# Sterling Infrastructure, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Sterling Infrastructure, Inc.](/companies/strl.md) (CIK 874238)
- Form: 10-Q
- Filed: 2023-11-07
- Accepted by EDGAR: Nov 7, 2023, 09:09 ET
- Period: 2023-09-30
- Accession: 0000874238-23-000118
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/874238/000087423823000118/strl-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/874238/000087423823000118/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $560.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $1.49bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $468.5m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $1.24bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $91.9m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $245.9m | us-gaap:GrossProfit |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $57.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $150.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $13.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $35.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $39.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $98.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $1.26 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $3.17 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $1.28 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $3.20 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 31,217,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 31,048,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $331.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $49.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-09-30 | $409.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $876.0m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $1.72bn | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $685.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $1.14bn | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $321.6m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-09-30 | $35.1m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-09-30 | $580.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 47,560 characters.

### Cautionary Statement Regarding Forward-Looking Statements

This quarterly report on Form 10-Q (“Report”) contains statements that are, or may be considered to be, “forward-looking statements” regarding the Company which represent our expectations and beliefs concerning future events. These forward-looking statements are intended to be covered by the safe harbor for certain forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements included herein relate to matters that are not based on historical facts and reflect our current expectations as of the date of this Report, regarding items such as: our industry and business outlook, including relating to federal, state and municipal funding for projects, the residential home building market and demand from our customers; business strategy, including the integration of recent acquisitions and the potential for additional future acquisitions; expectations and estimates relating to our backlog; expectations concerning our market position; future operations; margins; profitability; capital expenditures; liquidity and capital resources; and other financial and operating information. Forward-looking statements may use or contain words such as “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “intend,” “likely,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “strategy,” “will,” “would” and similar terms and phrases.

Actual events, results and outcomes may differ materially from those anticipated, projected or assumed in the forward-looking statements due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, the following:

- factors that affect demand for our services or demand in end markets, including economic recessions or volatile economic cycles;
- cost escalations associated with our contracts, including changes in availability, proximity and cost of materials such as steel, cement, concrete, aggregates, oil, fuel and other construction materials, including changes in U.S. trade policies and retaliatory responses from other countries and cost escalations associated with subcontractors and labor;
- actions of suppliers, subcontractors, design engineers, joint venture partners, customers, competitors, banks, surety companies and others which are beyond our control, including suppliers’, subcontractors’ and joint venture partners’ failure to perform;
- factors that affect the accuracy of estimates inherent in the bidding for contracts, estimates of backlog, and over time revenue recognition accounting policies, including onsite conditions that differ materially from those assumed in the original bid, contract modifications, mechanical problems with machinery or equipment and effects of other risks referenced below;
- changes in costs to lease, acquire or maintain our equipment;
- changes in general economic conditions, including reductions in federal, state and local government funding for projects, changes in those governments’ budgets, practices, laws and regulations and interest rate fluctuations and other adverse economic factors beyond our control in our geographic markets;
- the presence of competitors with greater financial resources or lower margin requirements than ours, and the impact of competitive bidders on our ability to obtain new backlog at reasonable margins acceptable to us;
- design/build contracts which subject us to the risk of design errors and omissions;
- our ability to obtain bonding or post letters of credit;
- adverse weather conditions;
- potential disruptions, failures or security breaches of the information technology systems on which we rely to conduct our business;
- potential risks and uncertainties relating to major public health crises, including the COVID-19 pandemic;
- our dependence on a limited number of significant customers;
- our ability to attract and retain key personnel;
- increased unionization of our workforce or labor costs and any work stoppages or slowdowns;
- federal, state and local environmental laws and regulations where non-compliance can result in penalties and/or termination of contracts as well as civil and criminal liability;
- citations issued by any governmental authority, including the Occupational Safety and Health Administration;
- our ability to qualify as an eligible bidder under government contract criteria;
- delays or difficulties related to the completion of our projects, including additional costs, reductions in revenues or the payment of liquidated damages, or delays or difficulties related to obtaining required governmental permits and approvals;
- any prolonged shutdown of the government;
- our ability to successfully identify, finance, complete and integrate recent and potential acquisitions;
- our ability to raise additional capital in the future on favorable terms or at all;
- our ability to generate cash flows sufficient to fund our financial commitments and objectives;
- our ability to meet the terms and conditions of our debt obligations and covenants; and
- the other risks discussed in more detail in the Company’s annual report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”) under “Part I, Item 1A. Risk Factors,” or our other filings with the Securities and Exchange Commission.

In reading this Report, you should consider these factors carefully in evaluating any forward-looking statements and you are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements reflect our current expectations as of the date of this Report regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect. Additional factors or risks that we currently deem immaterial, that are not presently known to us or that arise in the future could also cause our actual results to differ materially from our expected results. Given these uncertainties, investors are cautioned that many of the assumptions upon which our forward-looking statements are based are likely to change after the date the forward-looking statements are made. Further, we may make changes to our business plans that could affect our results. Although we believe that our plans, intentions and expectations reflected in, or suggested by, the forward-looking statements that we make in this Report are reasonable, we can provide no assurance that they will be achieved.

