UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: ~~September~~June 30, ~~2017~~2018

[ ] 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 office)	(Zip Code)

Registrant’s telephone number, including area code (281) 214-0800

(Former name, former address and former fiscal year, if changed from last report)

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.

[√] Yes [ ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

[√] Yes [ ] No

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 large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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. (Check one):



Large accelerated filer	[ ]	Accelerated filer	[√]
Non-accelerated filer	[ ]	Smaller reporting company	[ ]
(Do not check if a smaller reporting company)		Emerging growth company	[ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [√] No

~~At October 27, 2017, there were 27,051,143~~The number of shares outstanding of the ~~issuer’s~~registrant's common stock ~~par value $0.01 per share.~~as of July 31, 2018 -- 27,063,932

STERLING CONSTRUCTION COMPANY, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share ~~and per share~~ data)

(Unaudited)


	September 30, 2017			December 31, 2016
	(Unaudited)						June 30, 2018			December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	66,541		$	42,785		$	66,585		$	83,953
Contracts receivable, including retainage	149,052			84,132
Receivables, including retainage							164,465			133,931
Costs and estimated earnings in excess of billings on uncompleted contracts	43,384			32,705			36,388			37,112
Inventories	2,093			3,708			1,613			4,621
Receivables from and equity in construction joint ventures	9,069			7,130			11,766			11,380
Other current assets	9,654			5,448			9,066			7,529
Total current assets	279,793			175,908			289,883			278,526
Property and equipment, net	59,464			68,127			51,726			54,406
Goodwill	85,277			54,820			85,231			85,231
Intangibles	45,200			—
Intangibles, net							43,618			44,818
Other assets, net	3,301			2,968			227			317
Total assets	$	473,035		$	301,823		$	470,685		$	463,298
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	100,565		$	67,097		$	96,384		$	97,457
Billings in excess of costs and estimated earnings on uncompleted contracts	63,368			64,100			58,304			62,374
Current maturities of long-term debt	986			3,845			826			3,978
Income taxes payable	280			78			88			81
Accrued compensation	14,566			5,322			13,096			9,054
Other current liabilities	15,188			6,150			7,063			9,348
Total current liabilities	194,953			146,592			175,761			182,292
Long-term liabilities:
Long-term debt, net of current maturities	88,619			1,549			85,749			86,160
Members' interest subject to mandatory redemption and undistributed earnings	46,329			45,230			47,837			47,386
Other long-term liabilities	595			362			1,246			1,271
Total long-term liabilities	135,543			47,141			134,832			134,817
Commitments and contingencies (Note 9)
Equity:
Sterling stockholders’ equity:
Preferred stock, par value $0.01 per share; 1,000,000 shares authorized, none issued	—			—			—			—
Common stock, par value $0.01 per share; 38,000,000 shares authorized, 27,023,143 and 24,987,306 shares issued	270			250
Common stock, par value $0.01 per share; 38,000,000 shares authorized, 27,064,428 and 27,051,468 shares issued							271			271
Additional paid in capital	231,848			208,922			232,265			231,183
Retained deficit	(93,201		)	(101,738		)	(79,458		)	(90,121		)
Total Sterling common stockholders’ equity	138,917			107,434			153,078			141,333
Noncontrolling interests	3,622			656			7,014			4,856
Total equity	142,539			108,090			160,092			146,189
Total liabilities and equity	$	473,035		$	301,823		$	470,685		$	463,298

The accompanying notes are an integral part of these condensed consolidated financial statements.

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Revenues	$	304,219		$	205,629		$	704,047		$	521,778		$	268,734		$	246,412		$	491,226		$	399,828
Cost of revenues	(273,588		)	(189,007		)	(638,924		)	(486,065		)	(237,269		)	(221,207		)	(439,240		)	(365,336		)
Gross profit	30,631			16,622			65,123			35,713			31,465			25,205			51,986			34,492
General and administrative expenses	(13,129		)	(9,146		)	(36,545		)	(27,888		)	(13,622		)	(12,812		)	(26,649		)	(23,416		)
Other operating expense, net	(4,863		)	(3,804		)	(9,371		)	(7,238		)	(5,693		)	(4,037		)	(6,509		)	(4,508		)
Operating income	12,639			3,672			19,207			587			12,150			8,356			18,828			6,568
Interest income	107			15			192			19			201			44			330			85
Interest expense	(3,576		)	(491		)	(6,672		)	(2,176		)	(3,111		)	(2,984		)	(6,199		)	(3,096		)
Loss on extinguishment of debt	—			—			(755		)	—			—			(755		)	—			(755		)
Income (loss) before income taxes and earnings attributable to noncontrolling interests	9,170			3,196			11,972			(1,570		)
Income before income taxes and noncontrolling interests in earnings													9,240			4,661			12,959			2,802
Income tax expense	(344		)	(41		)	(469		)	(68		)	(98		)	(98		)	(138		)	(125		)
Net income (loss)	8,826			3,155			11,503			(1,638		)
Noncontrolling owners’ interests in earnings of subsidiaries and joint ventures	(1,694		)	(740		)	(2,966		)	(1,252		)
Net income (loss) attributable to Sterling common stockholders	$	7,132		$	2,415		$	8,537		$	(2,890	)
Net income													9,142			4,563			12,821			2,677
Noncontrolling interests in earnings													(966		)	(901		)	(2,158		)	(1,272		)
Net income attributable to Sterling common stockholders													$	8,176		$	3,662		$	10,663		$	1,405

Net income (loss) per share attributable to Sterling common stockholders:
Net income per share attributable to Sterling common stockholders:
Basic	$	0.27		$	0.10		$	0.33		$	(0.12	)	$	0.30		$	0.14		$	0.40		$	0.05
Diluted	$	0.26		$	0.10		$	0.33		$	(0.12	)	$	0.30		$	0.13		$	0.39		$	0.05

Weighted average number of common shares outstanding used in computing per share amounts:
Basic	26,486			25,003			25,787			23,915			26,887			26,978			26,881			25,972
Diluted	26,920			25,365			26,260			23,915			27,125			27,336			27,162			26,409

The accompanying notes are an integral part of these condensed consolidated financial statements.

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2018

(Amounts in thousands)

(Unaudited)

STERLING CONSTRUCTION COMPANY, INC.
STOCKHOLDERS
Common Stock Additional
Paid in Retained Noncon-trolling
Shares Amount Capital Deficit Interests Total
Balance at January 1, 2017 24,987
$ 250
$ 208,922
$ (101,738 ) $ 656
$ 108,090
Net income —
—
—
8,537
2,966
11,503
Stock-based compensation 154
1
2,533
—
—
2,534
Stock issued for Tealstone acquisition 1,882
19
17,042
—
—
17,061
Warrants issued to lenders —
—
3,500
—
—
3,500
Other —
—
(149 ) —
—
(149 )
Balance at September 30, 2017 27,023
$ 270
$ 231,848
$ (93,201 ) $ 3,622
$ 142,539



	STERLING CONSTRUCTION COMPANY, INC. STOCKHOLDERS
	Common Stock				Additional Paid in Capital			Retained Deficit			Noncon-trolling Interests
	Shares		Amount		Additional Paid in Capital			Retained Deficit			Noncon-trolling Interests		Total
Balance at January 1, 2018	27,051		$	271	$	231,183		$	(90,121	)	$	4,856	$	146,189
Net income	—		—		—			10,663			2,158		12,821
Stock-based compensation	36		—		1,383			—			—		1,383
Other	(23	)	—		(301		)	—			—		(301		)
Balance at June 30, 2018	27,064		$	271	$	232,265		$	(79,458	)	$	7,014	$	160,092

The accompanying notes are an integral part of these condensed consolidated financial statements.

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)


	Nine Months Ended September 30,						Six Months Ended June 30,
	2017			2016			2018			2017
Cash flows from operating activities:
Net income (loss) attributable to Sterling common stockholders	$	8,537		(2,890		)
Plus: Noncontrolling owners’ interests in earnings of subsidiaries and joint ventures	2,966			1,252
Net income (loss)	11,503			(1,638		)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Net income attributable to Sterling common stockholders							$	10,663		$	1,405
Plus: Noncontrolling interests in earnings							2,158			1,272
Net income							12,821			2,677
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	13,140			12,097			8,307			8,387
Loss (gain) on disposal of property and equipment	204			(255		)
Gain on disposal of property and equipment							(470		)	(396		)
Stock-based compensation expense	2,534			1,211			1,383			1,977
Impairment on building held-for-sale							—			895
Changes in operating assets and liabilities:
Contracts receivable	(45,044		)	(23,303		)	(30,534		)	(40,163		)
Costs and estimated earnings in excess of billings on uncompleted contracts	(7,735		)	(5,084		)	724			(4,939		)
Inventories	2,833			(1,465		)	3,008			1,405
Receivables from and equity in construction joint ventures	(1,939		)	3,461			(386		)	(333		)
Other assets	(4,487		)	(1,246		)	(1,446		)	(2,429		)
Accounts payable	16,687			17,902			(1,073		)	12,922
Billings in excess of costs and estimated earnings on uncompleted contracts	(1,035		)	31,340			(4,070		)	12,513
Accrued compensation and other liabilities	5,289			6,662			1,761			(5,968		)
Members' interest subject to mandatory redemption and undistributed earnings	1,099			(3,972		)	451			1,116
Net cash (used in) provided by operating activities	(6,951		)	35,710
Net cash used in operating activities							(9,524		)	(12,336		)
Cash flows from investing activities:
Tealstsone acquisition, net of cash acquired	(54,861		)	—
Tealstone acquisition, net of cash acquired							—			(55,000		)
Additions to property and equipment	(8,305		)	(8,852		)	(5,263		)	(5,870		)
Proceeds from sale of property and equipment	5,830			2,187			1,307			1,907
Net cash used in investing activities	(57,336		)	(6,665		)	(3,956		)	(58,963		)
Cash flows from financing activities:
Cash received–term loan	85,000			—
Cumulative repayments – equipment-based term loan and other	(4,449		)	(9,546		)
Cumulative drawdowns – equipment-based revolver	—			19,000
Cumulative repayments – equipment-based revolver	—			(19,000		)
Net proceeds from stock issued	—			19,142
Cash received – Oaktree Facility							—			85,000
Repayments – equipment-based term loan and other							(665		)	(3,953		)
Repayments – Oaktree Facility							(4,679		)	—
Debt issuance costs	6,889			—			—			6,889
Loss on debt extinguishment	755			—			—			755
Distributions to noncontrolling interest owners	—			—
Other	(152		)	(46		)	1,456			(119		)
Net cash provided by financing activities	88,043			9,550
Net increase in cash and cash equivalents	23,756			38,595
Net cash (used in) provided by financing activities							(3,888		)	88,572
Net (decrease) increase in cash and cash equivalents							(17,368		)	17,273
Cash and cash equivalents at beginning of period	42,785			4,426			83,953			42,785
Cash and cash equivalents at end of period	$	66,541		$	43,021		$	66,585		$	60,058


Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	6,139	$	2,426	$	5,712	$	3,096
Cash paid during the period for income taxes	$	145	$	5	$	279	$	78
Non-cash items:
Share consideration given for Tealstone acquisition (1,882,058 shares)	$	17,061	$	—	$	—	$	17,061
Notes and deferred payments to sellers	$	11,588	$	—	$	—	$	11,647
Warrants issued to lenders (1,000,000 Warrants)	$	3,500	$	—	$	—	$	3,500
Transportation and construction equipment acquired through financing arrangements	$	70	$	735	$	—	$	70

The accompanying notes are an integral part of these condensed consolidated financial statements.

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



1.	Summary of Business ~~Summary~~ and Significant Accounting Policies

Business Summary

Sterling Construction Company, Inc. (“Sterling” or “the Company”), a Delaware corporation, is a ~~leading heavy civil~~ construction company that specializes in ~~the building and reconstruction of transportation infrastructure, water infrastructure,~~heavy civil construction and residential ~~and commercial concrete~~construction projects, primarily in ~~Texas, Utah, Nevada, Colorado,~~ Arizona, California, Colorado, Hawaii, Nevada, Texas, Utah and other states in which there are feasible construction opportunities. ~~Its~~Our heavy civil construction projects include highways, roads, bridges, airfields, ports, light rail, water, wastewater and storm drainage systems, foundations for multi-family homes, commercial concrete projects and parking structures. ~~Its~~Our residential construction projects include concrete foundations for single-family homes.

Presentation

The condensed consolidated financial statements included herein have been prepared by Sterling, without audit, in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017 (“~~2016~~2017 Form 10-K”). Certain information and note disclosures prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been either condensed or omitted pursuant to SEC rules and regulations. The condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the Company’s financial position at ~~September~~June 30, ~~2017~~2018 and the results of operations and cash flows for the periods presented. The December 31, ~~2016~~2017 condensed consolidated balance sheet data herein was derived from audited financial statements, but as discussed above, does not include all disclosures required by GAAP. Interim results may be subject to significant seasonal variations and the results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 are not necessarily indicative of the results expected for the full year or subsequent quarters.

~~On April 3, 2017, the Company consummated the acquisition of 100% of the outstanding stock of Tealstone Residential Concrete, Inc. and Tealstone Commercial, Inc. (collectively, “Tealstone~~”) and entered into a Loan and Security Agreement providing for a term loan of $85,000,000 with a maturity date of April 4, 2022, which replaced the then existing debt facility. We have determined that with the acquisition of Tealstone there are two reportable segments: heavy civil construction and residential construction. Refer to Note 13 for a discussion of reportable segments and related financial information.

~~Significant Accounting Policies~~

The Company’s significant accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements in the 2016 Form 10-K. These accounting policies include, but are not limited to, those related to:

~~revenue recognition~~

~~contracts receivable, including retainage~~

~~valuation of property and equipment, goodwill and other long-lived assets~~

~~income taxes~~

~~segment reporting~~

~~There have been no material changes to significant accounting policies since December 31, 2016.~~

~~Principles of Consolidation~~

The accompanying condensed consolidated financial statements include the accounts of subsidiaries and construction joint ventures in which the Company has a greater than 50% ownership interest or otherwise controls such entities. For investments in subsidiaries and construction joint ventures that are not wholly-owned, but where the Company exercises control, the equity held by the remaining owners and their portions of net income (loss) are reflected in the balance sheet line item “Noncontrolling interests” in “Equity” and the statement of operations line item “Noncontrolling owners’ interests in earnings of subsidiaries and joint ventures,” respectively. For investments in subsidiaries that are not wholly-owned, but where the Company exercises control and where the Company has a mandatorily redeemable interest, the equity held by the remaining owners and their portion of net income (loss) is reflected in the balance sheet line item “Members’ interest subject to mandatory redemption and undistributed earnings” and the statement of operations line item “Other operating expense, net,” respectively. All significant intercompany accounts and transactions have been eliminated in consolidation. For all years presented, the Company had no subsidiaries where its ownership interests were less than 50%. Refer to Note 4 for further information regarding the Company’s Subsidiaries and Joint Ventures with Noncontrolling Owners’ Interest.

Where the Company is a noncontrolling joint venture partner, and otherwise not required to consolidate the joint venture entity, its share of the operations of such construction joint venture is accounted for on 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 an acceptable modification of the equity method of accounting which is a common practice in the construction industry. Refer to Note 5 for further information regarding the Company’s construction joint ventures.

Under GAAP, the Company must determine whether each entity, including joint ventures in which it participates, is a variable interest entity (“VIE”). This determination focuses on identifying which owner or joint venture partner, if any, has the power to direct the activities of the entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity disproportionate to its interest in the entity, which could have the effect of requiring the Company to consolidate the entity in which it has a noncontrolling variable interest. Refer to Note 6 for further information regarding the Company’s consolidated VIE.

