Sterling Reports 2019 Third Quarter Results

Increases 2019 Adjusted Guidance to Reflect the Immediately Accretive Plateau Acquisition

THE WOODLANDS, Texas–(BUSINESS WIRE)–Sterling Construction Company, Inc. (NasdaqGS: STRL) (“Sterling” or “the Company”) today announced financial results for the third quarter of 2019.

Consolidated Third Quarter 2019 Financial Results Compared to Third Quarter 2018:

  • Revenues were $291.7 million compared to $291.3 million;
  • Gross margin was 10.0% of revenues compared to 10.7%;
  • Plateau acquisition related costs totaled $1.9 million or $0.07 diluted share(1);
  • Net income attributable to Sterling common stockholders was $8.0 million (GAAP basis) or $9.9 million (adjusted basis(1)) compared to $8.9 million, reflecting a growth in net income attributable to Sterling common stockholders of 11% (adjusted basis(1)); and,
  • Net income per diluted share attributable to Sterling common stockholders was $0.30 (GAAP basis) or $0.37 (adjusted basis(1)) compared to $0.33.

Consolidated Financial Position, Liquidity and Cash Flows at September 30, 2019:

  • Cash and Cash Equivalents were $76.5 million; and,
  • Debt totaled $74.7 million.

Business Overview

Third quarter 2019 revenues increased $0.4 million compared to the prior year quarter, primarily driven by a $3.2 million increase in residential construction. The slightly lower heavy civil revenues were consistent with our expectations.

Gross profit was $29.2 million in the third quarter of 2019, a decrease of $2.1 million from the prior year third quarter. Gross margin declined 72 basis points to 10.0%. This decrease reflects a lower margin revenue mix, driven by the completion of two large design-build projects at the end of 2018. The company expects the margin mix to improve with the ramp up of several large design-build projects in 2020. Additionally, margins within residential construction declined as a result of the expansion into the Houston market.

General and administrative expenses were $10.8 million in the third quarter of 2019, or 3.7% of revenues compared to $11.5 million or 3.9% of revenues in the third quarter of 2018, reflecting lower business development costs in the third quarter of 2019.

Heavy Civil Construction Backlog Highlights

  • Combined backlog at September 30, 2019 was $1.2 billion, up slightly from December 31, 2018. Combined backlog consists of $881.4 million of backlog and $272.6 million of unsigned contracts as of September 30, 2019 compared to $850.7 million and $292.7 million at December 31, 2018, respectively. No residential construction contracts are included in backlog;
  • Gross margin on projects in combined backlog as of September 30, 2019 averaged 9.3%, an increase from 9.1% at June 30, 2019 and 8.9% at December 31, 2018; and,
  • Non-heavy highway revenues accounted for 43.5% of third quarter of 2019 heavy civil construction revenues, compared to 40.3% in the third quarter of 2018.

     

CEO Remarks and Outlook

“We had another strong quarter with adjusted net income growth of 11%(1) compared to the third quarter of last year, on essentially flat top-line results,” stated Joe Cutillo, Sterling’s Chief Executive Officer. “The 2019 third quarter was in-line with our expectations headed into the period and is exemplary of our strategy to consistently increase our bottom line as opposed to focusing on revenue growth. Our Heavy Civil revenues were down slightly compared to the same period last year, as a result of delays in the start of several large projects that we mentioned last quarter. We expect to see contribution from these projects in early 2020. Our backlog overall remains near record highs and most notably, margins in backlog improved in the third quarter, reflecting our disciplined bidding strategy.”

Mr. Cutillo continued, “Revenue in our Residential segment increased approximately 9% year over year, while operating margin declined 0.9%, due in large part to a mix shift. We have been ramping up our expansion into the Houston market, which has generated lower margins than our well-established operation in Dallas-Fort Worth as we build scale and efficiencies. As we continue to expand in the large and growing Houston market, we expect operating margins to improve. Looking at our residential business overall, we still foresee mid-single digit revenue growth and continued attractive margins in this segment.”

