UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~(Mark one)~~

~~[X]~~



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

For the quarterly period ~~ended:~~ended June 30, ~~2018~~2019

OrOR

~~[ ]~~



¨		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



~~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~~organization)	(I.R.S. Employer Identification No.)

1800 Hughes Landing Blvd. The Woodlands, Texas	77380
(Address of principal executive ~~office)~~offices)	(Zip Code)

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



Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share	STRL	The NASDAQ Stock Market LLC
(~~Former name, former address and former fiscal year, if changed from last report)~~Title of each class)	(Trading Symbol)	(Name of each exchange on which registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.þYes ¨ No

~~[√] 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):

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes ¨ No



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer	~~[ ]~~¨	Accelerated filer	~~[√]~~þ
Non-accelerated filer	~~[ ]~~¨	Smaller reporting company	~~[ ]~~¨
~~(Do not check if a smaller reporting company)~~		Emerging growth company	~~[ ]~~¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.			¨

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

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

The number of shares outstanding of the ~~registrant's~~registrant’s common stock as of ~~July 31, 2018 -- 27,063,932~~August 2, 2019 – 26,466,675

STERLING CONSTRUCTION COMPANY, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

PART ~~I -~~ I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

~~STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES~~

~~CONDENSED CONSOLIDATED BALANCE SHEETS~~

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

~~(Unaudited)~~

June 30,
2018 December 31,
2017
ASSETS

Current assets:

Cash and cash equivalents $ 66,585
$ 83,953
Receivables, including retainage 164,465
133,931
Costs and estimated earnings in excess of billings on uncompleted contracts 36,388
37,112
Inventories 1,613
4,621
Receivables from and equity in construction joint ventures 11,766
11,380
Other current assets 9,066
7,529
Total current assets 289,883
278,526
Property and equipment, net 51,726
54,406
Goodwill 85,231
85,231
Intangibles, net 43,618
44,818
Other assets, net 227
317
Total assets $ 470,685

$ 463,298
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 96,384
$ 97,457
Billings in excess of costs and estimated earnings on uncompleted contracts 58,304
62,374
Current maturities of long-term debt 826
3,978
Income taxes payable 88
81
Accrued compensation 13,096
9,054
Other current liabilities 7,063
9,348
Total current liabilities 175,761
182,292
Long-term liabilities:

Long-term debt, net of current maturities 85,749
86,160
Members' interest subject to mandatory redemption and undistributed earnings 47,837
47,386
Other long-term liabilities 1,246
1,271
Total long-term liabilities 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, 27,064,428 and 27,051,468 shares issued 271
271
Additional paid in capital 232,265
231,183
Retained deficit (79,458 ) (90,121 )
Total Sterling common stockholders’ equity 153,078
141,333
Noncontrolling interests 7,014
4,856
Total equity 160,092
146,189
Total liabilities and equity $ 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~~In thousands, except per share data)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Revenues	$	268,734		$	246,412		$	491,226		$	399,828		$	264,086		$	268,734		$	488,035		$	491,226
Cost of revenues	(237,269		)	(221,207		)	(439,240		)	(365,336		)	(238,590		)	(237,688		)	(443,036		)	(440,346		)
Gross profit	31,465			25,205			51,986			34,492			25,496			31,046			44,999			50,880
General and administrative expenses	(13,622		)	(12,812		)	(26,649		)	(23,416		)
General and administrative expense													(10,774		)	(13,203		)	(23,263		)	(25,543		)
Other operating expense, net	(5,693		)	(4,037		)	(6,509		)	(4,508		)	(3,538		)	(5,694		)	(5,832		)	(6,509		)
Operating income	12,150			8,356			18,828			6,568			11,184			12,149			15,904			18,828
Interest income	201			44			330			85			291			201			655			330
Interest expense	(3,111		)	(2,984		)	(6,199		)	(3,096		)	(2,904		)	(3,112		)	(5,964		)	(6,199		)
Loss on extinguishment of debt	—			(755		)	—			(755		)
Income before income taxes and noncontrolling interests in earnings	9,240			4,661			12,959			2,802
Income before income taxes													8,571			9,238			10,595			12,959
Income tax expense	(98		)	(98		)	(138		)	(125		)	(706		)	(97		)	(869		)	(138		)
Net income	9,142			4,563			12,821			2,677			7,865			9,141			9,726			12,821
Noncontrolling interests in earnings	(966		)	(901		)	(2,158		)	(1,272		)

Less: Net income attributable to noncontrolling interests													(37		)	(967		)	(83		)	(2,158		)
Net income attributable to Sterling common stockholders	$	8,176		$	3,662		$	10,663		$	1,405		$	7,828		$	8,174		$	9,643		$	10,663

Net income per share attributable to Sterling common stockholders:
Basic	$	0.30		$	0.14		$	0.40		$	0.05		$	0.30		$	0.30		$	0.37		$	0.40
Diluted	$	0.30		$	0.13		$	0.39		$	0.05		$	0.29		$	0.30		$	0.36		$	0.39

Weighted average number of common shares outstanding used in computing per share amounts:
Weighted average common shares outstanding:
Basic	26,887			26,978			26,881			25,972			26,338			26,887			26,357			26,881
Diluted	27,125			27,336			27,162			26,409			26,623			27,125			26,657			27,162

The accompanying ~~notes~~Notes are an integral part of these ~~condensed consolidated financial statements.~~Condensed Consolidated Financial Statements.

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED ~~STATEMENT OF CHANGES IN EQUITY~~

~~FOR THE SIX MONTHS ENDED JUNE 30, 2018~~BALANCE SHEETS

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

(Unaudited)

STERLING CONSTRUCTION COMPANY, INC.
STOCKHOLDERS

Common Stock
Additional
Paid in
Capital

Retained
Deficit

Noncon-trolling
Interests

Shares Amount 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



	June 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	71,730		$	94,095
Accounts receivable, including retainage	157,813			145,026
Costs and estimated earnings in excess of billings	53,896			41,542
Inventory	3,252			3,159
Receivables from and equity in construction joint ventures	14,381			10,720
Other current assets	7,951			8,074
Total current assets	309,023			302,616
Property and equipment, net	49,217			51,999
Operating lease right-of-use assets	14,995			—
Goodwill	85,231			85,231
Other intangibles, net	41,218			42,418
Other non-current assets, net	211			309
Total assets	$	499,895		$	482,573
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	101,342		$	99,426
Billings in excess of costs and estimated earnings	60,571			62,407
Current maturities of long-term debt	12,128			2,899
Current portion of long-term lease obligations	7,059			—
Income taxes payable	101			318
Accrued compensation	12,148			9,448
Other current liabilities	5,183			4,676
Total current liabilities	198,532			179,174
Long-term debt	66,497			79,117
Long-term lease obligations	8,030			—
Members’ interest subject to mandatory redemption and undistributed earnings	48,831			49,343
Deferred taxes	2,211			1,450
Other long-term liabilities	1,101			1,229
Total liabilities	325,202			310,313
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $0.01 per share; 1,000 shares authorized, none issued	—			—
Common stock, par value $0.01 per share; 38,000 shares authorized, 27,049 and 27,064 shares issued, 26,466 and 26,597 shares outstanding	271			271
Additional paid in capital	233,559			233,795
Treasury Stock, at cost: 583 and 467 shares	(6,688		)	(4,731		)
Retained deficit	(55,291		)	(64,934		)
Total Sterling stockholders’ equity	171,851			164,401
Noncontrolling interests	2,842			7,859
Total stockholders’ equity	174,693			172,260
Total liabilities and stockholders’ equity	$	499,895		$	482,573

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

Condensed Consolidated Financial Statements.

