Non-compete agreements
Total
Weighted
Average Life
(Years)
October 2, 2019
Fair Value
25
25
5
$
$
191,800
24,800
2,000
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
48
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.
Pro forma revenue
Pro forma net income attributable to Sterling
4. REVENUE FROM CUSTOMERS
Backlog
The Company had the following backlog, by segment:
Heavy Civil Backlog
Specialty Services Backlog
Total Heavy Civil and Specialty Services Backlog
Years Ended December 31,
2019
1,358,736
90,408
$
$
2018
1,326,854
54,282
December 31,
2019
834,049
233,976
1,068,025
$
$
2018
780,706
70,019
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:
Revenue by major end market
Heavy Highway
Aviation
Water Containment and Treatment
Other
Heavy Civil Revenue
Land Development
Commercial
Specialty Services Revenue
Residential Revenue
Revenues
Revenue by contract type
Fixed-Unit Price
Lump Sum
Residential and Other
Revenues
Years Ended December 31,
2019
2018
2017
$
$
$
$
$
$
$
$
483,175
141,371
65,795
69,984
760,325
84,637
128,187
212,824
153,129
1,126,278
708,638
262,237
155,403
1,126,278
$
$
$
$
$
$
$
$
513,376
111,824
66,928
73,510
765,638
$
$
— $
120,333
120,333
151,696
1,037,667
733,047
146,874
157,746
1,037,667
$
$
$
$
$
579,157
77,399
59,593
85,503
801,652
—
48,314
48,314
107,992
957,958
755,840
57,823
144,295
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.
49
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.
50
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The liability consists of the following:
Members’ interest subject to mandatory redemption
Net accumulated earnings
Total liability
As of December 31,
2019
2018
$
$
40,000
9,003
49,003
$
$
40,000
9,343
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:
Revenues
Operating income
Net income attributable to Sterling common stockholders
6. CONSTRUCTION JOINT VENTURES
Years Ended December 31,
2019
2018
2017
$
$
$
205,615
6,372
3,196
$
$
$
193,677
8,819
4,415
$
$
$
181,589
9,069
4,531
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:
Balance, beginning of period
Net income attributable to noncontrolling interest included in equity
Distributions to noncontrolling interest owners
Balance, end of period
Years Ended December 31,
2019
2018
2017
$
$
7,859
$
4,856
$
794
(7,360)
1,293
$
4,353
(1,350)
7,859
$
656
4,200
—
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.
51
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:
Revenues
Operating income
Net income attributable to Sterling common stockholders
Year Ended
December 31, 2019
$
$
$
6,903
467
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:
Current assets
Current liabilities
Sterling’s receivables from and equity in construction joint ventures
Revenues
Income before tax
Sterling’s noncontrolling interest:
Revenues
Income before tax
As of December 31,
2019
2018
$
$
$
$
92,710
(86,705) $
$
9,196
64,815
(74,543)
10,720
Years Ended December 31,
2019
2018
2017
$
$
$
$
158,291
20,449
76,419
8,170
$
$
$
$
115,441
8,097
55,134
4,104
$
$
$
$
93,848
7,827
44,948
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.
52
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7.
PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
Construction and transportation equipment
Buildings and improvements
Land
Office equipment
Total property and equipment
Less accumulated depreciation
Total property and equipment, net
As of December 31,
2019
2018
$
217,945
$
144,630
14,641
3,891
2,767
239,244
(123,214)
116,030
$
$
11,072
2,720
2,711
161,133
(109,134)
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.
53
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents goodwill by reportable segment:
Goodwill
Heavy Civil
Specialty Services
Residential
Total Goodwill
Other Intangible Assets
December 31,
2019
December 31,
2018
$
$
54,806
106,661
30,425
191,892
$
$
54,806
—
30,425
85,231
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
25
23
5
24
$
$
232,623
30,107
2,487
265,217
$
$
(6,911) $
(1,692)
(291)
(8,894) $
40,823
5,307
487
46,617
$
$
(3,159)
(919)
(121)
(4,199)
Customer relationships
Trade name
Non-compete agreements
Total
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.
