10-Q 1 strl-20220930.htm 10-Q strl-20220930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___ 
Commission File Number1-31993
strl-20220930_g1.jpg
STERLING INFRASTRUCTURE, INC.
(Exact name of registrant as specified in its charter)
Delaware25-1655321
(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 offices)(Zip Code)
  
Registrant’s telephone number, including area code:  (281) 214-0777
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per shareSTRLThe NASDAQ Stock Market LLC
(Title of each class)(Trading Symbol)(Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. þYes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨Accelerated filerþ
Non-accelerated filer¨Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes þ No
The number of shares outstanding of the registrant’s common stock as of October 28, 2022 – 30,329,659



STERLING INFRASTRUCTURE, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
2


PART I—FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
 
STERLING INFRASTRUCTURE, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited) 
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
Revenues$556,942 $463,449 $1,477,830 $1,180,431 
Cost of revenues(474,919)(405,645)(1,271,284)(1,021,348)
Gross profit82,023 57,804 206,546 159,083 
General and administrative expense(26,466)(19,637)(72,962)(52,565)
Intangible asset amortization(3,509)(2,866)(10,591)(8,598)
Acquisition related costs(277) (762) 
Other operating expense, net(4,085)(3,270)(5,186)(10,414)
Operating income47,686 32,031 117,045 87,506 
Interest income167 13 207 39 
Interest expense(5,134)(3,919)(14,201)(15,660)
Gain on extinguishment of debt, net 968 2,428 2,032 
Income before income taxes42,719 29,093 105,479 73,917 
Income tax expense(12,562)(7,336)(29,427)(20,275)
Net income 30,157 21,757 76,052 53,642 
Less: Net income attributable to noncontrolling interests(634)(631)(1,316)(1,905)
Net income attributable to Sterling common stockholders$29,523 $21,126 $74,736 $51,737 
Net income per share attributable to Sterling common stockholders:   
Basic$0.98 $0.74 $2.48 $1.81 
Diluted$0.97 $0.72 $2.46 $1.79 
Weighted average common shares outstanding:
Basic30,278 28,710 30,156 28,527 
Diluted30,540 29,213 30,364 28,927 
 
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

3


STERLING INFRASTRUCTURE, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited) 
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Net income$30,157 $21,757 $76,052 $53,642 
Other comprehensive income, net of tax
Change in interest rate swap, net of tax (Note 10)
(101)718 2,301 2,341 
Total comprehensive income30,056 22,475 78,353 55,983 
Less: Comprehensive income attributable to noncontrolling interests(634)(631)(1,316)(1,905)
Comprehensive income attributable to Sterling common stockholders$29,422 $21,844 $77,037 $54,078 
 
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
4


STERLING INFRASTRUCTURE, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
 September 30,
2022
December 31,
2021
Assets
Current assets:
Cash and cash equivalents ($28,994 and $35,378 related to variable interest entities (“VIEs”))
$146,479 $81,840 
Accounts receivable ($38,617 and $26,176 related to VIEs)
329,548 232,153 
Contract assets ($19,458 and $10,249 related to VIEs)
153,666 83,310 
Receivables from and equity in construction joint ventures ($5,530 and $7,058 related to VIEs)
16,316 16,896 
Other current assets ($4,317 and $4,451 related to VIEs)
23,549 20,492 
Total current assets669,558 434,691 
Property and equipment, net ($9,880 and $10,420 related to VIEs)
222,647 204,316 
Operating lease right-of-use assets, net ($5,033 and $5,097 related to VIEs)
60,384 24,520 
Goodwill ($1,501 and $1,501 related to VIEs)
252,887 259,791 
Other intangibles, net293,532 303,223 
Other non-current assets, net4,325 4,455 
Total assets$1,503,333 $1,230,996 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable ($45,728 and $23,611 related to VIEs)
$192,902 $144,982 
Contract liabilities ($16,137 and $22,583 related to VIEs)
224,739 127,932 
Current maturities of long-term debt ($0 and $4,857 related to VIEs)
29,705 28,230 
Current portion of long-term lease obligations ($2,407 and $2,334 related to VIEs)
17,418 8,841 
Accrued compensation ($3,383 and $2,388 related to VIEs)
37,448 22,803 
Other current liabilities ($496 and $889 related to VIEs)
10,096 18,972 
Total current liabilities512,308 351,760 
Long-term debt ($0 and $81 related to VIEs)
407,090 428,588 
Long-term lease obligations ($2,626 and $2,763 related to VIEs)
43,121 15,831 
Members’ interest subject to mandatory redemption and undistributed earnings55,862 55,115 
Deferred tax liability, net40,311 14,656 
Other long-term liabilities4,754 4,819 
Total liabilities1,063,446 870,769 
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock, par value $0.01 per share; 38,000 shares authorized,
30,318 and 29,838 shares issued and outstanding
303 298 
Additional paid in capital281,576 280,274 
Retained earnings154,654 79,918 
Accumulated other comprehensive gain (loss)578 (1,723)
Total Sterling stockholders’ equity437,111 358,767 
Noncontrolling interests2,776 1,460 
Total stockholders’ equity439,887 360,227 
Total liabilities and stockholders’ equity$1,503,333 $1,230,996 
 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
5


