| |
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For the transition period from___ to ___ | |
Commission file number 1-31993 | |
STERLING CONSTRUCTION COMPANY, INC.
(Exact name of registrant as specified in its charter)
STERLING CONSTRUCTION COMPANY, INC. (Exact name of registrant as specified in its charter) | |
| DELAWARE | 25-1655321 |
State or other jurisdiction of incorporation or organization | (I.R.S. Employer Identification No.) |
1800 Hughes Landing Blvd. The Woodlands, Texas | 77380 |
| (Address of principal executive office) | (Zip Code) |
Registrant’s telephone number, including area code (281) 214-0800 | |
| (Former name, former address and former fiscal year, if changed from last report) | |
Registrant’s telephone number, including area code (281) 214-0800
(Former name, former address and former fiscal year, if changed from last report)
| Large accelerated filer | [ ] | Accelerated filer | [√] |
| Non-accelerated filer | [ ] | Smaller reporting company | [ ] |
| (Do not check if a smaller reporting company) | Emerging growth | [ ] | |
| PART I. FINANCIAL INFORMATION | |
| PART II. OTHER INFORMATION | |
| March 31, 2017 | December 31, 2016 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 37,147 | $ | 42,785 | ||||
| Contracts receivable, including retainage | 91,089 | 84,132 | ||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | 34,475 | 32,705 | ||||||
| Inventories | 3,757 | 3,708 | ||||||
| Receivables from and equity in construction joint ventures | 7,890 | 7,130 | ||||||
| Other current assets | 6,609 | 5,448 | ||||||
| Total current assets | 180,967 | 175,908 | ||||||
| Property and equipment, net | 65,821 | 68,127 | ||||||
| Goodwill | 54,820 | 54,820 | ||||||
| Other assets, net | 2,968 | 2,968 | ||||||
| Total assets | $ | 304,576 | $ | 301,823 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 71,448 | $ | 67,097 | ||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | 62,656 | 64,100 | ||||||
| Current maturities of long-term debt | 2,939 | 3,845 | ||||||
| Income taxes payable | 105 | 78 | ||||||
| Accrued compensation | 7,885 | 5,322 | ||||||
| Other current liabilities | 6,745 | 6,150 | ||||||
| Total current liabilities | 151,778 | 146,592 | ||||||
| Long-term liabilities: | ||||||||
| Long-term debt, net of current maturities | 1,358 | 1,549 | ||||||
| Members’ interest subject to mandatory redemption and undistributed earnings | 44,183 | 45,230 | ||||||
| Other long-term liabilities | 419 | 362 | ||||||
| Total long-term liabilities | 45,960 | 47,141 | ||||||
| Commitments and contingencies (Note 8) | ||||||||
| Equity: | ||||||||
| Sterling stockholders’ equity: | ||||||||
| Preferred stock, par value $0.01 per share; 1,000,000 shares authorized, none issued | -- | -- | ||||||
| Common stock, par value $0.01 per share; 28,000,000 shares authorized, 25,050,501 and 24,987,306 shares issued | 251 | 250 | ||||||
| Additional paid in capital | 209,555 | 208,922 | ||||||
| Retained deficit | (103,995 | ) | (101,738 | ) | ||||
| Total Sterling common stockholders’ equity | 105,811 | 107,434 | ||||||
| Noncontrolling interests | 1,027 | 656 | ||||||
| Total equity | 106,838 | 108,090 | ||||||
| Total liabilities and equity | $ | 304,576 | $ | 301,823 | ||||
| September 30, 2017 | December 31, 2016 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 66,541 | $ | 42,785 | ||||
| Contracts receivable, including retainage | 149,052 | 84,132 | ||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | 43,384 | 32,705 | ||||||
| Inventories | 2,093 | 3,708 | ||||||
| Receivables from and equity in construction joint ventures | 9,069 | 7,130 | ||||||
| Other current assets | 9,654 | 5,448 | ||||||
| Total current assets | 279,793 | 175,908 | ||||||
| Property and equipment, net | 59,464 | 68,127 | ||||||
| Goodwill | 85,277 | 54,820 | ||||||
| Intangibles | 45,200 | — | ||||||
| Other assets, net | 3,301 | 2,968 | ||||||
| Total assets | $ | 473,035 | $ | 301,823 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 100,565 | $ | 67,097 | ||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | 63,368 | 64,100 | ||||||
| Current maturities of long-term debt | 986 | 3,845 | ||||||
| Income taxes payable | 280 | 78 | ||||||
| Accrued compensation | 14,566 | 5,322 | ||||||
| Other current liabilities | 15,188 | 6,150 | ||||||
| Total current liabilities | 194,953 | 146,592 | ||||||
| Long-term liabilities: | ||||||||
| Long-term debt, net of current maturities | 88,619 | 1,549 | ||||||
| Members' interest subject to mandatory redemption and undistributed earnings | 46,329 | 45,230 | ||||||
| Other long-term liabilities | 595 | 362 | ||||||
| Total long-term liabilities | 135,543 | 47,141 | ||||||
| Commitments and contingencies (Note 9) | ||||||||
| Equity: | ||||||||
| Sterling stockholders’ equity: | ||||||||
| Preferred stock, par value $0.01 per share; 1,000,000 shares authorized, none issued | — | — | ||||||
| Common stock, par value $0.01 per share; 38,000,000 shares authorized, 27,023,143 and 24,987,306 shares issued | 270 | 250 | ||||||
| Additional paid in capital | 231,848 | 208,922 | ||||||
| Retained deficit | (93,201 | ) | (101,738 | ) | ||||
| Total Sterling common stockholders’ equity | 138,917 | 107,434 | ||||||
| Noncontrolling interests | 3,622 | 656 | ||||||
| Total equity | 142,539 | 108,090 | ||||||
| Total liabilities and equity | $ | 473,035 | $ | 301,823 | ||||
| Three Months Ended March 31, | ||||||||
| 2017 | 2016 | |||||||
| Revenues | $ | 153,416 | $ | 126,567 | ||||
| Cost of revenues | (144,129 | ) | (123,019 | ) | ||||
| Gross profit | 9,287 | 3,548 | ||||||
| General and administrative expenses | (10,604 | ) | (10,085 | ) | ||||
| Other operating (expense) income, net | (471 | ) | 71 | |||||
| Operating loss | (1,788 | ) | (6,466 | ) | ||||
| Interest income | 41 | 3 | ||||||
| Interest expense | (112 | ) | (873 | ) | ||||
| Loss before income taxes and earnings attributable to noncontrolling interests | (1,859 | ) | (7,336 | ) | ||||
| Income tax expense | (27 | ) | -- | |||||
| Net loss | (1,886 | ) | (7,336 | ) | ||||
| Noncontrolling owners’ interests in earnings of subsidiaries and joint ventures | (371 | ) | 8 | |||||
| Net loss attributable to Sterling common stockholders | $ | (2,257 | ) | $ | (7,328 | ) | ||
| Net loss per share attributable to Sterling common stockholders: | ||||||||
| Basic and diluted | $ | (0.09 | ) | $ | (0.37 | ) | ||
| Weighted average number of common shares outstanding used in computing per share amounts: | ||||||||
| Basic and diluted | 25,022 | 19,760 | ||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues | $ | 304,219 | $ | 205,629 | $ | 704,047 | $ | 521,778 | ||||||||
| Cost of revenues | (273,588 | ) | (189,007 | ) | (638,924 | ) | (486,065 | ) | ||||||||
| Gross profit | 30,631 | 16,622 | 65,123 | 35,713 | ||||||||||||
| General and administrative expenses | (13,129 | ) | (9,146 | ) | (36,545 | ) | (27,888 | ) | ||||||||
| Other operating expense, net | (4,863 | ) | (3,804 | ) | (9,371 | ) | (7,238 | ) | ||||||||
| Operating income | 12,639 | 3,672 | 19,207 | 587 | ||||||||||||
| Interest income | 107 | 15 | 192 | 19 | ||||||||||||
| Interest expense | (3,576 | ) | (491 | ) | (6,672 | ) | (2,176 | ) | ||||||||
| Loss on extinguishment of debt | — | — | (755 | ) | — | |||||||||||
| Income (loss) before income taxes and earnings attributable to noncontrolling interests | 9,170 | 3,196 | 11,972 | (1,570 | ) | |||||||||||
| Income tax expense | (344 | ) | (41 | ) | (469 | ) | (68 | ) | ||||||||
| Net income (loss) | 8,826 | 3,155 | 11,503 | (1,638 | ) | |||||||||||
| Noncontrolling owners’ interests in earnings of subsidiaries and joint ventures | (1,694 | ) | (740 | ) | (2,966 | ) | (1,252 | ) | ||||||||
| Net income (loss) attributable to Sterling common stockholders | $ | 7,132 | $ | 2,415 | $ | 8,537 | $ | (2,890 | ) | |||||||