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(~~Amounts in~~In thousands)

(Unaudited)

Six Months Ended June 30,
2018 2017
Cash flows from 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 8,307
8,387
Gain on disposal of property and equipment (470 ) (396 )
Stock-based compensation expense 1,383
1,977
Impairment on building held-for-sale —
895
Changes in operating assets and liabilities:

Contracts receivable (30,534 ) (40,163 )
Costs and estimated earnings in excess of billings on uncompleted contracts 724
(4,939 )
Inventories 3,008
1,405
Receivables from and equity in construction joint ventures (386 ) (333 )
Other assets (1,446 ) (2,429 )
Accounts payable (1,073 ) 12,922
Billings in excess of costs and estimated earnings on uncompleted contracts (4,070 ) 12,513
Accrued compensation and other liabilities 1,761
(5,968 )
Members' interest subject to mandatory redemption and undistributed earnings 451
1,116
Net cash used in operating activities (9,524 )
(12,336 )
Cash flows from investing activities:

Tealstone acquisition, net of cash acquired —
(55,000 )
Additions to property and equipment (5,263 ) (5,870 )
Proceeds from sale of property and equipment 1,307
1,907
Net cash used in investing activities (3,956 )
(58,963 )
Cash flows from financing activities:

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
Loss on debt extinguishment —
755
Other 1,456
(119 )
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 83,953
42,785
Cash and cash equivalents at end of period $ 66,585

$ 60,058

Supplemental disclosures of cash flow information:

Cash paid during the period for interest $ 5,712
$ 3,096
Cash paid during the period for income taxes $ 279
$ 78
Non-cash items:

Share consideration given for Tealstone acquisition (1,882,058 shares) $ —
$ 17,061
Notes and deferred payments to sellers $ —
$ 11,647
Warrants issued to lenders (1,000,000 Warrants) $ —
$ 3,500
Transportation and construction equipment acquired through financing arrangements $ —
$ 70



	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net income	$	9,726		$	12,821
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	8,473			8,307
Amortization of deferred debt costs	1,602			1,610
Gain on disposal of property and equipment	(441		)	(470		)
Deferred tax expense	761			—
Stock-based compensation expense	1,670			1,383
Changes in operating assets and liabilities (Note 15)	(26,116		)	(31,565		)
Net cash used in operating activities	(4,325		)	(7,914		)
Cash flows from investing activities:
Capital expenditures	(4,854		)	(5,263		)
Proceeds from sale of property and equipment	802			1,307
Net cash used in investing activities	(4,052		)	(3,956		)
Cash flows from financing activities:
Repayments of long-term debt	(5,763		)	(5,344		)
Distributions to noncontrolling interest owners	(5,100		)	—
Purchase of treasury stock	(3,201		)	—
Other	76			(154		)
Net cash used in financing activities	(13,988		)	(5,498		)
Net decrease in cash and cash equivalents	(22,365		)	(17,368		)
Cash and cash equivalents at beginning of period	94,095			83,953
Cash and cash equivalents at end of period	$	71,730		$	66,585

The accompanying ~~notes~~Notes are an integral part of these ~~condensed consolidated financial statements.~~Condensed Consolidated Financial Statements.

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)



	Six Months Ended June 30, 2019
	Common Stock				Additional Paid in Capital			Retained Deficit			Treasury Stock					Total Sterling Stockholders’ Equity			Non-controlling Interests			Total Stockholders’ Equity
	Shares		Amount		Additional Paid in Capital			Retained Deficit			Shares		Amount			Total Sterling Stockholders’ Equity			Non-controlling Interests			Total Stockholders’ Equity
Balance at December 31, 2018	26,597		$	271	$	233,795		$	(64,934	)	467		$	(4,731	)	$	164,401		$	7,859		$	172,260
Net income	—		—		—			1,815			—		—			1,815			46			1,861
Stock-based compensation	(1	)	—		1,021			—			—		—			1,021			—			1,021
Distributions to owners	—		—		—			—			—		—			—			(5,100		)	(5,100		)
Purchase of treasury stock	(250	)	—		—			—			250		(3,201		)	(3,201		)	—			(3,201		)
Issuance of stock	130		—		(1,314		)	—			(130	)	1,314			—			—			—
Shares withheld for taxes	(52	)	—		—			—			45		(564		)	(564		)	—			(564		)
Balance at March 31, 2019	26,424		$	271	$	233,502		$	(63,119	)	632		$	(7,182	)	$	163,472		$	2,805		$	166,277
Net income	—		—		—			7,828			—		—			7,828			37			7,865
Stock-based compensation	—		—		649			—			—		—			649			—			649
Distributions to owners	—		—		—			—			—		—			—			—			—
Purchase of treasury stock	—		—		—			—			—		—			—			—			—
Issuance of stock	49		—		(494		)	—			(49	)	494			—			—			—
Shares withheld for taxes	(7	)			(98		)	—			—		—			(98		)	—			(98		)
Balance at June 30, 2019	26,466		$	271	$	233,559		$	(55,291	)	583		$	(6,688	)	$	171,851		$	2,842		$	174,693



	Six Months Ended June 30, 2018
	Common Stock					Additional Paid in Capital			Retained Deficit			Treasury Stock			Total Sterling Stockholders’ Equity			Non-controlling Interests		Total Stockholders’ Equity
	Shares		Amount			Additional Paid in Capital			Retained Deficit			Shares	Amount		Total Sterling Stockholders’ Equity			Non-controlling Interests		Total Stockholders’ Equity
Balance at December 31, 2017	27,051		$	271		$	231,183		$	(90,121	)	—	$	—	$	141,333		$	4,856	$	146,189
Net income	—		—			—			2,489			—	—		2,489			1,191		3,680
Stock-based compensation	(3	)	—			617			—			—	—		617			—		617
Shares withheld for taxes	(13	)	(1		)	(193		)	—			—	—		(194		)	—		(194		)
Balance at March 31, 2018	27,035		$	270		$	231,607		$	(87,632	)	—	$	—	$	144,245		$	6,047	$	150,292
Net income	—		—			—			8,174			—	—		8,174			967		9,141
Stock-based compensation	39		—			766			—			—	—		766			—		766
Shares withheld for taxes	(10	)	1			(108		)	—			—	—		(107		)	—		(107		)
Balance at June 30, 2018	27,064		$	271		$	232,265		$	(79,458	)	—	$	—	$	153,078		$	7,014	$	160,092

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

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

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

(Unaudited)



1.	~~Summary of Business and Significant Accounting Policies~~NATURE OF OPERATIONS

~~Business Summary~~

Nature of Operations—Sterling Construction Company, Inc. (“Sterling” or “the Company”), a Delaware corporation, is a construction company that specializes in heavy civil infrastructure construction and infrastructure rehabilitation as well as residential construction ~~projects,~~projects. We operate primarily in Arizona, California, Colorado, Hawaii, Nevada, Texas and Utah, ~~and~~as well as other states in which there are feasible construction opportunities. ~~Our heavy~~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~~Residential construction projects include concrete foundations for single-family homes.

~~Presentation~~



2.	BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—The ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements included herein have been prepared by ~~Sterling,~~the Company, 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, 2017 (“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~~Condensed Consolidated Financial Statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the Company’s financial position at June 30, ~~2018~~2019 and the results of operations and cash flows for the periods presented. The December 31, ~~2017 condensed consolidated balance sheet~~2018 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 six months ended June 30, 2018~~quarters presented are not necessarily indicative of the results expected for the full year or subsequent quarters. Values presented within tables, excluding per share data, are in thousands.

Principles of Consolidation—The accompanying Condensed Consolidated Financial Statements reflect all wholly owned subsidiaries and those entities the Company is required to consolidate. See the “Consolidated 50% Owned Subsidiaries” and “Construction Joint Ventures” section of this footnote for further discussion of the Company’s consolidation policy for those entities that are not wholly owned. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. All significant intercompany accounts and transactions have been eliminated in consolidation.

Consolidated 50% Owned Subsidiaries—The accompanying Condensed Consolidated Financial Statements include the accounts of two subsidiaries in which the Company has 50% ownership interest and exercises control over such entities. Therefore, the Company has consolidated these two entities. Both subsidiaries have individual provisions which, under circumstances that are certain to occur, obligate the Company to purchase each partner’s 50% interests. The Company has classified these obligations as mandatorily redeemable and has recorded a liability in “Members’ interest subject to mandatory redemption and undistributed earnings” on the Condensed Consolidated Balance Sheets. Each partner’s portion of net income (loss) is reflected in the Condensed Consolidated Statements of Operations line item “Other operating expense, net”.

Construction Joint Ventures—In the ordinary course of business, the Company executes specific projects and conducts certain operations through joint venture arrangements (referred to as “joint ventures”). The Company has various ownership interests in these joint ventures, with such ownership typically proportionate to the Company’s decision making and distribution rights.

Each joint venture is assessed at inception and on an ongoing basis as to whether it qualifies as a Variable Interest Entity (“VIE”) under the consolidations guidance in ASC Topic 810. If at any time a joint venture qualifies as a VIE, the Company performs a qualitative assessment to determine whether the Company is the primary beneficiary of the VIE and therefore needs to consolidate the VIE.

If the Company determines it is not the primary beneficiary of the VIE or only has the ability to significantly influence, rather than control the joint venture, it is not consolidated. The Company accounts for unconsolidated joint ventures using a pro-rata basis in the Condensed Consolidated Statements of Operations and as a single line item (“Receivables from and equity in construction joint ventures”) in the Condensed Consolidated Balance Sheets. This method is a permissible modification of the equity method of accounting which is a common practice in the construction industry.