9. DEBT
The Company’s outstanding debt was as follows:
Credit Facility
Oaktree Facility
Note payable to seller, Plateau Acquisition
Notes and deferred payments to sellers, Tealstone Acquisition
Notes payable for transportation and construction equipment and other
Total debt
Less - Current maturities of long-term debt
Less - Unamortized debt issuance costs
Total long-term debt
As of December 31,
2019
2018
$
420,000
—
10,000
12,230
805
443,035
—
74,571
—
13,572
612
88,755
(42,473)
(9,935)
390,627
$
(2,899)
(6,739)
79,117
$
$
54
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.
55
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.
10. LEASE OBLIGATIONS
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:
Operating lease cost
Short-term lease cost
Finance lease cost:
Amortization of right-of-use assets
Interest on lease liabilities
Total finance lease cost
Twelve Months Ended
December 31, 2019
$
$
$
$
8,594
18,032
213
20
233
56
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Supplemental cash flow information related to leases is as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Right-of-use assets obtained in exchange for lease obligations (non-cash):
Operating leases
Finance leases
Supplemental balance sheet information related to leases was as follows:
Operating Leases
Operating lease right-of-use assets
Current portion of long-term lease obligations
Long-term lease obligations
Total operating lease liabilities
Finance Leases
Property and equipment, at cost
Accumulated depreciation
Property and equipment, net
Current maturities of long-term debt
Long-term debt
Total finance lease liabilities
Weighted Average Remaining Lease Term
Operating leases
Finance leases
Weighted Average Discount Rate
Operating leases
Finance leases
Maturities of lease liabilities are as follows:
Year Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less imputed interest
Total
Operating
Leases
6,813
5,180
2,858
784
45
—
15,680
(1,609)
14,071
$
$
$
57
Twelve Months Ended
December 31, 2019
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
8,127
20
213
8,955
816
December 31, 2019
13,979
7,095
6,976
14,071
1,479
(482)
997
204
560
764
Finance
Leases
2.5
4.0
6.0%
4.2%
233
208
161
154
77
—
833
(69)
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:
Derivative Assets
Other current assets
Other non-current assets
Total assets at fair value
Derivative Liabilities
Other current liabilities
Other non-current liabilities
Total liabilities at fair value
December 31, 2019
Level 1
Level 2
Level 3
Total
$
$
$
$
— $
—
— $
— $
—
— $
216
—
216
$
$
(61) $
(398)
(459) $
— $
—
— $
— $
—
— $
216
—
216
(61)
(398)
(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:
Interest rate cash flow hedge
Gain (Loss)
Recognized in OCI
(273)
Gain (Loss)
Reclassified from
AOCI into
Earnings (1)
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.
58
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
59
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.
13. INCOME TAXES
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:
Current tax expense
Deferred tax (benefit) expense
Income tax (benefit) expense
Years Ended December 31,
2019
2018
2017
$
$
$
1,182
(27,398)
(26,216) $
288
1,450
1,738
$
$
118
—
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:
Tax expense (recovery) at the U.S. federal
statutory rate
State tax based on income, net of refunds and
federal benefits
Taxes on subsidiaries’ and joint ventures’
earnings allocated to noncontrolling
interests owners
Valuation allowance
Tax credits
Tax rate change
Return to provision
Earn-out liability
Equity compensation
Other permanent differences
Income tax (benefit) expense
Years Ended December 31,
2019
2018
2017
Amount
%
Amount
%
Amount
%
$
3,041
21.0 % $
6,568
21.0% $
5,577
35.0%
1,670
11.5
364
1.2
(264)
(1.7)
(2,241)
(29,375)
(397)
(15.5)
(202.9)
(2.7)
—
48
—
805
233
—
0.3
—
5.6
1.6
(4,097)
(1,013)
(286)
(281)
21
—
26
436
(13.1)
(3.3)
(0.9)
(0.9)
0.1
—
0.1
1.4
(5,504)
(18,006)
(349)
19,545
(62)
460
(1,371)
92
(34.5)
(113.0)
(2.2)
122.7
(0.4)
2.9
(8.6)
0.6
$ (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.