“In early October, we closed on our acquisition of Plateau, a leading provider of large-scale site infrastructure improvement contracting services that serves primarily large, blue-chip customers in the e-commerce, data center, distribution center and warehousing sectors,” remarked Mr. Cutillo. “This acquisition directly aligns with our strategic vision by diversifying Sterling into adjacent end markets with a focus on bottom line growth. Plateau not only positions us in exciting and quickly growing market segments, but also expands our geographic footprint into the highly attractive Southeastern United States. We expect this transaction to result in a significant boost to our profitability in 2020 and beyond and we are excited to ramp up our activities with the Plateau team.”

Mr. Cutillo concluded, “Despite the delayed starts on several large heavy civil projects, we continue to expect to reach our previously articulated full year 2019 targets on an organic basis. We are revising our guidance for the full year 2019 to reflect our expectations for the incremental contribution from Plateau. We now expect our 2019 revenues to be in the range $1.065 billion to $1.085 billion and GAAP net income attributable to Sterling common stockholders of $16 million to $17 million with weighted average shares of approximately 27.3 million. Our full year GAAP net income guidance includes acquisition related costs of approximately $4 million and approximately $9 million of early debt extinguishment cost related to the refinancing of our principle borrowing facility. We expect our full year adjusted net income attributable to Sterling common stockholders to be $29 million to $30 million(1), excluding the aforementioned acquisition related and early debt extinguishment costs.

Looking ahead to 2020, we expect substantial growth in our consolidated net income as we recognize a full year of Plateau contribution, work starts on the large heavy civil projects that were delayed in 2019, along with other projects in our combined backlog, and benefit from continued profitable growth in our residential business driven by continued expansion in Houston and ongoing market strength in Tealstone’s core Dallas-Fort Worth market.”

Conference Call

Sterling’s management will hold a conference call to discuss these results and recent corporate developments on Tuesday, November 5, 2019 at 9:00 a.m. ET/8:00 a.m. CT. Interested parties may participate in the call by dialing (201) 493-6744 or (877) 445-9755. Please call in ten minutes before the conference call is scheduled to begin and ask for the Sterling Construction call. Following management’s opening remarks, there will be a question and answer session. Questions may be asked during the live call, or alternatively, you may e-mail questions in advance to Brigette.Wilcox@strlco.com.

To listen to a simultaneous webcast of the call, please go to the Company’s website at www.strlco.com at least fifteen minutes early to download and install any necessary audio software. If you are unable to listen live, the conference call webcast will be archived on the Company’s website for thirty days.

About Sterling

Sterling is a construction company that specializes in heavy civil infrastructure construction and infrastructure rehabilitation as well as residential construction projects. The Company operates primarily in Arizona, California, Colorado, Hawaii, Nevada, Texas and Utah, as well as other states in which there are feasible construction opportunities. Heavy civil construction projects include highways, roads, bridges, airfields, ports, light rail, water, wastewater and storm drainage systems, foundations for multi-family homes, commercial concrete projects and parking structures. Residential construction projects include concrete foundations for single-family homes.

Important Information for Investors and Stockholders

Non-GAAP Measures

This press release contains “Non-GAAP” financial measures as defined under Regulation G of the amended U.S. Securities Exchange Act of 1934. The Company reports financial results in accordance with U.S. generally accepted accounting principles (“GAAP”), but the Company believes that certain Non-GAAP financial measures provide useful supplemental information to investors regarding the underlying business trends and performance of the Company’s ongoing operations and are useful for period-over-period comparisons of those operations.

Non-GAAP measures include adjusted EPS and adjusted net income, in each case excluding the impacts of certain identified items. The excluded items represent items that the Company does not consider to be representative of its normal operations. The Company believes that these measures are useful measures for investors to review, because they provide a consistent measure of the underlying financial results of the Company’s ongoing business and, in the Company’s view, allow for a supplemental comparison against historical results and expectations for future performance. Furthermore, the Company uses each of these measures as measures of the performance of the Company’s operations for budgeting, forecasting, as well as employee incentive compensation. However, Non-GAAP measures should not be considered as substitutes for EPS, net income, or other data prepared and reported in accordance with GAAP and should be viewed in addition to the Company’s reported results prepared in accordance with GAAP.

The Company has included adjusted net income as a forecast non-GAAP measure in this press release and the Company believes this forward-looking financial estimate is within reasonable measure.

Reconciliations of these Non-GAAP financial measures and forecast Non-GAAP financial measures to the most comparable GAAP measures are provided in the tables included in this press release.