Use of ~~Estimates~~

Estimates—The preparation of the accompanying ~~condensed consolidated financial statements~~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 over time and the valuation of ~~long-term assets, income taxes, and purchase accounting, including~~goodwill, other intangibles and ~~goodwill.~~income taxes. Management continually evaluates all of its estimates and judgments based on available information and experience; however, actual results could differ from these estimates.

~~Significant Accounting Policies~~

~~The~~Reclassification—Reclassifications have been made to historical financial data on the Company’s ~~significant accounting policies are more fully described in Note 1 of the Notes to~~Condensed Consolidated Financial Statements into conform to the ~~2017 Form 10-K. There have been no material changes to 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 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. Company’s current year presentation.

Where the Company is a noncontrolling joint venture partner, and is otherwise not required to 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

Revenue Recognition—The Company engages in various types of heavy civil construction projects principally for public (government) owners. Revenues are recognized as performance obligations are satisfied over time ~~(also~~(formerly known as percentage-of-completion method), ~~measured by~~using 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 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~~Change orders, claims and ~~related profit~~incentives are ~~recognized when construction on~~generally not distinct from the ~~concrete foundation unit is completed (i.e.~~existing contract due to the significant integration service provided in the context of the contract 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 the Company or its customers may initiate change orders. Change orders that are unapproved as to both price and scope are evaluated as claims. The Company estimates variable consideration for a performance obligation at the most likely amount to which the Company expects to be entitled (or the most likely amount the Company expects to incur in the case of liquidated damages), ~~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,~~utilizing estimation methods that best predict 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 controlamount of ~~promised goods or services is transferred to customers at an amount that reflects the~~ consideration to which the ~~company expects~~Company will be entitled (or will be incurred in the case of liquidated damages). The Company includes 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. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in transaction price are based largely on an assessment of its anticipated performance and all information (historical, current and forecasted) that is reasonably available to the Company.

The Company considers claims to be ~~entitled~~amounts 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 eachexcess 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~~approved contract prices 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~~seeks to collect from its 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. The effect of variable consideration 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~~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 case of liquidated damages) are not resolved in the Company’s favor, or to the ~~performance obligation. We have historically excluded such amounts from our revenues and will continue to do so under the new revenue standard.~~extent incentives reflected in transaction price are not earned, there could be reductions in, or reversals of, previously recognized revenue.

~~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, whichThe Company has projects that it 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~~process of negotiating, or awaiting final approval of, unapproved change orders and claims with its customers. The Company is proceeding with its contractual rights to recoup additional costs incurred from its customers based on ~~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 concretecompleting 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 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 ~~Tealstone Acquisition. This pro forma financial~~work. Unapproved change order and claim information has been ~~presented for illustrative purposes only~~provided to the Company’s customers and negotiations with the customers are ongoing. If additional progress with an acceptable resolution 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 contractsreached, legal action 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.taken.

Contract modifications are routine in the performance of ~~our~~the Company’s 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~~the Company does not recognize revenue on warranty-related work. WeThe Company generally ~~provide~~provides a one to two year warranty for workmanship under ~~our~~its 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. WeThe Company had no significant deferred pre-contract costs at June 30, ~~2018.~~2019.

~~Backlog~~

Residential Construction Revenue Recognition—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.

Leases—Effective January 1, 2019, the Company determines if an arrangement is a lease at inception. The operating lease right-of-use (“ROU”) assets are included within the Company’s other non-current assets and lease liabilities are included in current or non-current liabilities on the Company’s Condensed Consolidated Balance Sheets. Finance leases are included in property and equipment, current maturities of long-term debt, and long-term debt on the Company’s Condensed Consolidated Balance Sheets.

ROU assets represent the Company’s right to use, or control the use of, a specified asset for the lease term. Lease liabilities are the Company’s obligation to make lease payments arising from a lease, and are measured on a discounted basis. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term on the commencement date. As most of the Company’s leases do not provide an implicit rate, the Company’s incremental borrowing rate was used based on the information available on the commencement date in determining the present value of lease payments. For future leases, the implied rate in the lease will be used to determine the present value. The operating lease ROU asset includes any lease payments made and initial direct costs incurred and excludes lease incentives. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments continues to be recognized on a straight-line basis over the lease term.

Restricted cash—Restricted cash of approximately $3,200 and $3,900 is included in “Other current assets” on the Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018. This represents cash deposited by the Company into separate accounts and designated as collateral for standby letters of credit in the same amount in accordance with contractual agreements.

Recently Adopted Accounting Guidance

Leases—In February 2016, the Financial Accounting Standards Board (“FASB”) issued its new lease accounting guidance in ASU 2016-2, “Leases” (ASC 842). Under the new guidance, lessees are required to recognize all leases (with the exception of short-term leases) on the balance sheet. The Company adopted ASC 842 effective January 1, 2019 using the modified retrospective method. The new guidance has been applied to leases that exist or were entered into on or after January 1, 2019 without adjusting comparative periods in the financial statements. As an accounting policy, the Company has elected not to apply the recognition requirements to short-term leases (leases with terms of 12 months or less). Instead, the Company recognizes the lease payments in the Condensed Consolidated Statement of Operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. The Company has elected to utilize the package of practical expedients that allows entities to not reassess 1) the classification of leases existing at the date of adoption 2) the initial direct costs for any existing leases and 3) whether any expired or existing contracts are or contain leases.

At January 1, 2019, the Company recorded an ROU asset, current maturity of operating lease liability and long-term operating lease liability of $13,600, $6,200 and $7,400, respectively on its Condensed Consolidated Balance Sheet, related to its existing operating leases. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Statements of Operations. As of June 30, 2019, the weighted average remaining lease terms for the Company’s various operating leases extends out over the next 2.8 years. The weighted average discount rate used to determine the present value of the Company’s operating leases’ future payments was approximately 6.0%.



3.	REVENUE FROM CONTRACTS WITH CUSTOMERS

Performance Obligations Satisfied Over Time—Revenue for the heavy civil construction segment contracts that satisfy the criteria for over time recognition is recognized as the work progresses. The majority of the revenue is derived from long-term, heavy civil construction contracts and projects that typically span between 12 months to 36 months. Revenue from products and services transferred to customers over time accounted for 86% and 84% of revenue for the three and six months ended June 30, 2019, respectively. Revenue from products and services transferred to customers over time accounted for 83% and 84% of revenue for the three and six months ended June 30, 2018, respectively.

Performance Obligations Satisfied at a Point in Time—Revenue for the residential construction segment contracts that do not satisfy the criteria for over time recognition is recognized at a point in time and utilizes an output measure for performance based on the completion of a unit of work (e.g., residential foundation). The typical time frame for completion of a residential foundation is less than one month. Revenue from products and services transferred to customers at a point in time accounted for 14% and 16% of revenue for the three and six months ended June 30, 2019, respectively. Revenue from products and services transferred to customers at a point in time accounted for 17% and 16% of revenue for the three and six months ended June 30, 2018, respectively.

Backlog—On June 30, ~~2018, we~~2019, the Company had ~~$885 million~~approximately $909,000 of remaining performance obligations (which is also referred to as “backlog”) in ~~our~~its heavy civil construction ~~segment, which we also refer to as backlog. We expect~~segment. The Company expects to recognize approximately 70% of ~~our~~its 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~~increase of ~~$0.3 million~~approximately $3,500 and ~~$1.7 million~~$3,300 for the three and six months ended June 30, 2019, respectively, and a net increase of approximately $300 and $1,700 for the three and six months ended 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 income” on the ~~condensed consolidated statements~~Condensed Consolidated Statements of ~~operations.~~Operations. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.

Variable Consideration

~~Transaction~~—The transaction price for ~~our~~ contracts may include variable consideration, which includes increases to transaction price for approved and unapproved change orders, claims and incentives, and reductions to transaction price for liquidated damages. Change orders, claims and incentives are generally not distinct from the existing contract due to the significant integration service provided in the context of the contract 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. 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 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. 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 case of liquidated damages) are not resolved in our favor, or to the extent incentives reflected in transaction price are not earned, there could be reductions in, or reversals of, previously recognized 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~~the Company’s review of the provisions of ~~our~~its contracts, specific costs incurred, and other related evidence supporting the unapproved change orders and claims, ~~together in some cases as necessary with~~ the ~~views of the Company’s outside claim consultants, we~~Company concluded that it was appropriate to include ~~in project price~~ amounts of ~~$8.7 million~~approximately $15,700 and ~~$10.0 million,~~$9,300 at June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, in project price. These amounts, reflected in “Costs and estimated earnings in excess of billings on uncompleted contracts” on ~~our condensed consolidated balance sheets.~~

~~We expect these matters will be resolved without~~the Condensed Consolidated Balance Sheets, primarily relate to extended delays on a ~~material adverse effect on our financial statements.~~bridge project in Texas due to design errors in the original owner provided project plan. However, unapproved change order and claim amounts are subject to negotiations which may cause actual results to differ materially from estimated and recorded amounts.

