Sterling Construction (NASDAQ: STRL) reported Q4 EPS of $0.22, $0.03 worse than the analyst estimate of $0.25. Revenue for the quarter came in at $346.5 million versus the consensus estimate of $298 million.

Consolidated Fourth Quarter 2019 Financial Results Compared to Fourth Quarter 2018:

• Revenues were $346.5 million compared to $255.2 million;
• Gross margin was 9.7% of revenues compared to 11.0%;
• Plateau acquisition related costs totaled $2.2 million or $0.08 per diluted share;
• Gross margin and Net Income were impacted by a $10.2 million charge or $0.36 per diluted share related to a claim resolution of a 2014 legacy project;
• Recognized a non-cash income tax benefit of $25.8 million or $0.92 per diluted share, primarily due to the reversal of our valuation allowance;
• Net income attributable to Sterling common stockholders was $22.3 million or $6.3 million on an adjusted basis(1) compared to $5.6 million;
• Net income per diluted share attributable to Sterling common stockholders was $0.79 or $0.22 on an adjusted basis(1) compared to $0.21; and,
• Adjusted EBITDA(1) was $20.2 million compared to $12.7 million.

GUIDANCE:

Sterling Construction sees FY2020 revenue of $1.375-1.4 billion, versus the consensus of $1.4 billion.

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 $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 $1.375 billion and $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 $38 million to $41 million, excluding acquisition related costs of $2 million to $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 $11 million ($0.39 per diluted share) compared to a non-cash income tax benefit in 2019 of $27.4 million ($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 $125 million to $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 3.5X, to approximately 3.0X 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.”

For earnings history and earnings-related data on Sterling Construction (STRL) click here.