STERLING INFRASTRUCTURE, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
20222021
Cash flows from operating activities:
Net income$76,052 $53,642 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization38,550 25,336 
Amortization of debt issuance costs and non-cash interest1,636 1,756 
Gain on disposal of property and equipment(1,926)(1,176)
Gain on debt extinguishment, net(2,428)(2,032)
Deferred taxes24,975 17,413 
Stock-based compensation9,195 5,690 
Change in fair value of interest rate swap(320)(41)
Changes in operating assets and liabilities (Note 16)
(15,087)35,154 
Net cash provided by operating activities130,647 135,742 
Cash flows from investing activities:
Acquisitions, net of cash acquired(3,033) 
Capital expenditures(47,832)(39,315)
Proceeds from sale of property and equipment3,043 2,093 
Net cash used in investing activities(47,822)(37,222)
Cash flows from financing activities:
Repayments of debt(17,612)(44,184)
Distributions to noncontrolling interest owners (1,959)
Other (603)
Net cash used in financing activities(17,612)(46,746)
Net change in cash, cash equivalents, and restricted cash65,213 51,774 
Cash, cash equivalents, and restricted cash at beginning of period88,693 72,642 
Cash, cash equivalents, and restricted cash at end of period153,906 124,416 
Less: restricted cash (other current assets)(7,427)(6,714)
Cash and cash equivalents at end of period$146,479 $117,702 
Non-cash items:
Capital expenditures$562 $116 
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
6


STERLING INFRASTRUCTURE, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
Nine Months Ended September 30, 2022
Common StockAdditional Paid in CapitalRetained EarningsAccumulated Other Comprehensive (Loss) GainTotal Sterling Stockholders’ EquityNon-controlling InterestsTotal Stockholders’ Equity
SharesAmount
Balance at December 31, 202129,838 $298 $280,274 $79,918 $(1,723)$358,767 $1,460 $360,227 
Net income— — — 19,252 — 19,252 271 19,523 
Change in interest rate swap— — — — 1,563 1,563 — 1,563 
Stock-based compensation— — 3,521 — — 3,521 — 3,521 
Issuance of stock688 7 185 — — 192 — 192 
Shares withheld for taxes(263)(3)(7,383)— — (7,386)— (7,386)
Balance at March 31, 202230,263 $302 $276,597 $99,170 $(160)$375,909 $1,731 $377,640 
Net income— — — 25,961 — 25,961 411 26,372 
Change in interest rate swap— — — — 839 839 — 839 
Stock-based compensation— — 2,333 — — 2,333 — 2,333 
Issuance of stock36 1 190 — — 191 — 191 
Balance at June 30, 202230,299 $303 $279,120 $125,131 $679 $405,233 $2,142 $407,375 
Net income— — — 29,523 — 29,523 634 30,157 
Change in interest rate swap— — — — (101)(101)— (101)
Stock-based compensation— — 2,436 — — 2,436 — 2,436 
Issuance of stock24 — 155 — — 155 — 155 
Shares withheld for taxes(5)— (135)— — (135)— (135)
Balance at September 30, 202230,318 $303 $281,576 $154,654 $578 $437,111 $2,776 $439,887 
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
7