Revenue by Heavy Civil Construction Category

~~Our~~—The Company’s heavy civil construction ~~segment's~~segment’s portfolio of products and services consists of ~~over~~approximately 150 active contracts. The following series of tables presents ~~our~~the Company’s heavy civil construction revenue disaggregated by several ~~categories.~~categories:

~~Revenue by major end market (amounts in thousands):~~


	Three Months Ended June 30,				Six Months Ended June 30,
Revenue by major end market									Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Heavy Highway	$	126,554	$	149,749	$	233,962	$	259,135	$	129,964	$	126,554	$	223,574	$	233,962
Commercial	29,110		8,733		57,628		11,840		28,575		29,109		59,425		57,628
Aviation	27,832		22,857		51,084		33,447		37,061		27,832		66,998		51,084
Water Containment and Treatment	15,521		13,274		30,516		22,870		15,515		15,521		30,749		30,516
Other	24,267		14,581		37,334		35,318		17,015		24,267		28,568		37,334
Heavy Civil Construction Revenue	$	223,284	$	209,194	$	410,524	$	362,610
Total Heavy Civil Construction Revenue									$	228,130	$	223,283	$	409,314	$	410,524

~~Revenue by contract type (amounts in thousands):~~


	Three Months Ended June 30,				Six Months Ended June 30,
Revenue by contract type									Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Fixed Unit Price	$	194,486	$	190,435	$	354,721	$	334,795	$	185,297	$	194,485	$	326,516	$	354,721
Lump Sum and Other	28,798		18,759		55,803		27,815		42,833		28,798		82,798		55,803
Heavy Civil Construction Revenue	$	223,284	$	209,194	$	410,524	$	362,610
Total Heavy Civil Construction Revenue									$	228,130	$	223,283	$	409,314	$	410,524

Each of these contract types presents advantages and disadvantages. Typically, ~~we assume~~the Company assumes more risk with lump-sum contracts. However, these types of contracts offer additional profits when ~~we complete~~ the work is completed for less than originally estimated. Under fixed-unit price contracts, ~~our~~the Company’s profit may vary if actual labor-hour costs vary significantly from the negotiated rates. Also, because some contracts can provide little or no fee for managing material costs, the components of contract cost can impact profitability.

Contract Balances

—The timing of 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 ~~condensed consolidated balance sheet.~~Condensed Consolidated Balance Sheet. In ~~our~~the Company’s 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 contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, ~~we sometimes receive~~the Company occasionally receives advances or deposits from ~~our~~its customers, before revenue is recognized, resulting in billings in excess of costs and estimated earnings on uncompleted contracts (contract liabilities). These assets and liabilities are reported on the ~~condensed consolidated balance sheet~~Condensed Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period. Changes in the contract asset and liability balances during the six month period ended June 30, ~~2018,~~2019, were not materially impacted by any other factors.

~~The table below reconciles the net excess billings to the amounts included in the condensed consolidated balance sheets at those dates (amounts in thousands):~~

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.



4.	~~Cash and Cash Equivalents~~CONSOLIDATED 50% OWNED SUBSIDIARIES

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 consolidated subsidiaries and our majority controlled construction joint ventures. At June 30, 2018 and December 31, 2017, cash and cash equivalents included $17.6 million and $31.1 million, respectively, belonging to our consolidated 50% owned subsidiaries. At June 30, 2018 and December 31, 2017, cash and cash equivalents included $12.3 million and $18.9 million, respectively, belonging to our construction joint ventures. 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 $3.6 million is included in “Other current assets” on the condensed consolidated balance sheets as of June 30, 2018 and December 31, 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.



5.	~~Consolidated 50% Owned Subsidiaries, including Variable Interest Entities ("VIE")~~

The Company has a 50% interest in two subsidiaries (Myers and RHB); both subsidiaries have individual provisions which obligate the Company to purchase each ~~partner's~~partner’s 50% interests for ~~$20.0 million~~$20,000 ($~~40.0 million~~40,000 in the aggregate), due to circumstances outlined in the partner agreements that are certain to occur. Therefore, the Company has consolidated these two entities and classified 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.~~Condensed Consolidated Balance Sheets. In addition, all undistributed earnings at the time of the noncontrolling owners’ death or permanent disability are also mandatorily payable. In the event of either Mr. Buenting’s or Mr. ~~Myers's~~Myers’s death, the Company purchased two separate ~~$20.0 million~~$20,000 death and permanent total disability insurance policies to mitigate the Company’s cash draw if such events were to occur.

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


	June 30, 2018		December 31, 2017		June 30, 2019		December 31, 2018
Members’ interest subject to mandatory redemption	$	40,000	$	40,000	$	40,000	$	40,000
Net accumulated earnings	7,837		7,386		8,831		9,343
Total liability	$	47,837	$	47,386	$	48,831	$	49,343

Fifty percent of the earnings of these consolidated 50% owned subsidiaries for the three and six months ended June 30, ~~2018~~2019 were ~~$4.7 million,~~approximately $1,500 and ~~$5.3 million,~~$2,700, respectively and for the three and six months ended June 30, ~~2017~~2018 were ~~$2.6 million~~$4,700 and ~~$2.5 million,~~$5,300, respectively. These amounts were included in “Other operating expense, net” on the Company’s ~~condensed consolidated statements~~Condensed Consolidated Statements of ~~operations.~~Operations.

The Company must determine whether any of its entities, including these two 50% owned subsidiaries, in which it participates, is a ~~VIE.~~variable interest entity (“VIE”). The Company determined Myers is a VIE, as ~~we are~~Sterling is the primary beneficiary, as pursuant to the terms of the Myers Operating Agreement, ~~we are~~the Company is exposed to the majority of potential losses of the partnership. ~~As such, the~~

The following ~~table presents~~tables present the condensed financial information of Myers, which is reflected in the Company’s ~~condensed consolidated balance sheets~~Condensed Consolidated Balance Sheets and ~~statements~~Statements of ~~operations, as follows (amounts in thousands):~~Operations:

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

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



	June 30, 2019		December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	6,195	$	8,745
Accounts receivable, including retainage	27,011		24,109
Other current assets	14,959		14,533
Total current assets	48,165		47,387
Property and equipment, net	6,369		7,219
Operating lease right-of-use assets	3,232		—
Goodwill	1,501		1,501
Total assets	$	59,267	$	56,107
Liabilities
Current liabilities:
Accounts payable	$	23,672	$	22,211
Other current liabilities	10,583		9,811
Total current liabilities	34,255		32,022
Other long-term liabilities	1,680		1,976
Total liabilities	$	35,935	$	33,998



6.5.	~~Construction Joint Ventures~~CONSTRUCTION JOINT VENTURES

~~We participate~~The Company participates in 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 and several liability. ~~We select our~~The Company selects its joint venture partners based on ~~our~~its analysis of their construction and financial capabilities, expertise in the type of work to be performed and past working relationships with ~~us,~~the Company, among other criteria.

Joint ventures with a controlling interest—For these joint ventures, the equity held by the remaining owners and their portions of net income (loss) are reflected in the ~~balance sheet~~Condensed Consolidated Balance Sheets line item “Noncontrolling interests” in ~~“Equity”~~“Stockholders’ equity” and the ~~statement~~Condensed Consolidated Statements of ~~operations~~Operations line item ~~“Noncontrolling interests in earnings,”~~“Net income attributable to noncontrolling interests”, respectively. ~~Refer to Note 6 of~~

Joint ventures with a noncontrolling interest—Where the ~~Notes to Consolidated Financial Statements in the 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~~Company is a noncontrolling venture partner, ~~we account~~the Company accounts for ~~our~~their share of the operations of such construction joint ventures on a pro-rata basis using proportionate consolidation on ~~our condensed consolidated statements~~its Condensed Consolidated Statements of ~~operations~~Operations and as a single line item (“Receivables from and equity in construction joint ventures”) in the ~~condensed consolidated balance sheets.~~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~~Condensed Consolidated Financial Statements are shown ~~below (amounts in thousands):~~below:


	June 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
Total combined:
Current assets	$	62,050		$	64,574		$	95,991		$	64,815
Less current liabilities	(70,502		)	(78,349		)	(98,192		)	(74,543		)
Net liabilities	$	(8,452	)	$	(13,775	)	$	(2,201	)	$	(9,728	)

Sterling’s receivables from and equity in noncontrolling construction joint ventures	$	11,766		$	11,380		$	14,381		$	10,720