| Net income (loss) per share attributable to Sterling common stockholders: | ||||||||||||||||
| Basic | $ | 0.27 | $ | 0.10 | $ | 0.33 | $ | (0.12 | ) | |||||||
| Diluted | $ | 0.26 | $ | 0.10 | $ | 0.33 | $ | (0.12 | ) | |||||||
| Weighted average number of common shares outstanding used in computing per share amounts: | ||||||||||||||||
| Basic | 26,486 | 25,003 | 25,787 | 23,915 | ||||||||||||
| Diluted | 26,920 | 25,365 | 26,260 | 23,915 | ||||||||||||
| STERLING CONSTRUCTION COMPANY, INC. STOCKHOLDERS | ||||||||||||||||||||||||
| Common Stock | Additional Paid in | Retained | Noncon- trolling | |||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Interests | Total | |||||||||||||||||||
| Balance at January 1, 2017 | 24,987 | $ | 250 | $ | 208,922 | $ | (101,738 | ) | $ | 656 | $ | 108,090 | ||||||||||||
| Net (loss) income | -- | -- | -- | (2,257 | ) | 371 | (1,886 | ) | ||||||||||||||||
| Stock-based compensation | 64 | 1 | 639 | -- | -- | 640 | ||||||||||||||||||
| Other | -- | -- | (6 | ) | -- | -- | (6 | ) | ||||||||||||||||
| Balance at March 31, 2017 | 25,051 | $ | 251 | $ | 209,555 | $ | (103,995 | ) | $ | 1,027 | $ | 106,838 | ||||||||||||
| STERLING CONSTRUCTION COMPANY, INC. STOCKHOLDERS | |||||||||||||||||||||||
| Common Stock | Additional Paid in | Retained | Noncon-trolling | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Interests | Total | ||||||||||||||||||
| Balance at January 1, 2017 | 24,987 | $ | 250 | $ | 208,922 | $ | (101,738 | ) | $ | 656 | $ | 108,090 | |||||||||||
| Net income | — | — | — | 8,537 | 2,966 | 11,503 | |||||||||||||||||
| Stock-based compensation | 154 | 1 | 2,533 | — | — | 2,534 | |||||||||||||||||
| Stock issued for Tealstone acquisition | 1,882 | 19 | 17,042 | — | — | 17,061 | |||||||||||||||||
| Warrants issued to lenders | — | — | 3,500 | — | — | 3,500 | |||||||||||||||||
| Other | — | — | (149 | ) | — | — | (149 | ) | |||||||||||||||
| Balance at September 30, 2017 | 27,023 | $ | 270 | $ | 231,848 | $ | (93,201 | ) | $ | 3,622 | $ | 142,539 | |||||||||||
| Three Months Ended March 31, | ||||||||
| 2017 | 2016 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss attributable to Sterling common stockholders | $ | (2,257 | ) | $ | (7,328 | ) | ||
| Plus: Noncontrolling owners’ interests in earnings of subsidiaries and joint ventures | 371 | (8 | ) | |||||
| Net loss | (1,886 | ) | (7,336 | ) | ||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 4,070 | 4,162 | ||||||
Gain on disposal of property and equipment | (358 | ) | (175 | ) | ||||
| Stock-based compensation expense | 640 | 400 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Contracts receivable | (6,957 | ) | (12,646 | ) | ||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | (1,770 | ) | (1,283 | ) | ||||
| Inventories | (49 | ) | (395 | ) | ||||
| Receivables from and equity in construction joint ventures | (760 | ) | 4,614 | |||||
| Other assets | (1,059 | ) | 297 | |||||
| Accounts payable | 4,351 | 4,429 | ||||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | (1,444 | ) | 8,527 | |||||
| Accrued compensation and other liabilities | 3,207 | 4,123 | ||||||
| Members’ interest subject to mandatory redemption and undistributed earnings | (1,047 | ) | (4,227 | ) | ||||
| Net cash (used in) provided operating activities | (3,062 | ) | 490 | |||||
| Cash flows from investing activities: | ||||||||
| Additions to property and equipment | (1,825 | ) | (2,818 | ) | ||||
| Proceeds from sale of property and equipment | 588 | 1,065 | ||||||
| Net cash used in investing activities | (1,237 | ) | (1,753 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Cumulative repayments – equipment-based term loan and other | (1,333 | ) | (1,298 | ) | ||||
| Cumulative drawdowns – equipment-based revolver | -- | 14,000 | ||||||
| Cumulative repayments – equipment-based revolver | -- | (900 | ) | |||||
| Other | (6 | ) | (46 | ) | ||||
| Net cash (used in) provided by financing activities | (1,339 | ) | 11,756 | |||||
| Net (decrease) increase in cash and cash equivalents | (5,638 | ) | 10,493 | |||||
| Cash and cash equivalents at beginning of period | 42,785 | 4,426 | ||||||
| Cash and cash equivalents at end of period | $ | 37,147 | $ | 14,919 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for interest | $ | 113 | $ | 820 | ||||
| Cash paid during the period for income taxes | $ | -- | $ | -- | ||||
| Non-cash items: | ||||||||
| Transportation and construction equipment acquired through financing arrangements | $ | 70 | $ | 81 | ||||
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) attributable to Sterling common stockholders | $ | 8,537 | (2,890 | ) | ||||
| Plus: Noncontrolling owners’ interests in earnings of subsidiaries and joint ventures | 2,966 | 1,252 | ||||||
| Net income (loss) | 11,503 | (1,638 | ) | |||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 13,140 | 12,097 | ||||||
| Loss (gain) on disposal of property and equipment | 204 | (255 | ) | |||||
| Stock-based compensation expense | 2,534 | 1,211 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Contracts receivable | (45,044 | ) | (23,303 | ) | ||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | (7,735 | ) | (5,084 | ) | ||||
| Inventories | 2,833 | (1,465 | ) | |||||
| Receivables from and equity in construction joint ventures | (1,939 | ) | 3,461 | |||||
| Other assets | (4,487 | ) | (1,246 | ) | ||||
| Accounts payable | 16,687 | 17,902 | ||||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | (1,035 | ) | 31,340 | |||||
| Accrued compensation and other liabilities | 5,289 | 6,662 | ||||||
| Members' interest subject to mandatory redemption and undistributed earnings | 1,099 | (3,972 | ) | |||||
| Net cash (used in) provided by operating activities | (6,951 | ) | 35,710 | |||||
| Cash flows from investing activities: | ||||||||
| Tealstsone acquisition, net of cash acquired | (54,861 | ) | — | |||||
| Additions to property and equipment | (8,305 | ) | (8,852 | ) | ||||
| Proceeds from sale of property and equipment | 5,830 | 2,187 | ||||||
| Net cash used in investing activities | (57,336 | ) | (6,665 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Cash received–term loan | 85,000 | — | ||||||
| Cumulative repayments – equipment-based term loan and other | (4,449 | ) | (9,546 | ) | ||||
| Cumulative drawdowns – equipment-based revolver | — | 19,000 | ||||||
| Cumulative repayments – equipment-based revolver | — | (19,000 | ) | |||||
| Net proceeds from stock issued | — | 19,142 | ||||||
| Debt issuance costs | 6,889 | — | ||||||
| Loss on debt extinguishment | 755 | — | ||||||
| Distributions to noncontrolling interest owners | — | — | ||||||
| Other | (152 | ) | (46 | ) | ||||
| Net cash provided by financing activities | 88,043 | 9,550 | ||||||
| Net increase in cash and cash equivalents | 23,756 | 38,595 | ||||||
| Cash and cash equivalents at beginning of period | 42,785 | 4,426 | ||||||
| Cash and cash equivalents at end of period | $ | 66,541 | $ | 43,021 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for interest | $ | 6,139 | $ | 2,426 | ||||
| Cash paid during the period for income taxes | $ | 145 | $ | 5 | ||||
| Non-cash items: | ||||||||
| Share consideration given for Tealstone acquisition (1,882,058 shares) | $ | 17,061 | $ | — | ||||
| Notes and deferred payments to sellers | $ | 11,588 | $ | — | ||||
| Warrants issued to lenders (1,000,000 Warrants) | $ | 3,500 | $ | — | ||||
| Transportation and construction equipment acquired through financing arrangements | $ | 70 | $ | 735 | ||||
| 1. | Business Summary |
homes.
operations. Changes in estimated revenues and gross margin resulted in a net charge of $0.6 million and $1.1 million during the three and nine months ended September 30, 2016, respectively, included in “operating income” on the condensed consolidated statements of operations.