Use of Estimates

The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions 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 of the Company’s accounting policies require higher degrees of judgment than others in their application. These include the recognition of revenue and earnings from construction contracts ~~under the percentage-of-completion method,~~over time, the valuation of long-term assets, income taxes, and purchase accounting, including intangibles and ~~goodwill, and income taxes.~~goodwill. Management continually evaluates all of its estimates and judgments based on available information and experience; however, actual results could differ from these estimates.

~~Reclassification~~Significant Accounting Policies

~~Reclassifications~~The Company’s significant accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements in the 2017 Form 10-K. There have been ~~made~~no material changes to ~~historical financial data on our~~significant accounting policies since December 31, 2017.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of subsidiaries and construction joint ventures in which the Company has 50% or greater ownership interest or otherwise exercises control over such entities. For investments in construction joint ventures that are not wholly-owned, but where the Company exercises control, the equity held by the remaining owners and their portions of net income are reflected in the balance sheet line item “Noncontrolling interests” in “Equity” and the statement of operations line item “Noncontrolling interests in earnings,” respectively. For investments in subsidiaries that are not wholly-owned, but where the Company exercises control and where the Company has a mandatorily redeemable interest, the equity held by the remaining owners and their portion of net income (loss) is reflected in the balance sheet line item “Members' interest subject to ~~conform~~mandatory redemption and undistributed earnings” and the statement of operations line item “Other operating expense, net” respectively. All significant intercompany accounts and transactions have been eliminated in consolidation.

Where the Company is a noncontrolling joint venture partner, and is otherwise not required to ~~our current year presentation.~~consolidate the joint venture entity, its share of the earnings of such construction joint venture is accounted for on 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.

Revenue Recognition

Heavy Civil Construction

The Company engages in various types of heavy civil construction projects principally for public (government) owners. Credit risk is minimal with public owners since the Company ascertains that funds have been appropriated by the governmental project owner prior to commencing work on such projects. While most public contracts are subject to termination at the election of the government entity, in the event of termination the Company is entitled to receive the contract price for completed work and reimbursement of termination-related costs. Credit risk with private owners is minimized because of statutory mechanic’s liens, which give the Company high priority in the event of lien foreclosures following financial difficulties of private owners.

Our contracts generally take 12 to 36 months to complete. The Company generally provides a one to two-year warranty for workmanship under its contracts when completed. Warranty claims historically have been insignificant.

Revenues are recognized ~~on the~~as performance obligations are satisfied over time (also known as percentage-of-completion ~~method,~~method), measured by the ratio of costs incurred up to a given date to estimated total costs for each contract. This cost to cost measure is used because management considers it to be the best available measure of progress on these contracts. Contract costs include all direct material, labor, subcontract and other costs and those indirect costs ~~related~~determined to relate to contract performance, such as indirect salaries and wages, equipment repairs and depreciation, insurance and payroll taxes. Administrative and general expenses are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, estimated profitability and associated change orders and claims, 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.

Residential Construction

Residential construction revenue and related profit are recognized when construction on the concrete foundation unit is completed (i.e., at a point in time). The time from starting construction to finishing is typically less than one month.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-9, “Revenue from Contracts with Customers”, which provides a single comprehensive accounting standard for revenue recognition for contracts with customers and supersedes current industry-specific guidance, including ASC 605-35. The new standard requires companies to recognize revenue when control of promised goods or services is transferred to customers at an amount that reflects the consideration to which the company expects to be entitled in exchange for the goods or services. The new model requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time (formerly known as percentage-of-completion method) for each of these obligations. The new standard also significantly expands disclosure requirements regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

We adopted the new standard on January 1, 2018, for all contracts using the modified retrospective method that is described in the following paragraph. The adoption of the new revenue standard had no material impact on our condensed consolidated financial statements as it did not require a change in revenue recognition for either of our segments. As such, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

We implemented the new standard's transitional rules as follows: ASC 606-10-65-1 permits the omission of prior-period information about our performance obligations that were not complete at the time of our new adoption of the new standard. Further, rather than applying the new recognition policy on a contract by contract bases, ASC 606-10-32-18 allows the new standard to be applied against a portfolio of contracts (or performance obligations) with similar characteristics. As the majority of our significant contracts are with government entities and major homebuilders that utilize contracts of a similar structure and nature, this new accounting policy will not yield a material difference for the Company than applying the guidance on a contract by contract basis.

In addition to the foregoing, ASC 606-10-32-18 allows entities to waive the requirement to adjust the consideration amount for the effects of a significant financing component if the entity expects, at contract inception, that the period between its fulfillment of the performance obligation and receipt of the customer's payment is less than one year. Further ASC 606-10-32-2A allows entities to make an accounting policy election to exclude taxes assessed by and collected on behalf of government authorities from the transaction price allocated to the performance obligation. We have historically excluded such amounts from our revenues and will continue to do so under the new revenue standard.

See Note 3 for additional discussion of our revenue recognition accounting policies and expanded disclosures required by the new standard.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued its new lease accounting guidance in ASU No. 2016-2, “Leases” (Topic 842). Under the new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The standard is effective for us for interim and annual reporting periods beginning after December 15, 2018. In January 2018, the FASB issued an exposure draft proposing an amendment to the standard that, if approved, would permit companies the option to apply the provisions of the new lease standard either prospectively as of the effective date, without adjusting comparative periods presented, or using a modified retrospective transition applicable to all prior periods presented. If approved, we intend to apply the new guidance prospectively to leases that exist and those entered into on or after January 1, 2019 without adjusting comparative periods in the financial statements. We are assessing the potential impact on our Financial Statements and related disclosures.



2.	Tealstone Acquisition

General

On April 3, 2017, the Company consummated the acquisition (the “Tealstone Acquisition”) of 100% of the outstanding stock of Tealstone Residential Concrete, Inc. and Tealstone Commercial, Inc. (collectively, “Tealstone”) from the stockholders thereof (the “Sellers”) for consideration consisting of $55,000,000 in cash, 1,882,058 shares of the Company’s common stock, and $5,000,000 of promissory notes issued to the Sellers. In addition, the Company will make $2,426,000 and $7,500,000 of deferred cash payments on the second and third anniversaries of the closing date, respectively, and up to an aggregate of $15,000,000 in earn-out payments if specified financial performance levels are achieved (subject to annual maximums) on each of the first, second, third and fourth anniversaries of the closing date to continuing Tealstone management or their affiliates. Tealstone focuses on concrete construction of residential foundations, parking structures, elevated foundations and other concrete work for leading homebuilders, multi-family developers and general contractors in both residential and commercial markets. This acquisition enables expansion into adjacent markets and diversification of revenue streams and customer base with higher margin work.

Supplemental Pro Forma Information (Unaudited)

The following unaudited pro forma condensed combined financial information (“the pro forma financial information”) gives effect to the acquisition of Tealstone by Sterling, accounted for as a business combination using the purchase method of accounting. The pro forma financial information reflects the Tealstone Acquisition and related events as if they occurred at the beginning of the period covered by the pro formas, and gives effect to pro forma events that are: directly attributable to the acquisition, factually supportable, and expected to have a continuing impact on the combined results of Sterling and Tealstone following the acquisition. The pro forma financial information includes adjustments to: (1) exclude transaction costs that were included in Sterling’s and Tealstone’s historical results and are expected to be non-recurring; and (2) include additional intangibles amortization and net interest expense associated with the Tealstone Acquisition. 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 Tealstone Acquisition. The pro forma for the six months ended June 30, 2017 (amounts in thousands):



	Six months ended
	June 30, 2017
Pro forma revenue	$	444,957
Pro forma net income attributable to Sterling	$	1,716



3.	Revenue from Contracts with Customers

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the new revenue standard. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. Some of our contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the product life cycle (design and construction). For contracts with multiple performance obligations, we allocate the contract transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service.

Performance Obligations Satisfied Over Time

Revenue for our Heavy Civil Construction segment contracts that satisfy the criteria for over time recognition (formerly known as percentage-of-completion method) is recognized as the work progresses. The majority of our revenue is derived from long-term, heavy civil construction contracts and projects that typically span between 12 to 36 months. Our heavy civil construction contracts will continue to be recognized over time because of the continuous transfer of control to the customer as all of the work is performed at the customer’s site and, therefore, the customer controls the asset as it is being constructed. This continuous transfer of control to the customer is further supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. Under the new revenue standard, the cost-to-cost measure of progress continues to best depict the transfer of control of assets to the customer, which occurs as we incur costs. Contract costs include labor, material, and indirect costs. Revenue from products and services transferred to customers over time accounted for 83% and 84% of our revenue for the three and six months ended June 30, 2018, respectively. Revenue from products and services transferred to customers over time accounted for 85% and 91% of our revenue for the three and six months ended June 30, 2017, respectively.

Performance Obligations Satisfied at a Point in Time

Revenue for our Residential Construction segment contracts that do not satisfy the criteria for over time recognition is recognized at a point in time. Substantially all of our revenue recognized at a point in time is for work performed by our residential construction segment. Unlike our heavy civil construction segment that uses a cost-to-cost input measure for performance, the residential construction segment utilizes an output measure for performance based on the completion of a unit of work (e.g., foundation). The typical time frame for completion of a residential foundation is less than one month. Upon fulfillment of the performance obligation, the customer is provided an invoice (or equivalent) demonstrating transfer of control to the customer. We believe that point in time recognition remains appropriate for this segment and will continue to recognize revenues upon completion of the performance obligation and issuance of an invoice. Revenue from goods and services transferred to customers at a point in time accounted for 17% and 16% of our revenue for the three and six months ended June 30, 2018, respectively. Revenue from goods and services transferred to customers at a point in time accounted for 15% and 9% of our revenue for the three and six months ended June 30, 2017, respectively.

Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct, and, therefore, are accounted for as part of the existing contract.

Assurance-type warranties are the only warranties provided by the Company and, as such, we do not recognize revenue on warranty-related work. We generally provide a one to two year warranty for workmanship under our contracts when completed. Warranty claims historically have been insignificant.

Pre-contract costs are generally charged to expense as incurred, but in certain cases their recognition may be deferred if specific probability criteria are met. We had no significant deferred pre-contract costs at June 30, 2018.

Backlog

On June 30, 2018, we had $885 million of remaining performance obligations in our heavy civil construction segment, which we also refer to as backlog. We expect to recognize approximately 70% of our backlog as revenue during the next twelve months, and the balance thereafter.

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, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that 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 estimated revenues and gross margin resulted in a net gain of ~~$1.3~~$0.3 million and ~~$0.2~~$1.7 million ~~during~~ for the three and ~~nine~~six months ended ~~September~~June 30, 2018, respectively, and a net charge of $1.8 million and $1.1 million for the three and six months ended June 30, 2017, respectively, included in ~~“operating~~“Operating income” on the condensed consolidated statements of operations. ~~Changes~~Provisions for estimated losses on uncompleted contracts are made in ~~estimated revenues~~the period in which such losses are determined.

Variable Consideration

Transaction price for our contracts may include variable consideration, which includes increases to transaction price for approved and ~~gross margin resulted in a net charge of $0.6 million~~unapproved change orders, claims and ~~$1.1 million during the three~~incentives, and ~~nine months ended September 30, 2016, respectively, included in “operating income” on the condensed consolidated statements of operations.~~

reductions to transaction price for liquidated damages. Change orders, claims and incentives are ~~modifications of an original contract that effectively change~~generally not distinct from the existing ~~provisions~~contract due to the significant integration service provided in the context of the contract ~~without adding new provisions or terms.~~and are accounted for as a modification of the existing contract and performance obligation. Change orders may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work. Either we or our customers may initiate change orders.

The Company considers unapproved change orders to be contract variations for which we have customer approval for a change of scope but a price change associated with the scope change has not yet been agreed upon. Costs associated with unapproved change orders are included in the estimated costs to complete the contracts and are treated as project costs as incurred. The Company recognizes revenue equal to costs incurred on unapproved change orders when realization of price approval is probable. Unapproved change orders involve the use of estimates, and it is reasonably possible that revisions to the estimated costs and recoverable

~~amounts may be required in future reporting periods to reflect changes in estimates or final agreements with customers.~~ Change orders that are unapproved as to both price and scope are evaluated as claims.

We estimate variable consideration for a performance obligation at the most likely amount to which we expect to be entitled (or the most likely amount we expect to incur in the case of liquidated damages), utilizing estimation methods that best predict the amount of consideration to which we will be entitled (or will be incurred in the case of liquidated damages). We include variable consideration in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. The Company considers claims to be amounts in excess of ~~agreed~~approved contract prices that we seek to collect from our customers or others for customer-caused delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes of unanticipated additional contract costs. ~~Claims are included~~The effect of variable consideration on the transaction price of a performance obligation is recognized as an adjustment to revenue on a cumulative catch-up basis. To the extent unapproved change orders and claims reflected in transaction price (or excluded from transaction price in the ~~calculation~~case of ~~revenue when realization is probable and amounts can be reliably determined~~liquidated damages) are not resolved in our favor, or to the extent costs are incurred. To support these requirements, the existence of the following items must be satisfied: (i) The contract or other evidence provides a legal basis for the claim; or a legal opinion has been obtained, stating that under the circumstances there is a reasonable basis to support the claim; (ii) Additional costs are caused by circumstances that were unforeseen at the contract date andincentives reflected in transaction price are not ~~the result~~earned, there could be reductions in, or reversals of, deficiencies in the contractor’s performance; (iii) Costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed; and (iv) The evidence supporting the claim is objective and verifiable, not based on management’s feel for the situation or on unsupported representations. Revenue in excess of contract costs incurred on claims ispreviously recognized when an agreement is reached with customers as to the value of the claims, which in some instances may not occur until after completion of work under the contract. Costs associated with claims are included in the estimated costs to complete the contracts and are treated as project costs when incurred.

revenue.

The Company has projects where we are in the process of negotiating, or awaiting final approval of, unapproved change orders and claims with our 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 our 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 our review of the provisions of our contracts, specific costs incurred and other related evidence supporting the unapproved change orders ~~claims~~ and ~~our entitled unpaid project price,~~claims, together in some cases as necessary with the views of the Company’s outside claim consultants, we concluded that ~~including the unapproved change order, claim and entitled unpaid~~it was appropriate to include in project price amounts of ~~$0.3 million, $10.5~~$8.7 million and ~~$3.9~~$10.0 million, ~~respectively,~~ at ~~September~~June 30, ~~2017,~~2018 and ~~$2.2 million, $9.2 million and $3.9 million, respectively, at~~ December 31, ~~2016,~~2017, respectively, in “Costs and estimated earnings in excess of billings on uncompleted contracts” on our condensed consolidated balance ~~sheets was in accordance with GAAP.~~ sheets.

We expect these matters will be resolved without a material adverse effect on our financial statements. However, unapproved change order and claim amounts are subject to negotiations which may cause actual results to differ materially from estimated and recorded amounts.

~~Residential Construction~~

Residential construction revenue and related profit are recognized when construction on the concrete foundation unit is completed. The time from starting construction to finishing is typically one month or less.

~~Financial Instruments and Fair Value~~

The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. The Company’s financial instruments are cash and cash equivalents, restricted cash used as collateral for a letter of credit and restricted cash maintained in an escrow account, contracts receivable, accounts payable, notes payable, and a term loan (the “Loan”) with Oaktree Capital Management, L.P.

~~The recorded values of cash and cash equivalents, restricted cash, contracts receivable and accounts payable approximate their fair values based on their liquidity and/or short-term nature.~~

Refer to Note 8 regarding the fair value of the Loan and notes payable. The Company does not have any off-balance sheet financial instruments other than operating leases (refer to Note 10 of the Notes to Consolidated Financial Statements in the 2016 Form 10-K).