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Total combined:
Revenues	$	25,463	$	18,897	$	56,820	$	33,507	$	55,306	$	25,463	$	86,690	$	56,820
Income before tax	2,192		1,497		5,596		2,670		8,844		2,192		10,813		5,596
Sterling’s noncontrolling interest:
Revenues	$	12,564	$	8,674	$	27,629	$	15,163	$	25,971	$	12,564	$	41,655	$	27,629
Income before tax	1,167		718		2,858		1,271		3,116		1,167		4,100		2,858

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.	PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows:



	June 30, 2019			December 31, 2018
Construction and transportation equipment	$	147,796		$	144,630
Buildings and improvements	11,195			11,072
Land	2,720			2,720
Office equipment	2,627			2,711
Total property and equipment	164,338			161,133
Less accumulated depreciation	(115,121		)	(109,134		)
Total property and equipment, net	$	49,217		$	51,999



7.	OTHER INTANGIBLE ASSETS

The following table presents the Company’s acquired finite-lived intangible assets at June 30, 2019 and December 31, 2018:



		June 30, 2019					December 31, 2018
	Weighted Average Life	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Customer relationships	23 years	$	40,823	$	(4,062	)	$	40,823	$	(3,159	)
Trade name	13 years	5,307		(1,181		)	5,307		(919		)
Non-competition agreements	7 years	487		(156		)	487		(121		)
Total	22 years	$	46,617	$	(5,399	)	$	46,617	$	(4,199	)

The Company's intangible amortization expense was $600 and $1,200 for the three and six months ended June 30, 2019.



7.8.	~~Property and Equipment~~DEBT

~~Property~~The Company’s outstanding debt at June 30, 2019 and ~~equipment are summarized~~December 31, 2018 was as ~~follows (amounts in thousands):~~ follows:

June 30,
2018 December 31,
2017
Construction equipment $ 120,857
$ 118,868
Transportation equipment 17,758
17,511
Buildings 9,738
9,577
Office equipment 2,706
3,339
Leasehold Improvement 914
914
Construction in progress 279
258
Land 2,348
2,348
Water rights —
200
154,600
153,015
Less accumulated depreciation (102,874 ) (98,609 )
Total property and equipment, net $ 51,726
$ 54,406



	June 30, 2019			December 31, 2018
Oaktree Facility	$	71,602		$	74,571
Notes and deferred payments to sellers (Tealstone Acquisition)	11,710			13,572
Notes payable for construction and transportation equipment	1,015			612
Total debt	84,327			88,755

Less - Current maturities of long-term debt	(12,128		)	(2,899		)
Less - Unamortized deferred debt costs	(5,702		)	(6,739		)
Total long-term debt, net of unamortized debt costs	$	66,497		$	79,117



8.	~~Intangibles~~

~~The following table presents our acquired finite-lived intangible assets at~~Oaktree Facility—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):~~

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,~~2019, the Company ~~as borrower, and certain of its subsidiaries, as guarantors, entered into a Loan and Security Agreement~~had $71,602 outstanding under an $85,000 term loan with Wilmington Trust, National Association, as agent, and the lenders party thereto (the “Oaktree Facility”)~~, providing for a term loan of $85,000,000 (the “Loan”) with a maturity date of~~. The five-year Oaktree Facility, which matures in 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~~Oaktree Facility is equal to the one-, two-, three- or six-month London ~~interbank rate,~~Interbank Offered Rate, or LIBOR, plus 8.75% per annum on the unpaid principal amount of the ~~Loan,~~Oaktree Facility, subject to adjustment under certain ~~circumstances. Interest on the Loan~~circumstances, and is generally payable monthly. There are no amortized principal payments; however, the Company is required to prepay the ~~Loan,~~Oaktree Facility, 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~~Oaktree Facility in an amount equal to 75% of its excess cash flow, plus accrued and unpaid interest thereon and a prepayment premium.

Notes and Deferred Payments to Sellers—At June 30, 2019, the Company had $11,710 outstanding, net of debt discounts, of the combined Promissory Notes and deferred cash payments issued as part of the Tealstone Acquisition. During the six months ended June 30, 2019, the Company paid approximately $2,400 of the deferred cash payments. The remaining principal amounts of $5,000 of Promissory Notes and $7,500 of deferred cash payments are due on April 3, 2020. Based on a 12% discount rate, the Company recorded $11,600 as notes and deferred payments to sellers in long-term debt on its Condensed Consolidated Balance Sheet at the acquisition closing date. Accreted interest for the period was approximately $300 and $600 for the three and six months ended June 30, 2019 and $300 and $600 for the three and six months ended June 30, 2018, and was recorded as interest expense.

Notes Payable for Construction and Transportation Equipment—The Company has purchased and financed various construction and transportation equipment to enhance the Company’s fleet of equipment. The total long-term notes payable related to the purchase of financed equipment was approximately $1,015 and $600 at June 30, 2019 and December 31, 2018, respectively. The notes have payment terms ranging from 3 to 5 years and the associated interest rates range from 2.99% to 6.92%.

Compliance—The 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 ~~2.20~~1.9 to 1.00 for the trailing four consecutive fiscal quarters ending ~~June 30, 2018,~~March 31, 2019, reducing to ~~1.80~~1.8 to 1.00 for the four consecutive quarters ending September 30, 2019 through maturity in 2022;

daily cash collateral of not less than ~~$15,000,000;~~$15,000;

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

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

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

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

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

The 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 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. The total amount is amortized on a straight-line basis, which approximates the effective interest method, over the five-year life of the Loan.

Total amortization expense of $0.5 million and $1.0 million, respectively has been recorded for the three and six months ended June 30, 2018. Total amortization expense of $0.5 million was recorded for the three and six months ended June 30, 2017. The fair value of the Oaktree Facility approximates its book value.

~~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 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 $0.6 million for the three and six months ended June 30, 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 $1.1 million and $1.6 million at June 30, 2018 and December 31, 2017, respectively. The purchases have payment terms ranging from 2 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.~~

2019.



9.	LEASE OBLIGATIONS

The Company has operating and finance leases primarily for construction and transportation equipment as well as office space. The Company’s leases have remaining lease terms of 1 month to 5 years, some of which include options to extend the leases for up to 10 years.

The components of lease expense were as follows:



	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Operating lease cost	$	1,960	$	4,171
Short-term lease cost	$	3,269	$	8,012

Finance lease cost:
Amortization of right-of-use assets	$	39	$	71
Interest on lease liabilities	1		3
Total finance lease cost	$	40	$	74

Supplemental cash flow information related to leases was as follows:



	Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	4,466
Operating cash flows from finance leases	$	3
Financing cash flows from finance leases	$	71

Right-of-use assets obtained in exchange for lease obligations (noncash):
Operating leases	$	6,311
Finance leases	$	770

Supplemental balance sheet information related to leases was as follows:



	June 30, 2019
Operating Leases
Operating lease right-of-use assets	$	14,995

Current portion of long-term lease obligations	$	7,059
Long-term lease obligations	8,030
Total operating lease liabilities	$	15,089

Finance Leases
Property and equipment, at cost	$	1,433
Accumulated depreciation	(347		)
Property and equipment, net	$	1,086

Current maturities of long-term debt	$	234
Long-term debt	626
Total finance lease liabilities	$	860

Weighted Average Remaining Lease Term
Operating leases	2.8
Finance leases	4.4

Weighted Average Discount Rate
Operating leases	6.0		%
Finance leases	4.2		%

Maturities of lease liabilities are as follows:



	Operating Leases			Finance Leases
Year Ending December 31,
2019 (excluding the six months ended June 30, 2019)	$	4,206		$	157
2020	5,885			209
2021	4,231			186
2022	2,087			161
2023	399			154
Thereafter	5			77
Total lease payments	$	16,813		$	944
Less imputed interest	(1,724		)	(84		)
Total	$	15,089		$	860



10.	~~Commitments and Contingencies~~COMMITMENT AND CONTINGENCIES

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

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~~Condensed Consolidated Financial Statements of the Company.



11.	~~Income Taxes and Deferred Tax Asset/Liability~~INCOME TAXES

The Company and its subsidiaries file U.S. federal and various U.S. state income tax returns. Current income tax expense (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~~Condensed Consolidated Statements of ~~operations.~~Operations.

Due to net operating loss carryforwards, the Company isdoes not ~~expecting~~expect a current federal 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~~Current income tax expense of ~~$98 thousand~~$86 and ~~$138 thousand~~$108 was recorded for the three and six months ended June 30, ~~2018, respectively. Income tax expense of $98 thousand~~2019, respectively and ~~$125 thousand was recorded~~ for the three and six months ended June 30, ~~2017,~~2018 was $97 and $138, respectively.