STERLING INFRASTRUCTURE, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
Nine Months Ended September 30, 2021
Common StockAdditional Paid in CapitalTreasury StockRetained EarningsAccumulated Other Comprehensive LossTotal Sterling Stockholders’ EquityNon-controlling InterestsTotal Stockholders’ Equity
SharesAmountSharesAmount
Balance at December 31, 202028,184 $283 $256,423 95 $(1,445)$17,273 $(5,264)$267,270 $1,459 $268,729 
Net income— — — — — 10,555 — 10,555 1,113 11,668 
Change in interest rate swap— — — — — — 895 895 — 895 
Stock-based compensation— — 1,835 — — — — 1,835 — 1,835 
Distributions to owners— — — — — — — — (1,959)(1,959)
Issuance of stock668 5 (1,602)(111)1,741 — — 144 — 144 
Shares withheld for taxes(246)(2)(5,321)16 (296)— — (5,619)— (5,619)
Balance at March 31, 202128,606 $286 $251,335  $ $27,828 $(4,369)$275,080 $613 $275,693 
Net income— — — — — 20,056 — 20,056 161 20,217 
Change in interest rate swap— — — — — — 728 728 — 728 
Stock-based compensation— — 2,015 — — — — 2,015 — 2,015 
Issuance of stock32 — 120 — — — — 120 — 120 
Other— — (3)— — — — (3)— (3)
Balance at June 30, 202128,638 $286 $253,467  $ $47,884 $(3,641)$297,996 $774 $298,770 
Net income— — — — — 21,126 — 21,126 631 21,757 
Change in interest rate swap— — — — — — 718 718 — 718 
Stock-based compensation— — 1,840 — — — — 1,840 — 1,840 
Issuance of stock148 2 105 — — — — 107 — 107 
Shares withheld for taxes(4)— (99)— — — — (99)— (99)
Balance at September 30, 202128,782 $288 $255,313  $ $69,010 $(2,923)$321,688 $1,405 $323,093 
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
8


STERLING INFRASTRUCTURE, INC. & SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
($ and share values in thousands, except per share data)
(Unaudited)
1.NATURE OF OPERATIONS
Business Summary
Sterling Infrastructure, Inc. (“Sterling,” “the Company,” “we,” “our” or “us”), a Delaware corporation, operates through a variety of subsidiaries within three segments specializing in E-Infrastructure, Transportation and Building Solutions in the United States (the “U.S.”), primarily across the Southern, Northeastern, Mid-Atlantic and the Rocky Mountain States, California and Hawaii, as well as other areas with strategic construction opportunities. E-Infrastructure Solutions projects develop advanced, large-scale site development systems and services for data centers, e-commerce distribution centers, warehousing, transportation, energy and more. Transportation Solutions includes infrastructure and rehabilitation projects for highways, roads, bridges, airports, ports, light rail, water, wastewater and storm drainage systems. Building Solutions projects include residential and commercial concrete foundations for single-family and multi-family homes, parking structures, elevated slabs and other concrete work. From strategy to operations, we are committed to sustainability by operating responsibly to safeguard and improve society’s quality of life. Caring for our people and our communities, our customers and our investors – that is The Sterling Way.
2.BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Presentation Basis—The accompanying Condensed Consolidated Financial Statements are presented in accordance with accounting policies generally accepted in the United States (“GAAP”) and reflect all wholly owned subsidiaries and those entities the Company is required to consolidate. See Note 5 - Consolidated 50% Owned Subsidiaries and Note 6 - Construction Joint Ventures for further discussion of the Company’s consolidation policy for those entities that are not wholly owned. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. Values presented within tables (excluding per share data) are in thousands. Reclassifications have been made to historical financial data to conform to the current period presentation.
Estimates and Judgments—The preparation of the accompanying Condensed Consolidated Financial Statements in conformance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting estimates of the Company require a higher degree of judgment than others in their application. These include the recognition of revenue and earnings from construction contracts over time, the valuation of long-lived assets, goodwill and purchase accounting estimates. Management continually evaluates all of its estimates and judgments based on available information and experience; however, actual results could differ from these estimates.
Significant Accounting Policies
Consistent with Regulation S-X Rule 10-1(a), the Company has omitted significant accounting policies in this quarterly report that would duplicate the disclosures contained in the Company’s annual report on Form 10-K for the year ended December 31, 2021 under “Part II, Item 8. - Notes to Consolidated Financial Statements.” This quarterly report should be read in conjunction with the Company’s most recent annual report on Form 10-K.
Accounts Receivable—Receivables are generally based on amounts billed to the customer in accordance with contractual provisions. Receivables are written off based on the individual credit evaluation and specific circumstances of the customer, when such treatment is warranted. The Company performs a review of outstanding receivables, historical collection information and existing economic conditions to determine if there are potential uncollectible receivables. At September 30, 2022 and December 31, 2021, our allowance for our estimate of expected credit losses was zero.
Contracts in Progress—For performance obligations satisfied over time, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Typically, Sterling bills for advances or deposits from its customers before revenue is recognized, resulting in contract liabilities. However, the Company occasionally bills subsequent to revenue recognition, resulting in contract assets.
9


