STERLING CONSTRUCTION CO INC [STRL] Filings

10-Q 1 strl-20220331.htm 10-Q strl-20220331

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 March 31, 2022


☐						TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___


Commission File Number			1-31993


STERLING CONSTRUCTION COMPANY, INC.
(Exact name of registrant as specified in its charter)

Delaware			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 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 share	STRL	The 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 filer	þ
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 April 29, 2022 – 30,263,433

STERLING CONSTRUCTION COMPANY, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


			Page
PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements			3

Statements of Operations			3

Statements of Comprehensive Income			4

Balance Sheets			5

Statements of Cash Flows			6

Statements of Changes in Stockholders’ Equity			7

Notes to the Condensed Consolidated Financial Statements			8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20

Item 3. Quantitative and Qualitative Disclosures About Market Risk			26

Item 4. Controls and Procedures			26

PART II—OTHER INFORMATION

Item 1. Legal Proceedings			27

Item 1A. Risk Factors			27











Item 6. Exhibits			27

Signatures			28

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended March 31,
	2022		2021
Revenues	$	410,320	$	315,316
Cost of revenues	(354,181)		(270,284)
Gross profit	56,139		45,032
General and administrative expense	(23,072)		(17,099)
Intangible asset amortization	(3,568)		(2,866)
Acquisition related costs	(255)		—
Other operating expense, net	(975)		(2,312)
Operating income	28,269		22,755
Interest income	10		14
Interest expense	(4,587)		(6,004)
Gain (loss) on extinguishment of debt, net	2,428		(337)
Income before income taxes	26,120		16,428
Income tax expense	(6,597)		(4,760)
Net income	19,523		11,668
Less: Net income attributable to noncontrolling interests	(271)		(1,113)
Net income attributable to Sterling common stockholders	$	19,252	$	10,555

Net income per share attributable to Sterling common stockholders:
Basic	$	0.64	$	0.37
Diluted	$	0.64	$	0.37

Weighted average common shares outstanding:
Basic	29,964		28,279
Diluted	30,112		28,763

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2022		2021
Net income	$	19,523	$	11,668
Other comprehensive income, net of tax
Change in interest rate swap, net of tax (Note 10)	1,563		895
Total comprehensive income	21,086		12,563
Less: Comprehensive income attributable to noncontrolling interests	(271)		(1,113)
Comprehensive income attributable to Sterling common stockholders	$	20,815	$	11,450

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)


	March 31, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents ($26,449 and $35,378 related to variable interest entities (“VIEs”))	$	80,395	$	81,840
Accounts receivable ($24,537 and $26,176 related to VIEs)	226,397		232,153
Contract assets ($14,348 and $10,249 related to VIEs)	87,865		83,310
Receivables from and equity in construction joint ventures ($7,581 and $7,058 related to VIEs)	19,292		16,896
Other current assets ($206 and $1,087 related to VIEs)	21,941		20,492
Total current assets	435,890		434,691
Property and equipment, net ($10,189 and $10,420 related to VIEs)	212,603		204,316
Operating lease right-of-use assets, net ($5,702 and $5,097 related to VIEs)	37,344		24,520
Goodwill ($1,501 and $1,501 related to VIEs)	252,353		259,791
Other intangibles, net	300,055		303,223

Other non-current assets, net	4,488		4,455
Total assets	$	1,242,733	$	1,230,996

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable ($23,593 and $23,611 related to VIEs)	$	143,400	$	144,982
Contract liabilities ($15,461 and $22,583 related to VIEs)	116,182		127,932
Current maturities of long-term debt ($0 and $4,857 related to VIEs)	30,368		28,230
Current portion of long-term lease obligations ($2,370 and $2,334 related to VIEs)	10,117		8,841