*The forward-looking statements speak only as of the date made, and we undertake no obligation to publicly update or revise any forward-looking statements for any reason, whether as a result of new information, future events or developments, changed circumstances, or otherwise, and notwithstanding any changes in our assumptions, changes in business plans, actual experience or other changes.*

### OVERVIEW

*General—*Sterling Infrastructure, Inc., (“Sterling,” “the Company,” “we,” “our” or “us”) operates through a variety of subsidiaries within three segments specializing in E-Infrastructure, Transportation and Building Solutions in the United States, primarily across the Southern, Northeastern, Mid-Atlantic and Rocky Mountain regions and Hawaii. E-Infrastructure Solutions provides advanced, large-scale site development services for manufacturing, data centers, e-commerce distribution centers, warehousing, power generation and more. Transportation Solutions includes infrastructure and rehabilitation projects for highways, roads, bridges, airports, ports, rail and storm drainage systems. Building Solutions includes 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.

*Myers Disposition—*On November 30, 2022, we entered into an agreement (the “Myers Agreement”) and sold the Company’s 50% ownership interest in its partnership with Myers & Sons Construction L.P. (“Myers”) for $18 million in cash. The Company received two payments in the first quarter of 2023 totaling $14 million and in accordance with the Myers Agreement’s payment terms, two payments of $2 million each are due by the end of 2025 and 2027. The disposition is consistent with the Company’s strategic shift to reduce its portfolio of low-bid heavy highway and water containment and treatment projects in order to reduce risk, to improve the Company’s margins and to focus on its strategic geographies outside of California. This strategic shift had a major effect on our operations and consolidated financial results, and accordingly, the historical results of Myers have been presented as discontinued operations in our Condensed Consolidated Statements of Operations. Prior to being disclosed as a discontinued operation, the results of Myers were included within our Transportation Solutions segment. The following discussion reflects continuing operations only, unless otherwise indicated. See *Note 3 - Dispositions* for further discussion.

### MARKET OUTLOOK AND TRENDS

We see favorable opportunities for long-term growth across each of our business segments despite the current challenging macroeconomic environment. Inflation, supply chain constraints and labor shortages are easing, though intermittent stresses continue. We remain focused on our strategic objectives, which we believe will enhance our competitive position. These objectives include: 1) growth in our E-Infrastructure Solutions segment, with particular focus on large, high-value projects; 2) risk reduction through a continued shift in our Transportation Solutions business away from low-bid heavy highway work, toward alternative delivery and design-build projects; 3) continuing to grow market share and geographic presence in Building Solutions; and 4) improving our margins in each of our segments.

*E-Infrastructure Solutions—*Sterling’s E-Infrastructure Solutions business is driven by our customers’ investments in the development of advanced manufacturing centers, data centers, e-commerce distribution centers and warehouses. We see significant growth opportunities tied to the implementation of multi-year capital deployment plans by customers in the electric vehicle (EV), battery, solar, food, and semiconductor manufacturing markets. Sterling has recently been awarded several large projects related to investments in EV and solar products. We anticipate continued strong demand from these and other technology sectors, supported by Federal government investment initiatives and incentives. Additionally, we continue to benefit from activity related to multiphase hyperscale data center development. While we are seeing strength across the majority of our end customers, in 2023 we have experienced a decline in large e-commerce distribution center and small warehouse activity. We expect these markets will remain muted through 2024.

*Transportation Solutions—*Sterling’s Transportation Solutions business is primarily driven by federal, state and municipal funding. Federal funds, on average, provide 50% of annual State Department of Transportation capital outlays for highway and bridge projects. Sterling is benefiting from a number of federal, state and local infrastructure investment programs. At the state and local level, the November 2020 elections saw strong support for Transportation initiatives with the passage of many ballot measures that secured, and in some cases increased, funding. At the Federal level, the November 2021 Infrastructure Investments and Jobs Act (“IIJA”) includes approximately $643 billion in funding for transportation programs ($432 billion for highways, $109 billion for transportation and $102 billion for rail), of which $284 billion is an increase over historic investment levels that will fund new transportation infrastructure. The IIJA also includes $25 billion of funding for airport modernization.

*Building Solutions—*Our Building Solutions segment is comprised of our residential and commercial businesses. The business is driven by new home starts in Dallas-Fort Worth, the segment's largest market, and continued expansion in the Houston and Phoenix markets. Building Solutions' core customer base includes top national, regional and custom home builders in our areas. In 2022, the residential market experienced significant price volatility and availability for key materials, including concrete, steel and lumber, as well as increases in subcontractor labor costs and decreased labor availability. The Company negotiated with customers to successfully recoup the increases in material and labor costs through price increases. While the key materials markets have stabilized of late, interest rates have continued to escalate, making new home ownership less affordable. In turn, we saw a decrease in housing starts and reduced demand for single-family homes in late 2022. However, the year is showing signs of recovery, which we anticipate will continue through 2023. For our commercial business, the demand in the multi-family home market has started to increase, helping to offset the decrease in housing starts.

### BACKLOG

Our remaining performance obligations on our projects, as defined in ASC 606, do not differ from what we refer to as “Backlog.” Our Backlog represents the amount of revenues we expect to recognize in the future from our contract commitments on projects. The contracts in Backlog are typically completed in 6 to 36 months. Our unsigned awards (“Unsigned Awards”) are excluded from Backlog until the contract is executed by our customer. We refer to the combination of our Backlog and Unsigned Awards as “Combined Backlog.” Our book-to-burn ratio is determined by taking our additions to Backlog and dividing it by revenue for the applicable period. This metric allows management to monitor the Company’s business development efforts to ensure we grow our Backlog and our business over time, and management believes that this measure is useful to investors for the same reason.