Many of the contracts under which the Company performs work also contain retainage provisions. Retainage refers to that portion of our billings held for payment by the customer pending satisfactory completion of the project. Unless reserved, the Company assumes that all amounts retained by customers under such provisions are fully collectible. At September 30, 2022 and December 31, 2021, contract assets included $85,900 and $47,308 of retainage, respectively, and contract liabilities included $44,987 and $46,882 of retainage, respectively. Retainage on active contracts is classified as current regardless of the term of the contract and is generally collected within one year of the completion of a contract. We anticipate collecting approximately 64% of our September 30, 2022 retainage during the next twelve months. These assets and liabilities are reported on the Condensed Consolidated Balance Sheet within “Contract assets” and “Contract liabilities” on a contract-by-contract basis at the end of each reporting period.
Revenue recognized for the three and nine months ended September 30, 2022 that was included in the contract liability balance on December 31, 2021 was $45,315 and $517,579, respectively. Revenue recognized for the three and nine months ended September 30, 2021 that was included in the contract liability balance on December 31, 2020 was $111,887 and $409,257, respectively.
Cash and Restricted Cash—Our cash is comprised of highly liquid investments with maturities of three months or less. Restricted cash of $7,427 and $6,853 is included in “Other current assets” on the Condensed Consolidated Balance Sheets at September 30, 2022 and December 31, 2021, respectively. This primarily represents cash deposited by the Company into separate accounts and designated as collateral for standby letters of credit in the same amount in accordance with contractual agreements.
3.ACQUISITIONS
General—On December 30, 2021 (the “Closing Date”), Sterling completed the acquisition (the “Acquisition”) of Petillo LLC and its related entities (collectively, “Petillo”). The Acquisition is accounted for using the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations.
Purchase Consideration—Sterling completed the Acquisition for a purchase price of $196,763, net of cash acquired, detailed as follows:
Cash consideration transferred, net of cash acquired$175,000 
Equity consideration transferred (759 shares at $26.87 per share(1))
20,406
Target working capital adjustment1,357
Total consideration$196,763 
(1) Sterling’s closing stock price on December 29, 2021.
Preliminary Purchase Price Allocation—The aggregate purchase price noted above was allocated to the assets and liabilities acquired based upon their estimated fair values at the acquisition closing date, which were based, in part, upon a preliminary external appraisal and valuation of certain assets, including specifically identified intangible assets. The excess of the purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired totaling $60,873 was recorded as goodwill. This goodwill represents the value of expected future earnings and cash flows, as well as the synergies created by the integration of the new business within our organization, including cross-selling opportunities to help strengthen our existing service offerings and expand our market position. Goodwill and intangibles of approximately $132,000 related to the Acquisition, are deductible and amortizable for tax purposes over the next 15 years.
10