Accrued compensation ($3,397 and $2,388 related to VIEs)	25,815		22,803
Other current liabilities ($871 and $889 related to VIEs)	13,632		18,972
Total current liabilities	339,514		351,760
Long-term debt ($0 and $81 related to VIEs)	417,331		428,588
Long-term lease obligations ($3,332 and $2,763 related to VIEs)	27,326		15,831
Members’ interest subject to mandatory redemption and undistributed earnings	55,754		55,115
Deferred tax liability, net	20,758		14,656
Other long-term liabilities	4,410		4,819
Total liabilities	865,093		870,769
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock, par value $0.01 per share; 38,000 shares authorized, 30,263 and 29,838 shares issued and outstanding	302		298
Additional paid in capital	276,597		280,274

Retained earnings	99,170		79,918
Accumulated other comprehensive loss	(160)		(1,723)
Total Sterling stockholders’ equity	375,909		358,767
Noncontrolling interests	1,731		1,460
Total stockholders’ equity	377,640		360,227
Total liabilities and stockholders’ equity	$	1,242,733	$	1,230,996

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2022		2021
Cash flows from operating activities:
Net income	$	19,523	$	11,668
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	11,767		8,305
Amortization of debt issuance costs and non-cash interest	556		660
Gain on disposal of property and equipment	(228)		(68)
(Gain) loss on debt extinguishment, net	(2,428)		337
Deferred taxes	5,640		4,142
Stock-based compensation	3,836		1,835
Change in fair value of interest rate swap	(90)		(22)
Changes in operating assets and liabilities (Note 16)	(19,393)		11,233
Net cash provided by operating activities	19,183		38,090
Cash flows from investing activities:
Capital expenditures	(14,969)		(11,209)
Proceeds from sale of property and equipment	406		208
Net cash used in investing activities	(14,563)		(11,001)
Cash flows from financing activities:

Repayments of debt	(5,928)		(30,543)
Distributions to noncontrolling interest owners	—		(1,959)

Net cash used in financing activities	(5,928)		(32,502)
Net change in cash, cash equivalents, and restricted cash	(1,308)		(5,413)
Cash, cash equivalents, and restricted cash at beginning of period	88,693		72,642
Cash, cash equivalents, and restricted cash at end of period	87,385		67,229
Less: restricted cash (Other current assets)	(6,990)		(5,827)
Cash and cash equivalents at end of period	$	80,395	$	61,402



Non-cash items:
Capital expenditures	$	2,457	$	3,131

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


	Three Months Ended March 31, 2022
	Common Stock			Additional Paid in Capital		Retained Earnings	Accumulated Other Comprehensive Loss		Total Sterling Stockholders’ Equity		Non-controlling Interests		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2021	29,838	$	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 stock	688	7		185			—		—		192		—		192
Shares withheld for taxes	(263)	(3)		(7,383)			—		—		(7,386)		—		(7,386)
Balance at March 31, 2022	30,263	$	302	$	276,597		$	99,170	$	(160)	$	375,909	$	1,731	$	377,640


	Three Months Ended March 31, 2021
	Common Stock			Additional Paid in Capital		Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Loss		Total Sterling Stockholders’ Equity		Non-controlling Interests		Total Stockholders’ Equity
	Shares	Amount				Shares	Amount
Balance at December 31, 2020	28,184	$	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 stock	668	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, 2021	28,606	$	286	$	251,335	—	$	—	$	27,828	$	(4,369)	$	275,080	$	613	$	275,693

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

($ and share values in thousands, except per share data)

(Unaudited)


1.			NATURE OF OPERATIONS

Business Summary

Sterling Construction Company, 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 in the Condensed Consolidated Financial Statements to conform to the current year presentation.

Estimates and Judgments—The preparation of the accompanying Condensed Consolidated Financial Statements in 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 March 31, 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.

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 March 31, 2022 and December 31, 2021, contract assets included $33,016 and $47,308 of retainage, respectively, and contract liabilities included $66,361 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 March 31, 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 months ended March 31, 2022 that was included in the contract liability balance on December 31, 2021 was $227,079. Revenue recognized for the three months ended March 31, 2021 that was included in the contract liability balance on December 31, 2020 was $155,558.

