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Sterling Construction Company announces 2019 financial results

Published by , Deputy Editor
World Cement,

Consolidated fourth quarter 2019 financial results compared to fourth quarter 2018:

Revenues were US$346.5 million compared to US$255.2 million;

Gross margin was 9.7% of revenues compared to 11.0%;

Plateau acquisition related costs totalled US$2.2 million or US$0.08 per diluted share;

Gross margin and net income were impacted by a US$10.2 million charge or US$0.36 per diluted share related to a claim resolution of a 2014 legacy project;

Recognised a non-cash income tax benefit of US$25.8 million or US$0.92 per diluted share, primarily due to the reversal of our valuation allowance;

Net income attributable to Sterling common stockholders was US$22.3 million or US$6.3 million on an adjusted basis compared to US$5.6 million;

Net income per diluted share attributable to Sterling common stockholders was US$0.79 or US$0.22 on an adjusted basis compared to US$0.21; and,

Adjusted EBITDA was US$20.2 million compared to US$12.7 million.

Consolidated full year 2019 financial results compared to full year 2018:

Revenues were US$1.1 billion compared to US$1.0 billion;

Gross margin was 9.6% of revenues compared to 10.6%;

Plateau acquisition related costs totalled US$4.3 million or US$0.16 per diluted share;

Net income attributable to Sterling common stockholders was US$39.9 million or US$24.5 million on an adjusted basis compared to US$25.2 million;

Net income per diluted share attributable to Sterling common stockholders was US$1.47 or US$0.90 on an adjusted basis compared to US$0.93; and,

Adjusted EBITDA was US$62.0 million compared to US$55.0 million.

Consolidated financial position, liquidity and cash flows at 31 December 2019:

Cash and cash equivalents were US$45.7 million; and,

Debt totalled US$433.1 million reflecting Sterling’s new debt facility utilised to fund the 2 October 2019 Plateau acquisition and retire its prior debt facility.

Adjusted basis excludes costs related to the acquisition of Plateau (including related refinancing) and non-cash taxes.

Business overview

With the acquisition of Plateau, the company has added a third diversified platform for growth and has realigned its operating segments to reflect management’s present oversight of operations. Sterling’s operations now consist of three reporting segments: Heavy Civil, Specialty Services and Residential. The company’s commercial business has been reclassified from the Heavy Civil segment into a newly formed Specialty Services reporting segment, along with the Plateau operations. The segment information for the prior periods presented has been recast to conform to the current presentation.

Fourth quarter 2019 revenues increased US$91.4 million compared to the prior year quarter, primarily driven by US$84.6 million generated from Plateau.

Gross profit was US$33.6 million in the fourth quarter of 2019, an increase of US$5.4 million from the prior year fourth quarter. Gross margin declined 135 basis points to 9.7%, partly offset by the inclusion of three months of gross profit from Plateau operations in 2019.

In the quarter, Sterling was able to come to an interim agreement related to a 2014 project involving the construction of three separate bridges in Texas that had suffered from significant schedule delays and cost overruns due to major owner design flaws. This agreement enabled Sterling to recover approximately US$17 million in costs to date related to these delays and defined a better dispute resolution process along with agreed upon rates for potential future delays. As part of this agreement, Sterling agreed to work on all three bridges simultaneously (versus doing one at a time) to accelerate the final completion schedule. This revised schedule has significantly increased the amount of labour, equipment and infrastructure required to complete the project under the new terms of the agreement and resulted in a reduction of gross profit in the quarter of US$10.2 million, or US$0.36 per diluted share.

General and administrative expenses were US$16.9 million in the fourth quarter of 2019, or 4.9% of revenues compared to US$13.0 million or 5.1% of revenues in the fourth quarter of 2018, reflecting incremental general and administrative expenses attributable to the Plateau acquisition of US$3.0 million.

Heavy Civil and Specialty Services backlog highlights

Combined backlog on 31 December 2019 was US$1.3 billion, up from US$1.1 billion on 31 December 2018. Combined backlog consists of US$1.1 billion of backlog and US$273.5 million of unsigned contracts as of 31 December 2019 compared to US$850.7 million and US$292.7 million on 31 December 2018, respectively. On 31 December 2019, US$164.5 million of the company’s backlog was attributable to Plateau. No residential construction contracts are included in backlog.