60
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:
Assets related to:
Accrued compensation and other
Goodwill
Noncontrolling interests
Deferred revenue
Members interest liabilities
Right of use liabilities
Net operating loss carryforwards
Total deferred tax assets
Valuation allowance for deferred tax assets
Net deferred tax assets
Liabilities related to:
Depreciation of property and equipment
Right of use assets
Amortization of tax basis goodwill
Other
Net deferred tax liabilities
Long Term
As of December 31,
2019
2018
$
3,981
$
3,707
—
1,812
922
11,328
3,253
19,801
41,097
—
41,097
(7,911)
(3,232)
(3,091)
(851)
$
$
$ (15,085) $
—
1,687
232
11,570
—
22,818
40,014
(31,718)
8,296
(7,709)
—
(1,450)
(587)
(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.
61
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
14. STOCKHOLDERS' EQUITY
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:
Balance at December 31, 2018
OCI before reclassifications
Amounts reclassified from AOCI
Net OCI
Balance at December 31, 2019
Interest rate derivatives (interest expense)
Tax
Total net of tax
Unrealized Fair Value of
Swap (Cash Flow Hedge)
$
$
—
(186)
(23)
(209)
(209)
Amount Reclassified from
AOCI (1)
$
$
(30)
7
(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.
62
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
15. STOCK INCENTIVE PLAN
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:
Employee’s RSAs
Balance at December 31, 2018
Granted
Vested
Forfeited
Balance at December 31, 2019
Director’s RSAs
Balance at December 31, 2018
Granted
Vested
Forfeited
Balance at December 31, 2019
Number of Shares
Weighted Average
Fair Value Per
Share
147
52
(114)
(2)
83
42
52
(52) $
—
42
11.16
12.06
11.04
9.64
11.91
11.67
12.06
11.69
—
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.
63
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:
Nonvested RSUs
Balance at December 31, 2018
Granted
Vested
Forfeited
Balance at December 31, 2019
Number of Shares
Weighted Average
Fair Value Per
Share
217
261
(120)
(14)
344
12.40
12.14
14.30
16.14
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:
Stock price at grant date
Exercise option price
Expected term of warrants (in years)
Expected volatility rate
Risk-free rate
Expected dividend yield
Total fair value
64
April 3, 2017
8.88
10.25
$
$
5
48.29%
1.88%
—%
3,500
$
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16. EARNINGS PER SHARE
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:
Numerator:
Net income attributable to Sterling common stockholders
Denominator:
Weighted average common shares outstanding — basic
Shares for dilutive unvested stock
Weighted average common shares outstanding and assumed conversions—
diluted
Years Ended December 31,
2019
2018
2017
$
39,901
$
25,187
$
11,617
26,671
448
26,903
291
26,274
438
27,119
27,194
26,712
Basic net income per share attributable to Sterling common stockholders
Diluted net income per share attributable to Sterling common stockholders
$
$
1.50
1.47
$
$
0.94
0.93
$
$
0.44
0.43
17. RETIREMENT BENEFITS
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.
65
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents our participation in these plans:
Pension Trust
Fund
Pension Trust Fund for
Operating Engineers
Pension Plan
Laborers Pension
Trust for Northern
California
Carpenter Funds
Administrative Office
Cement Mason
Pension Trust Fund
For Northern
California
All other funds (4)
Pension Plan
Employer
Identification
Number
Pension Protection Act
(“PPA”) Certified
Zone Status (1)
2019
2018
FIP / RP Status
Pending/
Implemented (2)
Contributions
2019
2018
2017
Surcharge
Imposed
Expiration
Date of
Collective
Bargaining
Agreement (3)
94-6090764
Yellow
Red
Yes
$ 2,314
$ 1,932
$ 2,477
No
Various
94-6277608
Green
Yellow
94-6050970
Red
Red
Yes
Yes
857
547
880
748
953
727
94-6277669
Yellow
Yellow
Yes
320
7,144
504
7,283
423
8,006
Total Contributions:
$ 11,182
$ 11,347
$ 12,586
No
No
No
Various
Various
Various
(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.
Indicates whether the plan has a financial improvement plan (“FIP”) or a rehabilitation plan (“RP”) which is either
pending or has been implemented.
(2)
(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:
Accounts receivable, including retainage
Contracts in progress, net
Receivables from and equity in construction joint ventures
Other current and non-current assets
Accounts payable
Accrued compensation and other liabilities
Members' interest subject to mandatory redemption and undistributed earnings
Changes in operating assets and liabilities
Twelve Months Ended December 31,
2019
(21,300) $
6,023
1,524
43
10,987
(839)
(340)
(3,902) $
2018
(11,094) $
(4,397)
659
924
1,969
(4,038)
1,957
(14,020) $
2017
(29,923)
(3,492)
(4,250)
929
13,579
6,625
2,156
(14,376)
$
$
66
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.