The Company considers unapproved change orders to be contract variations for which we have customer approval for a change of scope but a price change associated with the scope change has not yet been agreed upon. Costs associated with unapproved change orders are included in the estimated costs to complete the contracts and are treated as project costs as incurred. The Company recognizes revenue equal to costs incurred on unapproved change orders when realization of price approval is probable. Unapproved change orders involve the use of estimates, and it is reasonably possible that revisions to the estimated costs and recoverable
The recorded values of cash and cash equivalents, restricted cash, contracts receivable and accounts payable approximate their fair values based on their liquidity and/or short-term nature.
In February 2016, the FASB issued its new lease accounting guidance in ASU No. 2016-02,2016-2, “Leases” (Topic 842). Under the new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The new standard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this ASU to the Company’s consolidated financial statements and related disclosures.
The Company considers all highly liquid investments with original or remaining maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents include cash balances held by our wholly-owned and less than wholly-owned subsidiaries and majority-owned construction joint ventures, as well as the Company’s VIE. Refer to Note 5 for more information regarding the Company’s consolidated VIE. Joint venture cash balances are limited to joint venture activities and are not available for other projects, general cash needs or distribution to us without approval of the board of directors, or equivalent body, of the respective joint ventures. At March 31, 2017 and December 31, 2016, cash and cash equivalents included $18.4 million and $10.9 million, respectively, belonging to majority-owned joint ventures which generally cannot be used for purposes outside the joint venture.
Restricted cash of approximately $3.0 million was included in “other assets, net” on the condensed consolidated balance sheet as of March 31, 2017 and December 31, 2016, and represents cash deposited by the Company into a separate account and designated as collateral for a standby letter of credit in the same amount in accordance with contractual agreements. Refer to Note 8 for more information about our standby letter of credit. In addition, restricted cash of approximately $2.0 million is included in “other current assets” on the condensed consolidated balance sheet as of March 31, 2017 and December 31, 2016 and represents cash deposited by a customer, for the benefit of the Company, in an escrow account which is restricted until the customer releases the restriction upon the completion of the job.
The Company holds cash on deposit in U.S. banks, at times, in excess of federally insured limits. Management does not believe that the risk associated with keeping cash deposits in excess of federal deposit insurance limits represents a material risk.
The Company is obligated to purchase its partners’ interests in two 50% owned subsidiaries, due to circumstances outlined in their agreements that are certain to occur. Therefore, the Company has classified these obligations as mandatorily redeemable and has recorded a liability in “Members’ interest subject to mandatory redemption and undistributed earnings” on the consolidated balance sheets. In addition, all undistributed earnings at the time of the noncontrolling owners’ death or permanent disability are also mandatorily payable. The liability consists of the following (amounts in thousands):
| March 31, 2017 | December 31, 2016 | |||||||
| Members’ interest subject to mandatory redemption | $ | 40,000 | $ | 40,000 | ||||
| Net accumulated earnings | 4,183 | 5,230 | ||||||
| Total liability | $ | 44,183 | $ | 45,230 | ||||
Earnings for the three months ended March 31, 2017 and 2016 were minimal in both periods, and were included in “Other operating income, net” on the Company’s condensed consolidated statements of operations.
Changes in Noncontrolling Interests
The following table summarizes the changes in the noncontrolling owners’ interests in subsidiaries and joint ventures (amounts in thousands):
| Three Months Ended March 31, | ||||||||
| 2017 | 2016 | |||||||
| Balance, beginning of period | $ | 656 | $ | (91 | ) | |||
| Net income attributable to noncontrolling interest included in equity | 371 | (8 | ) | |||||
| Distributions to noncontrolling interest owners | -- | -- | ||||||
| Balance, end of period | $ | 1,027 | $ | (99 | ) | |||
The increase in net income attributable to noncontrolling interest included in equity is due to the Company’s two Utah based majority-owned joint ventures which were not ongoing during the same prior year period.
The Company participates in various construction joint ventures. Generally, each construction joint venture is formed to construct a specific project and is jointly controlled by the joint venture partners. Refer to Note 5 of the Notes to Consolidated Financial Statements in the 2016 Form 10-K for further information about our joint ventures. Condensed combined financial amounts of joint ventures in which the Company has a noncontrolling interest and the Company’s share of such amounts which are included in the Company’s condensed consolidated financial statements are shown below (amounts in thousands):
| March 31, 2017 | December 31, 2016 | |||||||
| Total combined: | ||||||||
| Current assets | $ | 32,782 | $ | 32,592 | ||||
| Less current liabilities | (53,883 | ) | (57,598 | ) | ||||
| Net assets | $ | (21,101 | ) | $ | (25,006 | ) | ||
| Backlog | $ | 92,724 | $ | 107,333 | ||||
| Sterling’s noncontrolling interest in backlog | 46,504 | 52,992 | ||||||
| Sterling’s receivables from and equity in construction joint ventures | 7,890 | 7,130 | ||||||
| Three Months Ended March 31, | ||||||||
| 2017 | 2016 | |||||||
| Total combined: | ||||||||
| Revenues | $ | 14,609 | $ | 8,804 | ||||
| Income before tax | 1,173 | 535 | ||||||
| Sterling’s noncontrolling interest: | ||||||||
| Revenues | $ | 6,488 | $ | 3,780 | ||||
| Income before tax | 553 | 258 | ||||||
Approximately $47 million and $53 million of the Company’s backlog at March 31, 2017 and December 31, 2016, respectively, were attributable to projects performed by joint ventures. The most significant amount of the construction joint venture backlog outstanding at March 31, 2017 was attributable to the Company’s construction joint venture with Steve. P. Rados, Inc., where the Company has a 50% interest, and the most significant amount of backlog outstanding at December 31, 2016 was attributable to the Company’s construction joint venture with Granite Construction Corporation, where the Company has a 49% interest.
The caption “Receivables from and equity in construction joint ventures” includes undistributed earnings and receivables owed to the Company. Undistributed earnings are typically released to the joint venture partners after the customer accepts the project as complete and the warranty period, if any, has passed.
The Company owns a 50% interest in Myers, of which it is the primary beneficiary, and has consolidated Myers into the Company’s financial statements. Because the Company exercises primary control over activities of the partnership and it is exposed to the majority of potential losses of the partnership, the Company has consolidated Myers within the Company’s financial statements since August 1, 2011, the date of acquisition. Refer to Note 6 of the Notes to Consolidated Financial Statements included in the 2016 Form 10-K for additional information on the acquisition of this limited partnership.