Total margin in backlog has increased approximately 300 basis points, from 8.5% on 31 December 2018 to 11.5% on 31 December 2019. Approximately two-thirds of the gross margin improvement relates to the inclusion of Plateau’s backlog with the other one-third improvement driven by the Sterling legacy businesses. Combined Backlog gross margin improved from 8.9% on 31 December 2018 to 11.0% on 31 December 2019.

CEO Remarks and outlook

“Our fourth quarter concluded another outstanding year for Sterling, including the transformative acquisition of Plateau, which we closed on October 2nd,” stated Joe Cutillo, Sterling’s Chief Executive Officer. “As anticipated, Plateau was immediately accretive to our fourth quarter results and propelled our Backlog to a record level, positioning us for profitable growth in 2020. After only three months as part of our business portfolio, we are extremely pleased by the quality of Plateau’s management team, its high level of operational discipline and the attractiveness of its project pipeline.”

Mr. Cutillo continued, “With respect to our fourth quarter 2019 results, revenues increased slightly on an organic basis driven by commercial and aviation projects which were largely offset by the impact of continued delays in the start of two large design-build joint venture projects that we mentioned in the second quarter of 2019. We expect our second quarter 2020 results to begin to reflect our execution on these attractive projects and another recently announced design-build joint venture project in Utah.”

“Notably, during our fourth quarter, we reached an agreement and resolved numerous pending change orders on a bridge project in Texas that Sterling was awarded in 2014, that had encountered a multitude of delays over the years due to owner design issues. Additionally, we successfully negotiated the inclusion of prospective protocols to address future design changes, related schedule reliefs and accelerated resolution of change order requests and agreed to a new schedule to accelerate the project completion date. These components of the agreement enabled us to recoup US$17 million of incurred cost to date and significantly reduce the risks of further unreimbursed cost increases through the completion of the project in early 2022.”

“Results for our Residential segment were essentially flat as compared to the fourth quarter of last year, as we’d anticipated. Revenue growth has continued to be pressured by a shift in demand towards smaller square footage slabs, although margin levels remain robust. We continue to make good progress with the ramp-up of our residential business in Houston and expect margins to improve for us in 2020 as we gain critical mass in this market. Overall, we continue to see low to mid-single digit revenue growth and continued attractive margins in our residential segment, as we are positioned in very attractive and rapidly growing geographies.”

Mr. Cutillo concluded, “Based on the anticipated contribution from Plateau and our record high Backlog, along with our view on current booking trends, market strength, continued mix shift and improved execution, we expect to generate full year 2020 revenues of between US$1.375 billion and US$1.4 billion. With the integration of Plateau into Sterling, we expect that our blended gross margin will rise to the 13% to 14% range. Therefore, our expectation for 2020 net income attributable to Sterling common stockholders is between US$38 million to US$41 million, excluding acquisition related costs of US$2 million to US$3 million. We expect our full year 2020 diluted average common shares outstanding to be approximately 28.5 million. Importantly, our 2020 net income guidance includes an effective income tax rate of approximately 26%. This rate includes non-cash income tax expense of approximately 21% of pretax income; or US$11 million (US$0.39 per diluted share) compared to a non-cash income tax benefit in 2019 of US$27.4 million (US$1.01 per diluted share). This change in non-cash tax expense reflects the reversal of our net operating tax loss reserve in the fourth quarter of 2019 driven by sustained taxable income over the past several years in accordance with the accounting requirements.”

“Our outlook does not assume any major positive changes in government investment in infrastructure, which would likely enhance our growth forecast beginning in 2021 and beyond as we are well-positioned to win further economically compelling heavy civil project opportunities across our geographies. We expect our 2020 EBITDA to be US$125 million to US$135 million. With the free cash flow we expect to generate in 2020, we are targeting a reduction in our debt to forward looking EBITDA leverage ratio from our current proforma basis of 3.5 x, to approximately 3.0 x by the end of the year. Considering all of these factors, we are highly encouraged about our prospects for generating additional value for our shareholders over the course of 2020.”

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