At September 30, 2023, our Backlog was $2.01 billion, as compared to $1.41 billion at December 31, 2022, with a book-to-burn ratio of 1.5X for the nine months ended September 30, 2023.

Unsigned Awards were $375.2 million at September 30, 2023 and $275.0 million at December 31, 2022. Combined Backlog totaled $2.39 billion and $1.69 billion at September 30, 2023 and December 31, 2022, respectively, with a book-to-burn ratio of 1.5X for the nine months ended September 30, 2023.

The Company’s margin in Backlog has increased to 15.2% at September 30, 2023 from 14.3% at December 31, 2022 and the Combined Backlog margin increased to 14.9% at September 30, 2023 from 14.2% at December 31, 2022, driven by a greater mix of E-Infrastructure Solutions backlog and an improved backlog margin mix within Transportation Solutions.

### RESULTS OF OPERATIONS

### Consolidated Results (2023 compared to 2022)

Consolidated financial highlights for the three and nine months ended September 30, 2023 and 2022 are as follows:

*(In thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $560,347 | $493,040 | $1,486,251 | $1,320,829 |
| Gross profit | 91,867 | 79,444 | 245,883 | 205,601 |
| General and administrative expenses | (25,237) | (22,235) | (72,592) | (63,376) |
| Intangible asset amortization | (3,736) | (3,509) | (11,209) | (10,591) |
| Acquisition related costs | (103) | (77) | (352) | (562) |
| Other operating expense, net | (5,654) | (4,148) | (11,703) | (8,245) |
| Operating income | 57,137 | 49,475 | 150,027 | 122,827 |
| Interest, net | (3,107) | (4,970) | (14,189) | (14,061) |
| Income before income taxes and noncontrolling interests | 54,030 | 44,505 | 135,838 | 108,766 |
| Income tax expense | (13,891) | (13,173) | (35,429) | (30,966) |
| Less: Net income attributable to noncontrolling interests | (786) | (634) | (1,927) | (1,316) |
| Net income attributable to Sterling common stockholders | $39,353 | $30,698 | $98,482 | $76,484 |

Gross margin 16.4 % 16.1 % 16.5 % 15.6 %

*Revenues—*Revenues were $560.3 million for the third quarter of 2023, an increase of $67.3 million or 13.7% compared with the third quarter of 2022. The increase in the third quarter of 2023 was driven by a $35.8 million increase in Transportation Solutions and a $33.1 million increase in Building Solutions, partly offset by a $1.6 million decrease in E-Infrastructure Solutions. Revenues were $1.49 billion for the nine months ended September 30, 2023, an increase of $165.4 million or 12.5% compared with the nine months ended September 30, 2022. The increase in the nine months ended September 30, 2023 was driven by a $64.3 million increase in Building Solutions, a $61.9 million increase in E-Infrastructure Solutions and a $39.2 million increase in Transportation Solutions.

*Gross profit—*Gross profit was $91.9 million for the third quarter of 2023, an increase of $12.4 million or 15.6% compared to the third quarter of 2022. Gross profit was $245.9 million for the nine months ended September 30, 2023, an increase of $40.3 million or 19.6% compared to the nine months ended September 30, 2022. The increases in gross profit were primarily driven by higher volume, an improved project margin mix in Transportation Solutions and an improving supply chain.

*Gross margin—*The Company’s gross margin as a percent of revenue increased to 16.4% in the third quarter of 2023, as compared to 16.1% in the third quarter of 2022. The Company’s gross margin as a percent of revenue increased to 16.5% in the nine months ended September 30, 2023, as compared to 15.6% in the nine months ended September 30, 2022. The increases in gross margin as a percent of revenue were due to an easing of supply chain challenges starting in the second quarter of 2023.

Contracts in progress which were not substantially completed totaled approximately 230 and 240 at September 30, 2023 and 2022, respectively. 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 visibility the Company has in refining its estimate of total revenues (including incentives, delay penalties and change orders), costs and gross profit. Thus, gross profit as a percent of revenues can increase or decrease from comparable and subsequent quarters due to variations among contracts and depending upon the stage of completion of contracts.

*General and administrative expenses—*General and administrative expenses were $25.2 million, or 4.5% of revenue, for the third quarter of 2023, compared to $22.2 million, or 4.5% of revenue, for the third quarter of 2022. General and administrative expenses were $72.6 million, or 4.9% of revenue, for the nine months ended September 30, 2023, compared to $63.4 million, or 4.8% of revenue, for the nine months ended September 30, 2022. The Company anticipates that general and administrative expense will be approximately 5% of revenue for the full year 2023.

*Interest, net—*Interest, net was $3.1 million for the third quarter of 2023, compared to $5.0 million for the third quarter of 2022, and was $14.2 million for the nine months ended September 30, 2023, compared to $14.1 million for the nine months ended September 30, 2022. The three and nine months ended September 30, 2023 experienced higher interest expense due to continued interest rate increases in 2023 on our Credit Facility and the expiration of our interest rate swap in the fourth quarter of 2022, partly offset by higher interest income due to increased interest rates in 2023 on our growing cash balance.