21. SEGMENT INFORMATION
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.
67
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:
Revenue
Heavy Civil
Specialty Services
Residential
Total Revenue
Depreciation and Amortization
Heavy Civil
Specialty Services
Residential
Total Depreciation and Amortization
Operating Income
Heavy Civil
Specialty Services
Residential
Subtotal
Acquisition related costs
Total Operating Income
Years Ended December 31,
2019
2018
2017
$
760,325
212,824
153,129
$ 1,126,278
$
765,638
120,333
151,696
$ 1,037,667
$
$
$
$
12,839
6,059
1,842
20,740
3,316
18,207
20,539
42,062
(4,311)
37,751
$
$
$
$
13,492
1,439
1,839
16,770
17,044
4,629
20,938
42,611
—
42,611
$
$
$
$
$
$
801,652
48,314
107,992
957,958
14,789
815
1,390
16,994
8,246
2,284
15,646
26,176
—
26,176
The following table presents total assets by reportable segment at December 31, 2019 and 2018:
Assets
Heavy Civil
Specialty Services
Residential
Total Assets
December 31,
2019
December 31,
2018
$
$
287,779
587,642
86,519
961,940
$
$
318,586
76,170
87,817
482,573
22. QUARTERLY FINANCIAL INFORMATION
The following table summarizes the unaudited quarterly results of operations for 2019 and 2018:
Revenues
Gross profit
Income (loss) before income taxes
Net income attributable to Sterling common stockholders
Net income per share attributable to Sterling common
stockholders:
Basic
Diluted
2019 Quarters Ended (unaudited)
March 31
June 30
September 30 December 31
$
223,949
$
264,086
$
291,699
$
346,544
19,503
2,024
25,496
8,571
29,216
9,422
1,815
$
7,828
$
7,957
$
33,579
(5,538)
22,301
0.07
0.07
$
$
0.30
0.29
$
$
0.30
0.30
$
$
0.81
0.79
$
$
$
68
Revenues
Gross profit
Income before income taxes
Net income attributable to Sterling common stockholders
Net income per share attributable to Sterling common
stockholders:
Basic
Diluted
2018 Quarters Ended (unaudited)
March 31
June 30
September 30 December 31
$
$
$
$
$
$
222,492
19,834
3,721
2,489
0.09
0.09
$
$
$
$
$
$
268,734
31,046
9,238
8,174
0.30
0.30
$
$
$
$
$
$
291,266
31,279
11,581
8,917
0.33
0.33
$
$
$
$
$
$
255,175
28,173
6,738
5,607
0.22
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
Specialty Services
Residential
Total Revenue
Operating Income
Heavy Civil
Specialty Services
Residential
Subtotal
Acquisition related costs
Total Operating Income
150,505
30,679
42,765
223,949
$
$
200,236
27,894
35,956
264,086
$
$
$
$
218,894
32,863
39,942
291,699
7,420
1,371
5,220
14,011
(1,896)
12,115
$
$
$
$
190,690
121,388
34,466
346,544
$
760,325
212,824
153,129
$ 1,126,278
(7,704) $
14,923
4,666
11,885
(2,153)
9,732
$
3,316
18,207
20,539
42,062
(4,311)
37,751
5,747
865
4,834
11,446
(262)
11,184
$
$
$
(2,147) $
1,048
5,819
4,720
—
$
4,720
$
69
Revenue
Heavy Civil
Specialty Services
Residential
Total Revenue
Operating Income
Heavy Civil
Specialty Services
Residential
Total Operating Income
2018 Quarters Ended (unaudited)
March 31
June 30
September 30 December 31
Total
$
158,722
$
194,174
$
222,299
$
190,443
$
765,638
28,519
35,251
222,492
$
29,109
45,451
268,734
$
32,245
36,722
291,266
$
30,460
34,272
255,175
120,333
151,696
$ 1,037,667
1,092
$
4,322
$
7,385
$
4,245
$
519
5,068
6,679
$
1,480
6,347
12,149
$
1,647
5,341
14,373
$
983
4,182
9,410
$
17,044
4,629
20,938
42,611
$
$
$
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures include, but are not limited to, controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated
and communicated to the issuer’s management, including the principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
The Company’s principal executive officer and principal financial officer reviewed and evaluated the Company’s disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31,
2019. As previously disclosed, we completed the Plateau Acquisition on October 2, 2019 and, as permitted by SEC guidance for
newly acquired businesses, we have elected to exclude the acquired operations of Plateau from the scope of design and operation
of our disclosure controls and procedures for the year ended December 31, 2019. Based on that evaluation, the Company’s principal
executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective
at December 31, 2019 to ensure that the information required to be disclosed by the Company in this annual report on Form 10-
K is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s
rules and forms and is accumulated and communicated to the Company’s management including the principal executive and
principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting.