Cautionary Statement Regarding Forward-Looking Statements

This press release contains statements that are considered forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our: business strategy; financial strategy; and plans, objectives, expectations, forecasts, outlook and intentions. All of these types of statements, other than statements of historical fact included in this press release, are forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” the negative of such terms or other comparable terminology. The forward-looking statements contained in this press release are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this press release are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to factors listed in the “Risk Factors” section in our filings with the U.S. Securities and Exchange Commission (“SEC”) and elsewhere in those filings. The forward-looking statements speak only as of the date made, and other than as required by law, we do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

(1) Adjusted basis excludes costs related to the acquisition of Plateau. See the “Reconciliation of Non-GAAP Supplemental Adjusted Financial Data” section below for more information.

 

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

2019

 

2018

 

2019

 

2018

Revenues

$

 

291,699

 

 

$

 

291,266

 

 

$

 

779,734

 

 

$

 

782,492

 

Cost of revenues

 

(262,483

)

 

 

(259,987

)

 

 

(705,519

)

 

 

(700,333

)

Gross profit

 

29,216

 

 

 

31,279

 

 

 

74,215

 

 

 

82,159

 

General and administrative expense

 

(10,839

)

 

 

(11,455

)

 

 

(34,102

)

 

 

(36,998

)

Acquisition related costs

 

(1,896

)

 

 

 

 

(2,158

)

 

 

Other operating expense, net

 

(4,366

)

 

 

(5,451

)

 

 

(9,936

)

 

 

(11,960

)

Operating income

 

12,115

 

 

 

14,373

 

 

 

28,019

 

 

 

33,201

 

Interest income

 

331

 

 

 

274

 

 

 

986

 

 

 

604

 

Interest expense

 

(3,024

)

 

 

(3,066

)

 

 

(8,988

)

 

 

(9,265

)

Income before income taxes

 

9,422

 

 

 

11,581

 

 

 

20,017

 

 

 

24,540

 

Income tax expense

 

(913

)

 

 

(1,413

)

 

 

(1,782

)

 

 

(1,551

)

Net income

 

8,509

 

 

 

10,168

 

 

 

18,235

 

 

 

22,989

 

Less: Net income attributable to noncontrolling interests

 

(552

)

 

 

(1,251

)

 

 

(635

)

 

 

(3,409

)

Net income attributable to Sterling common stockholders

$

 

7,957

 

 

$

 

8,917

 

 

$

 

17,600

 

 

$

 

19,580

 

 

 

 

 

 

 

 

 

Net income per share attributable to Sterling common stockholders:

 

 

 

 

 

 

 

Basic

$

 

0.30

 

 

$

 

0.33

 

 

$

 

0.67

 

 

$

 

0.73

 

Diluted

$

 

0.30

 

 

$

 

0.33

 

 

$

 

0.66

 

 

$

 

0.72

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

26,365

 

 

 

26,908

 

 

 

26,359

 

 

 

26,893

 

Diluted

 

26,637

 

 

 

27,295

 

 

 

26,661

 

 

 

27,174

 

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

SEGMENT INFORMATION

(In thousands)

(Unaudited)

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2019

 

% of

Total

 

2018

 

% of

Total

 

2019

 

% of

Total

 

2018

 

% of

Total

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Heavy Civil Construction

$

 

251,757

 

 

86

%

 

$

 

254,544

 

 

87

%

 

$

 

661,071

 

 

85

%

 

$

 

665,068

 

 

85

%

Residential Construction

 

39,942

 

 

14

%

 

 

36,722

 

 

13

%

 

 

118,663

 

 

15

%

 

 

117,424

 

 

15

%

Total Revenues

$

 

291,699

 

 

 

 

$

 

291,266

 

 

 

 

$

 

779,734

 

 

 

 

$

 

782,492

 

 

 

Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Heavy Civil Construction

$

 

8,692

 

 

62

%

 

$

 

9,148

 

 

64

%

 

$

 

14,253

 

 

47

%

 

$

 

17,488

 

 

53

%

Residential Construction

 

5,319

 

 

38

%

 

 

5,225

 

 

36

%

 

 

15,924

 

 

53

%

 

 

15,713

 

 

47

%

Subtotal

 