The following table summarizes our purchase price allocation at the Acquisition Closing Date, net of cash acquired:
Net tangible assets:
Accounts receivable$45,016 
Contract assets5,953 
Other current assets193 
Property and equipment, net47,141 
Other non-current assets, net5,498 
Accounts payable(21,810)
Contract liabilities(8,585)
Other current liabilities(8,216)
Total net tangible assets65,190 
Identifiable intangible assets70,700 
Goodwill60,873 
Total consideration transferred$196,763 
During the nine months ended September 30, 2022, the total consideration and purchase price allocation (goodwill) changed by $7,800, primarily due to an updated estimate of the tax basis step-up payment. The purchase price allocation above is subject to further change when additional information is obtained. We have not finalized our assessment of the fair values primarily for intangible assets and property and equipment. We intend to finalize the purchase price allocation as soon as practicable within the measurement period, but in no event later than one year following the Closing Date of the Acquisition. Our final purchase price allocation may result in additional adjustments to various other assets and liabilities, including the residual amount allocated to goodwill during the measurement period.
Identifiable Intangible AssetsIntangible assets identified as part of the Acquisition are reflected in the table below and are recorded at their estimated fair value, as determined by the Company’s management, based on available information which includes a preliminary valuation from external experts. The estimated useful lives for intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows.
Weighted Average Life (Years)December 30, 2021
Fair Value
Customer relationships25$43,200 
Trade names2527,500 
Total$70,700 
Supplemental Pro Forma Information (Unaudited)The following unaudited pro forma combined financial information (“the pro forma financial information”) gives effect to the Acquisition, accounted for as a business combination using the purchase method of accounting. The pro forma financial information reflects the Acquisition and related events as if they occurred at the beginning of the period and includes adjustments to (1) include compensation expense associated with the employment agreement the Company entered into with Mr. Petillo, (2) include additional intangible asset amortization associated with the Acquisition, (3) include additional interest expense associated with the Acquisition and (4) include the pro forma results of Petillo for the three and nine months ended September 30, 2021. This pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the pro forma events taken place on the dates indicated. Further, the pro forma financial information does not purport to project the future operating results of the combined company following the Acquisition.
Three Months Ended September 30, 2021Nine Months Ended September 30, 2021
Pro forma revenue$524,405 $1,323,771 
Pro forma net income attributable to Sterling$27,985 $62,330 
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4.REVENUE FROM CUSTOMERS
BacklogThe following table presents the Company’s backlog, by segment:
September 30,
2022
December 31,
2021
E-Infrastructure Solutions Backlog$584,279 $432,613 
Transportation Solutions Backlog965,546 963,267 
Building Solutions Backlog - Commercial115,518 97,235 
Total Backlog$1,665,343 $1,493,115 
The Company expects to recognize approximately 70% of its backlog as revenue during the next twelve months, and the balance thereafter.
Revenue DisaggregationThe following tables present the Company’s revenue disaggregated by major end market and contract type:
Three Months Ended September 30,Nine Months Ended September 30,
Revenues by major end market2022202120222021
E-Infrastructure Solutions Revenues$255,530 $121,286 $658,005 $341,601 
Heavy Highway155,847 188,746 408,216 427,451 
Aviation25,463 35,840 61,980 99,816 
Water Containment and Treatment23,373 11,463 60,377 41,890 
Other16,443 13,849 42,433 30,948 
Transportation Solutions Revenues221,126 249,898 573,006 600,105 
Residential51,304 65,295 166,045 156,078 
Commercial28,982 26,970 80,774 82,647 
Building Solutions Revenues80,286 92,265 246,819 238,725 
Total Revenues$556,942 $463,449 $1,477,830 $1,180,431 
Revenues by contract type
Fixed-Unit Price$217,296 $267,092 $554,014 $670,526 
Lump-Sum287,472 129,742 752,614 348,313 
Residential and Other52,174 66,615 171,202 161,592 
Total Revenues$556,942 $463,449 $1,477,830 $1,180,431 
Each of these contract types presents advantages and disadvantages. Typically, the Company assumes more risk with lump-sum contracts; however, these types of contracts offer additional profits if the work is completed for less than originally estimated. Under fixed-unit price contracts, the Company’s profit may vary if actual labor-hour costs vary significantly from the negotiated rates. Also, because some contracts can provide little or no fee for managing material costs, the components of contract cost can impact profitability.
Variable Consideration