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. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of
our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
70
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because
of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and
is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also
be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material
misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. 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. However, these inherent limitations
are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce,
though not eliminate, this risk.
Management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31,
2019. In making this assessment, management used the criteria described in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. As permitted by guidance provided by the staff of the
SEC, the scope of management’s assessment of the effectiveness of our internal control over financial reporting as of December 31,
2019 did not include the internal controls of Plateau, which are included with the Consolidated Financial Statements of the Company.
Management has excluded from its evaluation the internal control over financial reporting of Plateau, which constituted 51% of
total assets and 8% of consolidated revenues. Management will include Plateau in the scope of its assessment of internal control
over financial reporting beginning in 2020. Based on this assessment, management concluded that our internal control over financial
reporting was effective as of December 31, 2019.
Attestation Report of the Registered Public Accounting Firm
Grant Thornton LLP, the independent registered public accounting firm that audited our Consolidated Financial Statements
included in this annual report on Form 10-K, has issued an attestation report on the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2019, included in Item 15 “Exhibits and Financial Statement Schedules” under the
heading “Reports of the Company’s Independent Registered Public Accounting Firm.”
Changes in Internal Control over Financial Reporting
We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States. Based on the most recent evaluation, we have concluded that no changes in our
internal control over financial reporting occurred during the three months ended December 31, 2019, that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Internal control over financial reporting may not prevent or detect all errors and all fraud. Also, projections of any evaluation
of effectiveness of internal control 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.
Item 9B. Other Information
None
71
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information required by this item will be contained in our definitive proxy statement to be filed with the SEC pursuant to
Regulation 14A relating to our 2020 annual meeting of stockholders and is incorporated herein by reference. Our code of business
conduct is available at www.strlco.com under Investor Relations—Code of Business Conduct and is available in print to any
stockholder who requests a copy. Amendments to or waivers of our code of business conduct granted to any of our directors or
executive officers will be published promptly on our website. Such information will remain on our website for at least 12 months.
Item 11. Executive Compensation
Information required by this item will be contained in our definitive proxy statement to be filed with the SEC pursuant to
Regulation 14A relating to our 2020 annual meeting of stockholders and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this item will be contained in our definitive proxy statement to be filed with the SEC pursuant to
Regulation 14A relating to our 2020 annual meeting of stockholders and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this item will be contained in our definitive proxy statement to be filed with the SEC pursuant to
Regulation 14A relating to our 2020 annual meeting of stockholders and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
Information required by this item will be contained in our definitive proxy statement to be filed with the SEC pursuant to
Regulation 14A relating to our 2020 annual meeting of stockholders and is incorporated herein by reference.
Item 15. Exhibits, and Financial Statement Schedules
Financial Statements
PART IV
The following Consolidated Financial Statements and Reports of Independent Registered Public Accounting Firm included
under Item 8 of Part II of this report are herein incorporated by reference:
Reports of the Company’s Independent Registered Public Accounting Firm
Consolidated Statements of Operations—For the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss)—For the years ended December 31, 2019, 2018 and 2017
Consolidated Balance Sheets—As of December 31, 2019 and 2018
Consolidated Statements of Cash Flows—For the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders’ Equity—For the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Financial Statement Schedules
All schedules have been omitted because the schedules are not applicable, the required information is not in amounts
sufficient to require submission of the schedule, or the information required is shown in the Consolidated Financial Statements
or notes thereto previously included under Item 8 of Part II of this report.