The condensed financial information of Myers, which is reflected in the Company’s condensed consolidated balance sheets and statements of operations, is as follows (amounts in thousands):
| March 31, 2017 | December 31, 2016 | |||||||
| Assets: | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,447 | $ | 9,655 | ||||
| Contracts receivable, including retainage | 16,279 | 15,046 | ||||||
| Other current assets | 10,925 | 10,208 | ||||||
| Total current assets | 28,651 | 34,909 | ||||||
| Property and equipment, net | 9,450 | 9,824 | ||||||
| Goodwill | 1,501 | 1,501 | ||||||
| Total assets | $ | 39,602 | $ | 46,234 | ||||
| Liabilities: | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 18,906 | $ | 21,274 | ||||
| Other current liabilities | 9,104 | 8,782 | ||||||
| Total current liabilities | 28,010 | 30,056 | ||||||
| Long-term liabilities: | ||||||||
| Other long-term liabilities | 399 | 5,373 | ||||||
| Total liabilities | $ | 28,409 | $ | 35,429 | ||||
| Three Months Ended March 31, | ||||||||
| 2017 | 2016 | |||||||
| Revenues | $ | 23,285 | $ | 26,943 | ||||
| Operating income | 394 | 194 | ||||||
| Net income attributable to Sterling common stockholders | 195 | 94 | ||||||
Property and equipment are summarized as follows (amounts in thousands):
| March 31, 2017 | December 31, 2016 | |||||||
| Construction equipment | $ | 122,097 | $ | 121,441 | ||||
| Transportation equipment | 18,161 | 19,017 | ||||||
| Buildings | 12,786 | 12,771 | ||||||
| Office equipment | 3,108 | 3,108 | ||||||
| Leasehold improvement | 914 | 914 | ||||||
| Construction in progress | 100 | 313 | ||||||
| Land | 3,509 | 3,509 | ||||||
| Water rights | 200 | 200 | ||||||
| 160,875 | 161,273 | |||||||
| Less accumulated depreciation | (95,054 | ) | (93,146 | ) | ||||
| Total property and equipment, net | $ | 65,821 | $ | 68,127 | ||||
Debt consisted of the following (in thousands):
| March 31, 2017 | December 31, 2016 | |||||||
| Equipment-based Facility | $ | 2,511 | $ | 3,532 | ||||
| Less deferred loan costs | (602 | ) | (803 | ) | ||||
| Equipment-based Facility, net | 1,909 | 2,729 | ||||||
| Notes payable for transportation and construction equipment and other | 2,388 | 2,665 | ||||||
| 4,297 | 5,394 | |||||||
| Current maturities of long-term debt | 3,541 | 4,648 | ||||||
| Less current deferred loan costs | (602 | ) | (803 | ) | ||||
| Less current maturities of long-term debt, net | (2,939 | ) | (3,845 | ) | ||||
| Total long-term debt | $ | 1,358 | $ | 1,549 | ||||
Equipment-based Facility
At March 31, 2017, the Company had a borrowing base of approximately $24.4 million, which was the result of calculating 65% of the appraised value (where appraised value equals net operating liquidated value) of the Company’s collateral. However, we had reached our revolver $20.0 million cap, and therefore only $20.0 million of borrowings were available at March 31, 2017. The Company had no amounts drawn on the revolving loan and $2.5 million of its term loan outstanding at March 31, 2017. Refer to Note 12 regarding the subsequent event related to our Equipment-based Facility.
Fair Value
The Company’s debt is recorded at its carrying amount in the condensed consolidated balance sheets. The Company uses an income approach to determine the fair value of its 12% Term Loan due May 29, 2019 using estimated cash flows, which is a Level 3 fair value measurement. As of March 31, 2017 and December 31, 2016, the carrying values approximated the fair values and were $2.5 million and $3.5 million, respectively, for the Term Loan. There were no amounts outstanding on the revolving loan as of March 31, 2017 or December 31, 2016.
Notes Payable for Transportation and Construction Equipment
The Company has purchased and financed various transportation and construction equipment to enhance the Company’s fleet of equipment. The total long-term notes payable related to the purchase of financed equipment was $2.4 million and $2.7 million at March 31, 2017 and December 31, 2016, respectively. The purchases have payment terms ranging from 3 to 5 years and the associated interest rates range from 3.12% to 7.13%. The fair value of these notes payable approximates their book value.
Interest Expense
Interest expense related to our Equipment-based Facility and other debt for the three months ended March 31, 2017 and 2016 was $0.1 million and $0.9 million, respectively. The decrease in interest expense was due to the decreased principal amounts outstanding on the Equipment-based Facility.
The Company is required by our insurance provider to obtain and hold a standby letter of credit. This letter of credit serves as a guarantee by the banking institution to pay our insurance provider the incurred claim costs attributable to our general liability, workers compensation and automobile liability claims, up to the amount stated in the standby letter of credit, in the event that these claims were not paid by the Company. We have cash collateralized the letter of credit, resulting in the cash being designated as restricted. Refer to Note 2 for more information on our restricted cash.
The Company is the subject of certain other claims and lawsuits occurring in the normal course of business. Management, after consultation with legal counsel, does not believe that the outcome of these actions will have a material impact on the condensed consolidated financial statements of the Company.
The Company and its subsidiaries file U.S. federal and various U.S. state income tax returns. Current income tax expense or (benefit) represents federal and state taxes based on tax paid or expected to be payable or receivable for the periods shown in the condensed consolidated statements of operations.
The Company is not expecting a current federal tax liability due to sufficient net operating loss carry forwards. The Company may incur current state tax liabilities in states in which the Company does not have sufficient net operating loss carry forwards. A minimal amount and no amount of current tax expense were recorded for the three months ended March 31, 2017 and 2016, respectively. The effective income tax rate varied from the statutory rate primarily as a result of the change in the valuation allowance, net income attributable to noncontrolling interest owners which is taxable to those owners rather than to the Company, state income taxes, and other permanent differences.
The Company’s deferred tax expense or (benefit) reflects the change in deferred tax assets or liabilities. The Company performs an analysis at the end of each reporting period to determine whether it is more likely than not the deferred tax assets are expected to be realized in future years. Based upon this analysis, a full valuation allowance has been applied to our net deferred tax assets as of March 31, 2017 and December 31, 2016. Therefore, there has been no change in net deferred taxes for the three months ended March 31, 2017.
As a result of the Company’s analysis, management has determined that the Company does not have any material uncertain tax positions.
Basic net loss per share attributable to Sterling common stockholders is computed by dividing net loss attributable to Sterling common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share attributable to Sterling common stockholders is the same as basic net loss per share attributable to Sterling common stockholders but includes dilutive unvested stock using the treasury stock method. The following table reconciles the numerators and denominators of the basic and diluted per common share computations for net loss attributable to Sterling common stockholders (amounts in thousands, except per share data):
| Three Months Ended March 31, | ||||||||
| 2017 | 2016 | |||||||
| Numerator: | ||||||||
| Net loss attributable to Sterling common stockholders | $ | (2,257 | ) | $ | (7,328 | ) | ||
| Denominator: | ||||||||
| Weighted average common shares outstanding — basic | 25,022 | 19,760 | ||||||
| Shares for dilutive unvested stock | -- | -- | ||||||
| Weighted average common shares outstanding and incremental shares assumed repurchased— diluted | 25,022 | 19,760 | ||||||
| Basic and diluted loss per share attributable to Sterling common stockholders | $ | (0.09 | ) | $ | (0.37 | ) | ||
In accordance with the treasury stock method, 0.5 million and 0.3 million shares of unvested common stock were excluded from the diluted weighted average common shares outstanding for the three months ended March 31, 2017 and 2016, respectively, as the Company incurred a loss during these periods and the impact of such shares would have been antidilutive.
The Company has a stock-based incentive plan which is administered by the Compensation Committee of the Board of Directors. Refer to Note 14 of the Notes to Consolidated Financial Statements included in the 2016 Form 10-K for further information. The Company recorded stock-based compensation expense of $0.6 million for the three months ended March 31, 2017 and $0.4 million for the three months ended March 31, 2016.
At March 31, 2017, total unrecognized compensation cost related to unvested common stock awards was $1.7 million. This cost is expected to be recognized over a weighted average period of 1.4 years. At March 31, 2017, there were 0.5 million shares of common stock covered by outstanding unvested common stock.
Purchase of Tealstone
On April 3, 2017, the Company consummated the acquisition (the “Tealstone Acquisition”) of 100% of the outstanding stock of Tealstone Residential Concrete, Inc. and Tealstone Commercial, Inc. (collectively, “Tealstone”) from the stockholders thereof (the “Sellers”) for consideration consisting of $55,000,000 in cash, (less debt outstanding on the closing date and costs incurred by the Sellers and Tealstone in connection with the transaction), 1,882,058 shares of the Company’s common stock (the “Placement Shares”), and $5,000,000 of promissory notes issued to the Sellers. In addition, the Company will make $2,500,000$2,426,000 and $7,500,000 of deferred cash payments on the second and third anniversaries of the closing date, respectively, and up to an aggregate of $15,000,000 in earn-out payments may be made 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. Tealstone focuses on concrete construction of residential foundations, parking structures, elevated slabs and other concrete work for leading homebuilders, multi-family developers and general contractors in both residential and commercial markets.