The Company’s deferred tax expense reflects the change in deferred tax assets and 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 valuation allowance of approximately $31,700 has been applied to the Company’s net deferred tax assets at both June 30, 2019 and December 31, 2018. As part of this analysis, the Company monitors its quarterly results. Based on the Company’s continued positive income trend and current forecast for the full year of 2019, we believe that there could be enough positive evidence to remove the valuation allowance in the fourth quarter of 2019. Deferred tax liabilities are a consideration in the analysis of whether to apply a valuation allowance because taxable temporary differences may be used as a source of taxable income to support the realization of deferred tax assets. A deferred tax liability that relates to an asset with an indefinite life, such as goodwill, may not be considered a source of income and should not be netted against deferred tax assets for valuation allowance purposes. The Company expects to have a deferred tax liability for the excess of book over tax basis difference in its goodwill. A $620 and $761 deferred tax expense for the three and six months ended June 30, 2019, respectively has been recorded to reflect this liability.

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 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 June 30, 2018 and December 31, 2017. Therefore, there has been no ~~change in net deferred taxes for the three and six months ended June 30, 2018.~~

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



~~12.~~	~~Stockholder's Equity~~

~~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 2017 Form 10-K for further information.

During the three and six months ended June 30, 2018, the Company awarded, subject to vesting restrictions, a total of 44,424 and 371,875 common stock awards, respectively. The Company recorded stock-based compensation expense of $0.8 million and $1.4 million for the three and six months ended June 30, 2018, respectively. During the three and six months ended June 30, 2017, the Company awarded, subject to vesting restrictions, a total of 102,571 and 166,410 common stock awards, respectively. The Company recorded stock-based compensation expense of $1.4 million and $2.0 million for the three and six months ended June 30, 2017, respectively.

At June 30, 2018 and 2017, total unrecognized compensation cost related to unvested common stock awards was $6.1 million and $1.5 million, respectively. This cost is expected to be recognized over a weighted average period of 2.3 years.



~~13.~~12.	~~Net Income Per Share Attributable to Sterling Common Stockholders~~STOCK INCENTIVE PLAN AND OTHER EQUITY ACTIVITY

General—The Company has a stock incentive plan (the “Stock Incentive Plan”) that is administered by the Compensation and Talent Development Committee of the Board of Directors. Under the Stock Incentive Plan, the Company can issue shares to employees and directors in the form of restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and performance based shares (“PSUs”). Changes in common stock, additional paid in capital, and treasury stock during the six months ended June 30, 2019 primarily relate to activity associated with the Stock Incentive Plan and share repurchases.

Share Grants—During the six months ended June 30, 2019, the Company had the following share grants associated with the Stock Incentive Plan:



	Shares	Weighted Average Grant-Date Fair Value per Share
RSAs	52	$	12.06
RSUs	138	$	10.96
PSUs	185	$	10.89
Total shares granted	375	—

Share Issuances—During the six months ended June 30, 2019, the Company had the following share issuances associated with the Stock Incentive Plan:



		Shares
RSA (issued upon grant)		52
RSUs (issued upon vesting)		73
PSUs (issued upon vesting)		54
Total shares issued		179

Stock-Based Compensation Expense—During the three and six months ended June 30, 2019 the Company recognized $649 and $1,670, respectively, of stock-based compensation expense, and during the three and six months ended June 30, 2018 the Company recognized $766 and $1,383 of stock-based compensation expense, primarily within general and administrative expenses. The Company recognizes forfeitures as they occur, rather than estimating expected forfeitures.

Share Repurchases—During the six months ended June 30, 2019, the Company repurchased 250 shares of the Company’s outstanding common stock for $3,201 under the stock repurchase plan, all of which were purchased in the first quarter of 2019. The Company also repurchased 7 and 59 shares for taxes withheld on stock-based compensation vestings for $98 and $662 during the three and six months ended June 30, 2019.



13.	EARNINGS PER SHARE

The following table reconciles the numerators and denominators of the basic and diluted per common share computations for net income attributable to Sterling common ~~stockholders (amounts in thousands, except per share data):~~

stockholders:


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Numerator:
Net income attributable to Sterling common stockholders	$	8,176	$	3,662	$	10,663	$	1,405	$	7,828	$	8,174	$	9,643	$	10,663
Denominator:
Weighted average common shares outstanding — basic	26,887		26,978		26,881		25,972		26,338		26,887		26,357		26,881
Shares for dilutive unvested stock and warrants	238		358		281		437		285		238		300		281
Weighted average common shares outstanding and incremental shares assumed repurchased— diluted	27,125		27,336		27,162		26,409
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
Weighted average common shares outstanding — diluted									26,623		27,125		26,657		27,162
Basic net income per share attributable to Sterling common stockholders									$	0.30	$	0.30	$	0.37	$	0.40
Diluted net income per share attributable to Sterling common stockholders									$	0.29	$	0.30	$	0.36	$	0.39

In accordance with the treasury stock method, for the three and six months ended June 30, 2017, our Warrants were excluded from the diluted weighted average common shares outstanding as the shares were considered anti-dilutive.



14.	~~Segment Information~~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.

Segment reporting is aligned based upon the services offered by ~~our~~ two operating groups, which represent ~~our~~the following reportable segments: ~~Heavy Civil Construction~~heavy civil construction and ~~Residential Construction. Our~~residential construction. The Company’s 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 six months ended June 30, ~~2018~~2019 and ~~2017 (in thousands):~~2018:


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Revenue
Revenues
Heavy Civil Construction	$	223,284	$	209,194	$	410,524	$	362,610	$	228,130	$	223,283	$	409,314	$	410,524
Residential Construction	45,450		37,218		80,702		37,218		35,956		45,451		78,721		80,702
Total Revenue	$	268,734	$	246,412	$	491,226	$	399,828
Total Revenues									$	264,086	$	268,734	$	488,035	$	491,226

Operating Income
Heavy Civil Construction	$	6,380	$	3,141	$	8,340	$	1,667	$	6,146	$	6,395	$	5,299	$	8,340
Residential Construction	5,770		5,215		10,488		4,901		5,038		5,754		10,605		10,488
Total Operating Income	$	12,150	$	8,356	$	18,828	$	6,568	$	11,184	$	12,149	$	15,904	$	18,828



15.	SUPPLEMENTAL CASH FLOW INFORMATION

Operating assets and liabilities—The following table ~~presents total~~summarizes the changes in the components of operating assets ~~by reportable segment at June 30, 2018~~ and ~~December 31, 2017 (in thousands):~~liabilities:

June 30,
2018 December 31,
2017
Assets
Heavy Civil Construction $ 343,559
$ 354,090
Residential Construction 127,126
109,208
Total Assets $ 470,685
$ 463,298



	Six Months Ended June 30,
	2019			2018
Accounts receivable, including retainage	$	(12,787	)	$	(30,534	)
Contracts in progress, net	(14,190		)	(3,346		)
Receivables from and equity in construction joint ventures	(3,661		)	(386		)
Other assets	128			1,562
Accounts payable	1,916			(1,073		)
Accrued compensation and other liabilities	2,990			1,761
Member’s interest subject to mandatory redemption and undistributed earnings	(512		)	451
Changes in operating assets and liabilities	$	(26,116	)	$	(31,565	)

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

Cautionary Comment Regarding Forward-Looking Statements

This Report, including the documents incorporated herein by reference, contains statements that are ~~or may be~~ considered ~~to be, “forward-looking statements” regarding~~forward-looking statements within the ~~Company which represent our expectations and beliefs concerning future events.~~meaning of the federal securities laws. These forward-looking statements are ~~intended~~subject to ~~be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act~~a number 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. The forward-looking statements included 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, 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.

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~~which may include statements about our: business strategy; financial strategy; and plans, objectives, expectations, forecasts, outlook and intentions. All of these types of statements, other than statements of historical fact included in this presentation, are forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” the negative of such terms or other comparable terminology.

The forward-looking statements contained in this presentation are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this presentation are not ~~being~~guarantees of future performance, and we cannot assure any reader that such statements will be realized or ~~otherwise could materially affect our financial condition, results of operations~~the forward-looking events and ~~cash flows.~~circumstances will occur.