Cash and Restricted Cash—Our cash is comprised of highly liquid investments with maturities of three months or less. Restricted cash of $6,990 and $6,853 is included in “Other current assets” on the Condensed Consolidated Balance Sheets at March 31, 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 adjustment	1,357
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 $60,339 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 $130,000 related to the Acquisition, are deductible and amortizable for tax purposes over the next 15 years.

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 assets	5,953
Other current assets	193
Property and equipment, net	48,175
Other non-current assets, net	5,498
Accounts payable	(21,810)
Contract liabilities	(8,585)
Other current liabilities	(8,216)
Total net tangible assets	66,224
Identifiable intangible assets	70,200
Goodwill	60,339
Total consideration transferred	$	196,763

During the three months ended March 31, 2022 the total consideration and purchase price allocation 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 Assets—Intangible 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 relationships	25	$	42,700
Trade names	25	27,500
Total		$	70,200

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 period ending March 31, 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
	March 31, 2021
Pro forma revenue	$	343,539
Pro forma net income attributable to Sterling	$	10,814


4.			REVENUE FROM CUSTOMERS

Backlog—The following table presents the Company’s backlog, by segment:


	March 31, 2022		December 31, 2021
E-Infrastructure Solutions Backlog	$	541,150	$	432,613
Transportation Solutions Backlog	898,679		963,267
Building Solutions Backlog - Commercial	87,055		97,235
Total Backlog	$	1,526,884	$	1,493,115

The Company expects to recognize approximately 68% of its backlog as revenue during the next twelve months, and the balance thereafter.

Revenue Disaggregation—The following tables present the Company’s revenue disaggregated by major end market and contract type:


	Three Months Ended March 31,
Revenues by major end market	2022		2021
E-Infrastructure Solutions Revenues	$	168,927	$	96,572
Heavy Highway	112,745		99,516
Aviation	17,583		27,222
Water Containment and Treatment	19,887		14,219
Other	10,284		6,097
Transportation Solutions Revenues	160,499		147,054
Residential	54,270		44,174
Commercial	26,624		27,516
Building Solutions Revenues	80,894		71,690
Total Revenues	$	410,320	$	315,316

Revenues by contract type
Fixed-Unit Price	$	156,310	$	177,547
Lump-Sum	197,868		91,155
Residential and Other	56,142		46,614
Total Revenues	$	410,320	$	315,316

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 $13,985 and $13,905, at March 31, 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.

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 scope resulted in a net increase of $15,400 and $8,300 for the three months ended March 31, 2022 and 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 $1,000 and $1,800 for the three months ended March 31, 2022 and 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:


	March 31, 2022		December 31, 2021
Members’ interest subject to mandatory redemption	$	40,000	$	40,000
Net accumulated earnings	15,754		15,115
Total liability	$	55,754	$	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 for Myers is as follows:


	Three Months Ended March 31,
	2022		2021
Revenues	$	44,358	$	27,957
Operating (loss) income	$	(1,448)	$	718
Net income	$	1,737	$	352


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. 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 March 31,
	2022		2021
Revenues	$	7,853	$	8,242
Operating income	$	552	$	2,527
Net income	$	554	$	2,528

Joint Ventures with a Noncontrolling Interest—The Company accounts for unconsolidated joint ventures using a pro-rata basis in the Condensed Consolidated Statements of Operations and as a single line item (“Receivables from and equity in construction joint ventures”) in the Condensed Consolidated Balance Sheets. This method is a permissible modification of the equity method of accounting which is a common practice in the construction industry. Combined financial amounts of joint ventures in which the Company has a noncontrolling interest and the Company’s share of such amounts which are included in the Company’s Condensed Consolidated Financial Statements are shown below:


	March 31, 2022		December 31, 2021
Current assets	$	119,561	$	130,898
Current liabilities	$	(74,243)	$	(91,121)
Sterling’s receivables from and equity in construction joint ventures	$	19,292	$	16,896


	Three Months Ended March 31,
	2022		2021
Revenues	$	58,559	$	49,417
Income before tax	$	6,777	$	4,635
Sterling’s noncontrolling interest:
Revenues	$	26,608	$	21,944
Income before tax	$	3,067	$	2,135

The caption “Receivables from and equity in construction joint ventures” includes undistributed earnings and receivables owed to the Company. Undistributed earnings are typically released to the joint venture partners after the customer accepts the project as completed and the warranty period, if any, has passed.