| Cash | $ | 55,000 | ||
| Common stock (1,882,058 shares) | 17,100 | |||
| Promissory notes | 4,400 | |||
| Deferred payments | 7,200 | |||
| Total | $ | 83,700 |
| Cash | $ | 55,000 | |
| Common stock (1,882,058 shares) | 17,061 | ||
| Promissory notes | 4,436 | ||
| Deferred payments | 7,153 | ||
| Total | $ | 83,650 | |
| Balance at January 1, 2017 | $ | 54,820 | |
| Additional goodwill related to acquisition | 30,457 | ||
| Balance at September 30, 2017 | $ | 85,277 | |
| Cash | $ | 139 | |
| Accounts receivable | 19,876 | ||
| Costs and estimated earnings in excess of billings on uncompleted contracts | 2,944 | ||
| Inventory | 1,218 | ||
| Other current assets | 54 | ||
| Property, plant and equipment | 565 | ||
| Other assets, net | 1 | ||
| Identifiable intangible assets and Goodwill | 77,028 | ||
| Accounts payable | (16,781 | ) | |
| Billings in excess of costs and estimated earnings on uncompleted contracts | (303 | ) | |
| Accrued expenses | (823 | ) | |
| State income tax payable | (268 | ) | |
| Total Consideration | $ | 83,650 | |
Loan Agreement
does not purport
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Pro forma revenue | $ | 304,219 | $ | 255,002 | $ | 749,176 | $ | 657,773 | ||||||||
| Pro forma net income attributable to Sterling | $ | 7,132 | $ | 4,659 | $ | 8,848 | $ | 7,705 | ||||||||
| 3. | Cash and Cash Equivalents and Restricted Cash |
| 4. | Subsidiaries and Joint Ventures with Noncontrolling Owners’ Interests |
| September 30, 2017 | December 31, 2016 | |||||||
| Members’ interest subject to mandatory redemption | $ | 40,000 | $ | 40,000 | ||||
| Net accumulated earnings | 6,329 | 5,230 | ||||||
| Total liability | $ | 46,329 | $ | 45,230 | ||||
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Balance, beginning of period | $ | 656 | $ | (91 | ) | |||
| Net income attributable to noncontrolling interest included in equity | 2,966 | 1,252 | ||||||
| Distributions to noncontrolling interest owners | — | — | ||||||
| Balance, end of period | $ | 3,622 | $ | 1,161 | ||||
| 5. | Construction Joint Ventures |
| September 30, 2017 | December 31, 2016 | |||||||
| Total combined: | ||||||||
| Current assets | $ | 42,129 | $ | 32,592 | ||||
| Less current liabilities | (61,079 | ) | (57,598 | ) | ||||
| Net liabilities | $ | (18,950 | ) | $ | (25,006 | ) | ||
| Backlog | $ | 51,110 | $ | 107,333 | ||||
| Sterling’s noncontrolling interest in backlog | $ | 26,659 | $ | 52,992 | ||||
| Sterling’s receivables from and equity in construction joint ventures | $ | 9,069 | $ | 7,130 | ||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Total combined: | ||||||||||||||||
| Revenues | $ | 27,703 | $ | 15,520 | $ | 61,210 | $ | 44,074 | ||||||||
| Income before tax | (6,281 | ) | 1,925 | (3,611 | ) | 3,838 | ||||||||||
| Sterling’s noncontrolling interest: | ||||||||||||||||
| Revenues | $ | 13,664 | $ | 6,103 | $ | 28,826 | $ | 17,567 | ||||||||
| Income before tax | (1,629 | ) | 519 | (358 | ) | 1,370 | ||||||||||
| 6. | Variable Interest Entities |
| September 30, 2017 | December 31, 2016 | |||||||
| Assets: | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 2,588 | $ | 9,655 | ||||
| Contracts receivable, including retainage | 30,134 | 15,046 | ||||||
| Other current assets | 13,936 | 10,208 | ||||||
| Total current assets | 46,658 | 34,909 | ||||||
| Property and equipment, net | 8,996 | 9,824 | ||||||
| Goodwill | 1,501 | 1,501 | ||||||
| Total assets | $ | 57,155 | $ | 46,234 | ||||
| Liabilities: | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 27,109 | $ | 21,274 | ||||
| Other current liabilities | 14,667 | 8,782 | ||||||
| Total current liabilities | 41,776 | 30,056 | ||||||
| Long-term liabilities: | ||||||||
| Other long-term liabilities | 271 | 5,373 | ||||||
| Total liabilities | $ | 42,047 | $ | 35,429 | ||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues | $ | 64,266 | $ | 50,739 | $ | 126,333 | $ | 121,649 | ||||||||
| Operating income | 3,666 | 2,720 | 6,307 | 4,894 | ||||||||||||
| Net income | 1,834 | 1,357 | 3,149 | 2,440 | ||||||||||||
| 7. | Property and Equipment |
| September 30, 2017 | December 31, 2016 | |||||||
| Construction equipment | $ | 121,364 | $ | 121,441 | ||||
| Transportation equipment | 18,275 | 19,017 | ||||||
| Buildings | 9,547 | 12,771 | ||||||
| Office equipment | 3,339 | 3,108 | ||||||
| Leasehold improvement | 914 | 914 | ||||||
| Construction in progress | 1,432 | 313 | ||||||
| Land | 2,348 | 3,509 | ||||||
| Water rights | 200 | 200 | ||||||
| 157,419 | 161,273 | |||||||
| Less accumulated depreciation | (97,955 | ) | (93,146 | ) | ||||
| Total property and equipment, net | $ | 59,464 | $ | 68,127 | ||||
| 8. | Debt |
| September 30, 2017 | December 31, 2016 | |||||||
| Loan | $ | 85,000 | $ | 3,532 | ||||
| Less deferred loan costs and discount | (9,350 | ) | (803 | ) | ||||
| Total Loan, net | 75,650 | 2,729 | ||||||
| Notes and deferred payments to sellers, Tealstone acquisition | 12,118 | — | ||||||
| Notes payable for transportation and construction equipment and other | 1,837 | 2,665 | ||||||
| 89,605 | 5,394 | |||||||
| Current maturities of long-term debt | 986 | 4,648 | ||||||
| Less current deferred loan costs | — | (803 | ) | |||||
| Less current maturities of long-term debt, net | (986 | ) | (3,845 | ) | ||||
| Total long-term debt | $ | 88,619 | $ | 1,549 | ||||
| 9. | Commitments and Contingencies |
10. Income Taxes 11. Stockholder’s Equity Warrantswarrants (the “Warrants”“Warrants”) to the lenders under the Loan Agreement (the “Holders”“Holders”) pursuant to which the Holderssuch holders have the right to purchase, for a period of five years from the date of issuance, up to an aggregate of 1,000,000 shares of the Company’s common stock (the “Warrant Shares”“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 antidilutionanti-dilution upon the issuance
| At April 3, 2017 | |||
| Current stock price | $ | 8.88 | |
| Exercise option price | $ | 10.25 | |
| Expected term of warrants (in years) | 5 | ||
| Expected volatility rate | 48.29 | % | |
| Risk-free rate | 1.88 | % | |
| Expected dividend yield | — | % | |
| 12. | Net Income (Loss) per Share Attributable to Sterling Common Stockholders |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income (loss) attributable to Sterling common stockholders | $ | 7,132 | $ | 2,415 | $ | 8,537 | $ | (2,890 | ) | |||||||
| Weighted average common shares outstanding — basic | 26,486 | 25,003 | 25,787 | 23,915 | ||||||||||||
| Shares for dilutive unvested stock and warrants | 434 | 362 | 473 | — | ||||||||||||
| Weighted average common shares outstanding and incremental shares assumed repurchased— diluted | 26,920 | 25,365 | 26,260 | 23,915 | ||||||||||||
| Basic income (loss) per share attributable to Sterling common stockholders | $ | 0.27 | $ | 0.10 | $ | 0.33 | $ | (0.12 | ) | |||||||
| Diluted income (loss) per share attributable to Sterling common stockholders | $ | 0.26 | $ | 0.10 | $ | 0.33 | $ | (0.12 | ) | |||||||
| 13. | Segment Information |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenue | ||||||||||||||||
| Heavy Civil Construction | $ | 263,278 | $ | 205,629 | $ | 625,887 | $ | 521,778 | ||||||||
| Residential Construction | 40,941 | — | 78,160 | — | ||||||||||||
| Total Revenue | $ | 304,219 | $ | 205,629 | $ | 704,047 | $ | 521,778 | ||||||||
| Operating Income | ||||||||||||||||
| Heavy Civil Construction | $ | 6,960 | $ | 3,672 | $ | 8,627 | $ | 587 | ||||||||
| Residential Construction | 5,679 | — | 10,580 | — | ||||||||||||
| Total Operating Income | $ | 12,639 | $ | 3,672 | $ | 19,207 | $ | 587 | ||||||||
| September 30, 2017 | December 31, 2016 | |||||||
| Assets | ||||||||
| Heavy Civil Construction | $ | 365,178 | $ | 301,823 | ||||
| Residential Construction | 107,857 | — | ||||||
| Total Assets | $ | 473,035 | $ | 301,823 | ||||
The forward-looking statements included in this Report are made only as of the date of this Report and we undertake no obligation to update any information contained in this Report 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 Report, except as may be required by applicable securities laws.
homes.