14,011

 

 

 

 

 

14,373

 

 

 

 

 

30,177

 

 

 

 

 

33,201

 

 

 

Acquisition related costs

 

(1,896

)

 

 

 

 

 

 

 

 

(2,158

)

 

 

 

 

 

 

Total Operating Income

$

 

12,115

 

 

 

 

$

 

14,373

 

 

 

 

$

 

28,019

 

 

 

 

$

 

33,201

 

 

 

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

 

 

September 30,

2019

 

December 31,

2018

Assets

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$

 

76,530

 

 

$

 

94,095

 

Accounts receivable, including retainage

 

160,512

 

 

 

145,026

 

Costs and estimated earnings in excess of billings

 

67,602

 

 

 

41,542

 

Inventory

 

2,386

 

 

 

3,159

 

Receivables from and equity in construction joint ventures

 

14,651

 

 

 

10,720

 

Other current assets

 

11,065

 

 

 

8,074

 

Total current assets

 

332,746

 

 

 

302,616

 

Property and equipment, net

 

48,584

 

 

 

51,999

 

Operating lease right-of-use assets

 

14,589

 

 

 

Goodwill

 

85,231

 

 

 

85,231

 

Other intangibles, net

 

40,617

 

 

 

42,418

 

Other non-current assets, net

 

202

 

 

 

309

 

Total assets

$

 

521,969

 

 

$

 

482,573

 

Liabilities and Stockholders’ Equity

 

 

 

Current liabilities:

 

 

 

Accounts payable

$

 

110,624

 

 

$

 

99,426

 

Billings in excess of costs and estimated earnings

 

61,533

 

 

 

62,407

 

Current maturities of long-term debt

 

12,238

 

 

 

2,899

 

Current portion of long-term lease obligations

 

7,492

 

 

 

Income taxes payable

 

214

 

 

 

318

 

Accrued compensation

 

14,576

 

 

 

9,448

 

Other current liabilities

 

6,982

 

 

 

4,676

 

Total current liabilities

 

213,659

 

 

 

179,174

 

Long-term debt

 

62,489

 

 

 

79,117

 

Long-term lease obligations

 

7,191

 

 

 

Members’ interest subject to mandatory redemption and undistributed earnings

 

51,272

 

 

 

49,343

 

Deferred taxes

 

3,011

 

 

 

1,450

 

Other long-term liabilities

 

1,088

 

 

 

1,229

 

Total liabilities

 

338,710

 

 

 

310,313

 

Stockholders’ equity:

 

 

 

Preferred stock, par value $0.01 per share; 1,000 shares authorized, none issued

 

 

 

Common stock, par value $0.01 per share; 38,000 shares authorized, 27,049 and 27,064

shares issued, 26,476 and 26,597 shares outstanding

 

271

 

 

 

271

 

Additional paid in capital

 

234,309

 

 

 

233,795

 

Treasury Stock, at cost: 573 and 467 shares

 

(6,581

)

 

 

(4,731

)

Retained deficit

 

(47,334

)

 

 

(64,934

)

Total Sterling stockholders’ equity

 

180,665

 

 

 

164,401

 

Noncontrolling interests

 

2,594

 

 

 

7,859

 

Total stockholders’ equity

 

183,259

 

 

 

172,260

 

Total liabilities and stockholders’ equity

$

 

521,969

 

 

$

 

482,573

 

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Nine Months Ended

September 30,

 

2019

 

2018

Cash flows from operating activities:

 

 

 

Net income

$

 

18,235

 

 

$

 

22,989

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

Depreciation and amortization

 

12,288

 

 

 

12,511

 

Amortization of deferred debt costs

 

2,375

 

 

 

2,427

 

Gain on disposal of property and equipment

 

(466

)

 

 

(466

)

Deferred tax expense

 

1,561

 

 

 

1,299

 

Stock-based compensation expense

 

2,489

 

 

 

2,181

 

Changes in operating assets and liabilities

 

(28,005

)

 

 

(14,695

)

Net cash provided by operating activities

 

8,477

 

 

 

26,246

 

Cash flows from investing activities:

 

 

 

Capital expenditures

 

(7,871

)

 

 

(9,533

)

Proceeds from sale of property and equipment

 

1,265

 

 