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

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~~the control of the Company, including suppliers’, subcontractors’ and joint venture partners’ failure to perform;

factors that affect the accuracy of estimates inherent in ~~our~~the bidding for contracts, estimates of backlog, ~~percentage-of-completion~~over time recognition accounting policies, including onsite conditions that differ materially from those assumed in ~~our~~the 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 usthe Company 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;

the presence of competitors with greater financial resources or lower margin requirements than ~~ours~~the Company and the impact of competitive bidders on ~~our~~the Companies ability to obtain new backlog at reasonable margins acceptable to ~~us;~~the Company;

~~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~~the Company’s markets; and

the other factors discussed in more detail in ~~our~~the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018 (“~~2017~~2018 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~~the Company’s forward-looking statements are based are likely to change after the forward-looking statements are made. Further, wethe Company may make changes to ~~our~~their business plans that could affect ~~our~~their results. Although ~~we believe~~the Company believes that ~~our~~its plans, intentions and expectations reflected in, or suggested by, the forward-looking statements that ~~we make~~the Company makes in this Report are reasonable, wethe Company can provide no assurance that they will be achieved.

The forward-looking statements included herein are made only as of the date hereof, and ~~we undertake~~the Company undertakes no obligation to update any information contained 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~~the Company becomes aware of after the date of this Report.

~~Overview~~OVERVIEW

General—Sterling Construction Company, Inc. (“Sterling” or “the Company”), is a construction company that specializes in ~~(1)~~ heavy civil infrastructure construction and ~~(2)~~infrastructure rehabilitation as well as residential construction ~~projects,~~projects. The Company operates primarily in Arizona, California, Colorado, Hawaii, Nevada, Texas and Utah, ~~and~~as well as other states in which there are feasible construction opportunities. ~~Our heavy~~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~~Residential construction projects include concrete foundations for single-family homes.

~~Market Outlook and Trends~~MARKET OUTLOOK AND TRENDS

Heavy Civil Construction

~~Our~~—Sterling’s heavy civil construction business is primarily driven by federal, state and municipal funding. ~~The 2015 passage~~Federal funds, on average, provide 50% of annual State Department of Transportation (DOT) capital outlays for highway and bridge projects. Several of the states in Sterling’s key markets have instituted actions to further increase annual spending. In November 2018, various state and local transportation measures were passed securing, and in some cases increasing, funding of $1.57 billion in California, $1.27 billion in Texas, $528.5 million in Arizona, $128.2 million in Colorado and $87 million in Utah. In October 2018, the Federal Aviation Administration reauthorized $3.35 billion annually for the next five years. This reauthorization also includes more than $1 billion a year for airport infrastructure grants and about $1.7 billion for disaster relief.

In addition to the state locally funded actions, Sterling is in year four of the 2015 federally funded five-year $305 billion ~~surface transportation bill will increase~~Fixing America’s Surface Transportation (“FAST”) Act that increased the annual federal highway investment by 15.1% over the five-year period from 2016 to 2020. ~~In addition~~With the FAST Act set to expire next year, the federal government is currently working towards a bipartisan Federal ~~program, several of~~Infrastructure Bill that would further stabilize the ~~states~~Highway Trust Fund. Should the federal government approve this incremental infrastructure investment in ~~our key markets have instituted actions~~2019, it would be an additional growth catalyst; however, it would be unlikely to further increase annual spending. In Texas, two constitutional amendments were passed, which will increase the annual funds allocated to transportation projects from $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. The State of Utah also approved, in 2017, a $1 billion bond package for infrastructure improvements. A 12-cent sales tax increase was approved in Los Angeles, California in 2016 that will provide $3 billion per 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 2017 Form 10-K for a more detailed discussion of our markets and their funding sources.create significant business impact before 2020 or 2021.

Bid Discipline and Project Execution

—To ensure that ~~we take~~the Company takes full advantage of the improved market conditions and ~~maximize~~maximizes profitability, ~~we have~~the Company has completed an extensive evaluation of ~~our~~its historical success on heavy civil construction ~~projects’ historical success~~projects 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 usthe Company to focus ~~our~~its resources on the most beneficial projects and significantly reduce ~~our~~its risk. In addition, in order to strengthen these processes and capitalize further on the improved market conditions, we appointed a Chief Operating Officer in the first quarter of 2016, and in the first quarter of 2018 we appointed a Vice President, Strategy and Business Development.

Backlog

—At June 30, ~~2018, our Backlog~~2019, backlog of construction projects, which is made up solely of ~~our~~the heavy civil construction segment, was ~~$885~~$909.0 million, as compared to ~~$745~~$850.7 million at December 31, ~~2017.~~2018. The contracts in this ~~Backlog~~backlog are typically completed in 12 to 36 months. Contracts for which ~~we are~~the Company is the apparent low bidder on the project (“Unsigned Low-bid Awards”) are excluded from ~~Backlog~~backlog until the contract has been executed by ~~our~~its customer. Unsigned Low-bid Awards were ~~$156~~$314.9 million at June 30, 2019 as compared to $292.7 million at December 31, 2018. The combination of ~~Backlog~~backlog and Unsigned Low-bid Awards, which ~~we refer~~the Company refers to as ~~"Combined~~“Combined Backlog,"” totaled ~~$1.04~~$1.2 billion and ~~$995 million,~~$1.1 billion, respectively at June 30, ~~2018~~2019 and December 31, ~~2017.~~2018. Backlog includes ~~$28~~$34.3 million and ~~$55~~$33.6 million at June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, attributable to ~~our~~the Company’s share of estimated revenues related to joint ventures where ~~we are~~the Company is a noncontrolling joint venture partner.

~~Our~~The Company’s margin in backlog has ~~decreased approximately 20 basis points,~~increased from ~~8.4%~~8.5% 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 increased2018 to 8.8% at June 30, ~~2018~~2019 and the Combined Backlog margin increased from ~~8.3%~~8.9% at December 31, ~~2017.~~ 2018 to 9.1% at June 30, 2019, driven by a greater mix of heavy highway awards.

Residential Construction

~~Our residential construction business was a component of the Tealstone acquisition.~~ —Continuing revenue growth of ~~our~~the Company’s residential construction business is directly related to the growth of new home starts in ~~our~~its key markets. ~~Our~~The Company’s 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~~The Company’s customers’ expected average growth during 2019 is approximately 10% in the ~~Dallas-Forth~~Dallas-Fort Worth Metroplex, ~~is approximately 13%. During 2018, we began our~~however some of this growth may have been dampened by significant Texas weather impacts during the year. The Company has continued its expansion of the residential business into the Houston market and surrounding areas.

RESULTS OF OPERATIONS

~~Summary~~Consolidated Results

Summary—For the second quarter of ~~Consolidated Financial Results for~~2019, the ~~Current Quarter~~

WeCompany had operating income of ~~$12.15~~$11.2 million, income before income taxes ~~and earnings attributable to noncontrolling interest owners~~ of ~~$9.2~~$8.6 million, net income attributable to Sterling common stockholders of ~~$8.2~~$7.8 million and net income per diluted share attributable to Sterling common stockholders of ~~$0.30.~~

$0.29.

Consolidated ~~Financial Highlights~~financial highlights for the ~~Three~~three and ~~Six Months Ended~~six months ended June 30, 2019 as compared to 2018 ~~(amounts in thousands)~~are as follows:


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
(In thousands)													2019			2018			2019			2018
Revenues	$	268,734		$	246,412		$	491,226		$	399,828		$	264,086		$	268,734		$	488,035		$	491,226
Gross profit	31,465			25,205			$	51,986		$	34,492		25,496			31,046			$	44,999		$	50,880
General and administrative expenses	(13,622		)	(12,812		)	(26,649		)	(23,416		)
General and administrative expense													(10,774		)	(13,203		)	(23,263		)	(25,543		)
Other operating expense, net	(5,693		)	(4,037		)	(6,509		)	(4,508		)	(3,538		)	(5,694		)	(5,832		)	(6,509		)
Operating income	12,150			8,356			18,828			6,568			11,184			12,149			15,904			18,828
Interest, net	(2,910		)	(2,940		)	(5,869		)	(3,011		)	(2,613		)	(2,911		)	(5,309		)	(5,869		)
Income tax expense	(98		)	(98		)	(138		)	(125		)	(706		)	(97		)	(869		)	(138		)
Noncontrolling interests in earnings	(966		)	(901		)	(2,158		)	(1,272		)
Less: Net income attributable to noncontrolling interests													(37		)	(967		)	(83		)	(2,158		)
Net income attributable to Sterling common stockholders	$	8,176		$	3,662		$	10,663		$	1,405		$	7,828		$	8,174		$	9,643		$	10,663
Gross margin	11.7		%	10.2		%	10.6		%	8.6		%	9.7		%	11.6		%	9.2		%	10.4		%
Operating margin	4.5		%	3.4		%	3.8		%	1.6		%	4.2		%	4.5		%	3.3		%	3.8		%

~~Revenues~~

Revenues—Revenues ~~increased $22.3~~decreased $4.6 million, or ~~9.1% in~~2% for the second quarter of ~~2018~~2019 compared with the second quarter of ~~2017.~~2018. The ~~increase~~decrease in the second quarter of ~~2018 is~~2019 was driven by a ~~$14.1~~$9.5 million decrease in residential construction and by a $4.8 million increase in heavy civil ~~construction and $8.2 million increase in residential~~ construction. Revenues ~~increased $91.4~~decreased $3.2 million, or ~~22.9%~~1% in the six months ended June 30, ~~2018~~2019 compared with the six months ended June 30, ~~2017, primarily from a~~2018. The decrease in the 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~~ended June 30, 2019 was driven by a ~~$30.2~~$1.2 million ~~increase~~decrease in heavy civil construction and a $2.0 million decrease in residential construction. Both of our operating segments were negatively impacted by unusually severe weather in the first half of 2019.