In order to assess the fair value of the Company’s financial instruments, the Company uses the fair value hierarchy established by GAAP which prioritizes the inputs used in valuation techniques into the following three levels:

~~Level 1 Inputs – Based upon quoted prices for identical assets in active markets that the Company has the ability to access at the measurement date.~~

Level 2 Inputs – Based upon quoted prices (other than Level 1) in active markets for similar assets, quoted prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable for the asset such as interest rates, yield curves, volatilities and default rates and inputs that are derived principally from or corroborated by observable market data.

Level 3 Inputs – Based on unobservable inputs reflecting the Company’s own assumptions about the assumptions that market participants would use in pricing the asset based on the best information available.

For each financial instrument, the Company uses the highest priority level input that is available in order to appropriately value that particular instrument. In certain instances, Level 1 inputs are not availableRevenue by Heavy Civil Construction Category

Our heavy civil construction segment's portfolio of products and ~~the Company must use Level 2 or Level 3 inputs. In these cases, the Company provides a description~~services consists of ~~the valuation techniques used and the inputs used in the fair value measurement.~~

~~Recently Adopted Accounting Pronouncements~~

In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance in Accounting Standards Update (“ASU”) No. 2017-4 “Intangibles-Goodwill and Other” (Topic 350) which simplifies and eliminates step 2over 150 active contracts. The following series of the current two step goodwill impairment test. This guidance is effective for public business entities for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted this ASU on January 1, 2017. The adoption did not have a material impact ontables presents our ~~consolidated financial statements or related disclosures.~~

~~Recently Issued Accounting Pronouncements~~

In May 2017, the FASB issued guidance in ASU No. 2017-9 “Compensation—Stock Compensation” (Topic 718): Scope of Modification Accounting, which provides guidance to assist entities with evaluating which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update provide certain thresholds that must be met in order to determine when an entity should account for the effects of a modification. This guidance is effective for all entities for annual periods and interim periods within those annual periods, beginning after December 15, 2017. The Company expects to adopt this guidance as required and does not expect a material impact to the Company’s consolidated financial statements.

In January 2017, the FASB issued guidance in ASU No. 2017-1 “Business Combinations” (Topic 805): Clarifying the Definition of a Business, which adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update provide a screen to determine when a set of assets and activities is not a business, provide a framework to assist entities in evaluating whether both an input and a substantive process are present and narrow the definition of the term output to be consistent with Topic 606. This guidance is effective for public business entities for annual periods beginning after December 15, 2017 including interim periods within those periods. The Company expects to adopt this guidance as required and does not expect a material impact to the Company’s consolidated financial statements.

In November 2016, the FASB issued guidance in ASU No. 2016-18 “Statement of Cash Flows” (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company expects to adopt this guidance as required and does not expect a material impact to the Company’s consolidated financial statements other than to the presentation of restricted cash on our consolidated statements of cash flows.

In August 2016, the FASB issued guidance in ASU No. 2016-15 (Topic 230): “Classification of Certain Cash Receipts and Cash Payments.” This update addresses specific cash flow issues with the objective of reducing existing diversity in practice. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company expects to adopt this guidance as required and does not expect a material impact to the Company’s consolidated financial statements.

~~In May 2014, the FASB issued ASU 2014-9, “Revenue from Contracts with Customers.” The core principle of the guidance is that an entity should recognize~~heavy civil construction revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-9disaggregated by ~~one year. As a result, the amendments in ASU 2014-9 are~~

effective for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Additional ASUs have been issued that are part of the overall new revenue guidance, including: ASU No. 2016-8, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” and ASU 2016-12, “Narrow Scope Improvements and Practical Expedients.”

The new revenue recognition standard prescribes a five-step model that focuses on transfer of control and entitlement to payment when determining the amount of revenue to be recognized. The new model requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time for each of these obligations. We expect that revenue generated from our fixed unit price contracts, which represent a significant portion of our total contracts, will continue to be recognized over time utilizing the cost-to-cost measure of progress consistent with our current practice. Therefore, we do not expect a material impact to the Company’s consolidated financial statements related to fixed unit price contracts. We also expect our revenue recognition disclosures to significantly expand due to the new qualitative and quantitative requirements under the new standard. The Company is currently determining the impact of the new standard on our lump-sum, cost-plus and other than fixed unit price contracts. Although, our assessment has not yet been finalized as of September 30, 2017, our contract review has not identified any significant changes that would materially affect the Company's consolidated financial statements. Because the standards will impact our business processes, systems and controls, the Company has developed a comprehensive change management project plan to guide the implementation. We will adopt the requirements of the new standard effective January 1, 2018 and intend to use the modified retrospective adoption approach.



2.	~~Tealstone Acquisition~~

~~General~~several categories.

On April 3, 2017, the Company consummated the acquisition (the “Tealstone Acquisition”) of 100% of the outstanding stock of Tealstone Residential Concrete, Inc. and Tealstone Commercial, Inc. (collectively, “~~Tealstone”) from the stockholders thereof (the “Sellers”) for consideration consisting of $55,000,000 in cash, 1,882,058 shares of the Company’s common stock (the “Placement Shares~~”), and $5,000,000 of promissory notes issued to the Sellers. In addition, the Company will make $2,426,000 and $7,500,000 of deferred cash payments on the second and third anniversaries of the closing date, respectively, and up to an aggregate of $15,000,000 in earn-out payments may be made on the first, second, third and fourth anniversaries of the closing date to continuing Tealstone management or their affiliates if specified financial performance levels are achieved. Tealstone focuses on concrete construction of residential foundations, parking structures, elevated slabs and other concrete work for leading homebuilders, multi-family developers and general contractors in both residential and commercial markets. This acquisition enables expansion into adjacent markets and diversification of revenue streams and customer base with higher margin work.

~~The preliminary acquisition-date fair value of the consideration transferred totaled $83.7 million, which consisted of the following:~~

~~Fair value of consideration transferred~~Revenue by major end market (amounts in thousands):

Cash $ 55,000
Common stock (1,882,058 shares) 17,061
Promissory notes 4,436
Deferred payments 7,153
Total $ 83,650



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Heavy Highway	$	126,554	$	149,749	$	233,962	$	259,135
Commercial	29,110		8,733		57,628		11,840
Aviation	27,832		22,857		51,084		33,447
Water Containment and Treatment	15,521		13,274		30,516		22,870
Other	24,267		14,581		37,334		35,318
Heavy Civil Construction Revenue	$	223,284	$	209,194	$	410,524	$	362,610

Revenue by contract type (amounts in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Fixed Unit Price	$	194,486	$	190,435	$	354,721	$	334,795
Lump Sum and Other	28,798		18,759		55,803		27,815
Heavy Civil Construction Revenue	$	223,284	$	209,194	$	410,524	$	362,610

Each of these contract types presents advantages and disadvantages. Typically, we assume more risk with lump-sum contracts. However, these types of contracts offer additional profits when we complete the work for less than originally estimated. Under fixed-unit price contracts, our 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.

Contract Balances

The ~~fair value~~timing of ~~the 1,882,058 common shares issued was determined based~~revenue recognition, billings and cash collections results in billed accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts (contract assets) on the ~~average market price~~condensed consolidated balance sheet. In our heavy civil construction segment, 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 ~~the Company’s common shares~~contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we sometimes receive advances or deposits from our customers, before revenue is recognized, resulting in billings in excess of costs and estimated earnings on ~~the acquisition date.~~

The promissory notes and deferred payments have been discounted using a preliminary 12% fair value discount rate. The earn-out arrangement requires the Company to pay up to an aggregate of $15,000,000 in earn-out payments on the first, second, third and fourth anniversaries of the closing date to continuing Tealstone management or their affiliates if specified financial performance levels are achieved. The Company’s preliminary analysis indicates that the compensation is tied to the continuing employment of certain key employees and executives of Tealstone and will be treated as additional compensation and not as additional contingent consideration.

~~Preliminary Purchase Price Allocation~~

~~The aggregate purchase price noted above was allocated to the major categories of~~uncompleted contracts (contract liabilities). These assets and liabilities ~~acquired based upon their estimated fair values~~are reported on the condensed consolidated balance sheet on a contract-by-contract basis at the ~~acquisition closing date, which were based,~~end of each reporting period. Changes in ~~part, upon outside preliminary appraisals for certain assets, including specifically-identified intangible assets. The excess of~~ the ~~purchase price over the preliminary estimated fair value of the net tangible and identifiable intangible assets acquired totaling $30.5 million, was recorded as goodwill.~~

~~The following table summarizes our preliminary goodwill addition (in thousands):~~

Balance at January 1, 2017 $ 54,820
Additional goodwill related to acquisition 30,457
Balance at September 30, 2017 $ 85,277

~~Goodwill decreased from June 30, 2017 by $5.7 million as a result of an increase in our identified intangible assets of $6.6 million, offset by a working capital adjustment of $0.9 million.~~

~~The following table summarizes our preliminary purchase price allocation at the acquisition closing date (in thousands):~~

Cash $ 139
Accounts receivable 19,876
Costs and estimated earnings in excess of billings on uncompleted contracts 2,944
Inventory 1,218
Other current assets 54
Property, plant and equipment 565
Other assets, net 1
Identifiable intangible assets and Goodwill 77,028
Accounts payable (16,781 )
Billings in excess of costs and estimated earnings on uncompleted contracts (303 )
Accrued expenses (823 )
State income tax payable (268 )
Total Consideration $ 83,650

~~The purchase price allocation and related amortization periods are based upon preliminary information and are subject to change when additional information concerning final~~contract asset and liability ~~valuations is obtained. We have~~balances during the six month period ended June 30, 2018, were not ~~completed our final assessment of~~materially impacted by any other factors.

The table below reconciles the fair value of purchased intangible assets, property and equipment, inventory, tax balances, contingent liabilities, long-term leases or acquired contracts. Our final purchase price allocation may result in adjustmentsnet excess billings to ~~certain assets and liabilities, including~~ the residual amount allocated to goodwill. Based on our preliminary appraisal report, we have assigned an asset value of $46.6 million for identified intangible assets and have amortized $0.9 million and $1.4 million, which isamounts included in ~~general and administrative expenses on our statement of operations for~~ the three and nine months ended September 30, 2017, respectively. We believe that a majority of the intangible amount will be allocated to customer relationships. A 10% change in the valuation of intangible assets would cause a corresponding increase or decrease in thecondensed consolidated balance ~~of goodwill and annual amortization expense of approximately $4.7 million and $0.3 million respectively.~~

~~Supplemental Pro Forma Information (Unaudited)~~

The following unaudited pro forma condensed combined financial information (“the pro forma financial information”) gives effect to the acquisition of Tealstone by Sterling, accounted for as a business combination using the purchase method of accounting. To give effect to the Tealstone Acquisition for pro forma financial information purposes, Tealstone’s commercial historical results were brought to within one month of Sterling’s interim results for the three and nine month periods ended September 30, 2017, and included the three and nine months ended August 31, 2017, respectively. The pro forma financial information reflects the Tealstone Acquisition and related events as if they occurredsheets at the beginning of the period, and gives effect to pro forma events that are: directly attributable to the acquisition, factually supportable, and expected to have a continuing impact on the combined results of Sterling and Tealstone following the acquisition. The pro forma financial information includes adjustments to: (1) exclude transaction costs that were included in Sterling’s and Tealstone’s historical results and are expected to be non-recurring; (2) include additional intangibles amortization and net interest expense associated with the Tealstone Acquisition; and (3) include the pro forma results of Tealstone for the three and nine month periods ended September 30, 2017. 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 thethose dates ~~indicated. Further, the pro forma financial information does not purport~~

~~to project the future operating results of the combined company following the Tealstone Acquisition. The pro forma consists of the following~~ (amounts in thousands):

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Pro forma revenue $ 304,219
$ 255,002
$ 749,176
$ 657,773
Pro forma net income attributable to Sterling $ 7,132
$ 4,659
$ 8,848
$ 7,705



	June 30, 2018			December 31, 2017
Costs and estimated earnings in excess of billings on uncompleted contracts	$	36,388		$	37,112
Billings in excess of costs and estimated earnings on uncompleted contracts	(58,304		)	(62,374		)
Net amount of costs and estimated earnings on uncompleted contracts below billings	$	(21,916	)	$	(25,262	)

Revenues recognized and billings on uncompleted contracts include cumulative amounts recognized as revenues and billings in prior periods. This revenue primarily represents progress on our construction jobs.



3.4.	Cash and Cash Equivalents ~~and Restricted Cash~~

The Company considers all highly liquid investments with original or remaining maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents include cash balances held by our ~~wholly-owned and less than wholly-owned~~consolidated subsidiaries and ~~majority-owned~~our majority controlled construction joint ~~ventures, as well as the Company’s VIE. Refer to Note 6 for more information regarding the Company’s consolidated VIE.~~ventures. At ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, cash and cash equivalents included ~~$15.1~~$17.6 million and ~~$24.1~~$31.1 million, respectively, belonging to our ~~less than wholly-owned~~consolidated 50% owned subsidiaries. At ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, cash and cash equivalents included ~~$20.7~~$12.3 million and ~~$10.9~~$18.9 million, respectively, belonging to ~~majority-owned~~our construction joint ventures. ~~Joint~~Construction joint venture cash balances are limited to joint venture activities and are not available for other projects, general cash needs or distribution to us without approval of the board of directors, or equivalent body, of the respective joint ventures.

Restricted cash of approximately ~~$3.0~~$3.6 million is included in “other assets, net” on the condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016 and represents cash deposited by the Company into a separate account and designated as collateral for a standby letter of credit in the same amount in accordance with contractual agreements. Refer to Note 9 for more information about our standby letter of credit. In addition, restricted cash of approximately $2.0 million is included in “other“Other current assets” on the condensed consolidated balance sheets as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 and represents $3.0 million of cash designated as collateral for a standby letter of credit and approximately $0.6 million represents cash deposited by a customer, for the benefit of the Company, in an escrow account which is restricted until the customer releases the restriction upon the completion of the job.

The Company holds cash on deposit in U.S. banks, at times, in excess of federally insured limits. Management does not believe that the risk associated with keeping cash deposits in excess of federal deposit insurance limits represents a material risk.



4.5.	Consolidated 50% Owned Subsidiaries, ~~and Joint Ventures with Noncontrolling Owners’ Interests~~including Variable Interest Entities ("VIE")

The ~~amended agreements, as described~~Company has a 50% interest in ~~Note 4 of~~two subsidiaries (Myers and RHB); both subsidiaries have individual provisions which obligate the ~~Notes~~Company to ~~Consolidated Financial Statements~~purchase each partner's 50% interests for $20.0 million ($40.0 million in the ~~2016 Form 10-K, resulted~~aggregate), due to circumstances outlined in ~~an obligation to purchase Mr. Buenting’s and Mr. Myers’ 50% members’ interest~~the partner agreements that ~~the Company is~~are certain to ~~incur, either because of Mr. Buenting’s or Mr. Myers’ death; therefore,~~occur. Therefore, the Company has consolidated these two entities and classified ~~the noncontrolling interest~~these obligations as mandatorily redeemable and has recorded a liability in ~~“Members’~~“Members' interest subject to mandatory redemption and undistributed earnings” on the condensed consolidated balance sheets. In addition, all undistributed earnings at the time of the noncontrolling ~~owners'~~owners’ death or permanent ~~total~~ disability are also mandatorily payable. In the event of either Mr. Buenting’s or Mr. ~~Myers’~~Myers's death, the Company ~~has~~ purchased two separate $20.0 million death and permanent total disability insurance ~~of $40.0 million~~policies to mitigate the Company’s cash draw if such events were to occur.