*Income taxes—*The effective income tax rate was 25.7% for the third quarter of 2023 and 26.1% for the nine months ended September 30, 2023. The rates varied from the statutory rate primarily as a result of state income taxes, non-deductible compensation and other permanent differences. The Company incurred a tax rate benefit for the three and nine months ended September 30, 2023 for increased tax deductions related to stock compensation. The Company anticipates an effective income tax rate for the full year 2023 of approximately 27%. See *Note 11 - Income Taxes* for more information.

### Segment Results (2023 compared to 2022)

The Company’s operations consist of three reportable segments: E-Infrastructure Solutions, Transportation Solutions and Building Solutions. We incur expenses at the corporate level that relate to our business as a whole. Certain of these amounts have been charged to our business segments by various methods, largely on the basis of usage, with the unallocated remainder reported in the “Corporate G&A Expense” line. Corporate general and administrative expense is primarily comprised of corporate headquarters facility expense, the cost of the executive management team, and expenses pertaining to certain centralized functions that benefit the entire Company but are not directly attributable to the businesses, such as corporate human resources, legal, governance, compliance and finance functions. The segment information for the prior period has been recast to conform to the current presentation.

*(In thousands)*

| Revenues | Three Months Ended September 30, 2023 | % of Revenue | 2022 | % of Revenue | Nine Months Ended September 30, 2023 | % of Revenue | 2022 | % of Revenue |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| E-Infrastructure Solutions | $253,948 | 45% | $255,530 | 52% | $719,936 | 48% | $658,005 | 50% |
| Transportation Solutions | 192,996 | 35% | 157,224 | 32% | 455,223 | 31% | 416,005 | 31% |
| Building Solutions | 113,403 | 20% | 80,286 | 16% | 311,092 | 21% | 246,819 | 19% |
| Total Revenues | $560,347 |  | $493,040 |  | $1,486,251 |  | $1,320,829 |  |
| **Operating Income** |  |  |  |  |  |  |  |  |
| E-Infrastructure Solutions | $35,945 | 14.2% | $37,533 | 14.7% | $103,381 | 14.4% | $91,642 | 13.9% |
| Transportation Solutions | 14,487 | 7.5% | 9,700 | 6.2% | 29,649 | 6.5% | 21,553 | 5.2% |
| Building Solutions | 12,848 | 11.3% | 9,324 | 11.6% | 35,029 | 11.3% | 28,433 | 11.5% |
| Segment Operating Income | 63,280 | 11.3% | 56,557 | 11.5% | 168,059 | 11.3% | 141,628 | 10.7% |
| Corporate G&A Expense | (6,040) |  | (7,005) |  | (17,680) |  | (18,239) |  |
| Acquisition Related Costs | (103) |  | (77) |  | (352) |  | (562) |  |
| Total Operating Income | $57,137 | 10.2% | $49,475 | 10.0% | $150,027 | 10.1% | $122,827 | 9.3% |

#### E-Infrastructure Solutions

*Revenues—*Revenues were $253.9 million for the third quarter of 2023, a decrease of $1.6 million or 0.6% compared to the third quarter of 2022, and revenues were $719.9 million for the nine months ended September 30, 2023, an increase of $61.9 million or 9.4% compared to the nine months ended September 30, 2022. The increase for the nine months ended September 30, 2023 was driven by higher volume from advanced manufacturing and data centers, partly offset by lower volume from large e-commerce distribution centers and small warehouses.

*Operating income—*Operating income was $35.9 million, or 14.2% of revenue, for the third quarter of 2023, a decrease of $1.6 million, compared to $37.5 million, or 14.7% of revenue, for the third quarter of 2022. The decreases in operating income and margin were driven by lower volume from large e-commerce distribution centers and small warehouses, partly offset by higher volume from advanced manufacturing.

Operating income was $103.4 million, or 14.4% of revenue, for the nine months ended September 30, 2023, an increase of $11.7 million, compared to $91.6 million, or 13.9% of revenue, for the nine months ended September 30, 2022. The increases in operating income and margin for the nine months ended September 30, 2023 were driven by the aforementioned higher volume from advanced manufacturing and data centers, and an easing of supply chain challenges starting in the second quarter of 2023.

#### Transportation Solutions

*Revenues—*Revenues were $193.0 million for the third quarter of 2023, an increase of $35.8 million or 22.8% compared to the third quarter of 2022, and revenues were $455.2 million for the nine months ended September 30, 2023, an increase of $39.2 million or 9.4% compared to the nine months ended September 30, 2022. The increases were primarily driven by higher heavy highway and other non-highway services revenue, partly offset by lower aviation revenues due to the timing of backlog execution.

*Operating Income—*Operating income was $14.5 million, or 7.5% of revenue, for the third quarter of 2023, an increase of $4.8 million, compared to $9.7 million, or 6.2% of revenue, for the third quarter of 2022. Operating income was $29.6 million, or 6.5% of revenue, for the nine months ended September 30, 2023, an increase of $8.1 million, compared to $21.6 million, or 5.2% of revenue, for the nine months ended September 30, 2022. The increases in operating income and margin were driven by an improved project margin mix and the aforementioned higher revenue.