On April 3, 2017,Projects in our heavy civil construction segment typically last for several years, involve several subtasks and are accounted for using the Company consummatedpercentage of completion method. Conversely, our residential construction projects typically consist of a high volume of independent units performed for customers that are billed, paid and accounted for as the acquisition of 100% of the outstanding stock of Tealstone Residential Concrete, Inc. and Tealstone Commercial, Inc. (collectively, “Tealstone”) and entered into a Loan and Security Agreement providing for a term loan of $85,000,000 with a maturity date of April 4, 2022, which replaced the then existing debt facility. The Company is reviewing the impact which the acquisition will have on itsindividual units are completed. Each job performed in our residential construction segment reporting beginning with the quarter ending June 30, 2017. Preliminarily, the Company believes that the residential concrete portion of Tealstone will be an additional reportable segment. Refertypically takes less than one month to Note 12 regarding subsequent events for additional information.
complete.
| Backlog | Gross Margin in Backlog | |
| (Dollar amounts in thousands) | ||
| First quarter of 2017 | $925,000 | 8.4% |
| Fourth quarter of 2016 | $823,000 | 8.2% |
| Third quarter of 2016 | $820,000 | 8.0% |
| Second quarter of 2016 | $810,000 | 7.8% |
| First quarter of 2016 | $854,000 | 7.7% |
| Backlog | Gross Margin in Backlog | |
| (Dollar amounts in thousands) | ||
| Third quarter of 2017 | $804,000 | 8.4% |
| Second quarter of 2017 | $923,000 | 8.4% |
| First quarter of 2017 | $925,000 | 8.4% |
| Fourth quarter of 2016 | $823,000 | 8.2% |
| Third quarter of 2016 | $820,000 | 8.0% |
discipline.
and Current Period
$0.26 and $0.33, respectively.
Period area. our Utah market. while implementing our growth strategy. tax expense was recorded for the Current Quarter and Current Period. part of the Tealstone Acquisition. equipment. Loan Agreement The total fair value of the Warrants was $3.5 million, which was recorded as a Loan discount and netted against our new Loan and included in “additional paid in capital” on our balance sheet. the Company’s financial results.Quarter Three Months Ended March 31, 2017 2016 %
Change (dollar amounts in thousands) Revenues $ 153,416 $ 126,567 21.2 % Gross profit $ 9,287 $ 3,548 NM General and administrative expenses (10,604 ) (10,085 ) 5.1 Other operating (expense) income, net (471 ) 71 NM Operating loss (1,788 ) (6,466 ) (72.3 ) Interest income 41 3 NM Interest expense (112 ) (873 ) (87.2 ) Loss before taxes and earnings attributable to noncontrolling interests (1,859 ) (7,336 ) (74.7 ) Income tax expense (27 ) -- NM Net loss (1,886 ) (7,336 ) (74.3 ) Noncontrolling owners’ interests in earnings of subsidiaries and joint ventures (371 ) 8 NM Net loss attributable to Sterling common stockholders $ (2,257 ) $ (7,328 ) (69.2 ) Gross margin 6.1 % 2.8 % NM Operating margin (deficit) (1.2 )% (5.1 )% (76.5 ) NM – Not meaningful. Amount as of March 31,
2017 December 31,
2016Contract Backlog, end of period $ 925,000 $ 823,000 Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 % Change 2017 2016 % Change (Dollar amounts in thousands) Revenues $ 304,219 $ 205,629 47.9% $ 704,047 $ 521,778 34.9% Gross profit 30,631 16,622 84.3% $ 65,123 $ 35,713 82.4% General and administrative expenses (13,129 ) (9,146 ) 43.5% (36,545 ) (27,888 ) 31.0% Other operating expense, net (4,863 ) (3,804 ) 27.8% (9,371 ) (7,238 ) 29.5% Operating income 12,639 3,672 NM 19,207 587 NM Interest income 107 15 NM 192 19 NM Interest expense (3,576 ) (491 ) NM (6,672 ) (2,176 ) NM Loss on extinguishment of debt — — NM (755 ) — NM Income (loss) before taxes and earnings attributable to noncontrolling interests 9,170 3,196 NM 11,972 (1,570 ) NM Income tax expense (344 ) (41 ) NM (469 ) (68 ) NM Net income (loss) 8,826 3,155 NM 11,503 (1,638 ) NM Noncontrolling owners’ interests in earnings of subsidiaries and joint ventures (1,694 ) (740 ) NM (2,966 ) (1,252 ) NM Net income (loss) attributable to Sterling common stockholders $ 7,132 $ 2,415 NM $ 8,537 $ (2,890 ) NM Gross margin 10.1 % 8.1 % 24.7% 9.2 % 6.8 % 35.3% Operating margin 4.2 % 1.8 % NM 2.7 % 0.1 % NM NM – Not meaningful. $26.8$98.6 million, or 21.2%,47.9% in the Current Quarter compared with the Prior Quarter. As our markets continue to improve, so has the trend of increasing backlog which increased $62 million from December 31, 2015 to $823 million at December 31, 2016Quarter and increased an additional $102$182.3 million, from December 31, 2016 to March 31, 2017. This trend has contributed to the increased execution of projects and has favorably affected revenuesor 34.9% in the first quarterCurrent Period compared with the Prior Period. The increase in the Current Quarter is primarily the result of 2017. Specifically, the $26.8April 3, 2017, Tealstone Acquisition, which resulted in approximately $50.4 million in additional revenue. The majority of the remaining net increase of $48.2 million in the Current Quarter is attributable to Utah projects and a totalresult of a ramp up in a new 2017 Rocky Mountain region construction joint venture project. The increase of approximately $31 millionin the Current Period compared to the Prior Period was primarily due to the Tealstone Acquisition, which resulted in approximately $92.9 million in additional revenue. The majority of the remaining $89.4 million net increase in the Current Period was also primarily attributable to Utah projects as a result of a ramp up in a new 2017 Rocky Mountain region construction joint venture project and increased project productivity in Texas. The effect of large Utah projects constructed by our majority-owned joint ventures and construction on large projectshurricane Harvey did not have a significant impact in Texas as well as in Utah. The Texas increase was also aided by improved weather conditions during the Current Quarter. This increaseQuarter and the Current Period as time lost on project construction was offset by approximately $4 million of decreased project activity primarilya pickup in California due toemergency work in the winding down of a large project in California.$5.7$14.0 million for the Current Quarter compared with the Prior Quarter. Gross marginsQuarter and $29.4 million for the Current Period compared with the Prior Period. Our gross margin increased to 6.1% from 2.8%10.1% and 9.2% in the Current Quarter and Current Period, respectively, as compared to 8.1% and 6.8% in the Prior Quarter.Quarter and Prior Period, respectively. The increase in gross margin during the Current Quarter as compared to the Prior Quarter and the increase in the Current Period as compared to the Prior Period was primarily a result of improved project execution and higher backlog margins which have positively affected profitability in the first quarter of 2017.The first quarter of our fiscal year incurs the greatest declines related to seasonality in both revenues and gross profit. Seasonality declines related to revenues are the result of heavy winter weather which in some cases results in work ceasing in the winter months, hinders productivity, or causes delays, on our projects in progress mainly in the northern or mountainous parts of our markets. Seasonality declines related to gross profits are the result of under-absorbed overhead dueattributable to the lower revenue volumes. Overhead rates are set for equipment usage hours and labor hours performed on projects based on expected total hours of equipment usage or expected total hours of workTealstone Acquisition adding approximately 1.6% gross margin to be performed for the full year. In a period with low volume, the under-absorbed overhead amounts have an unfavorable effect on gross profit. Typically, a portion of this first quarter under-absorbed overhead is recovered in subsequent quarters when the activity levels are higher. During the Current Quarter under-absorbed overhead, which we believe will be recovered by higher levels of activity forand 1.4% gross margin to the balance of the year, was approximately $1.5 million.