The liability consists of the following (amounts in thousands):


	September 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Members’ interest subject to mandatory redemption	$	40,000	$	40,000	$	40,000	$	40,000
Net accumulated earnings	6,329		5,230		7,837		7,386
Total liability	$	46,329	$	45,230	$	47,837	$	47,386

~~Earnings, which were included in net accumulated~~Fifty percent of the earnings ~~and represent~~of these consolidated 50% ~~of total earnings,~~owned subsidiaries for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 were ~~$4.5~~$4.7 million, and ~~$7.0~~$5.3 million, respectively and ~~were $3.4 million and $7.3 million~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017 were $2.6 million and $2.5 million, respectively. These amounts were included in ~~“other~~“Other operating expense, net” on the Company’s condensed consolidated statements of operations.

~~Changes~~The Company must determine whether any of its entities, including these two 50% owned subsidiaries, in ~~Noncontrolling Interests~~

which it participates, is a VIE. The Company determined Myers is a VIE, as we are the primary beneficiary, as pursuant to the terms of the Myers Operating Agreement we are exposed to the majority of potential losses of the partnership. As such, the following table ~~summarizes~~presents the ~~changes~~condensed financial information of Myers, which is reflected in the ~~noncontrolling owners’ interests in subsidiaries~~Company’s condensed consolidated balance sheets and ~~construction joint ventures~~statements of operations, as follows (amounts in thousands):

Nine Months Ended
September 30,
2017 2016
Balance, beginning of period $ 656
$ (91 )
Net income attributable to noncontrolling interest included in equity 2,966
1,252
Distributions to noncontrolling interest owners —
—
Balance, end of period $ 3,622
$ 1,161



	June 30, 2018		December 31, 2017
Assets:
Current assets:
Cash and cash equivalents	$	—	$	8,590
Contracts receivable, including retainage	27,557		26,844
Other current assets	11,629		15,672
Total current assets	39,186		51,106
Property and equipment, net	8,107		9,001
Goodwill	1,501		1,501
Total assets	$	48,794	$	61,608
Liabilities:
Current liabilities:
Accounts payable	$	21,753	$	28,448
Other current liabilities	9,715		11,798
Total current liabilities	31,468		40,246
Long-term liabilities:
Other long-term liabilities	104		3,491
Total liabilities	$	31,572	$	43,737

The increase in net income attributable to noncontrolling interest included in equity is due to the Company’s addition of a Rocky Mountain region majority-owned construction joint venture which was not ongoing during the same prior year period.



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Revenues	$	45,795	$	38,783	$	85,970	$	62,067
Operating income	1,632		2,246		2,740		2,640
Net income attributable to Sterling common stockholders	816		1,121		1,370		1,316



5.6.	Construction Joint Ventures

~~The Company participates~~We participate in ~~various~~joint ventures with other major construction companies and other partners, typically for large, technically complex projects, including design-build projects, when it is desirable to share risk and resources in order to seek a competitive advantage. Joint venture partners typically provide independently prepared estimates, furnish employees and equipment, enhance bonding capacity and often also bring local knowledge and expertise. These projects generally have joint ~~ventures. Generally, each construction~~and several liability. We select our joint venture ~~is formed~~partners based on our analysis of their construction and financial capabilities, expertise in the type of work to ~~construct a specific project~~be performed and ~~is jointly controlled~~past working relationships with us, among other criteria.

For these joint ventures, the equity held by the ~~joint venture partners.~~remaining owners and their portions of net income (loss) are reflected in the balance sheet line item “Noncontrolling interests” in “Equity” and the statement of operations line item “Noncontrolling interests in earnings,” respectively. Refer to Note 56 of the Notes to Consolidated Financial Statements in the ~~2016~~2017 Form 10-K for further information about our joint ventures.

The following table summarizes the changes in noncontrolling interests (amounts in thousands):



	Six Months Ended June 30,
	2018		2017
Balance, beginning of period	$	4,856	$	656
Net income attributable to noncontrolling interest included in equity	2,158		1,272
Distributions to noncontrolling interest owners	—		—
Balance, end of period	$	7,014	$	1,928

Where we are a noncontrolling venture partner, we account for our share of the operations of such construction joint ventures on a pro-rata basis using proportionate consolidation on our 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 an acceptable modification of the equity method of accounting which is a common practice in the construction industry. Condensed 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 (amounts in thousands):


	September 30, 2017			December 31, 2016			June 30, 2018			December 31, 2017
Total combined:
Current assets	$	42,129		$	32,592		$	62,050		$	64,574
Less current liabilities	(61,079		)	(57,598		)	(70,502		)	(78,349		)
Net liabilities	$	(18,950	)	$	(25,006	)	$	(8,452	)	$	(13,775	)
Backlog	$	51,110		$	107,333

Sterling’s noncontrolling interest in backlog	$	26,659		$	52,992
Sterling’s receivables from and equity in construction joint ventures	$	9,069		$	7,130
Sterling’s receivables from and equity in noncontrolling construction joint ventures							$	11,766		$	11,380


	Three Months Ended September 30,					Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
	2017			2016		2017			2016		2018		2017		2018		2017
Total combined:
Revenues	$	27,703		$	15,520	$	61,210		$	44,074	$	25,463	$	18,897	$	56,820	$	33,507
Income before tax	(6,281		)	1,925		(3,611		)	3,838		2,192		1,497		5,596		2,670

Sterling’s noncontrolling interest:
Revenues	$	13,664		$	6,103	$	28,826		$	17,567	$	12,564	$	8,674	$	27,629	$	15,163
Income before tax	(1,629		)	519		(358		)	1,370		1,167		718		2,858		1,271

Approximately $26.7 million of the Company’s backlog at September 30, 2017 was attributable to projects performed by joint ventures. The majority of this amount is attributable to the Company’s joint venture with Steve P. Rados, Inc., where the Company has a 50% interest.

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 complete and the warranty period, if any, has passed.



6.	~~Variable Interest Entities~~

The Company owns a 50% interest in Myers & Sons Construction, L.P. (“Myers”), of which it is the primary beneficiary and has consolidated Myers into the Company’s financial statements. Because the Company exercises primary control over activities of the partnership and it is exposed to the majority of potential losses of the partnership, the Company has consolidated Myers within the Company’s financial statements since August 1, 2011, the date of acquisition. Refer to Note 6 of the Notes to Consolidated Financial Statements included in the 2016 Form 10-K for additional information on the acquisition of this limited partnership.

~~The condensed financial information of Myers, which is reflected in the Company’s condensed consolidated balance sheets and statements of operations, is as follows (amounts in thousands):~~

September 30,
2017 December 31,
2016
Assets:

Current assets:

Cash and cash equivalents $ 2,588
$ 9,655
Contracts receivable, including retainage 30,134
15,046
Other current assets 13,936
10,208
Total current assets 46,658
34,909
Property and equipment, net 8,996
9,824
Goodwill 1,501
1,501
Total assets $ 57,155
$ 46,234
Liabilities:

Current liabilities:

Accounts payable $ 27,109
$ 21,274
Other current liabilities 14,667
8,782
Total current liabilities 41,776
30,056
Long-term liabilities:

Other long-term liabilities 271
5,373
Total liabilities $ 42,047
$ 35,429

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Revenues $ 64,266
$ 50,739
$ 126,333
$ 121,649
Operating income 3,666
2,720
6,307
4,894
Net income 1,834
1,357
3,149
2,440



7.	Property and Equipment

Property and equipment are summarized as follows (amounts in thousands):


	September 30, 2017			December 31, 2016			June 30, 2018			December 31, 2017
Construction equipment	$	121,364		$	121,441		$	120,857		$	118,868
Transportation equipment	18,275			19,017			17,758			17,511
Buildings	9,547			12,771			9,738			9,577
Office equipment	3,339			3,108			2,706			3,339
Leasehold improvement	914			914
Leasehold Improvement							914			914
Construction in progress	1,432			313			279			258
Land	2,348			3,509			2,348			2,348
Water rights	200			200			—			200
	157,419			161,273			154,600			153,015
Less accumulated depreciation	(97,955		)	(93,146		)	(102,874		)	(98,609		)
Total property and equipment, net	$	59,464		$	68,127		$	51,726		$	54,406

During the nine months ended September 30, 2017, we sold one of our Texas subsidiary’s office, equipment shop and yard facilities, located in Texas. The property had a net book value of $4.1 million, and we received $3.0 million, after selling costs. As such, we recorded a loss of approximately $1.1 million in “other operating expense, net” for the nine months ended September 30, 2017.



8.	Intangibles

The following table presents our acquired finite-lived intangible assets at June 30, 2018 and December 31, 2017 (in thousands):



		June 30, 2018					December 31, 2017
	Weighted Average Life	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Customer relationships	23 years	$	40,823	$	(2,256	)	$	40,823	$	(1,353	)
Trade name	13 years	5,307		(656		)	5,307		(394		)
Noncompetition agreements	7 years	487		(87		)	487		(52		)
Total (1)	22 years	$	46,617	$	(2,999	)	$	46,617	$	(1,799	)

Our intangible expense was $0.6 million and $1.2 million for the three and six months ended June 30, 2018 and $1.8 million for the year ended December 31, 2017.



9.	Secured Credit Facility and Other Debt

Debt consists of the following (in thousands):

September 30,
2017 December 31,
2016
Loan $ 85,000
$ 3,532
Less deferred loan costs and discount (9,350 ) (803 )
Total Loan, net 75,650
2,729
Notes and deferred payments to sellers, Tealstone acquisition 12,118
—
Notes payable for transportation and construction equipment and other 1,837
2,665
89,605
5,394

Current maturities of long-term debt 986
4,648
Less current deferred loan costs —
(803 )
Less current maturities of long-term debt, net (986 ) (3,845 )
Total long-term debt $ 88,619
$ 1,549



	June 30, 2018			December 31, 2017
Loans	$	80,321		$	85,000
Notes and deferred payments to sellers, Tealstone acquisition	12,967			12,393
Notes payable for transportation and construction equipment and other	1,063			1,557
Total debt	94,351			98,950

Less - Current maturities of long-term debt	(826		)	(3,978		)
Less - Unamortized deferred loan costs	(7,776		)	(8,812		)
Total long-term debt	$	85,749		$	86,160

On April 3, 2017, the Company, as borrower, and certain of its subsidiaries, as guarantors, entered into a Loan and Security Agreement with Wilmington Trust, National Association, as agent, and the lenders party thereto (the ~~“Loan Agreement”~~“Oaktree Facility”), providing for a term loan of $85,000,000 (the “Loan”) with a maturity date of April 4, 2022, which replaced the then existing debt facility. The Loan is secured by substantially all of the assets of the Company and its subsidiaries.

and extraordinary receipts. The Company is required to make an offer quarterly to the lenders to prepay the Loan in an amount equal to 75% of its excess cash flow, plus accrued and unpaid interest thereon and a prepayment premium.

The ~~Loan Agreement~~Oaktree Facility contains various covenants that limit, among other things, the Company’s ability and certain of its subsidiaries’ ability to incur certain indebtedness, grant certain liens, merge or consolidate, sell assets, make certain loans, enter into acquisitions, incur capital expenditures, make investments, and pay dividends. In addition, the Company is required to maintain the following principal financial covenants:

a ratio of secured indebtedness to EBITDA of not more than ~~3.10~~2.20 to 1.00 for the trailing four consecutive fiscal quarters ending June 30, 2018, reducing to 1.80 to 1.00 byfor the four consecutive quarters ending September 30, ~~2019;~~2019 through maturity in 2022;

daily cash collateral of not less ~~$15,000,000, potentially further increasing to $18,000,000 beginning on April 4, 2018;~~than $15,000,000;

~~a rolling four quarter~~ gross margin in contract backlog of not less than ~~$60,000,000,~~$65,000,000 for the average of the trailing four consecutive fiscal quarters ending June 30, 2018, increasing to $70,000,000 by March 31, 2019;

~~the incurrence of~~ net capital expenditures during ~~each~~the trailing four consecutive fiscal quarters shall not exceed $15,000,000;

bonding capacity shall be maintained at all times in an amount not less than $1,000,000,000; and

the EBITDA of Tealstone Residential Concrete, Inc. shall not be less than $12,000,000 ~~during~~for each of the trailing four consecutive fiscal quarters.

The Company is in compliance with these covenants at ~~September~~June 30, ~~2017.~~2018.

The ~~Loan Agreement~~Oaktree Facility also includes customary events of default, including events of default relating to non-payment of principal or interest, inaccuracy of representations and warranties, breaches of covenants, cross-defaults, bankruptcy and insolvency events, certain unsatisfied judgments, loan documents not being valid, calls under the Company’s bonds, failure of specified individuals to remain employed by the Company, and a change of control. If an event of default occurs, the lenders will be able to accelerate the maturity of the ~~Loan Agreement~~Oaktree Facility and exercise other rights and remedies.

Deferred loan costs and discounts totaled $10.4 million, which included attorney fees, investment bank fees as well as amounts paid to the lenders and which were discounted from the loan amount. Warrants valued at $3.5 million were included as well. ~~Refer to Note 11 for additional information on the warrants.~~ The total amount ~~will be~~is amortized on a straight-line basis, which approximates the effective interest method, over the five-year life of the Loan. ~~Amortization~~

Total amortization expense of $0.5 million and $1.0 million, respectively has been ~~included in interest expense~~recorded for the three and ~~nine~~six months ended ~~September~~June 30, 2018. Total amortization expense of $0.5 million was recorded for the three and six months ended June 30, 2017.

~~As part~~ The fair value of the extinguishment of our prior credit facility, $0.8 million in debt extinguishment costs was expensed and included as a “loss on extinguishment of debt” on our statement of operations for the nine months ended September 30, 2017.

~~Fair Value~~

~~The Company’s debt is recorded at~~Oaktree Facility approximates its carrying amount in the condensed consolidated balance sheets. As of September 30, 2017 and December 31, 2016, the carrying values of our debt outstanding approximated the fair values and were $85.0 million and $3.5 million, respectively for the Loan. There was no revolver as of September 30, 2017 and no amounts outstanding on the prior revolver as of December 31, 2016.

book value.

Notes and Deferred Payments to Sellers

As part of the Tealstone Acquisition, the Company issued $5,000,000 of ~~promissory notes~~Promissory Notes to the ~~sellers~~Sellers and agreed to make $2,426,000 and $7,500,000 of deferred cash payments on the second and third anniversaries of the closing date, respectively. Based on a ~~preliminary~~ 12% discount rate, the Company recorded $11.6 million as notes and deferred payments to sellers in long-term debt on our condensed consolidated balance sheet at the acquisition closing date. Accreted interest for the period was $0.3 million and ~~$0.5~~$0.6 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, respectively, and was recorded as interest expense.

Notes Payable for Transportation and Construction Equipment

The Company has purchased and financed various transportation and construction equipment to enhance the Company’s fleet of equipment. The total long-term notes payable related to the purchase of financed equipment was ~~$1.8~~$1.1 million and ~~$2.7~~$1.6 million at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. The purchases have payment terms ranging from 32 to 5 years and the associated interest rates range from 3.15% to 6.92%. The fair value of these notes payable approximates their book value.

~~Interest Expense~~

Interest expense related to our Loan and prior credit facility and other debt for the three and nine months ended September 30, 2017 was $3.6 million and $6.7 million, respectively, and $0.5 million and $2.2 million for the three and nine months ended September 30, 2016, respectively. The increase in interest cost for both periods is due to our new Loan that has a higher amount of principal outstanding.