Other—The use of joint ventures exposes us to a number of risks, including the risk that our partners may be unable or unwilling to provide their share of capital investment to fund the operations of the venture or complete their obligations to us, the venture, or ultimately, the customer. Differences in opinions or views among joint venture partners could also result in delayed decision-making or failure to agree on material issues, which could adversely affect the business and operations of the joint venture. In addition, agreement terms may subject us to joint and several liability for our venture partners, and the failure of our venture partners to perform their obligations could impose additional performance and financial obligations on us. The aforementioned factors could result in unanticipated costs to complete the projects, liquidated damages or contract disputes, including claims against our partners.


7.			PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows:


	March 31, 2022		December 31, 2021
Construction and transportation equipment	$	332,289	$	316,381
Buildings and improvements	24,298		24,042
Land	3,891		3,891
Office equipment	3,314		3,270
Total property and equipment	363,792		347,584
Less accumulated depreciation	(151,189)		(143,268)
Total property and equipment, net	$	212,603	$	204,316

Depreciation Expense—Depreciation expense is primarily included within cost of revenues and was $8,199 and $5,439 for the three months ended March 31, 2022 and 2021, respectively.


8.			OTHER INTANGIBLE ASSETS

The following table presents our acquired finite-lived intangible assets, including the weighted-average useful lives for each major intangible asset category and in total:


		March 31, 2022				December 31, 2021
	Weighted Average Life (Years)	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Customer relationships	25	$	275,323	$	(28,634)	$	274,923	$	(25,838)
Trade names	24	57,607		(5,380)		57,607		(4,726)
Non-compete agreements	5	2,487		(1,348)		2,487		(1,230)
Total	24	$	335,417	$	(35,362)	$	335,017	$	(31,794)

The Company’s intangible amortization expense was $3,568 and $2,866 for the three months ended March 31, 2022 and 2021, respectively.


9.			DEBT

The Company’s outstanding debt was as follows:


	March 31, 2022		December 31, 2021
Term Loan Facility	$	441,081	$	446,888
Revolving Credit Facility	—		—
Credit Facility	441,081		446,888

Other debt	11,441		15,309
Total debt	452,522		462,197
Less - Current maturities of long-term debt	(30,368)		(28,230)
Less - Unamortized debt issuance costs	(4,823)		(5,379)
Total long-term debt	$	417,331	$	428,588

Credit Facility—Our amended credit agreement (as amended, the “Credit Agreement”) provides the Company with senior secured debt financing (collectively, the “Credit Facility”) consisting of (i) a senior secured first lien term loan facility (the “Term Loan Facility”) in the aggregate principal amount of $540,000 and (ii) a senior secured first lien revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of $75,000 (with a $75,000 limit for the issuance of letters of credit and a $15,000 sublimit for swing line loans). The obligations under the Credit Facility are secured by substantially all assets of the Company and the subsidiary guarantors, subject to certain permitted liens and interests of other parties. The Credit Facility will mature on October 2, 2024.

The Term Loan Facility bears interest at either the base rate plus a margin, or at a one to twelve-month LIBOR rate plus a margin, at the Company’s election. At March 31, 2022, the Company calculated interest using a one-month LIBOR rate and an applicable margin of 0.21% and 2.50% per annum, respectively. We continue to utilize an interest rate swap to hedge against $200,000 of the outstanding Term Loan Facility, which resulted in a weighted average interest rate of approximately 3.28% per annum during the three months ended March 31, 2022. Scheduled principal payments on the Term Loan Facility are made quarterly and total approximately $23,200, $31,900, and $26,100 for each of the years ending 2022, 2023 and 2024, respectively. A final payment of all principal and interest then outstanding on the Term Loan Facility is due on October 2, 2024. The Company is required to make mandatory prepayments on the Credit Facility with proceeds received from issuances of debt, events of loss and certain dispositions, and is also required to prepay the Credit Facility with a certain percentage of its excess cash flow within 5 days after receipt of its annual audited financial statements. For the three months ended March 31, 2022, the Company made scheduled term loan payments of $5,806.