Current Period.22March 31,September 30, 2017 and 2016, we had approximately 126140 and 121 heavy civil contracts-in-progress, respectively, which were less than 90% complete. 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 we are able to refine our estimate of total revenues (including incentives, delay penalties, change orders and change orders)claims), costs and gross profit. Thus, gross profit as a percent of revenues$0.5$4.0 million to $10.6$13.1 million during the Current Quarter from $10.1$9.1 million in the Prior Quarter.Quarter and increased $8.7 million to $36.5 million during the Current Period from $27.9 million in the Prior Period. The increase in the Current Quarter as compared to the Prior Quarter and the Current Period to the Prior Period is primarily the result of higher salarythe Tealstone Acquisition, stock based compensation costs related to the acceleration of our former CEO’s unvested shares, and wagepre-bid contract and recruiting costs due to increased hiring to perform work on a greater number of projects in the Current Quarter.1.1%0.1% to 6.9%4.3% and 5.2% to in the Current Quarter and Current Period, respectively, compared with 8.0%4.4% and 5.3% in the Prior Quarter.Quarter and Prior Period, respectively. The slight decrease in general and administrative expenses, as a percentagepercent of revenue, for the Current Quarter and Current Period is primarily the result of the leverage generated from generally fixedCompany's ability to control costs and increases in revenues.income,expense, netincome,expense, net, includes 50% of earnings and losses related to members’ interests and other miscellaneous operating income or expense. Members’ interest earnings are treated as an expense while losses are treated as income, as earnings wouldand increase the amount in our liability account “Members’ interest subject to mandatory redemption and undistributed earnings,earnings.” and losses would decrease this liability. The change in other operating (expense) income,expense, net, of $0.5was $1.1 million during the Current Quarter and $2.1 million during the Current Period. The increase in the Current Quarter was primarily due to consultingan increase in earnings by our 50% owned subsidiaries. The increase in the Current Period was primarily due the sale for a loss of $1.1 million on one of our Texas buildings that was sold in the third quarter and legalthe write-down of $0.9 million that was recorded in the second quarter of 2017, a loss on debt extinguishment of $0.8 million and transaction costs of $0.3 million related to the Tealstone Acquisition.acquisitionmarket improves and we increasingly benefit from the Tealstone Acquisition, we are expecting a current federal alternative minimum tax liability for the year. Therefore, $0.3 million and $0.5 million of Tealstone. Three Months Ended
September 30, Nine Months Ended
September 30, 2017 2016 2017 2016 Revenue Heavy Civil Construction $ 263,278 87% $ 205,629 100% $ 625,887 89% $ 521,778 100% Residential Construction 40,941 13% — —% 78,160 11% — —% Total Revenue $ 304,219 $ 205,629 $ 704,047 $ 521,778 Operating Income Heavy Civil Construction $ 6,960 55% $ 3,672 100% $ 8,627 45% $ 587 100% Residential Construction 5,679 45% — —% 10,580 55% — —% Total Operating Income $ 12,639 $ 3,672 $ 19,207 $ 587 Three Months Ended
March 31, 2017 2016 Net cash (used in) provided by: Operating activities $ (3,062 ) $ 490 Investing activities (1,237 ) (1,753 ) Financing activities (1,339 ) 11,756 Total (decrease) increase in cash and cash equivalents $ (5,638 ) $ 10,493 March 31,
2017 December 31,
2016Cash and cash equivalents $ 37,147 $ 42,785 Working capital $ 29,189 $ 29,316 23 Nine Months Ended
September 30, 2017 2016 Net cash (used in) provided by: Operating activities $ (6,951 ) $ 35,710 Investing activities (57,336 ) (6,665 ) Financing activities 88,043 9,550 Total increase in cash and cash equivalents $ 23,756 $ 38,595 September 30,
2017 December 31,
2016Cash and cash equivalents $ 66,541 $ 42,785 Working capital $ 84,840 $ 29,316 Quarter,Period, net cash used inby operating activities was $3.1million$7.0 million compared to net cash provided of $0.5$35.7 million in the Prior Quarter.Period. The drivers of operating activities cash flows were primarily the result of our improvement in net loss noted in our Results of Operationsincome discussed above, non-cash items, the change in our accounts receivable, inventory, net contracts in progress and accounts payable balances (collectively, “Contract Capital”) as discussed below.reconciled toincluded in operating activities include depreciation and amortization expense, which were $4.1$13.1 million in the Current QuarterPeriod and $4.2$12.1 million in the Prior Quarter.Period. Depreciation and amortization expense has decreased slightlyincreased from the Prior QuarterPeriod to the Current QuarterPeriod as a result of our April 3, 2017 acquisition where we acquired identified intangible assets and have amortized $1.4 million in the Current Period. Depreciation expense decreased as part of our efforts to maintain our current fleet of equipment and supplement it as necessary with more economical project specific leased equipment.March 31,September 30, 2017 and March 31, 2016 and changes during the Current Quarter and Prior Quarter were as follows (amounts in thousands): Quarterly Changes in Components of
Contract Capital for the Period Ended March 31,
2017 March 31,
2016 Variance Costs and estimated earnings in excess of billings on uncompleted contracts $ (1,770 ) $ (1,283 ) $ (487 ) Billings in excess of costs and estimated earnings on uncompleted contracts (1,444 ) 8,527 (9,971 ) Contracts in progress, net (3,214 ) 7,244 (10,458 ) Contracts receivable, including retainage (6,957 ) (12,646 ) 5,689 Receivables from and equity in construction joint ventures (760 ) 4,614 (5,374 ) Inventories (49 ) (395 ) 346 Accounts payable 4,351 4,429 (78 ) Contract Capital, net $ (6,629 ) $ 3,246 $ (9,875 ) During the September 30, 2017 September 30, 2016 Variance Costs and estimated earnings in excess of billings on uncompleted contracts $ (7,735 ) $ (5,084 ) $ (2,651 ) Billings in excess of costs and estimated earnings on uncompleted contracts (1,035 ) 31,340 (32,375 ) Contracts in progress, net (8,770 ) 26,256 (35,026 ) Contracts receivable, including retainage (45,044 ) (23,303 ) (21,741 ) Receivables from and equity in construction joint ventures (1,939 ) 3,461 (5,400 ) Inventories 2,833 (1,465 ) 4,298 Accounts payable 16,687 17,902 (1,215 ) Contract Capital, net $ (36,233 ) $ 22,851 $ (59,084 ) Quarter,Period change in Contract Capital decreased liquidity by $9.9$36.2 million. Fluctuations in our Contract Capital balance and its components are not unusual in our business and are impacted by the size of our projects and changing type and mix of projects in our backlog. Our Contract Capital is particularly impacted by the timing of new awards and related payments of performing work and the contract billings to the customer as we complete our projects. Contract Capital is also impacted at period-end by the timing of accounts receivable collections and accounts payable payments for our projects.Quarter,Period, net cash used in investing activities was $1.2$57.3 million compared to net cash used of $1.8$6.7 million in the Prior Quarter.Period. The primary driver of investing activities cash flows were investments in capital equipmentwas the $55 million paid on April 3, 2017, as discussed below.$1.8$8.3 million for the Current Quarter.Period. Proceeds from the sale of property and equipment totaled $0.6$5.8 million for the Current QuarterPeriod with an associated net gainloss of $0.4$0.2 million. For the Prior Quarter,Period, expenditures totaled $2.8$8.9 million, while proceeds from the sale of property and equipment totaled $1.1$2.2 million with an associated net gain of $0.2$0.3 million. The level of expenditures in the Current QuarterPeriod decreased by $1.0$0.6 million compared to the Prior Quarter. ThePeriod. This decrease is awas the result of management’sour efforts to optimize utilization ofmaintain our existingcurrent fleet of equipment based on current and projected workloads while supplementing our fleetsupplement it as necessary with more economical project-specific leased and financed equipment as needed.Quarter,Period, net cash used inprovided by financing activities was $1.3$88.0 million compared to cash provided of $11.8$9.6 million in the Prior Quarter.Period. The increase in cash usedprovided by financing activities was primarily a result of typical scheduled principal payment fornet proceeds of $85.0 million received as part of our Equipment-based Facility and notes payable,new Loan Agreement, compared to a net drawdownproceeds of $13.1$19.1 million received from the issuance of our Revolving Loancommon stock in the Prior Quarter.