9.10.	Commitments and Contingencies

The Company is required by our former insurance provider to obtain and hold a standby letter of credit. This letter of credit serves as a guarantee by the banking institution to pay our former insurance provider the incurred claim costs attributable to our general liability, workers compensation and automobile liability claims, up to the amount stated in the standby letter of credit, in the event that these claims were not paid by the Company. We have cash collateralized the letter of credit, resulting in the cash being designated as restricted. ~~Since we have now replaced our insurance provider, the amount required will diminish as claims are processed. Refer to Note 3 for more information on our restricted cash.~~

The Company is the subject of certain other claims and lawsuits occurring in the normal 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.



~~10.~~11.	Income Taxes and Deferred Tax Asset/Liability

The Company and its subsidiaries file U.S. federal and various U.S. state income tax returns. Current income tax expense or (benefit) represents federal and state taxes based on tax paid or expected to be payable or receivable for the periods shown in the condensed consolidated statements of operations.

~~The~~Due to net operating loss carryforwards, the Company is not expecting a current federal ~~liability for alternative minimum tax.~~liability. The Company may incur current state tax liabilities in states in which the Company does not have sufficient net operating loss carry forwards. Income tax expense of ~~$0.3 million~~$98 thousand and ~~$0.5 million~~$138 thousand was recorded for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, respectively. ~~A minimal~~Income tax expense of $98 thousand and $125 thousand was recorded for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017, respectively. The effective income tax rate varied from the statutory rate primarily as a result of the change in the valuation allowance, net income attributable to noncontrolling interest owners which is taxable to those owners rather than to the Company, state income taxes and other permanent differences. For interim periods, the Company estimates an annual effective tax rate and applies that rate to year-to-date operating results.

The Company’s deferred tax expense ~~or (benefit)~~ reflects the change in deferred tax assets or liabilities. The Company performs an analysis at the end of each reporting period to determine whether it is more likely than not the deferred tax assets are expected to be realized in future years. Based upon this analysis, a full valuation allowance has been applied to our net deferred tax assets as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016.~~2017. Therefore, there has been no change in net deferred taxes for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018.

As a result of the Company’s analysis, management has determined that the Company does not have any material uncertain tax positions.



~~11.~~12.	~~Stockholder’s~~Stockholder's Equity

~~Stock Offering~~

On April 3, 2017, in connection with the Tealstone Acquisition, the Company issued 1,882,058 shares of the Company’s stock as consideration paid to the sellers. The value of the shares issued was $17.1 million based on the average fair value of the shares on the date of acquisition.

On May 9, 2016, the Company completed an underwritten public offering of 5,175,000 shares of the Company’s common stock, which included the full exercise of the sole underwriter’s over-allotment option, at a price to the public of $4.00 per share ($3.77 per share net of underwriting discounts). The net proceeds from the offering of $19.1 million, after deducting underwriting discounts and other offering expenses, were used for working capital, repayment of our indebtedness under the revolving loan portion of our then existing equipment-based credit facility and for general corporate purposes.

~~Warrants~~

On April 3, 2017, the Company issued warrants (the “Warrants”) to the lenders under the Loan Agreement (the “Holders”) pursuant to which such holders have the right to purchase, for a period of five years from the date of issuance, up to an aggregate of 1,000,000 shares of the Company’s common stock (the “Warrant Shares”) at an initial exercise price of $10.25 per share, subject to adjustment for stock splits, combinations and similar recapitalization events and weighted-average anti-dilution upon the issuance

~~by the Company of shares of common stock or rights, options or convertible securities exercisable for common stock in the future at a price below the exercise price of the Warrants.~~

The Company valued these Warrants using the Black-Scholes model, which is a type 3 fair value measurement. The key assumptions used in the Black-Scholes Model with respect to these valuations are summarized in the following table:

At April 3,
2017
Current stock price $ 8.88
Exercise option price $ 10.25
Expected term of warrants (in years) 5
Expected volatility rate 48.29 %
Risk-free rate 1.88 %
Expected dividend yield — %

Based on these inputs, the total fair value of the warrants was $3.5 million, which was recorded as a Loan discount and netted against our new Loan and included in “additional paid in capital” on our balance sheet.

Stock-Based Compensation

The Company has a stock-based incentive plan that is administered by the Compensation Committee of the Board of Directors. Refer to Note 14 of the Notes to Consolidated Financial Statements included in the ~~2016~~2017 Form 10-K for further information.

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, the Company awarded, subject to vesting restrictions, a total of ~~8,000~~44,424 and ~~174,410 shares of~~371,875 common stock awards, respectively. The Company recorded stock-based compensation expense of ~~$0.6~~$0.8 million and ~~$2.5~~$1.4 million for the three and ~~nine~~six months ended ~~September~~June 30, 2018, respectively. During the three and six months ended June 30, 2017, ~~respectively. The nine months ended September 30, 2017 included costs for~~ the ~~acceleration~~Company awarded, subject to vesting restrictions, a total of ~~unvested shares related to the departure of our former CEO of $0.7 million.~~102,571 and 166,410 common stock awards, respectively. The Company recorded stock-based compensation expense of ~~$0.4~~$1.4 million and ~~$1.2~~$2.0 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, respectively.

At ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, total unrecognized compensation cost related to unvested common stock awards was ~~$1.1~~$6.1 million and ~~$2.3~~$1.5 million, respectively. This cost is expected to be recognized over a weighted average period of ~~1.6~~2.3 years. ~~At September 30, 2017, there were 0.5 million shares of common stock covered by outstanding unvested common stock.~~



~~12.~~13.	Net Income ~~(Loss) per~~Per Share Attributable to Sterling Common Stockholders

Basic net income (loss) per share attributable to Sterling common stockholders is computed by dividing net income (loss) attributable to Sterling common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share attributable to Sterling common stockholders is the same as basic net income (loss) per share attributable to Sterling common stockholders but includes dilutive unvested stock and warrants using the treasury stock method. The following table reconciles the numerators and denominators of the basic and diluted per common share computations for net income ~~(loss)~~ attributable to Sterling common stockholders (amounts in thousands, except per share data):


	Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016			2018		2017		2018		2017
Numerator:
Net income (loss) attributable to Sterling common stockholders	$	7,132	$	2,415	$	8,537	$	(2,890	)
Net income attributable to Sterling common stockholders										$	8,176	$	3,662	$	10,663	$	1,405
Weighted average common shares outstanding — basic	26,486		25,003		25,787		23,915			26,887		26,978		26,881		25,972
Shares for dilutive unvested stock and warrants	434		362		473		—			238		358		281		437
Weighted average common shares outstanding and incremental shares assumed repurchased— diluted	26,920		25,365		26,260		23,915			27,125		27,336		27,162		26,409
Basic income (loss) per share attributable to Sterling common stockholders	$	0.27	$	0.10	$	0.33	$	(0.12	)
Diluted income (loss) per share attributable to Sterling common stockholders	$	0.26	$	0.10	$	0.33	$	(0.12	)
Basic income per share attributable to Sterling common stockholders										$	0.30	$	0.14	$	0.40	$	0.05
Diluted income per share attributable to Sterling common stockholders										$	0.30	$	0.13	$	0.39	$	0.05

In accordance with the treasury stock method, ~~approximately 0.3 million shares of unvested common stock~~for the three and six months ended June 30, 2017, our Warrants were excluded from the diluted weighted average common shares outstanding ~~for the nine months ended September 30, 2016,~~ as the ~~Company incurred a loss during that period and the impact of such~~ shares ~~would have been~~were considered anti-dilutive.



~~13.~~14.	Segment Information

Due to the April 3, 2017 acquisition of Tealstone, the Company has reviewed its reportable segments, operating segments and reporting units. Based on our review, we have concluded that our operations consist of two reportable segments, two operating segments and two reporting unit components: heavy civil construction and residential construction. In making this determination, the Company considered the discrete financial information used by our Chief Operating Decision Maker (“CODM”). Based on this approach, the Company noted that the CODM organizes, evaluates and manages the financial information of our aggregated heavy civil construction projects and the entire residential construction division separately when making operating decisions and assessing the Company’s overall performance. Furthermore, we considered the differences between the types of work performed in each reporting unit. Each heavy civil construction project has similar characteristics, includes similar services, has similar types of customers and is subject to similar economic and regulatory environments. Projects in our heavy civil construction segment typically last for several years, involve several subtasks and are accounted for using the percentage of completion method. Conversely, our residential construction projects typically consist of a high volume of independent units performed for customers that are billed, paid and accounted for as the individual units are completed. Each job performed in our residential construction segment typically takes less than one month to complete.

Segment reporting is aligned based upon the services offered by our two operating groups, which represent our reportable segments: Heavy Civil Construction and Residential ~~Construction, as mentioned above.~~Construction. Our ~~chief operating decision maker~~Chief Operating Decision Maker (“CODM”) evaluates the performance of the aforementioned operating groups based upon revenue and income from operations. Each operating group’s income from operations reflects corporate costs, allocated based primarily upon revenue.

The following table presents total revenue and income from operations by reportable segment for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Revenue
Heavy Civil Construction	$	263,278	$	205,629	$	625,887	$	521,778	$	223,284	$	209,194	$	410,524	$	362,610
Residential Construction	40,941		—		78,160		—		45,450		37,218		80,702		37,218
Total Revenue	$	304,219	$	205,629	$	704,047	$	521,778	$	268,734	$	246,412	$	491,226	$	399,828

Operating Income
Heavy Civil Construction	$	6,960	$	3,672	$	8,627	$	587	$	6,380	$	3,141	$	8,340	$	1,667
Residential Construction	5,679		—		10,580		—		5,770		5,215		10,488		4,901
Total Operating Income	$	12,639	$	3,672	$	19,207	$	587	$	12,150	$	8,356	$	18,828	$	6,568

From the acquisition closing date of April 3, 2017, through September 30, 2017, revenue and income from operations associated with the Tealstone Acquisition totaled approximately $92.9 million and $13.2 million, respectively.

The following table presents total assets by reportable segment at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016:~~2017 (in thousands):


	September 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Assets
Heavy Civil Construction	$	365,178	$	301,823	$	343,559	$	354,090
Residential Construction	107,857		—		127,126		109,208
Total Assets	$	473,035	$	301,823	$	470,685	$	463,298

The Company is in the process of finalizing the purchase accounting, which will affect the allocation of goodwill by reportable segments. Refer to Note 2. However, of the newly acquired goodwill, with a preliminarily amount of $30.5 million, we believe that almost all will be allocated to the Residential Construction segment.

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

Cautionary Comment Regarding Forward-Looking Statements

This Report, ~~includes~~including the documents incorporated herein by reference, contains statements that are, or may be considered to be, “forward-looking statements” ~~within~~regarding the ~~meaning~~Company which represent our expectations and beliefs concerning future events. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995 as set forth in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. ~~These~~The forward-looking statements ~~are~~ included ~~throughout this Report, including in this section, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and~~herein or incorporated herein by reference relate to matters that are predictive in nature, such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating ~~information. We have used the~~information, and may use or contain words such as “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar terms and ~~phrases to identify forward-looking statements in this Report.~~phrases.

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. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, that could result in our expectations not being realized or otherwise could materially affect our financial condition, results of operations and cash flows.

Actual events, results and outcomes may differ materially from ~~our expectations~~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:

changes in general economic conditions, including recessions, reductions in federal, state and local government funding for infrastructure services and changes in those governments’ budgets, practices, laws and regulations;

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;

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 our bidding for contracts, estimates of backlog, percentage-of-completion accounting policies, including onsite conditions that differ materially from those assumed in our original bid, contract modifications, mechanical problems with our machinery or equipment and effects of other risks discussed in this document;

design/build contracts which subject us to the risk of design errors and omissions;

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 and cost escalations associated with subcontractors and labor;

our dependence on a limited number of significant customers;

adverse weather conditions; ~~although we prepare our budgets and bid contracts based on historical rain and snowfall patterns, the incidence of rain, snow, hurricanes, etc., may differ materially from these expectations;~~

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;

our ability to successfully identify, finance, complete and integrate acquisitions;

citations issued by any governmental authority, including the Occupational Safety and Health Administration;

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;

adverse economic conditions in our markets; and

the other factors discussed in more detail in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017 (“~~2016~~2017 Form 10-K”) under “Part I, Item 1A. Risk Factors.”

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. Investors are cautioned that many of the assumptions upon which our forward-looking statements are based are likely to change after 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 included ~~in this Report~~herein are made only as of the date ~~of this Report~~hereof, and we undertake no obligation to update any information contained ~~in this Report~~herein or to publicly release the results of any revisions to any forward-looking statements to reflect events or circumstances that occur, or that we become aware of after the date of this ~~Report, except as may be required by applicable securities laws.~~Report.

Overview

Sterling Construction Company, Inc. (“Sterling” or “the Company”) is a ~~leading heavy civil~~ construction company that specializes in ~~building~~(1) heavy civil construction and ~~reconstruction of transportation infrastructure, water infrastructure, and~~(2) residential ~~and commercial concrete~~construction projects, primarily in ~~Texas, Utah, Nevada, Colorado,~~ Arizona, California, Colorado, Hawaii, Nevada, Texas, Utah and other states in which there are feasible construction opportunities. Our heavy civil construction projects include highways, roads, bridges, airfields, ports, light rail, water, wastewater and storm drainage systems, foundations for multi-family homes, commercial concrete projects and parking structures. Our residential construction projects include concrete foundations for single-family homes.

Although we describe our business in this Report in terms of the services we provide, our base of customers and the geographic areas in which we operate, we have concluded that our operations consist of two reportable segments, two operating segments and two reporting unit components: heavy civil construction and residential construction. In making this determination, the Company considered the discrete financial information used by our Chief Operating Decision Maker (“CODM”). Based on this approach, the Company noted that the CODM organizes, evaluates and manages the financial information of our aggregated heavy civil construction projects and the entire residential construction division separately when making operating decisions and assessing the Company’s overall performance. Furthermore, we considered the differences between the types of work performed in each reporting unit. Each heavy civil construction project has similar characteristics, includes similar services, has similar types of customers and is subject to similar economic and regulatory environments. Projects in our heavy civil construction segment typically last for several years, involve several subtasks and are accounted for using the percentage of completion method. Conversely, our residential construction projects typically consist of a high volume of independent units performed for customers that are billed, paid and accounted for as the individual units are completed. Each job performed in our residential construction segment typically takes less than one month to complete.

Market Outlook and Trends

~~Market outlook:~~

Heavy Civil Construction

Our ~~core~~ heavy civil construction business ~~through September 30, 2017, was~~is primarily driven by ~~Federal~~federal, state and ~~state~~municipal funding. The 2015 passage of the federally funded five-year $305 billion surface transportation bill will increase the annual federal highway investment by 15.1% over the five-year period from 2016 to 2020. In addition to the Federal program, several of the states in our key markets have instituted actions to further increase annual spending. In Texas, two constitutional amendments were passed, which will increase the annual funds allocated to transportation projects byfrom $4.0 billion to $4.5 billion per year. Texas also has locally approved bonds estimated at $1.3 billion that were approved in November 2017. In Utah, a 20% gas tax increase to support infrastructure projects was put into effect January 1, 2016, which is the first state gas tax increase in 18 years. ~~Furthermore,~~The State of Utah also approved, in 2017, a ~~bill was passed in Utah authorizing the issuance of up to~~ $1 billion ~~in bonds~~bond package for ~~use in the state’s highway projects. In addition, a 1-cent~~infrastructure improvements. A 12-cent sales tax increase was approved in Los Angeles, California in 2016 that will provide $3 billion aper year for local road, bridge and transit projects. In addition, California approved a 10 year $52 billion bill that provides an annual $5 billion in incremental funding for use on highway transit repair projects, however a repeal referendum to remove the incremental funding will be up for vote in the fall of 2018. See “Item 1. Business—Our Markets, Competition and Customers” in our ~~2016~~2017 Form 10-K for a more detailed discussion of our markets and their funding sources.