#### Building Solutions

*Revenues—*Revenues were $113.4 million for the third quarter of 2023, an increase of $33.1 million or 41.2%, compared to the third quarter of 2022, and revenues were $311.1 million for the nine months ended September 30, 2023, an increase of $64.3 million or 26.0%, compared to the nine months ended September 30, 2022. The increases were driven by higher residential revenues due to a record number of slabs poured for the third quarter and nine months ended September 30, 2023, and an increase in commercial volume compared to 2022. The increase in residential revenues includes $9.8 million and $24.4 million for the three and nine months ended September 30, 2023, respectively, from the Arizona concrete foundation business acquired in late 2022.

*Operating income—*Operating income was $12.8 million, or 11.3% of revenue, for the third quarter of 2023, an increase of $3.5 million, compared to $9.3 million, or 11.6% of revenue, for the third quarter of 2022. Operating income was $35.0 million, or 11.3% of revenue, for the nine months ended September 30, 2023, an increase of $6.6 million, compared to $28.4 million, or 11.5% of revenue, for the nine months ended September 30, 2022. The increases in operating income were driven by the aforementioned higher volume. The decreases in operating margin were driven by a greater mix of commercial work, which generally generates lower margins, and higher concrete prices in 2023 compared to 2022.

### PRIOR PERIOD RESULTS OF OPERATIONS

As a result of the Myers Disposition, the Company is providing its third quarter and nine months ended September 30, 2022 Results of Operations to reflect the results on a Continued and Discontinued Operations basis.

### Consolidated Results (2022 compared to 2021)

Consolidated financial highlights for the three and nine months ended 2022 and 2021 are as follows:

*(In thousands)*

|  | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $493,040 | $413,111 | $1,320,829 | $1,058,999 |
| Gross profit | 79,444 | 54,878 | 205,601 | 151,020 |
| General and administrative expenses | (22,235) | (17,142) | (63,376) | (46,182) |
| Intangible asset amortization | (3,509) | (2,866) | (10,591) | (8,598) |
| Acquisition related costs | (77) | — | (562) | — |
| Other operating expense, net | (4,148) | (2,860) | (8,245) | (9,287) |
| Operating income | 49,475 | 32,010 | 122,827 | 86,953 |
| Interest, net | (4,970) | (3,919) | (14,061) | (15,603) |
| Gain on extinguishment of debt, net | — | — | — | 1,064 |
| Income before income taxes and noncontrolling interests | 44,505 | 28,091 | 108,766 | 72,414 |
| Income tax expense | (13,173) | (7,475) | (30,966) | (20,322) |
| Less: Net income attributable to noncontrolling interests | (634) | (631) | (1,316) | (1,905) |
| Net income attributable to Sterling common stockholders | $30,698 | $19,985 | $76,484 | $50,187 |

Gross margin 16.1 % 13.3 % 15.6 % 14.3 %

| Discontinued Operations (Note 3): |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $63,902 | $50,338 | $157,001 | $121,432 |
| Operating (loss) income | $(1,789) | $21 | $(5,782) | $553 |
| Pretax (loss) income | $(1,786) | $1,002 | $(3,287) | $1,503 |

*Revenues—*Revenues were $493.0 million for third quarter of 2022, an increase of $79.9 million or 19.3% compared with the third quarter of 2021. The increase was driven by a $134.2 million increase in E-Infrastructure Solutions, partly offset by a $42.3 million decrease in Transportation Solutions and a $12.0 million decrease in Building Solutions. Revenues were $1.32 billion for the nine months ended September 30, 2022, an increase of $261.8 million or 24.7% compared with the nine months ended September 30, 2021. The increase was driven by a $316.4 million increase in E-Infrastructure Solutions and an $8.1 million increase in Building Solutions, partly offset by a $62.7 million decrease in Transportation Solutions.

*Gross profit—*Gross profit was $79.4 million for the third quarter of 2022, an increase of $24.6 million or 44.8% compared to the third quarter of 2021. Gross profit was $205.6 million for the nine months ended September 30, 2022, an increase of $54.6 million or 36.1% compared to the nine months ended September 30, 2021. The increases were primarily driven by the inclusion of the acquired operations of Petillo LLC and its related entities (collectively, “Petillo”) and higher volume within E-Infrastructure Solutions, and cost recovery efforts within Building Solutions, partly offset by continued headwinds from inflation, labor and material supply issues primarily within E-Infrastructure Solutions and Building Solutions.

Gross margin—The Company’s gross margin as a percent of revenue increased to 16.1% in the third quarter of 2022, as compared to 13.3% in the third quarter of 2021. The Company’s gross margin as a percent of revenue increased to 15.6% in the nine months ended September 30, 2022, as compared to 14.3% in the nine months ended September 30, 2021. The increases in gross margin as a percent of revenue were primarily due to an increased proportion of revenue from the higher margin E-Infrastructure Solutions segment, improved margin mix from Transportation Solutions, and cost recovery efforts from Building Solutions.

Contracts in progress that were not substantially complete totaled approximately 240 and 160 September 30, 2022 and 2021, respectively. 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 visibility the Company has in refining its estimate of total revenues (including incentives, delay penalties and change orders), costs and gross profit. Thus, gross profit as a percent of revenues can increase or decrease from comparable and subsequent quarters due to variations among contracts and depending upon the stage of completion of contracts.