The Revolving Credit Facility bears interest at the same rate options as the Term Loan Facility. In addition to interest on debt borrowings, we are assessed quarterly commitment fees on the unutilized portion of the facility as well as letter of credit fees on outstanding instruments. At March 31, 2022, we had no outstanding borrowings under the $75,000 Revolving Credit Facility.

Debt Issuance Costs—The costs associated with the Credit Facility are reflected on the Condensed Consolidated Balance Sheets as a direct reduction from the related debt liability and amortized over the term of the facility. Amortization of debt

issuance costs was $556 and $660 for the three months ended March 31, 2022 and 2021, respectively, and was recorded as interest expense.

Other Debt—Other debt has primarily consisted of a $10,000 subordinated promissory note to one of the Plateau sellers and short-term Paycheck Protection Program loans (the “PPP Loans”) received by the Company’s two 50% owned subsidiaries. During the first quarter of 2022, the Small Business Administration forgave the final outstanding PPP Loan of approximately $4,800, of which the Company recorded a gain on debt extinguishment of $2,428 for its 50% portion of the gain.

Compliance and Other—The Credit Agreement contains various affirmative and negative covenants that may, subject to certain exceptions, restrict the ability of us and our subsidiaries to, among other things, grant liens, incur additional indebtedness, make loans, advances or other investments, make non-ordinary course asset sales, declare or pay dividends or make other distributions with respect to equity interests, purchase, redeem or otherwise acquire or retire capital stock or other equity interests, or merge or consolidate with any other person, among various other things. In addition, the Company is required to maintain certain financial covenants. As of March 31, 2022, we were in compliance with all of our restrictive and financial covenants. The Company’s debt is recorded at its carrying amount in the Condensed Consolidated Balance Sheets. At March 31, 2022 and December 31, 2021, the carrying values of our debt outstanding approximated the fair values.


10.			FINANCIAL INSTRUMENTS

Interest Rate Derivative—We continue to utilize a swap arrangement to hedge against interest rate variability associated with $200,000 of the $441,081 outstanding under the Term Loan Facility. The Company has designated its interest rate swap agreement as a cash flow hedging derivative. To the extent the derivative instrument is effective and the documentation requirements have been met, changes in fair value are recognized in other comprehensive income (loss) (“OCI”) until the underlying hedged item is recognized in earnings. At March 31, 2022, the fair value of the swap recorded in accumulated other comprehensive income (loss) (“AOCI”) was a net loss of $210.

Derivatives Disclosures

Fair Value—Financial instruments are required to be categorized within a valuation hierarchy based upon the lowest level of input that is significant to the fair value measurement. The three levels of the valuation hierarchy are as follows:

•Level 1—Fair value is based on quoted prices in active markets.

•Level 2—Fair value is based on internally developed models that use, as their basis, readily observable market parameters. Our derivative positions are classified within level 2 of the valuation hierarchy as they are valued using quoted market prices for similar assets and liabilities in active markets. These level 2 derivatives are valued utilizing an income approach, which discounts future cash flow based on current market expectations and adjusts for credit risk.

•Level 3—Fair value is based on internally developed models that use, as their basis, significant unobservable market parameters. The Company did not have any level 3 classifications at March 31, 2022 or December 31, 2021.