Bid ~~discipline~~Discipline and ~~project execution:~~ Project Execution

To ensure that we take full advantage of the improved market conditions and maximize profitability we have completed an extensive evaluation of our heavy civil construction projects’ historical success based on project size, end customer, product delivered and geography. The knowledge gained has now been incorporated into a more formal and rigorous bid evaluation and approval process, which along with the institution of common processes, we believe will enable us to focus our resources on the most beneficial projects and significantly reduce our risk. In addition, in order to strengthen these processes and capitalize further on the improved market conditions, we appointed a Chief Operating Officer ~~late~~ in the first quarter of ~~2016.~~

2016, and in the first quarter of 2018 we appointed a Vice President, Strategy and Business Development.

Backlog ~~backlog gross margin and gross margin trends:~~

Backlog Gross Margin in Backlog
(Dollar amounts in thousands)
Third quarter of 2017 $804,000 8.4%
Second quarter of 2017 $923,000 8.4%
First quarter of 2017 $925,000 8.4%
Fourth quarter of 2016 $823,000 8.2%
Third quarter of 2016 $820,000 8.0%

Our total margin in backlog has increased approximately 40 basis points, from 8.0% at September 30, 2016 to 8.4% at September 30, 2017. The increases noted above are primarily the result of the improving market conditions and actions that we have taken to improve bid discipline.

For purposes of the discussions which follow, “Current Quarter” refers to the three-month period ended September 30, 2017, “Prior Quarter” refers to the three-month period ended September 30, 2016, “Current Period” refers to the nine-month period ended September 30, 2017 and “Prior Period” refers to the nine-month period ended September 30, 2016.

~~Summary of Financial Results for the Current Quarter and Current Period~~

In the Current Quarter and Current Period, we had operating income of $12.6 million and $19.2 million, respectively, income before income taxes and earnings attributable to noncontrolling interest owners of $9.2 million and $12.0 million, respectively, net income attributable to Sterling common stockholders of $7.1 million and $8.5 million, respectively, and net income per diluted share attributable to Sterling common stockholders of $0.26 and $0.33, respectively.

~~Results of Operations~~

~~Heavy Civil Backlog at September 30, 2017~~

At ~~September~~June 30, ~~2017,~~2018, our ~~backlog~~Backlog of construction projects, which is made up solely of our heavy civil construction segment, was ~~$804~~$885 million, as compared to ~~$823~~$745 million at December 31, ~~2016.~~2017. The contracts in this ~~backlog~~Backlog are typically completed in 12 to 36 months. ~~At September 30, 2017 and December 31, 2016, approximately $108 million and $226 million, respectively, was excluded from our consolidated backlog~~Contracts for ~~projects in~~ which we ~~were~~are the apparent low bidder ~~but had not yet been formally awarded~~on the ~~contract or the contract price had not been finalized~~project (“Unsigned Low-bid Awards”)~~. Total backlog, including~~ are excluded from Backlog until the contract has been executed by our customer. Unsigned Low-bid Awards were $156 million at ~~September~~June 30, ~~2017~~2018. The combination of Backlog and Unsigned Low-bid Awards, which we refer to as "Combined Backlog," totaled $1.04 billion and $995 million, respectively at June 30, 2018 and December 31, ~~2016 was $912~~2017. Backlog includes $28 million and ~~$1.0 billion, respectively. Backlog includes $27 million and $53~~$55 million at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively, attributable to our share of estimated revenues related to joint ventures where we are a noncontrolling joint venture partner.

Our margin in backlog has decreased approximately 20 basis points, from 8.4% at December 31, 2017 to 8.2% at June 30, 2018. The decrease noted above is primarily the result of change in project mix and proportionally lower backlog of our large projects in the Rocky Mountain region and Hawaii. Our margin in Combined Backlog increased to 8.8% at June 30, 2018 from 8.3% at December 31, 2017.

Residential Construction

Our residential construction business was a component of the Tealstone acquisition. Continuing revenue growth of our residential construction business is directly related to the growth of new home starts in our key markets. Our core customer base is primarily made up of leading national home builders as well as regional and custom home builders. Our customers' year over year expected average growth in the Dallas-Forth Worth Metroplex, is approximately 13%. During 2018, we began our expansion into the Houston market and surrounding areas.

Summary of Consolidated Financial Results

~~Results of Operations~~ for the Current Quarter ~~as Compared~~

We had operating income of $12.15 million, income before income taxes and earnings attributable to ~~the Prior Quarter~~noncontrolling interest owners of $9.2 million, net income attributable to Sterling common stockholders of $8.2 million and net income per diluted share attributable to Sterling common stockholders of $0.30.

Consolidated Financial Highlights for the ~~Current Period~~Three and Six Months Ended June 30, 2018 (amounts in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Revenues	$	268,734		$	246,412		$	491,226		$	399,828
Gross profit	31,465			25,205			$	51,986		$	34,492
General and administrative expenses	(13,622		)	(12,812		)	(26,649		)	(23,416		)
Other operating expense, net	(5,693		)	(4,037		)	(6,509		)	(4,508		)
Operating income	12,150			8,356			18,828			6,568
Interest, net	(2,910		)	(2,940		)	(5,869		)	(3,011		)
Income tax expense	(98		)	(98		)	(138		)	(125		)
Noncontrolling interests in earnings	(966		)	(901		)	(2,158		)	(1,272		)
Net income attributable to Sterling common stockholders	$	8,176		$	3,662		$	10,663		$	1,405
Gross margin	11.7		%	10.2		%	10.6		%	8.6		%
Operating margin	4.5		%	3.4		%	3.8		%	1.6		%

Revenues

Revenues increased $22.3 million, or 9.1% in the second quarter of 2018 compared with the second quarter of 2017. The increase in the second quarter of 2018 is driven by a $14.1 million increase in heavy civil construction and $8.2 million increase in residential construction. Revenues increased $91.4 million or 22.9% in the six months ended June 30, 2018 compared with the six months ended June 30, 2017, primarily from a six months compared to three months contribution from the April 3, 2017 Tealstone Acquisition, which resulted in approximately $53.0 million in additional revenue. The remaining increase is driven by a $30.2 million increase in heavy civil construction.

Gross profit

Gross profit increased $6.3 million for the second quarter of 2018 compared with the second quarter of 2017. Our gross margin increased to 11.7% in the second quarter of 2018, as compared to 10.2% in the second quarter of 2017. The increase in gross margin during the second quarter of 2018 as compared to the ~~Prior Period~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 % Change 2017 2016 % Change
(Dollar amounts in thousands)
Revenues $ 304,219
$ 205,629
47.9% $ 704,047
$ 521,778
34.9%
Gross profit 30,631
16,622
84.3% $ 65,123
$ 35,713
82.4%
General and administrative expenses (13,129 ) (9,146 ) 43.5% (36,545 ) (27,888 ) 31.0%
Other operating expense, net (4,863 ) (3,804 ) 27.8% (9,371 ) (7,238 ) 29.5%
Operating income 12,639
3,672
NM 19,207
587
NM
Interest income 107
15
NM 192
19
NM
Interest expense (3,576 ) (491 ) NM (6,672 ) (2,176 ) NM
Loss on extinguishment of debt —
—
NM (755 ) —
NM
Income (loss) before taxes and earnings attributable to noncontrolling interests 9,170
3,196
NM 11,972
(1,570 ) NM
Income tax expense (344 ) (41 ) NM (469 ) (68 ) NM
Net income (loss) 8,826
3,155
NM 11,503
(1,638 ) NM
Noncontrolling owners’ interests in earnings of subsidiaries and joint ventures (1,694 ) (740 ) NM (2,966 ) (1,252 ) NM
Net income (loss) attributable to Sterling common stockholders $ 7,132
$ 2,415
NM $ 8,537
$ (2,890 ) NM
Gross margin 10.1 % 8.1 % 24.7% 9.2 % 6.8 % 35.3%
Operating margin 4.2 % 1.8 % NM 2.7 % 0.1 % NM
NM – Not meaningful.

~~Revenues~~

~~Revenues~~second quarter of 2017 was attributable to improvement in our heavy civil construction business. Gross profit increased ~~$98.6~~$17.5 million ~~or 47.9% in~~for the ~~Current Quarter~~six months ended June 30, 2018 compared with the ~~Prior Quarter and increased $182.3 million, or 34.9% in the Current Period compared with the Prior Period. The increase in the Current Quarter is~~six months ended June 30, 2017, primarily the result of the April 3, 2017 Tealstone Acquisition, which resulted in approximately ~~$50.4~~$9.5 million in additional revenue. The majority of the remaining net increase of $48.2 million in the Current Quarter is attributable to Utah projects and a result of a ramp up in a new 2017 Rocky Mountain region construction joint venture project. The increase in the Current Period compared to the Prior Period was primarily due to the Tealstone Acquisition, which resulted in approximately $92.9 million in additional revenue. The majority of the remaining $89.4 million net increase in the Current Period was also primarily attributable to Utah projects as a result of a ramp up in a new 2017 Rocky Mountain region construction joint venture project and increased project productivity in Texas. The effect of hurricane Harvey did not have a significant impact in the Current Quarter and the Current Period as time lost on project construction was offset by a pickup in emergency work in the area.

~~Gross profit~~

~~Gross profit increased $14.0 million for the Current Quarter compared with the Prior Quarter and $29.4 million for the Current Period compared with the Prior Period. Our~~ gross margin increased to 10.1% and 9.2% in the Current Quarter and Current Period, respectively, as compared to 8.1% and 6.8% in the Prior Quarter and Prior Period, respectively. The increase in gross margin during the Current Quarter as compared to the Prior Quarter and the increase in the Current Period as compared to the Prior Period was primarily attributable to the Tealstone Acquisition adding approximately 1.6% gross margin to the Current Quarter and 1.4% gross margin to the Current Period.

profit.

At ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, we had approximately ~~140~~184 and ~~121~~139 heavy civil contracts-in-progress, respectively, which were less than 90% complete. 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 we are able to refine our estimate of total revenues (including incentives, delay penalties, change orders and claims), 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 increased ~~$4.0~~$0.8 million to ~~$13.1~~$13.6 million during the ~~Current Quarter~~second quarter of 2018 from ~~$9.1~~$12.8 million in the ~~Prior Quarter and~~second quarter of 2017 primarily related to increased ~~$8.7 million~~business development costs. The year to ~~$36.5 million during the Current Period from $27.9 million in the Prior Period. The~~date increase in the ~~Current Quarter compared to the Prior Quarter and the Current Period to the Prior Period~~period is primarily the result of ~~the Tealstone Acquisition, stock based compensation costs related to the acceleration of our former CEO’s unvested shares, and pre-bid contract and recruiting~~increased estimating costs in our ~~Utah market.~~

heavy civil construction business when compared to 2017. General and administrative expenses increased $3.2 million for the six months ended June 30, 2018 compared with the six months ended June 30, 2017, primarily from the the inclusion of six months compared to three months contribution from the April 3, 2017 Tealstone Acquisition.

As a percent of revenues, general and administrative expenses decreased ~~0.1%~~0.5% to ~~4.3% and 5.2% to in~~5.4% during the ~~Current Quarter and Current Period, respectively, compared with 4.4% and 5.3% in the Prior Quarter and Prior Period, respectively.~~six months ended June 30, 2018. The ~~slight~~ decrease in general and administrative expenses, as a percent of revenue, ~~for the Current Quarter and Current Period~~ is primarily the result of ~~the Company's ability to control costs while implementing our growth strategy.~~

increased operating leverage from higher revenues in heavy civil construction.

Other operating expense, net

Other operating expense, net, includes 50% of earnings and losses related to ~~members’~~Members’ interests and other miscellaneous operating income or expense. Members’ interest earnings are treated as an expense and increase our liability ~~account “Members’ interest subject to mandatory redemption and undistributed earnings.”~~account. The change in other operating expense, net, was ~~$1.1~~$1.7 million during the ~~Current Quarter~~second quarter of 2018, driven by an increase in Members' interest earnings of $2.1 million and ~~$2.1~~increased earnout expense of $0.4 million, partially offset by the disposition of a property in Texas of $0.9 million. Other operating expense, net, increased $2.0 million to $6.5 million during the ~~Current Period. The increase in~~six months ended June 30, 2018, compared to $4.5 million during the ~~Current Quarter was primarily due to~~six months ended June 30, 2017, driven by an increase in Members' interest earnings of $2.7 million and increased earnout expense of $0.4 million, partially offset by ~~our 50% owned subsidiaries. The increase~~the disposition of a property in ~~the Current Period was primarily due the sale for a loss of $1.1 million on one of our~~ Texas ~~buildings that was sold in the third quarter and the write-down~~ of $0.9 ~~million that~~million.

Interest expense

Interest expense was ~~recorded~~$3.1 million in the second quarter of ~~2017, a loss on debt extinguishment~~2018 compared to $3.0 million in the second quarter of ~~$0.8 million and transaction costs of $0.3 million~~2017. The interest expense is related to our borrowings under our Oaktree Facility, which replaced our Equipment-based Facility and funded the cash component of the Tealstone Acquisition.

~~Income taxes~~

~~Our effective income tax rates for~~ Interest expense was $6.2 million in the ~~Current Quarter and Current Period were approximately 4%~~six months ended June 30, 2018 compared to ~~a minimal~~$3.1 million in the six months ended June 30, 2017, reflecting six months of interest from our borrowings under our Oaktree Facility in the 2018 period compared to only three months in the 2017 period. We have made cumulative repayments of $4.7 million since the inception of the Oaktree Facility on April 3, 2017, while the prevailing interest rate in Prior Quarter and Prior Period. As our market improves and we increasingly benefit from the Tealstone Acquisition, we are expecting a current federal alternative minimum tax liability for the year. Therefore, $0.3 million and $0.5 million of tax expense was recorded for the Current Quarter and Current Period.increased approximately 100 basis points during that same period.

Segment ~~Results~~Financial Highlights for the Three and Six Months Ended June 30, 2018 (amounts in thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017		% of Total	2016		% of Total	2017		% of Total	2016		% of Total	2018		% of Total	2017		% of Total	2018		% of Total	2017		% of Total
Revenue
Heavy Civil Construction	$	263,278	87%	$	205,629	100%	$	625,887	89%	$	521,778	100%	$	223,284	83%	$	209,194	85%	$	410,524	84%	$	362,610	91%
Residential Construction	40,941		13%	—		—%	78,160		11%	—		—%	45,450		17%	37,218		15%	80,702		16%	37,218		9%
Total Revenue	$	304,219		$	205,629		$	704,047		$	521,778		$	268,734		$	246,412		$	491,226		$	399,828
Operating Income
Heavy Civil Construction	$	6,960	55%	$	3,672	100%	$	8,627	45%	$	587	100%	$	6,380	53%	$	3,141	38%	$	8,340	44%	$	1,667	25%
Residential Construction	5,679		45%	—		—%	10,580		55%	—		—%	5,770		47%	5,215		62%	10,488		56%	4,901		75%
Total Operating Income	$	12,639		$	3,672		$	19,207		$	587		$	12,150		$	8,356		$	18,828		$	6,568

Heavy Civil Construction

~~Revenue~~Revenues

~~Revenue was $304.2 million and $704.0~~Heavy civil construction revenues were $223.3 million for the ~~Current Quarter and Current Period, respectively. This represented~~second quarter of 2018, an increase in our heavy civil construction segment of ~~$57.6~~$14.1 million or ~~28%~~6.7% compared to the second quarter of 2017. The increase was primarily attributable to increased revenues of $30.1 million related to the commercial and ~~$104.1~~aviation space, partially offset by the substantial completion of a large Rocky Mountain construction joint venture project and lower volume in Texas. Revenues increased $47.9 million or ~~20% for~~13.2% in the ~~Current Quarter~~six months ended June 30, 2018 compared with the six months ended June 30, 2017, primarily the result of six months compared to three months contribution from the April 3, 2017 Tealstone Acquisition, which resulted in approximately $17.7 million in additional revenue. The remaining increase is driven by growth in our other civil work in the commercial and aviation space, partially offset by the substantial completion of a Hawaii project.