Quarterly financial data for the years ended December 31, 2019 and 2018 is shown in the Notes to Consolidated Financial
Statements included under Item 8 of Part II of this report.
Exhibits
The Exhibit Index, starting on the next page, and Exhibits being filed are submitted as part of this report.
72
EXHIBIT INDEX
Explanatory Note—Prior to changing its name to Sterling Construction Company, Inc. in November 2001, the Company’s
name was Oakhurst Company, Inc. References in the following exhibit list use the name of the Company in effect at the date
of the exhibit.
Number
2.1
Exhibit Title
Stock Purchase Agreement, dated March 8, 2017, by and among Sterling Construction Company, Inc. the sellers
identified therein, Gary Roger Engasser II, as sellers’ representative and the principals identified therein
(incorporated by reference to Exhibit 2.1 to Sterling Construction Company, Inc.’s Current Report on Form 8-K,
filed on March 9, 2017 (SEC File No. 1-31993)).
2.2
3.1
3.2
4.1
4.2
4.3
4.4(2)
10.1(1)
10.2(1)
10.3.1(1)
10.3.2(1)
10.4(1)
10.5(1)
10.6(1)
10.7.1(1)
10.7.2(1)
Equity Purchase Agreement, dated as of August 13, 2019, by and among Greg K. Rogers, Philip P. Travis, as
trustee of the Lorin L. Rogers 2018 Trust, Kimberlin Rogers 2018 Trust, Gregory K. Rogers 2018 Trust and Mary
K. Rogers 2018 Trust, LK Gregory Construction, Inc., Plateau Excavation, Inc., and DeWitt Excavation, LLC
(incorporated by reference to Exhibit 2.1 to Sterling Construction Company, Inc.’s Current Report on Form 8-K,
filed on August 16, 2019 (SEC File No. 1-31993)).
Certificate of Incorporation of Sterling Construction Company, Inc. as amended through April 28, 2017
(incorporated by reference to Exhibit 3 to Sterling Construction Company, Inc.'s Current Report on Form 8-K,
filed on May 3, 2017 (SEC File No. 1-31993)).
Amended and Restated Bylaws of Sterling Construction Company, Inc. (incorporated by reference to Exhibit 3.1
to Sterling Construction Company, Inc.’s Current Report on Form 8-K, filed on March 8, 2018 (SEC file No.
1-31993)).
Form of Common Stock Certificate of Sterling Construction Company, Inc. (incorporated by reference to
Exhibit 4.5 to Sterling Construction Company, Inc.'s Form 8-A, filed on January 11, 2006 (SEC File No.
1-31993)).
Registration Rights Agreement, dated April 3, 2017, by and among Sterling Construction Company, Inc., OCM
Sterling NE Holdings, LLC and OCM Sterling E. Holdings, LLC (incorporated by reference to Exhibit 4.1 to
Sterling Construction Company, Inc.’s Current Report on Form 8-K, filed on April 4, 2017 (SEC File No. 1-31993)).
Form of Warrant, issued April 3, 2017, by Sterling Construction Company, Inc. to OCM Sterling NE Holdings,
LLC or OCM Sterling E. Holdings, LLC (incorporated by reference to Exhibit 4.1 to Sterling Construction
Company, Inc.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2017, filed on May 3, 2017 (SEC
File No. 1-31993)).
Description of Securities Registered Under Section 12.
Sterling Construction Company, Inc. 2019 Employee Stock Purchase Plan (incorporated by reference to Exhibit
10.1 to Sterling Construction Company, Inc.’s Current Report on Form 8-K, filed on May 8, 2019 (SEC File No.
1-31993)).
Sterling Construction Company, Inc. 2018 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to
Sterling Construction Company, Inc.’s Current Report on Form 8-K, filed on May 8, 2018 (SEC File No.
001-31993)).
Standard Non-Employee Director Compensation adopted by the Board of Directors to be effective May 2,
2018 (incorporated by reference to Exhibit 10.1.1 to Sterling Construction Company, Inc.'s Quarterly Report
on Form 10-Q for quarter ended September 30, 2018, filed November 6, 2018).