*General and administrative expenses—*General and administrative expenses were $22.2 million, or 4.5% of revenue, for the third quarter of 2022, compared to $17.1 million, or 4.1% of revenue, for the third quarter of 2021. General and administrative expenses were $63.4 million, or 4.8% of revenue, for the nine months ended September 30, 2022, compared to $46.2 million, or 4.4% of revenue, for the nine months ended September 30, 2021. The increases were primarily driven by the inclusion of $2.8 million and $8.4 million of general and administrative expense generated from the acquired Petillo operations in the three and nine months ended 2022, respectively, as well as a continued impact from inflation and supply-chain issues.

*Interest expense—*Interest expense was $5.1 million for the third quarter of 2022 compared to $3.9 million for the third quarter of 2021. The increase was due to additional borrowings related to the Petillo acquisition and increasing interest rates in 2022. Interest expense was $14.3 million for the nine months ended September 30, 2022, compared to $15.6 million for the nine months ended September 30, 2021. The decrease was due to a 2% lower applicable interest rate provided under the amended Credit Agreement, which was amended in the second quarter of 2021, partly offset by the additional borrowings related to the Petillo acquisition and increasing interest rates in 2022.

*Income taxes—*The effective income tax rate was 29.6% for the third quarter of 2022 and 28.5% for nine months ended September 30, 2022. Due to its net operating loss carryforwards, the Company had no cash payments for federal income taxes in 2022 or 2021.

*Discontinued Operations—*Revenues were $63.9 million for the third quarter of 2022, an increase of $13.6 million or 26.9%, compared to the third quarter of 2021. Revenues were $157.0 million for the nine months ended September 30, 2022, an increase of $35.6 million or 29.3%, compared to the nine months ended September 30, 2021. The increases were primarily driven by higher heavy highway and water containment and treatment revenue.

Operating loss was $1.8 million for the third quarter of 2022, a decrease of $1.8 million, compared to operating income of $21 thousand in the third quarter 2021. Operating loss was $5.8 million for the nine months ended September 30, 2022, a decrease of $6.3 million compared to operating income of $553 thousand for the nine months ended September 30, 2021. The decreases in operating income were primarily the result of project losses and higher professional fees.

Pretax loss was $1.8 million for the third quarter of 2022, a decrease of $2.8 million compared to pretax income of $1.0 million in the third quarter of 2021. Pretax loss was $3.3 million for the nine months ended September 30, 2022, a decrease of $4.8 million compared to pretax income of $1.5 million for the nine months ended September 30, 2021. The decreases in pretax income were driven by the aforementioned operating losses, with the nine months ended September 30, 2022 being partly offset by a gain on the forgiveness of a PPP loan.

### Segment Results (2022 compared to 2021)

*(In thousands)*

| Revenues | Three Months Ended September 30, 2022 | % of Revenue | 2021 | % of Revenue | Nine Months Ended September 30, 2022 | % of Revenue | 2021 | % of Revenue |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| E-Infrastructure Solutions | $255,530 | 52% | $121,286 | 30% | $658,005 | 50% | $341,601 | 32% |
| Transportation Solutions | 157,224 | 32% | 199,560 | 48% | 416,005 | 31% | 478,673 | 45% |
| Building Solutions | 80,286 | 16% | 92,265 | 22% | 246,819 | 19% | 238,725 | 23% |
| Total Revenues | $493,040 |  | $413,111 |  | $1,320,829 |  | $1,058,999 |  |
| **Operating Income** |  |  |  |  |  |  |  |  |
| E-Infrastructure Solutions | $37,533 | 14.7% | $19,218 | 15.8% | $91,642 | 13.9% | $61,744 | 18.1% |
| Transportation Solutions | 9,700 | 6.2% | 8,936 | 4.5% | 21,553 | 5.2% | 15,650 | 3.3% |
| Building Solutions | 9,324 | 11.6% | 9,238 | 10.0% | 28,433 | 11.5% | 23,389 | 9.8% |
| Segment Operating Income | 56,557 | 11.5% | 37,392 | 9.1% | 141,628 | 10.7% | 100,783 | 9.5% |
| Corporate G&A Expense | (7,005) |  | (5,382) |  | (18,239) |  | (13,830) |  |
| Acquisition Related Costs | (77) |  | — |  | (562) |  | — |  |
| Total Operating Income | $49,475 | 10.0% | $32,010 | 7.7% | $122,827 | 9.3% | $86,953 | 8.2% |

#### E-Infrastructure Solutions

*Revenues—*Revenues were $255.5 million for the third quarter of 2022, an increase of $134.2 million or 110.7% compared to the third quarter of 2021, and revenues were $658.0 million for the nine months ended September 30, 2022, an increase of $316.4 million or 92.6% compared to the nine months ended September 30, 2021. The increases were primarily driven by the inclusion of $83.6 million and $207.0 million of revenue generated from Petillo operations for the three and nine months ended September 30, 2022, respectively, as well as higher volume.

*Operating income—*Operating income was $37.5 million (or 14.7% of revenue) for the third quarter of 2022, an increase of $18.3 million, compared to $19.2 million (or 15.8% of revenue) for the third quarter of 2021. The increase in operating income was primarily driven by the inclusion of Petillo operations and higher volume in the third quarter of 2022, partly offset by continued headwinds from inflation and supply chain issues, and the related impact on productivity and efficiency. The decrease in operating margin was primarily due to the inclusion of certain lower margin activities within Petillo’s operations and the aforementioned headwinds.