~~and Current Period~~Operating income

Our heavy civil construction segment had operating income of $6.4 million for the second quarter of 2018, an increase of $3.2 million, compared to the ~~Prior Quarter and Prior Period, coupled with $40.9~~second quarter of 2017. The improvement was the result of volume driven increases of approximately $1.4 million and ~~$78.2 million~~project mix contributions from our other civil work in ~~additional revenue related to our new residential construction segment for~~ the ~~Current Quarter~~commercial and ~~Current Period, respectively.~~

aviation space. Operating ~~Income~~

~~Operating Income~~income was ~~$12.6 million and $19.2~~$8.3 million for the ~~Current Quarter and Current Period, respectively. This represented~~six months ended June 30, 2018, an increase of ~~$3.3~~$6.7 million, ~~or 90%~~ in our heavy civil construction segment compared to the ~~Prior Quarter~~six months ended June 30, 2017. The improvement was the result of volume driven increases of approximately $4.1 million, a $1.2 million increase from a six months compared to three months contribution from the April 3, 2017 Tealstone Acquisition with the remainder from project mix contributions from other civil work in the commercial and aviation space.

Residential Construction

Revenues

Our residential construction segment contributed $45.5 million in revenues for the second quarter of 2018, an increase of ~~$8.0~~$8.2 million or ~~1,370% in our heavy civil construction segment~~22.1%, compared to the ~~Prior Period, coupled~~second quarter of 2017. The increase in revenue is indicative of the underlying growth in the Dallas-Fort Worth area and to a lesser extent expansion into adjacent markets. Revenues increased $43.5 million to $80.7 million in the six months ended June 30, 2018 compared with ~~$5.7 million and $10.6~~the six months ended June 30, 2017, the result of the April 3, 2017 Tealstone Acquisition, which contributed approximately $35.3 million in additional revenue in the period over period variance referenced above.

Operating income ~~related to our new~~

The residential construction segment had operating income of $5.8 million for the ~~Current Quarter~~second quarter of 2018, an increase of $0.6 million, compared to the second quarter of 2017. The improvement was the result of volume driven increases, offset by increased earnout expense and ~~Current Period, respectively.~~

start-up costs from the expansion into the Houston area. Operating income was $10.5 million for the six months ended June 30, 2018, an increase of $5.6 million, compared to the six months ended June 30, 2017. The improvement was the result of six months compared to three months contribution from the April 3, 2017 Tealstone Acquisition.

Liquidity and Sources of Capital

The following table sets forth information about our cash flows and liquidity (amounts in thousands):



	Six Months Ended June 30,
	2018			2017
Net cash (used in) provided by:
Operating activities	$	(9,524	)	$	(12,336	)
Investing activities	(3,956		)	(58,963		)
Financing activities	(3,888		)	88,572
Total increase (decrease) in cash and cash equivalents	$	(17,368	)	$	17,273

Nine Months Ended
September 30,
2017 2016
Net cash (used in) provided by:

Operating activities $ (6,951 ) $ 35,710
Investing activities (57,336 ) (6,665 )
Financing activities 88,043
9,550
Total increase in cash and cash equivalents $ 23,756
$ 38,595
September 30,
2017 December 31,
2016
Cash and cash equivalents $ 66,541
$ 42,785
Working capital $ 84,840
$ 29,316



	June 30, 2018		December 31, 2017
Cash and cash equivalents	$	66,585	$	83,953
Working capital	$	114,122	$	96,234

The significant non-cash items in operating activities include depreciation and amortization expense, which were $8.3 million in the six months ended June 30, 2018 and 2017. Amortization expense has increased approximately $0.6 million as a result of our April 3, 2017 acquisition where we acquired identified intangible assets. Depreciation expense decreased as part of our efforts to maintain our current fleet of equipment and supplement it as necessary with more economical project specific leased equipment.

Operating ~~Activities.~~Activities

During the ~~Current Period,~~six months ended June 30, 2018, net cash used byin operating activities was ~~$7.0~~$9.5 million compared to ~~net cash provided of $35.7~~$12.3 million in the ~~Prior Period.~~six months ended June 30, 2017. The drivers of operating activities cash flows were primarily the result of our improvement in net income discussed above, non-cash items, the change in our accounts receivable, inventory, net contracts in progress and accounts payable balances (collectively, “Contract Capital”) as discussed below.

Cash and Working Capital

Cash at June 30, 2018, was $66.6 million, and includes the following components (amounts in thousands):



	June 30, 2018		December 31, 2017
Generally Available	$	36,710	34,031
Consolidated 50% Owned Subsidiaries	17,566		31,056
Construction Joint Ventures	12,309		18,866
Total Cash	$	66,585	$	83,953

The ~~significant non-cash items included~~increase in ~~operating activities include depreciation~~generally available cash is primarily due to our improvement in net income, partially offset by $4.7 million of repayments on our Oaktree Facility during the first quarter of 2018. The decrease in consolidated 50% owned subsidiaries and ~~amortization expense, which were $13.1~~construction joint venture cash levels is driven by project mix and the substantial completion of a large Rocky Mountain region construction joint venture project and a large project in Hawaii. Our working capital increased $17.9 million ~~in the Current Period and $12.1~~to $114.1 million ~~in the Prior Period. Depreciation and amortization expense has increased~~at June 30, 2018 from ~~the Prior Period~~$96.2 million at December 31, 2017, due to the ~~Current Period as a result of our April 3, 2017 acquisition where we acquired identified intangible assets~~cash factors previously described and ~~have amortized $1.4 million in~~ the ~~Current Period. Depreciation expense decreased as part of our efforts to maintain our current fleet of equipment and supplement it as necessary with more economical project specific leased equipment.~~Contract Capital discussion below.

Contract Capital

The need for working capital for our business varies due to fluctuations in operating activities and investments in our Contract Capital. The ~~Components~~changes in the components of Contract Capital ~~at September 30, 2017 and 2016 and changes during the Current Quarter and Prior Quarter~~ were as follows (amounts in thousands):


	Changes in Components of Contract Capital for the Period Ended
	September 30, 2017			September 30, 2016			Variance			Six Months Ended June 30, 2018			Six Months Ended June 30, 2017
Costs and estimated earnings in excess of billings on uncompleted contracts	$	(7,735	)	$	(5,084	)	$	(2,651	)	$	724		$	(4,939	)
Billings in excess of costs and estimated earnings on uncompleted contracts	(1,035		)	31,340			(32,375		)	(4,070		)	12,513
Contracts in progress, net	(8,770		)	26,256			(35,026		)	(3,346		)	7,574
Contracts receivable, including retainage	(45,044		)	(23,303		)	(21,741		)	(30,534		)	(40,163		)
Receivables from and equity in construction joint ventures	(1,939		)	3,461			(5,400		)	(386		)	(333		)
Inventories	2,833			(1,465		)	4,298			3,008			1,405
Accounts payable	16,687			17,902			(1,215		)	(1,073		)	12,922
Contract Capital, net	$	(36,233	)	$	22,851		$	(59,084	)	$	(32,331	)	$	(18,595	)

The ~~Current Period~~six months ended June 30, 2018 change in Contract Capital decreased liquidity by ~~$36.2~~$32.3 million. Fluctuations in our Contract Capital balance and its components are not unusual in our business and are impacted by seasonality, the size of our projects and changing type and mix of projects in our backlog. Our Contract Capital is particularly impacted by the timing of new awards and related payments of performing work and the contract billings to the customer as we complete our projects. Contract Capital is also impacted at period-end by the timing of accounts receivable collections and accounts payable payments for our projects. We expect cash flow from operations to improve, principally driven by seasonality.

Investing ~~Activities.~~Activities

During the ~~Current Period,~~six months ended June 30, 2018, net cash used in investing activities was ~~$57.3~~$4.0 million compared to ~~$6.7~~$59.0 million in the ~~Prior Period.~~six months ended June 30, 2017. The ~~primary driver~~decrease is the result of ~~investing activities cash flows was the $55 million paid on~~our April 3, 2017 ~~as part~~Tealstone acquisition which included a cash component of ~~the Tealstone Acquisition.~~

$55.0 million. Capital equipment is acquired as needed to support changing levels of production activities and to replace retiring equipment. Expenditures for the replacement of certain equipment and to expand our construction fleet ~~totaled $8.3~~were approximately $5.3 million for the ~~Current Period. Proceeds from the sale of property~~six months ended June 30, 2018 and ~~equipment totaled $5.8~~$5.9 million for the ~~Current Period with an associated~~six months ended June 30, 2017.

Financing Activities

During the six months ended June 30, 2018, net loss of $0.2 million. For the Prior Period, expenditures totaled $8.9 million, while proceeds from the sale of property and equipment totaled $2.2 million with an associated net gain of $0.3 million. The level of expenditurescash used in ~~the Current Period decreased by $0.6~~financing activities was $3.9 million compared to ~~the Prior Period. This decrease was the result of our efforts to maintain our current fleet of equipment and supplement it as necessary with more economical project-specific leased equipment.~~

~~Financing Activities.~~

~~During the Current Period,~~ net cash provided by financing activities ~~was $88.0 million compared to $9.6~~of $88.6 million in the Prior Period. The increase in cash provided by financing activities was primarily a result of net proceeds of $85.0 million received as part of our new Loan Agreement, compared to net proceeds of $19.1 million received from the issuance of common stock in the Prior Period.

~~Cash and Working Capital.~~

~~Cash at September~~six months ended June 30, 2017, ~~was $66.5 million, which increased based on~~driven by the ~~items mentioned above. Cash includes $2.6 million that was held by our VIE which is also a majority-owned subsidiary, $12.5 million belonging~~Oaktree Facility to ~~another majority-owned subsidiary and $20.7 million belonging to majority-owned joint ventures which generally cannot be used for purposes outside~~fund the ~~joint venture. Our working capital increased $55.5 million to $84.8 million at September~~Tealstone Acquisition during the six months ended June 30, ~~2017 from $29.3 million at December 31, 2016.~~

2017.

Credit Facility and Other Sources of Capital

In addition to our available cash, cash equivalents and cash provided by operations, from time to time, we use borrowings to finance acquisitions, our capital expenditures and working capital needs.

~~Loan Agreement~~

On April 3, 2017, the Company, as borrower, and certain of its subsidiaries, as guarantors, entered into a Loan and Security Agreement with Wilmington Trust, National Association, as agent, and the lenders party thereto (the “~~Loan Agreement”), providing for a term loan of $85,000,000 (the “Loan”) with a maturity date of April 4, 2022, which replaced the then existing debt facility. The Loan is secured by substantially all of the assets of the Company and its subsidiaries.~~

Interest on the Loan is equal to the one-, two-, three- or six-month London interbank rate, or LIBOR, plus 8.75% per annum on the unpaid principal amount of the Loan, subject to adjustment under certain circumstances. Interest on the Loan is generally payable monthly. There are no amortized principal payments; however, the Company is required to prepay the Loan, and in certain cases pay a prepayment premium thereon, with proceeds received from the issuances of debt or equity, transfers, events of loss and extraordinary receipts. The Company is required to make an offer quarterly to the lenders to prepay the Loan in an amount equal to 75% of its excess cash flow, plus accrued and unpaid interest thereon and a prepayment premium.

The Loan Agreement contains various covenants that limit, among other things, the Company’s ability and certain of its subsidiaries’ ability to incur certain indebtedness, grant certain liens, merge or consolidate, sell assets, make certain loans, enter into acquisitions, incur capital expenditures, make investments, and pay dividends. In addition, the Company is required to maintain the following principal financial covenants:

~~a ratio of secured indebtedness to EBITDA of not more than 3.10 to 1.00 for four consecutive quarters, reducing to 1.80 to 1.00 by the four consecutive quarters ending September 30, 2019;~~

~~daily cash collateral of not less than $15,000,000, potentially increasing to $18,000,000 beginning on April 4, 2018;~~

~~a rolling four quarter gross margin in contract backlog of not less than $60,000,000, increasing to $70,000,000 by March 31, 2019;~~

~~the incurrence of net capital expenditures during each four consecutive fiscal quarters shall not exceed $15,000,000;~~

~~bonding capacity shall be maintained at all times in an amount not less than $1,000,000,000; and~~

~~the EBITDA of Tealstone Residential Concrete, Inc. shall not be less than $12,000,000 during each four consecutive fiscal quarters.~~

~~The Company is in compliance with these covenants at September 30, 2017.~~

The Loan Agreement also includes customary events of default, including events of default relating to non-payment of principal or interest, inaccuracy of representations and warranties, breaches of covenants, cross-defaults, bankruptcy and insolvency events, certain unsatisfied judgments, loan documents not being valid, calls under the Company’s bonds, failure of specified individuals to remain employed by the Company, and a change of control. If an event of default occurs, the lenders will be able to accelerate the maturity of the Loan Agreement and exercise other rights and remedies.

Deferred loan costs and discounts totaled $10.4 million, which included attorney fees, investment bank fees as well as amounts payed to the lenders and which were discounted from the loan amount. Warrants valued at $3.5 million were included as well. Refer to Note 11 for additional information on the warrants. The total amount will be amortized on a straight-line basis over the five-year life of the Loan. Amortization expense of $0.5 million and $1.0 million has been included in interest expense for the three and nine months ended September 30, 2017.

As part of the extinguishment of our prior credit facility, $0.8 million in debt extinguishment costs was expensed and included as a “loss on extinguishment of debt” on our statement of operations for the three and nine months ended September 30, 2017.

~~Notes and Deferred Payments to Sellers~~

As part of the Tealstone Acquisition, the Company issued $5,000,000 of promissory notes to the sellers and agreed to make $2,426,000 and $7,500,000 of deferred cash payments on the second and third anniversaries of the closing date, respectively. Based on a preliminary 12% discount rate the Company recorded $11.6 million as notes and deferred payments to sellers in long-term debt on our condensed consolidated balance sheet at the acquisition closing date. Accreted interest for the period was $0.3 million and $0.5 million for the three and nine months ended September 30, 2017, respectively, and was recorded as interest expense.

~~Warrants~~

On April 3, 2017, the Company issued warrants (the “Warrants”) to the lenders under the Loan Agreement (the “Holders”) pursuant to which the Holders have the right to purchase, for a period of five years from the date of issuance, up to an aggregate of 1,000,000 shares of the Company’s common stock (the “Warrant Shares”) at an initial exercise price of $10.25 per share, subject to adjustment for stock splits, combinations and similar recapitalization events and weighted-average anti-dilution upon the issuance by the Company of shares of common stock or rights, options or convertible securities exercisable for common stock in the future at a price below the exercise price of the Warrants. The total fair value of the Warrants was $3.5 million, which was recorded as a Loan discount and netted against our new Loan and included in “additional paid in capital” on our balance sheet.

Borrowings

Average borrowings under our ~~Loan and prior credit facility~~Oaktree Facility for the ~~Current Quarter and Current Period were $85.0~~six months ended June 30, 2018 was $81.6 million and ~~$57.7 million, respectively. Average borrowings under the prior equipment-based credit facility~~ for the ~~2016 fiscal year were $18.1~~six months ended June 30, 2017 was $85.0 million.