Form of Non-Employee Director Restricted Stock Agreement (incorporated by reference to Exhibit 10.2.1 to
Sterling Construction Company, Inc.'s Quarterly Report on Form 10-Q for quarter ended March 31, 2018, filed
on May 8, 2018).
Executive Employment Agreement dated December 12, 2018 between Sterling Construction Company, Inc.
and Joseph A. Cutillo (incorporated by reference to Exhibit 10.3 to Sterling Construction Company, Inc’s Form
10-K filed on March 5, 2019 (SEC File No. 1-31993)).
Executive Employment Agreement dated December 12, 2018 between Sterling Construction Company, Inc.
and Ronald A. Ballschmiede (incorporated by reference to Exhibit 10.4 to Sterling Construction Company,
Inc’s Form 10-K filed on March 5, 2019 (SEC File No. 1-31993)).
Executive Employment Agreement dated December 12, 2018 between Sterling Construction Company, Inc.
and Richard E. Chandler, Jr. (incorporated by reference to Exhibit 10.5 to Sterling Construction Company,
Inc’s Form 10-K filed on March 5, 2019 (SEC File No. 1-31993)).
Program Description — 2017 Executive Incentive Compensation Program (incorporated by reference to Exhibit
10.1 to Sterling Construction Company, Inc.'s Current Report on Form 8-K filed on February 15, 2017 (SEC File
No. 1-31993)).
Form of 2017 Executive Incentive Compensation Program Restricted Stock Award Agreement (incorporated by
reference to Exhibit 10.2 to Sterling Construction Company, Inc.'s Current Report on Form 8-K filed on February
15, 2017 (SEC File No. 1-31993)).
73
10.7.3(1)
10.7.4(1)
10.7.5(1)
10.8(1)
10.9(1)(2)
10.10
10.11(2)
21.1(2)
23.1(2)
31.1(2)
31.2(2)
32.1(3)
32.2(3)
Program Description - Stock Repurchase Program (incorporated by reference to Exhibit 10.6.7 to Sterling
Construction Company, Inc.’s Form 10-K filed on March 5, 2019 (SEC File No. 1-31993)).
Plan Description - Senior Executive Incentive Compensation Plan (adopted 2018) (incorporated by reference to
Exhibit 10.5.5 to Sterling Construction Company Inc.'s Quarterly Report on Form 10-Q for quarter ended March
31, 2018, filed on May 8, 2018).
Form of 2018 Long-Term Incentive Award Agreement (incorporated by reference to Exhibit 10.5.6 to Sterling
Construction Company, Inc.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2018, filed on May
8, 2018).
Plan Description - Senior Executive Incentive Compensation Plan (adopted 2019) (incorporated by reference to
Exhibit 10.1 to Sterling Construction Company, Inc.’s Quarterly Report on Form 10-Q filed on May 7, 2019 (SEC
File No. 1-31993)).
Form of Long-Term Incentive Award Agreement (adopted 2019).
Credit Agreement, dated as of October 2, 2019, by and among Sterling Construction Company, Inc., the subsidiaries
of the Company party thereto as Guarantors, the Lenders party thereto, 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 (incorporated by reference to Exhibit 10.1 to Sterling Construction
Company, Inc.’s Current Report on Form 8-K, filed on October 2, 2019 (SEC File No. 1-31993)).
First Amendment to Credit Agreement, dated December 2, 2019, by and among Sterling Construction Company,
Inc., the subsidiaries of the Company party thereto as Guarantors, the Lenders party thereto and BMO Harris
Bank, N.A., as Administrative Agent.
Subsidiaries of the registrant.
Consent of Grant Thornton LLP.
Certification of Joseph A. Cutillo, Chief Executive Officer of Sterling Construction Company, Inc.
Certification of Ronald A. Ballschmiede, Executive Vice President & Chief Financial Officer of Sterling
Construction Company, Inc.
Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) of
Joseph A. Cutillo, Chief Executive Officer of Sterling Construction Company, Inc.
Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) of
Ronald A. Ballschmiede, Executive Vice President & Chief Financial Officer of Sterling Construction Company,
Inc.
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
(1) Management contract, compensatory plan or arrangement
(2) Filed herewith
(3) Furnished herewith
Item 16. Form 10-K Summary
None
74
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 3, 2020.
SIGNATURES
Sterling Construction Company, Inc.