The Company has projects that it is in the process of negotiating, or awaiting final approval of, unapproved change orders and claims with its customers. The Company is proceeding with its contractual rights to recoup additional costs incurred from its customers based on completing work associated with change orders, including change orders with pending change order pricing, or claims related to significant changes in scope which resulted in substantial delays and additional costs in completing the work. Unapproved change order and claim information has been provided to the Company’s customers and negotiations with the customers are ongoing. If additional progress with an acceptable resolution is not reached, legal action will be taken. Based upon the Company’s review of the provisions of its contracts, specific costs incurred and other related evidence supporting the unapproved change orders and claims, together in some cases as necessary with the views of the Company’s outside claim consultants, the Company concluded it was appropriate to include in project price amounts of $14,680 and $13,905, at September 30, 2022 and December 31, 2021, respectively, relating to unapproved change orders and claims. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
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Contract Estimates
Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, the Company estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognizes such profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future events that often span several years. These assumptions include labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials and the performance of subcontractors. Changes in job performance, job conditions and estimated profitability, including those changes arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Changes in contract estimates and variations in project scope of work resulted in net increases of approximately $13,400 and $39,400 for the three and nine months ended September 30, 2022, respectively, and in a net decrease of approximately $360 and a net increase of $11,700 for the three and nine months ended September 30, 2021, respectively, included in “Operating income” on the Condensed Consolidated Statements of Operations.
5.CONSOLIDATED 50% OWNED SUBSIDIARIES
The Company has 50% ownership interests in two subsidiaries (“Myers” and “RHB”) that it fully consolidates as a result of its exercise of control over the entities. The earnings attributable to the 50% portions the Company does not own were approximately $4,100 and $5,200 for the three and nine months ended September 30, 2022, respectively, and were approximately $3,300 and $9,900 for the three and nine months ended September 30, 2021, respectively, and are eliminated within “Other operating expense, net” in the Condensed Consolidated Statements of Operations. Any undistributed earnings for partners are included in “Members’ interest subject to mandatory redemption and undistributed earnings” within the Condensed Consolidated Balance Sheets and are mandatorily payable at the time of the noncontrolling owners’ death or permanent disability.
These two subsidiaries have individual mandatory redemption provisions which, under circumstances outlined in the partner agreements, are certain to occur and obligate the Company to purchase each partner’s remaining 50% interests for $20,000 ($40,000 in the aggregate). The Company has purchased two separate $20,000 death and permanent total disability insurance policies to mitigate the Company’s cash draw if such events were to occur. These purchase obligations are also recorded in “Members’ interest subject to mandatory redemption and undistributed earnings” on the Condensed Consolidated Balance Sheets.
The liability consists of the following:
September 30,
2022
December 31,
2021
Members’ interest subject to mandatory redemption$40,000 $40,000 
Net accumulated earnings15,862 15,115 
Total liability$55,862 $55,115 
The Company must determine whether any of its entities, including these two 50% owned subsidiaries, in which it participates, is a VIE. The Company determined that Myers is a VIE and that the Company is the primary beneficiary because, pursuant to the terms of the Myers Operating Agreement, the Company is exposed to the majority of potential losses of the partnership.
Summary financial information on an unconsolidated basis for Myers is as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Revenues$63,902 $50,338 $157,001 $121,432 
Operating (loss) income$(128)$808 $(6,184)$2,273 
Net (loss) income$(126)$2,757 $(1,261)$4,192 
6.CONSTRUCTION JOINT VENTURES
Joint Ventures with a Controlling Interest—We consolidate any venture that is determined to be a VIE for which we are the primary beneficiary, or which we otherwise effectively control. The equity held by the remaining owners and their portions of net income (loss) are reflected in stockholders’ equity on the Condensed Consolidated Balance Sheets line item “Noncontrolling interests” and in the Condensed Consolidated Statements of Operations line item “Net income attributable to noncontrolling interests,” respectively. The Company determined that a joint venture in which the Company’s Ralph L.
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Wadsworth Construction subsidiary is a 51% owner is a VIE and the Company is the primary beneficiary. Summary financial information for this construction joint venture is as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Revenues$16,544 $19,846 $37,006 $37,412 
Operating income$1,285 $1,290 $