Operating income was $91.6 million (or 13.9% of revenue) for the nine months ended September 30, 2022, an increase of $29.9 million, compared to $61.7 million (or 18.1% of revenue) for the nine months ended September 30, 2021. The increase in operating income was driven by the inclusion of Petillo operations and higher volume in the nine months ended September 30, 2022, partly offset by the aforementioned headwinds and seasonality of weather in the Northeastern and Mid-Atlantic U.S. region in the first quarter of 2022. The decrease in operating margin was primarily due to the factors mentioned above.

#### Transportation Solutions

*Revenues—*Revenues were $157.2 million for the third quarter of 2022, a decrease of $42.3 million or 21.2% compared to the third quarter of 2021. Revenues were $416.0 million for the nine months ended September 30, 2022, a decrease of $62.7 million or 13.1% compared to the nine months ended September 30, 2021. The decreases were primarily driven by lower heavy highway and aviation revenue due to the timing of backlog execution, partly offset by an increase in other non-highway services revenue.

*Operating Income—*Operating income was $9.7 million (or 6.2% of revenue) for the third quarter of 2022, an increase of $0.8 million, compared to $8.9 million (or 4.5% of revenue) for the third quarter of 2021, and operating income was $21.6 million (or 5.2% of revenue) for the nine months ended September 30, 2022, an increase of $5.9 million, compared to $15.7 million (or 3.3% of revenue) for the nine months ended September 30, 2021. The increases were the result of improved margin mix with the ramp up of construction on large design-build projects and the continued execution of our strategic plan to reduce revenue from lower margin low-bid heavy highway work, partly offset by lower volume.

#### Building Solutions

*Revenues—*Revenues were $80.3 million for the third quarter of 2022, a decrease of $12.0 million or 13.0%, compared to the third quarter of 2021. The decrease was primarily driven by a decline in housing demand as home ownership became less affordable due to increasing interest rates and inflation.

Revenues were $246.8 million for the nine months ended September 30, 2022, an increase of $8.1 million or 3.4%, compared to the nine months ended September 30, 2021. The revenue increase was due to a higher volume of slabs poured in the first and second quarters of 2022, compared to 2021, partly offset by the aforementioned third quarter impact.

*Operating income—*Operating income was $9.3 million (or 11.6% of revenue) for the third quarter of 2022, an increase of $0.1 million, compared to $9.2 million (or 10.0% of revenue) for the third quarter of 2021. The increase in operating income and margin were driven by our successful efforts to work with customers to pass on the increases in material and labor cost, partly offset by the aforementioned lower volume.

Operating income was $28.4 million (or 11.5% of revenue) for the nine months ended September 30, 2022, an increase of $5.0 million, compared to $23.4 million (or 9.8% of revenue) for the nine months ended September 30, 2021. The increases in operating income and margin were driven by the aforementioned higher volume in the first and second quarters of 2022 and cost recovery efforts from customers.

### LIQUIDITY AND SOURCES OF CAPITAL

*Cash—*Cash at September 30, 2023 and December 31, 2022 includes the following components:

*(In thousands)*

|  | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Generally Available | $308,418 | $100,825 |
| Consolidated 50% Owned Subsidiaries | 71,720 | 55,700 |
| Construction Joint Ventures | 29,260 | 25,019 |
| Total Cash | $409,398 | $181,544 |

The following tables set forth information about our cash flows and liquidity:

*(In thousands)*

| Net cash provided by (used in): | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Operating activities | $331,215 | $138,168 |
| Investing activities | (25,637) | (47,822) |
| Financing activities | (81,445) | (25,133) |
| Net change in cash and cash equivalents | $224,133 | $65,213 |

*Operating Activities—*During the nine months ended September 30, 2023, net cash provided by operating activities was $331.2 million, compared to net cash provided by operating activities of $138.2 million for the nine months ended September 30, 2022. Cash flows provided by operating activities were driven by higher net income, adjusted for various non-cash items and changes in accounts receivable, net contracts in progress and accounts payable balances (collectively, “Contract Capital”), as discussed below, and other assets and accrued liabilities.

*Changes in Contract Capital—*The change in operating assets and liabilities varies due to fluctuations in operating activities and investments in Contract Capital. The changes in the components of Contract Capital during the nine months ended September 30, 2023 and 2022 were as follows:

*(In thousands)*

|  | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Contracts in progress, net | $195,392 | $26,451 |
| Accounts receivable | (63,685) | (97,447) |
| Receivables from and equity in construction joint ventures | (471) | 580 |
| Accounts payable | 24,180 | 47,411 |
| Change in Contract Capital, net | $155,416 | $(23,005) |

During the nine months ended September 30, 2023, the change in Contract Capital was $155.4 million, which was primarily driven by the E-Infrastructure Solutions segment due to the increased size and duration of its projects in progress. The

Company’s Contract Capital fluctuations are impacted by the mix of projects in Backlog, seasonality, the timing of new awards and related payments for work performed and the contract billings to the customer as projects are completed. Contract Capital is also impacted at period-end by the timing of accounts receivable collections and accounts payable payments for projects.