Period.24March 31,September 30, 2017, was $37.1$66.5 million, which decreasedincreased based on the items mentioned above. Cash includes $1.5$2.6 million that was held by our VIE and $18.4which is also a majority-owned subsidiary, $12.5 million belonging to ouranother majority-owned subsidiary and $20.7 million belonging to majority-owned joint ventures.ventures which generally cannot be used for purposes outside the joint venture. Our working capital largely remained flat with a decrease of $0.1increased $55.5 million to $29.2$84.8 million at March 31,September 30, 2017 from $29.3 million at December 31, 2016. and Acquisitionhave useduse borrowings under our Equipment-based Facility to finance acquisitions, our capital expenditures and working capital needs.At March 31, 2017, the Company had a borrowing base of $24.4 million, which was the result of calculating 65% of the appraised value (where appraised value equals net operating liquidated value) of the Company’s collateral. However, we had reached our revolver $20.0 million cap, and therefore only $20.0 million of borrowings were available at March 31, 2017. The Company had no amounts drawn on the revolving loan and $2.5 million of its term loan outstanding at March 31, 2017. Refer to Note 12 regarding the subsequent event related to our Equipment-based Facility.Average borrowings under our Equipment-based Facility for the Current Quarter were $3.2 million and the largest amount of borrowings was $3.5 million in January 2017. Average borrowings under the Equipment-based Facility for the 2016 fiscal year were $18.1 million, and the largest amount of borrowings under the Equipment-based Facility was $31.6 million in January 2016.Based on our average borrowings for 2016 and our 2017 forecasted cash needs, we continue to believe that the Company has sufficient liquid financial resources to fund our requirements for the next twelve months of operations, including our bonding requirements. 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, or we incurred losses, our working capital could be materially and adversely affected. Refer to “Item 1A. Risk Factors” in the 2016 Form 10-K for further discussion of liquidity related risks.We will continue to explore additional capital alternatives to further strengthen our financial position in order to take advantage of this improving transportation infrastructure market. This could include the potential sale of assets, businesses or equity, the favorable resolution of outstanding contract claims, or a combination thereof. We expect to use proceeds from these initiatives to invest in projects meeting our gross margin, overall profitability and other requirements, as well as pursuing projects or investments in adjacent markets.Purchase of TealstoneOn April 3, 2017, the Company consummated the acquisition of 100% of the outstanding stock of Tealstone Residential Concrete, Inc. and Tealstone Commercial, Inc. (collectively, “Tealstone”) from the stockholders thereof (the “Sellers”) for consideration consisting of $55,000,000 in cash (less debt outstanding on the closing date and costs incurred by the Sellers and Tealstone in connection with the transaction), 1,882,058 shares of the Company’s common stock (the “Placement Shares”), and $5,000,000 of promissory notes issued to the Sellers. In addition, the Company will make $2,500,000 and $7,500,000 of deferred cash payments on the second and third anniversaries of the closing date, respectively, and up to an aggregate of $15,000,000 in earn-out payments may be made 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. Tealstone focuses on concrete construction of residential foundations, parking structures, elevated slabs and other concrete work for leading homebuilders, multi-family developers and general contractors in both residential and commercial markets.25The preliminary acquisition-date fair value of the consideration transferred totaled $83.7 million, which consisted of the following:Fair value of consideration transferred (amounts in thousands):Cash $ 55,000 Common stock (1,882,058 shares) 17,100 Promissory notes 4,400 Deferred payments 7,200 Total $ 83,700 The fair value of the 1,882,058 common shares issued was determined based on the average market price of the Company’s common shares on the acquisition date.The promissory notes and deferred payments have been discounted using a preliminary 12% fair value discount rate. The earn-out arrangement requires the Company to pay up to an aggregate of $15,000,000 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. The Company’s preliminary analysis indicates that the compensation is tied to the continuing employment of certain key employees and executives of Tealstone and will be treated as additional compensation and not as additional contingent consideration.The Company is in the process of estimating the fair values of the assets acquired and liabilities assumed at the acquisition date and obtaining third-party valuations of certain intangible assets. Additionally, the Company is in the process of compiling the pro forma financial information required.·a ratio of secured indebtedness to EBITDA of not more than 3.10 to 1.00 beginning with the four consecutive quarters ending June 30, 2017, reducing to 1.80 to 1.00 by the four consecutive quarters ending September 30, 2019;·daily cash collateral of not less than $10,000,000 commencing on June 30, 2017, increasing to $15,000,000 on October 1, 2017, and potentially further increasing to $18,000,000 beginning on April 4, 2018;·a rolling four quarter gross margin in contract backlog of not less than $60,000,000 commencing June 30, 2017, increasing to $70,000,000 by March 31, 2019;·the incurrence of net capital expenditures during each four consecutive fiscal quarters shall not exceed $15,000,000;·bonding capacity shall be maintained at all times in an amount not less than $1,000,000,000; and·the EBITDA of Tealstone Residential Concrete, Inc. shall not be less than $12,000,000 during each four consecutive fiscal quarters, commencing June 30, 2017.
Deferred loan costs and discounts totaled $10.4 million, which included attorney fees, investment bank fees as well as amounts payed to the lenders and which were discounted from the loan amount. Warrants valued at $3.5 million were included as well. Refer to Note 11 for additional information on the warrants. The total amount will be amortized on a straight-line basis over the five-year life of the Loan. Amortization expense of $0.5 million and $1.0 million has been included in interest expense for the three and nine months ended September 30, 2017.26Warrantswarrants (the “Warrants”“Warrants”) to the lenders under the Loan Agreement (the “Holders”“Holders”) pursuant to which the Holders have the right to purchase, for a period of five years from the date of issuance, up to an aggregate of 1,000,000 shares of the Company’s common stock (the “Warrant Shares”“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 antidilutionanti-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. March 31,September 30, 2017, there was approximately $93$51 million of construction work to be completed on unconsolidated construction joint venture contracts, of which $47$27 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 March 31,September 30, 2017, 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 provisions under our contracts.Equipment-based Facility does not bearLoan Agreement bears interest at floating rates (LIBOR), so our results from operations are notcould be impacted from a change in interest rates. However,A 1% increase in our interest rate couldwould increase interest expense by 2% based$0.9 million per year. However, the Company does not expect interest rate fluctuations to have a material adverse effect on our fixed charge coverage ratio.27March 31,September 30, 2017 to ensure that the information required to be disclosed by the Company in this Report 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.ThereMarch 31,September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.28The homebuilding industry is cyclical which could affect our residential concrete projects, including foundations for single-family and multi-family homes. Deterioration in the homebuilding industry conditions or downward changes in general economic or other business conditions could materially adversely affect our results of operations.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 concrete projects we construct 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.other risk factors previously disclosed in Part“Part I, Item 1A1A. Risk FactorsFactors” of our 2016 Form 10-K. You should carefully consider such risk factors, which could materially affect our business, financial condition or future results.March 31,September 30, 2017.Period Total
Number of
Shares
Purchased Average
Price Paid
per Share Total Number of
Shares (or Units)
Purchased as Part of
Publicly- Announced
Plans or Program Maximum Number (or
Approximate Dollar
Value) of Shares (or Units)
that May Yet Be
Purchased Under the
Plans or ProgramsFebruary 1 – February 28, 2017 544 (1) $ 9.16 -- -- Period July 1—July 31, 2017 2,336 (1) $ 13.07 — — August 1—August 31, 2017 65 (1) $ 10.79 — — (1) 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 occasioned by the release of the restrictions. The repurchase was made at the election of the employees pursuant to a procedure adopted by the Compensation Committee of the Board of Directors. None.29Exhibit No. Description 4.1*10.1* Form of Warrant, dated April 3, 201710.1*#Standard Non-Employee Director Compensation adopted by the Board of Directors to be effective May 1, 2017.First Amendment To Loan and Security Agreement31.1* Certification of Joseph A. Cutillo, Chief Executive Officer of Sterling Construction Company, Inc. 31.2* Certification of Ronald A. Ballschmiede, Chief Financial Officer of Sterling Construction Company, Inc. 32* 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, and Ronald A. Ballschmiede, Chief Financial Officer 101.INS* XBRL Instance Document 101.SCH* XBRL Taxonomy Extension Schema Document 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* XBRL Taxonomy Extension Label Linkbase Document 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document # Management contract or compensatory plan or arrangement.30 STERLING CONSTRUCTION COMPANY, INC. Date: May 3, October 31, 2017By: /s/ Joseph A. Cutillo Joseph A. Cutillo Chief Executive Officer Date: May 3, October 31, 2017By: /s/ Ronald A. Ballschmiede Ronald A. Ballschmiede Chief Financial Officer 31March 31,September 30, 2017 Exhibit No. Description 4.1*10.1* 10.1*#31.1* Standard Non-Employee Director Compensation adopted by the Board of Directors to be effective May 1, 2017.31.1* 31.2* 32* 101.INS* XBRL Instance Document 101.SCH* XBRL Taxonomy Extension Schema Document 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* XBRL Taxonomy Extension Label Linkbase Document 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document _______________*Filed herewith.#Management contract or compensatory plan or arrangement.32