Based on our average borrowings ~~for 2016~~ and our ~~2017~~2018 forecasted cash needs, we continue to believe that the Company has sufficient liquid financial resources to fund our requirements for the next twelve months of operations, including our bonding requirements. Furthermore, the Company is continually assessing ways to increase revenues and reduce costs to improve liquidity. However, in the event of a substantial cash constraint and if we were unable to secure adequate debt financing, or we were to incur losses, our working capital could be materially and adversely affected. Refer to “Part I, Item 1A. Risk Factors” in the 2016 Form 10-K for further discussion of liquidity related risks.

Capital Strategy

We will continue to explore additional revenue growth and capital alternatives to ~~further~~ strengthen our financial position in order to take advantage of ~~this~~the improving ~~transportation~~heavy civil infrastructure market. ~~This could include the potential sale of assets, businesses or equity, the favorable resolution of outstanding contract claims, or a combination thereof.~~ We expect to ~~use proceeds from these initiatives~~pursue strategic uses of our cash to invest in projects ~~meeting~~or businesses that meet our gross margin targets, overall profitability and other requirements, as well as managing our debt balances, ~~and pursuing projects or investments~~invest in adjacent ~~markets.~~markets or other opportunities.

Inflation

Inflation generally has not had a material impact on our financial results; however, from time to time, increases in oil, fuel and steel prices have affected our cost of operations. Anticipated cost increases and reductions are considered in our bids to customers on proposed new construction projects.

~~Where~~When we are the successful bidder on a heavy civil construction project, we execute purchase orders with material suppliers and contracts with subcontractors covering the prices of most materials and services, other than oil and fuel products, thereby mitigating future price increases and supply disruptions. These purchase orders and contracts do not contain quantity guarantees and we have no obligation for materials and services beyond those required to complete the contracts with our customers. There can be no assurance that increases in prices of oil and fuel used in our business will be adequately covered by the estimated escalation we have included in our bids and there can be no assurance that all of our vendors will fulfill their pricing and supply commitments under their purchase orders and contracts with the Company. We adjust our total estimated costs on our projects when we believe it is probable that we will have cost increases which will not be recovered from customers, vendors or re-engineering.

Inflation affects our residential construction projects minimally as these projects are typically ~~last~~completed in less than one ~~month or less.~~month.

Off-Balance Sheet Arrangements and Joint Ventures

We participate in various construction joint ventures in order to share expertise, risk and resources for certain highly complex projects. The 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 is 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 incurs a loss or additional costs that we could incur should the partner fail to provide the services and resources toward project completion that had been committed to in the joint venture agreement.

At ~~September~~June 30, ~~2017,~~2018, there was approximately ~~$51~~$56 million of construction work to be completed on unconsolidated construction joint venture contracts, of which ~~$27~~$28 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~~June 30, ~~2017,~~2018, 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 provisions under our contracts.

Off-balance sheet arrangements related to operating leases are discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ~~–Liquidity~~– Liquidity and Sources of ~~Capital−~~Capital − Contractual Obligations” in our ~~2016~~2017 Form 10-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Changes in interest rates are one of our sources of market ~~risks. Outstanding~~risk. Interest on outstanding indebtedness under our Oaktree Facility is equal to the one-, two-, three- or six-month London interbank rate, or LIBOR, plus 8.75% per annum on the unpaid principal amount of the Loan, ~~Agreement bears~~subject to adjustment under certain circumstances. There are no amortized principal payments; however, the Company is required to prepay the Loan, and in certain cases pay a prepayment premium thereon, with proceeds received from the issuances of debt or equity, transfers, events of loss and extraordinary receipts. The Company is required to make an offer quarterly to the lenders to prepay the Loan in an amount equal to 75% of its excess cash flow, plus accrued and unpaid interest ~~at floating rates (LIBOR), so our results from operations could be impacted from~~thereon and a ~~change in interest rates.~~prepayment premium. At June 30, 2018, we had a term loan of $80.3 million outstanding under this facility. A 1% increase in our interest rate would increase interest expense by ~~$0.9~~$0.8 million per year. ~~However, the Company does not expect interest rate fluctuations to have a material adverse effect on the Company’s financial results.~~

See “Inflation” above regarding risks associated with materials and fuel purchases required to complete our construction contracts.

Item 4. Controls and Procedures

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, as amended (the “Exchange Act”), 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 Exchange Act). Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective at ~~September~~June 30, ~~2017~~2018 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.

We acquired Tealstone on April 3, 2017 and have not yet included Tealstone in our assessment of the effectiveness of our internal control over financial reporting. Accordingly, pursuant to the Securities and Exchange Commission's general guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment in the year of acquisition, the scope of our assessment of the effectiveness of disclosure controls and procedures does not include internal control over financial reporting related to Tealstone. Since the acquisition date of April 3, 2017, Tealstone accounted for $93 million of our total revenues and as of September 30, 2017 had total assets of $112 million.

Changes in Internal Control over Financial Reporting

~~Except as noted above, there~~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~~June 30, ~~2017~~2018 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.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are now and may in the future be involved as a party to various legal proceedings that are incidental to the ordinary course of business. We regularly analyze current information about these proceedings and, as necessary, provide accruals for probable liabilities on the eventual disposition of these matters.

In the opinion of management, after consultation with legal counsel, there are currently no threatened or pending legal matters that would reasonably be expected to have a material adverse impact on our condensed consolidated results of operations, financial position or cash flows.

Item 1A. Risk Factors

There have not been any material changes from the risk factors previously disclosed in “Part I, Item 1A. Risk Factors” of our ~~2016~~2017 Form 10-K. You should carefully consider such risk factors, which could materially affect our business, financial condition or future results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table shows, by month, the number of shares of the Company's common stock that the Company repurchased in the quarter ended ~~September~~June 30, ~~2017.~~

2018.

Period
Total Number of
Shares
Purchased

Average
Price Paid
per Share

Total Number of Shares (or Units) Purchased as Part of
Publicly- Announced
Plans or Program

Maximum Number (or
Approximate Dollar
Value) of Shares (or Units)
that May Yet Be
Purchased Under the
Plans or Programs
July 1—July 31, 2017 2,336
(1) $ 13.07
—
—
August 1—August 31, 2017 65
(1) $ 10.79
—
—



Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares (or Units) Purchased as Part of Publicly- Announced Plans or Program	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
April 1 - April 30, 2018	9,571	(1)	$	11.26	—	—
May 1 - May 31, 2018	—		$	—	—	—
June 1 - June 30, 2018	—		$	—	—	—

(1)

These shares were repurchased from employees holding shares of the Company's common stock that had been awarded to them by the Company and that were released from Company-imposed transfer restrictions. The repurchase was to enable the employees to satisfy the Company's tax withholding obligations occasioned by the release of the restrictions. The repurchase was made at the election of the employees pursuant to a procedure adopted by the Compensation Committee of the Board of Directors.

~~Item 3. Defaults upon Senior Securities~~

~~None.~~

~~Item 4. Mine Safety Disclosures~~

~~None.~~

~~Item 5. Other Information~~

~~None.~~

Item 6.3. Exhibits

The following exhibits are filed with this Report.



Exhibit No.			~~Description~~Exhibit Title
10.1*3.1	Certificate of Incorporation of Sterling Construction Company, Inc. as amended through April 28, 2017 (incorporated by reference to Exhibit 3 to Sterling Construction Company, Inc.'s Current Report on Form 8-K, filed on May 3, 2017 (SEC File No. 1-31993)).
3.2	~~First~~ Amended and Restated Bylaws of Sterling Construction Company, Inc. (incorporated by reference to Exhibit 3.1 to Sterling Construction Company, Inc.’s Current Report on Form 8-K, filed on March 8, 2018 (SEC file No. 1-31993)).
10.1.1#*	Standard Non-Employee Director Compensation adopted by the Board of Directors to be effective May 2, 2018 (incorporated by reference to Exhibit 10.2.1 to Sterling Construction Company, Inc.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2018, filed on May 8, 2018). (Replaces incorrect exhibit previously filed.)
10.1.2#	Form of Non-Employee Director Restricted Stock Agreement (incorporated by reference to Exhibit 10.2.1 to Sterling Construction Company, Inc.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2018, filed on May 8, 2018).
10.2.1#	Plan Description - Senior Executive Incentive Compensation Plan (adopted 2018) (incorporated by reference to Exhibit 10.2.1 to Sterling Construction Company, Inc.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2018, filed on May 8, 2018).
10.2.2#	Form of 2018 Long-Term Incentive Award Agreement (incorporated by reference to Exhibit 10.2.1 to Sterling Construction Company, Inc.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2018, filed on May 8, 2018).
10.3	Third Amendment Toto Loan and Security Agreement, dated April 3, 2018, by and among Sterling Construction Company, Inc., as borrower, the subsidiary guarantors party thereto, the lenders party thereto, and Wilmington Trust, National Association, as agent (incorporated by reference to Exhibit 10.2.1 to Sterling Construction Company, Inc.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2018, filed on May 8, 2018).
10.4	Sterling Construction Company, Inc. 2018 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to Sterling Construction Company, Inc.’s Current Report on Form 8-K, filed on May 8, 2018 (SEC File No. 001-31993)).
31.1*			Certification of Joseph A. Cutillo, Chief Executive Officer of Sterling Construction Company, Inc.
31.2*			Certification of Ronald A. Ballschmiede, Executive Vice President & Chief Financial Officer of Sterling Construction Company, Inc.
32*32.1+			Certification furnished pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) of Joseph A. Cutillo, Chief Executive Officer, and Ronald A. Ballschmiede, Executive Vice President & Chief Financial Officer of Sterling Construction Company, Inc.
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*			XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*			XBRL Taxonomy Extension Presentation Linkbase Document

_______________

~~_______________~~ # Management contract or compensatory plan or arrangement.

* Filed herewith.

+ Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	STERLING CONSTRUCTION COMPANY, INC.


Date: ~~October 31, 2017~~August 2, 2018	By:	/s/ Joseph A. Cutillo
		Joseph A. Cutillo
		Chief Executive Officer


Date: ~~October 31, 2017~~August 2, 2018	By:	/s/ Ronald A. Ballschmiede
		Ronald A. Ballschmiede
		Chief Financial Officer

~~STERLING CONSTRUCTION COMPANY, INC.~~

~~Quarterly Report on Form 10-Q for Period Ended September 30, 2017~~

~~Exhibit Index~~




~~Exhibit No.~~		~~Description~~

10.1*		~~First Amendment To Loan and Security Agreement~~

31.1*		~~Certification of Joseph A. Cutillo, Chief Executive Officer of Sterling Construction Company, Inc.~~

31.2*		~~Certification of Ronald A. Ballschmiede, Chief Financial Officer of Sterling Construction Company, Inc.~~

32*		Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) of Joseph A. Cutillo, Chief Executive Officer, and Ronald A. Ballschmiede, Chief Financial Officer.

101.INS*		~~XBRL Instance Document~~

101.SCH*		~~XBRL Taxonomy Extension Schema Document~~

101.CAL*		~~XBRL Taxonomy Extension Calculation Linkbase Document~~

101.DEF*		~~XBRL Taxonomy Extension Definition Linkbase Document~~

101.LAB*		~~XBRL Taxonomy Extension Label Linkbase Document~~

101.PRE*		~~XBRL Taxonomy Extension Presentation Linkbase Document~~

~~_____________~~

* Filed herewith.

3532



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3. Quantitative and Qualitative Disclosures about Market Risk	3029

Item 4. Controls and Procedures	3129

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	3230

Item 1A. Risk Factors	3230

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3230

Item 3. ~~Defaults upon Senior Securities~~	32

~~Item 4. Mine Safety Disclosures~~	32

~~Item 5. Other Information~~	32

~~Item 6.~~ Exhibits	3331

SIGNATURES	35



	STERLING CONSTRUCTION COMPANY, INC. STOCKHOLDERS
	Common Stock			Additional Paid in			Retained			Noncon-trolling
	Shares	Amount		Capital			Deficit			Interests		Total
Balance at January 1, 2017	24,987	$	250	$	208,922		$	(101,738	)	$	656	$	108,090
Net income	—	—		—			8,537			2,966		11,503
Stock-based compensation	154	1		2,533			—			—		2,534
Stock issued for Tealstone acquisition	1,882	19		17,042			—			—		17,061
Warrants issued to lenders	—	—		3,500			—			—		3,500
Other	—	—		(149		)	—			—		(149		)
Balance at September 30, 2017	27,023	$	270	$	231,848		$	(93,201	)	$	3,622	$	142,539



Cash	$	55,000
Common stock (1,882,058 shares)	17,061
Promissory notes	4,436
Deferred payments	7,153
Total	$	83,650



Balance at January 1, 2017	$	54,820
Additional goodwill related to acquisition	30,457
Balance at September 30, 2017	$	85,277



Cash	$	139
Accounts receivable	19,876
Costs and estimated earnings in excess of billings on uncompleted contracts	2,944
Inventory	1,218
Other current assets	54
Property, plant and equipment	565
Other assets, net	1
Identifiable intangible assets and Goodwill	77,028
Accounts payable	(16,781		)
Billings in excess of costs and estimated earnings on uncompleted contracts	(303		)
Accrued expenses	(823		)
State income tax payable	(268		)
Total Consideration	$	83,650



	September 30, 2017			December 31, 2016
Loan	$	85,000		$	3,532
Less deferred loan costs and discount	(9,350		)	(803		)
Total Loan, net	75,650			2,729
Notes and deferred payments to sellers, Tealstone acquisition	12,118			—
Notes payable for transportation and construction equipment and other	1,837			2,665
	89,605			5,394

Current maturities of long-term debt	986			4,648
Less current deferred loan costs	—			(803		)
Less current maturities of long-term debt, net	(986		)	(3,845		)
Total long-term debt	$	88,619		$	1,549



	At April 3, 2017
Current stock price	$	8.88
Exercise option price	$	10.25
Expected term of warrants (in years)	5
Expected volatility rate	48.29		%
Risk-free rate	1.88		%
Expected dividend yield	—		%



	Backlog	Gross Margin in Backlog
	(Dollar amounts in thousands)
Third quarter of 2017	$804,000	8.4%
Second quarter of 2017	$923,000	8.4%
First quarter of 2017	$925,000	8.4%
Fourth quarter of 2016	$823,000	8.2%
Third quarter of 2016	$820,000	8.0%



	Three Months Ended September 30,							Nine Months Ended September 30,
	2017			2016			% Change	2017			2016			% Change
	(Dollar amounts in thousands)
Revenues	$	304,219		$	205,629		47.9%	$	704,047		$	521,778		34.9%
Gross profit	30,631			16,622			84.3%	$	65,123		$	35,713		82.4%
General and administrative expenses	(13,129		)	(9,146		)	43.5%	(36,545		)	(27,888		)	31.0%
Other operating expense, net	(4,863		)	(3,804		)	27.8%	(9,371		)	(7,238		)	29.5%
Operating income	12,639			3,672			NM	19,207			587			NM
Interest income	107			15			NM	192			19			NM
Interest expense	(3,576		)	(491		)	NM	(6,672		)	(2,176		)	NM
Loss on extinguishment of debt	—			—			NM	(755		)	—			NM
Income (loss) before taxes and earnings attributable to noncontrolling interests	9,170			3,196			NM	11,972			(1,570		)	NM
Income tax expense	(344		)	(41		)	NM	(469		)	(68		)	NM
Net income (loss)	8,826			3,155			NM	11,503			(1,638		)	NM
Noncontrolling owners’ interests in earnings of subsidiaries and joint ventures	(1,694		)	(740		)	NM	(2,966		)	(1,252		)	NM
Net income (loss) attributable to Sterling common stockholders	$	7,132		$	2,415		NM	$	8,537		$	(2,890	)	NM
Gross margin	10.1		%	8.1		%	24.7%	9.2		%	6.8		%	35.3%
Operating margin	4.2		%	1.8		%	NM	2.7		%	0.1		%	NM
NM – Not meaningful.