 

1,499

 

Net cash used in investing activities

 

(6,606

)

 

 

(8,034

)

Cash flows from financing activities:

 

 

 

Repayments of long-term debt

 

(10,435

)

 

 

(11,298

)

Distributions to noncontrolling interest owners

 

(5,900

)

 

 

(1,350

)

Purchase of treasury stock

 

(3,201

)

 

 

Other

 

100

 

 

 

(181

)

Net cash used in financing activities

 

(19,436

)

 

 

(12,829

)

Net change in cash and cash equivalents

 

(17,565

)

 

 

5,383

 

Cash and cash equivalents at beginning of period

 

94,095

 

 

 

83,953

 

Cash and cash equivalents at end of period

$

 

76,530

 

 

$

 

89,336

 

 

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Reconciliation of Non-GAAP Supplemental Adjusted Financial Data (1)

(In thousands, except per share data)

(Unaudited)

The Company reports its financial results in accordance with GAAP. This press release also includes several Non-GAAP financial measures as defined under the SEC’s Regulation G. The following tables reconcile certain Non-GAAP financial measures used in this press release to comparable GAAP financial measures.

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

As Reported

(GAAP)

 

Adjustment

 

Adjusted

(Non-GAAP)

Revenues

$

 

291,699

 

 

$

 

 

 

$

 

291,699

 

Cost of revenues

 

(262,483

)

 

 

 

 

(262,483

)

Gross profit

 

29,216

 

 

 

 

 

29,216

 

General and administrative expense

 

(10,839

)

 

 

 

 

(10,839

)

Acquisition related costs

 

(1,896

)

 

 

1,896

 

 

 

Other operating expense, net

 

(4,366

)

 

 

 

 

(4,366

)

Operating income

 

12,115

 

 

 

1,896

 

 

 

14,011

 

Interest income

 

331

 

 

 

 

 

331

 

Interest expense

 

(3,024

)

 

 

 

 

(3,024

)

Income before income taxes

 

9,422

 

 

 

1,896

 

 

 

11,318

 

Income tax expense

 

(913

)

 

 

 

 

(913

)

Net income

 

8,509

 

 

 

1,896

 

 

 

10,405

 

Less: Net income attributable to noncontrolling interests

 

(552

)

 

 

 

 

(552

)

Net income attributable to Sterling common stockholders

$

 

7,957

 

 

$

 

1,896

 

 

$

 

9,853

 

 

 

 

 

 

 

Percent change in net income attributable to Sterling common stockholders

compared to the three months ended September 30, 2018 amount of $8,917

 

(11

)%

 

 

 

 

11

%

 

 

 

 

 

 

Net income per share attributable to Sterling common stockholders:

 

 

 

 

 

Basic

$

 

0.30

 

 

$

 

0.07

 

 

$

 

0.37

 

Diluted

$

 

0.30

 

 

$

 

0.07

 

 

$

 

0.37

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

Basic

 

26,365

 

 

 

26,365

 

 

 

26,365

 

Diluted

 

26,637

 

 

 

26,637

 

 

 

26,637

 

 

 

 

 

 

 

(1) The summary unaudited adjusted financial data is presented excluding the costs of acquiring Plateau. This presentation is considered a non-GAAP financial measure, which the Company believes provides a better indication of our operating results prior to the acquisition.

 

Forward-Looking

Twelve Months Ended December 31, 2019

 

 

Forecast

(GAAP)

 

Adjustment(1)

 

Adjusted

(Non-GAAP)

 

Net income attributable to Sterling common stockholders (Low Estimate)

$

 

16,000

 

 

$

 

13,000

 

 

$

 

29,000

 

 

Net income attributable to Sterling common stockholders (High Estimate)

$

 

17,000

 

 

$

 

13,000

 

 

$

 

30,000

 

 

 

 

 

 

 

 

 

(1) The adjustment includes estimated full year acquisition related costs of approximately $4 million and approximately $9 million of early debt extinguishment cost related to the refinancing of our principle borrowing facility.

 

 

 

Contacts

Sterling Construction Company, Inc.

Ron Ballschmiede, Chief Financial Officer

281-214-0800

Investor Relations Counsel:
The Equity Group Inc.

Fred Buonocore, CFA 212-836-9607

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