*Investing Activities—*During the nine months ended September 30, 2023, net cash used by investing activities was $25.6 million, compared to net cash used of $47.8 million in the nine months ended September 30, 2022. The net cash used was driven by $49.2 million for purchases of capital equipment, partly offset by $14 million received in accordance with the Myers Agreement’s payment terms for the disposition of Myers and $9.6 million of cash proceeds from the sale of property and equipment. Capital equipment is acquired as needed to support changing levels of production activities and to replace retiring equipment.

*Financing Activities—*During the nine months ended September 30, 2023, net cash used in financing activities was $81.4 million, compared to net cash used of $25.1 million in the prior year. The financing cash outflow was primarily driven by $76.2 million of repayments on the Term Loan Facility, including scheduled payments of $23.2 million and voluntary early payments of $53 million. The Company is currently evaluating options to either extend or replace the Credit Facility, which will otherwise mature on October 2, 2024.

*Discontinued Operations—*Cash flows from discontinued operations are disclosed below and in *Note 3 - Dispositions*, rather than separately presented in the statement of cash flows. The Company does not expect the absence of the cash flows from discontinued operations to have a significant impact on future liquidity and capital resources.

| Net cash used in: | Nine Months Ended September 30, 2022 |
| --- | ---: |
| Operating activities of Discontinued Operations | $(9,158) |
| Investing activities of Discontinued Operations | (688) |
| Financing activities of Discontinued Operations | (81) |
| Net change in cash, cash equivalents, and restricted cash of Discontinued Operations | $(9,927) |

*Capital Strategy—*The Company will continue to explore additional revenue growth and capital alternatives to improve leverage and strengthen its financial position in order to take advantage of trends in the civil infrastructure and E-infrastructure markets. The Company expects to pursue strategic uses of its cash, such as, investing in projects or businesses that meet its gross margin targets and overall profitability and managing its debt balances.

### JOINT VENTURES

We participate in various construction joint venture partnerships in order to share expertise, risk and resources for certain highly complex projects. The joint venture’s contract with the project owner typically requires joint and several liability among the joint venture partners. Although our agreements with our joint venture partners provide that each party will assume and fund its share of any losses resulting from a project, if one of our partners was unable to pay its share, we would be fully liable for such share under our contract with the project owner. Circumstances that could lead to a loss under these guarantee arrangements include a partner’s inability to contribute additional funds to the venture in the event that the project incurred a loss or additional costs that we could incur should the partner fail to provide the services and resources toward project completion to which it committed in the joint venture agreement. See the 2022 Form 10-K under “Part I, Item 1A. Risk Factors.”

At September 30, 2023, there was approximately $6 million of construction work to be completed on unconsolidated construction joint venture contracts, of which approximately $3 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 September 30, 2023, 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 under our contracts.

### NEW ACCOUNTING STANDARDS

See *Note 2 - Basis of Presentation and Significant Accounting Policies* for a discussion of new accounting standards.

### CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to the Company’s discussion of critical accounting estimates from those described in Item 7 of our 2022 Form 10-K.

## Market risk

As filed, 1,393 characters.

### Interest Rate Risk

Our interest rate risk relates primarily to fluctuations in variable interest rates on our Credit Facility. Our indebtedness as of September 30, 2023 included $347.4 million of variable rate debt under our Credit Facility. At September 30, 2023 a 100-basis point (or 1%) increase or decrease in the interest rate would increase or decrease interest expense by approximately $3.5 million per year.

### Other

*Fair Value—*The carrying values of the Company’s cash and cash equivalents, accounts receivable and accounts payable approximate their fair values because of the short-term nature of these instruments. Based upon the current market rates for debt with similar credit risk and maturities, at September 30, 2023, the fair value of our debt outstanding approximated the carrying value, as interest is based on Term SOFR plus an applicable margin.

*Inflation—*While inflation did not have a material impact on our financial results for many years, since 2021, supply chain volatility and inflation has resulted in price increases in oil, fuel, lumber, concrete, steel and labor which have increased our cost of operations, and inflation has increased our general and administrative expense. Anticipated cost increases are considered in our bids to customers; however, inflation has had, and may continue to have, a negative impact on the Company’s financial results.

## Controls and procedures

As filed, 2,712 characters.

### Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures include, but are not limited to, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuer’s management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

The Company’s principal executive officer and principal financial officer reviewed and evaluated the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2023. As previously disclosed in “Part II, Item 9A. Controls and Procedures” of the 2022 Form 10-K, we completed the acquisition of Concrete Construction Services of Arizona LLC and its affiliated company’s business (collectively, “CCS”) on December 20, 2022 and, as permitted by SEC guidance for newly acquired businesses, we have elected to exclude the acquired business operations of CCS from the scope of design and operation of our disclosure controls and procedures for the quarter ended September 30, 2023. Based on the evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective at September 30, 2023 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.

### Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

### Inherent Limitations on Effectiveness of Controls

Internal control over financial reporting may not prevent or detect all errors and all fraud. Also, projections of any evaluation of effectiveness of internal control to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

## Risk factors

As filed, 273 characters.

There have not been any material changes from the risk factors previously disclosed in “Part I, Item 1A. Risk Factors” of the 2022 Form 10-K. You should carefully consider such risk factors, which could materially affect the business, financial condition or future results.

Filed Nov 7, 2023.
Source: SEC EDGAR, the filing index for accession 0000874238-23-000118. Last ingested by Listed: Nov 5, 2026, 14:02 ET. No prices; not investment advice.