The following table presents the fair value of the interest rate derivative by valuation hierarchy and balance sheet classification:


	March 31, 2022								December 31, 2021
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total





Other current liabilities	$	—	$	(322)	$	—	$	(322)	$	—	$	(2,438)	$	—	$	(2,438)
Other non-current liabilities	—		—		—		—		—		—		—		—
Total liabilities at fair value	$	—	$	(322)	$	—	$	(322)	$	—	$	(2,438)	$	—	$	(2,438)

OCI—The following table presents the total value recognized in OCI and reclassified from AOCI into earnings during the three months ended March 31, 2022 and 2021 for derivatives designated as cash flow hedges:


	Three Months Ended						Three Months Ended
	March 31, 2022						March 31, 2021
	Before Tax		Tax		Net of Tax		Before Tax		Tax		Net of Tax
Net gain (loss) recognized in OCI	$	1,285	$	(293)	$	992	$	126	$	(29)	$	97
Net amount reclassified from AOCI into earnings(1)	741		(170)		571		1,034		(236)		798
Change in other comprehensive income	$	2,026	$	(463)	$	1,563	$	1,160	$	(265)	$	895

(1) Net unrealized losses totaling $210 are anticipated to be reclassified from AOCI into earnings during the next 12 months due to settlement of the associated underlying obligations.


11.			LEASE OBLIGATIONS

The Company has operating and finance leases primarily for construction and transportation equipment, as well as office space. The Company’s leases have remaining lease terms of one month to fourteen years, some of which include options to extend the leases for up to ten years.

The components of lease expense are as follows:


	Three Months Ended March 31,
	2022		2021
Operating lease cost	$	2,693	$	1,512
Short-term lease cost	$	3,168	$	2,124
Finance lease cost:
Amortization of right-of-use assets	$	41	$	50
Interest on lease liabilities	4		6
Total finance lease cost	$	45	$	56

Supplemental cash flow information related to leases is as follows:


	Three Months Ended March 31,
Cash paid for amounts included in the measurement of lease liabilities:	2022		2021

Operating cash flows from operating leases	$	2,991	$	1,518
Operating cash flows from finance leases	$	4	$	6
Financing cash flows from finance leases	$	41	$	50

Right-of-use assets obtained in exchange for lease obligations (non-cash):
Operating leases	$	15,897	$	896
Finance leases	$	—	$	—

Supplemental balance sheet information related to leases is as follows:


Operating Leases	March 31, 2022			December 31, 2021

Operating lease right-of-use assets	$	37,344		$	24,520

Current portion of long-term lease obligations	$	10,117		$	8,841
Long-term lease obligations	27,326			15,831
Total operating lease liabilities	$	37,443		$	24,672
Finance Leases
Property and equipment, at cost	$	1,479		$	1,479
Accumulated depreciation	(953)			(907)
Property and equipment, net	$	526		$	572

Current maturities of long-term debt	$	143		$	148
Long-term debt	188			224
Total finance lease liabilities	$	331		$	372
Weighted Average Remaining Lease Term
Operating leases	5.6			5.4
Finance leases	2.3			2.5
Weighted Average Discount Rate
Operating leases	4.9		%	5.0		%
Finance leases	4.3		%	4.3		%

Maturities of lease liabilities are as follows:


Year Ending December 31,	Operating Leases		Finance Leases

2022 (excluding the three months ended March 31, 2022)	$	8,786	$	116
2023	9,507		154
2024	7,453		77
2025	5,713		—
2026	3,926		—
2027	3,579		—
Thereafter	3,978		—
Total lease payments	$	42,942	$	347
Less imputed interest	(5,499)		(16)
Total	$	37,443	$	331


12.			COMMITMENTS AND CONTINGENCIES

The Company is required by its insurance providers to obtain and hold standby letters of credit. These letters of credit serve as a guarantee by the banking institution to pay the Company’s insurance providers the incurred claim costs attributable to its general liability, workers’ compensation and automobile liability claims, up to the amount stated in the standby letters of credit, in the event that these claims were not paid by the Company. These letters of credit are cash collateralized, resulting in the cash being designated as restricted.

The Company, including its construction joint ventures and its consolidated 50% owned subsidiaries, is now and may in the future be involved as a party to various legal proceedings that are incidental to the ordinary 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. There are no significant unresolved legal issues as of March 31, 2022.


13.			INCOME TAXES

The Company and its subsidiaries are based in the U.S. and file federal and various state income tax returns. The components of the provision for income taxes were as follows:


	Three Months Ended March 31,
	2022		2021
Current tax expense	$	957	$	618
Deferred tax expense