By:
/s/ Joseph A. Cutillo
Joseph A. Cutillo, Chief Executive Officer
(Duly Authorized Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities indicated on March 3, 2020.
Signature
/s/ Joseph A. Cutillo
Joseph A. Cutillo
/s/ Ronald A. Ballschmiede
Ronald A. Ballschmiede
/s/Thomas M. White
Thomas M. White
/s/ Roger Cregg
Roger Cregg
/s/ Marian M. Davenport
Marian M. Davenport
/s/ Raymond F. Messer
Raymond F. Messer
/s/ Dana C. O’Brien
Dana C. O’Brien
/s/ Charles R. Patton
Charles R. Patton
Title
Chief Executive Officer (Principal Executive Officer)
Director
Executive Vice President, Chief Financial Officer, Chief Accounting Officer, and
Treasurer (Principal Financial Officer and Principal Accounting Officer)
Director and Non-Executive Chairman
Director
Director
Director
Director
Director
75
ANNUAL REPORT AND
MEETING
in
2019 Annual Report
The 2019 Annual Report and the
statements contained
it are
submitted or the general information
of
the shareholders of Sterling
Construction Company, Inc. and not
in connection with any offer to sell, or
the solicitation of an offer to buy, any
securities, nor is it intended as a
representation by the Company of the
value of its securities. Pursuant to
Rule 14a-3(c) of Regulation 14A
under the Securities Exchange Act of
1934, this 2019 Annual Report is not
to be deemed part of the proxy
solicitation materials of Sterling
Construction Company, Inc.
Company,
Notice of Annual Meeting
The Annual Meeting of Stockholders
of Sterling Construction Company,
Inc. will be held Wednesday, May 6,
2020 at 8:30 a.m., CST, at the Sterling
Inc.
Construction
corporate office
located at 1800
Hughes Landing Boulevard, Suite
250, The Woodlands, Texas 77380.
the
Information with
meeting is contained in the Proxy
Statement mailed on or about March
25, 2020, to the holders of record on
March 12, 2020, of Sterling
Construction Company, Inc. common
stock.
respect
to
BOARD OF DIRECTORS
MANAGEMENT
Thomas M. White
Former Chairman of Cardinal
Logistics Holdings; Former CFO of
Hub Group, Inc.
Chair of the Board of Directors
Director since 2018
Joseph A. Cutillo
Chief Executive Officer
Director since 2017
Roger A. Cregg
Former President and CEO of AV
Homes, Inc.; Director of Comerica
Incorporated
Chair of the Audit Committee
Director since 2019
Marian M. Davenport
Chair of Infrastructure Committee
for City of Houston Fourth Ward
Redevelopment Authority; Director
and Former Executive Director of
Genesys Works
Chair of the Compensation and
Talent Development Committee
Director since 2014
Raymond F. Messer
Chairman Emeritus and Former
CEO, Walter P Moore
Chair of the Corporate Governance
and Nominating Committee
Director since 2017
Dana C. O’Brien
Senior Vice President and General
Counsel of The Brinks Company
Director since 2019
Charles R. Patton
Executive Vice President — External
Affairs of American Electric Power
Company, Inc.
Director since 2013
Joseph A. Cutillo
Chief Executive Officer
Ronald A. Ballschmiede
Executive Vice President & Chief
Financial Officer, Chief Accounting
Officer & Treasurer
Con L. Wadsworth
Executive Vice President & Chief
Operating Officer
Richard E. Chandler, Jr.
Executive Vice President, General
Counsel & Secretary
CORPORATE
INFORMATION
Transfer Agent
American Stock Transfer & Trust
Company, LLC
6201 15th Avenue
Brooklyn, New York 11219
Outside Legal Counsel
Jones Walker LLP
New Orleans, Louisiana
Independent Accountants
Grant Thornton LLP
Houston, Texas
Stock Listing
NASDAQ
Symbol: STRL
Headquarters
Sterling Construction Company, Inc.
1800 Hughes Landing Boulevard,
Suite 250
The Woodlands, Texas 77380
Telephone: (281) 214-0800
Fax: (281) 465-8198
Website: www.strlco.com
1800 Hughes Landing Blvd · The Woodlands, Texas 77380 · 281-214-0800
www.strlco.com