Gross ~~profit~~

profit—Gross profit ~~increased $6.3~~decreased $5.6 million for the second quarter of ~~2018~~2019 compared with the second quarter of ~~2017. Our~~2018. The Company’s gross margin ~~increased~~as a percent of revenue decreased to ~~11.7%~~9.7% in the second quarter of ~~2018,~~2019, as compared to ~~10.2%~~11.6% in the second quarter of ~~2017.~~2018. The ~~increase~~decrease in gross margin during the second quarter of ~~2018~~2019 as compared to the second quarter of ~~2017~~2018 was ~~attributable to improvement in~~driven by lower revenues from our higher margin residential construction segment and a lower margin mix of heavy civil construction ~~business.~~projects. Gross profit ~~increased $17.5~~decreased $5.9 million for the six months ended June 30, ~~2018~~2019 compared with the six months ended June 30, ~~2017, primarily~~2018. The Company’s gross margin as a percent of revenue decreased to 9.2% in the ~~result of~~six months ended June 30, 2019, as compared to 10.4% in the ~~April 3, 2017 Tealstone Acquisition, which resulted~~six months ended June 30, 2018. The decrease in ~~approximately $9.5 million~~gross margin during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018 was driven by a decrease in ~~additional gross profit.~~heavy civil construction and residential construction’s lower volume from revenues.

At June 30, 2019 and 2018, ~~and 2017, we~~the Company had approximately ~~184~~134 and ~~139~~184 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~~the Company is able to refine ~~our~~its 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~~

expenses—General and administrative expenses ~~increased $0.8~~decreased $2.4 million to ~~$13.6~~$10.8 million during the second quarter of ~~2018~~2019 from ~~$12.8~~$13.2 million in the second quarter of 2017 primarily related to increased business development costs. The year to date increase in the period is primarily the result of increased estimating costs in our 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.

2018. As a percent of revenues, general and administrative expenses decreased ~~0.5%~~approximately 90 basis points to ~~5.4%~~4.1% during the three months ended June 30, 2019. General and administrative expenses decreased $2.2 million to $23.3 million during the six months ended June 30, 2019 from $25.5 million during the six months ended June 30, 2018, primarily due to higher business development costs in 2018. ~~The decrease in~~As a percent of revenues, general and administrative expenses ~~as a percent of revenue, is primarily~~decreased approximately 40 basis points to 4.8% during the ~~result of increased operating leverage from higher revenues in heavy civil construction.~~six months ended June 30, 2019.

Other operating expense, ~~net~~

net—Other operating expense, net, includes 50% of earnings and losses related to Members’ ~~interests~~interest of consolidated 50% owned subsidiaries, earn-out expense, and other miscellaneous operating income or expense. Members’ interest earnings are treated as an expense and increase ~~our~~the liability account. The change in other operating expense, net, was ~~$1.7~~$2.2 million during the second quarter. Earn-out expense decreased by $0.5 million during the second quarter of 2019 to $0.5 million from $1.0 million in the second quarter of 2018, driven by ~~an increase in Members'~~the lower income generated by residential construction. Members’ interest earnings decreased by $1.9 million during the second quarter of ~~$2.1~~2019 to $2.8 million from $4.7 million in the second quarter of 2018, reflecting decreased revenue and ~~increased earnout expense of $0.4 million, partially offset by the disposition of a property~~project mix.

The change in ~~Texas of $0.9 million. Other~~other operating expense, net, ~~increased $2.0 million to $6.5~~was $0.7 million during the six months ended June 30, ~~2018, compared to $4.5~~2019. Earn-out expense increased by $0.3 million during the six months ended June 30, ~~2017, driven by an increase in Members' interest earnings of $2.7~~2019 to $1.5 million ~~and increased earnout expense of $0.4 million, partially offset by the disposition of a property in Texas of $0.9 million.~~

~~Interest expense~~

Interest expense was $3.1 million in the second quarter of 2018 compared to $3.0 million in the second quarter of 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. Interest expense was $6.2from $1.2 million in the six months ended June 30, 2018, driven by an increase in the first quarter of 2019, partly offset by the aforementioned second quarter 2019 decrease. Members’ interest earnings decreased by $1.2 million during the six months ended June 30, 2019 to $4.1 million from $5.3 million in the six months ended June 30, 2018, reflecting decreased revenue and project mix.

Interest expense—Interest expense was $2.9 million in the second quarter of 2019 compared to $3.1 million in the six months ended June 30, ~~2017, reflecting six months of~~2018 and 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~~expense was $6.0 million ~~since the inception of the Oaktree Facility on April 3, 2017, while the prevailing interest rate increased approximately 100 basis points during that same period.~~

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

Three Months Ended June 30, Six Months Ended June 30,
2018
% of
Total
2017
% of
Total
2018
% of
Total
2017
% of
Total
Revenue

Heavy Civil Construction $ 223,284
83% $ 209,194
85% $ 410,524
84% $ 362,610
91%
Residential Construction 45,450
17% 37,218
15% 80,702
16% 37,218
9%
Total Revenue $ 268,734
$ 246,412
$ 491,226
$ 399,828

Operating Income

Heavy Civil Construction $ 6,380
53% $ 3,141
38% $ 8,340
44% $ 1,667
25%
Residential Construction 5,770
47% 5,215
62% 10,488
56% 4,901
75%
Total Operating Income $ 12,150
$ 8,356
$ 18,828
$ 6,568

~~Heavy Civil Construction~~

~~Revenues~~

Heavy civil construction revenues were $223.3 million for the second quarter of 2018, an increase in our heavy civil construction segment of $14.1 million or 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 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 13.2% in the six months ended June 30, ~~2018 compared with the six months ended June 30, 2017, primarily the result of six months~~2019 compared to ~~three months contribution from the April 3, 2017 Tealstone Acquisition, which resulted in approximately $17.7~~$6.2 million in ~~additional revenue.~~the second quarter of 2018. The ~~remaining increase is driven by growth in our other civil work in the commercial and aviation space,~~interest expense on lower comparative debt levels was partially offset by higher interest rates. The interest expense is primarily related to borrowings under the ~~substantial completion of a Hawaii project.~~

Oaktree Facility.

Operating ~~income~~Group Results

~~Our heavy civil construction~~The Company’s revenue and income from operations by reportable segment ~~had operating income of $6.4~~are as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2019		% of Total	2018		% of Total	2019		% of Total	2018		% of Total
Revenues
Heavy Civil Construction	$	228,130	86%	$	223,283	83%	$	409,314	84%	$	410,524	84%
Residential Construction	35,956		14%	45,451		17%	78,721		16%	80,702		16%
Total Revenues	$	264,086		$	268,734		$	488,035		$	491,226
Operating Income
Heavy Civil Construction	$	6,146	55%	$	6,395	53%	$	5,299	33%	$	8,340	44%
Residential Construction	5,038		45%	5,754		47%	10,605		67%	10,488		56%
Total Operating Income	$	11,184		$	12,149		$	15,904		$	18,828

Heavy Civil Construction

Revenues—Revenues were $228.1 million for the second quarter of ~~2018,~~2019, an increase of ~~$3.2~~$4.8 million or 2.2% compared to the second quarter of ~~2017.~~2018. The ~~improvement~~increase was driven by higher revenues of $26.7 million related to fully controlled heavy highway work and increased aviation work. These increases were largely offset by lower revenue of $21.9 million related to two large construction joint venture projects that were substantially complete by the ~~result~~end of ~~volume driven increases of approximately $1.4~~2018. The lower construction joint venture revenues totaled $1.5 million ~~and project mix contributions from our other civil work~~for the second quarter compared to $23.4 million in the ~~commercial and aviation space. Operating income was $8.3~~second quarter of 2018.

Revenues were $409.3 million for the six months ended June 30, ~~2018, an increase~~2019, a decrease of ~~$6.7~~$1.2 million ~~in our heavy civil construction segment~~or 0.3% compared to the six months ended June 30, ~~2017.~~2018. The ~~improvement~~decrease was driven by lower revenue of $51.6 million related to two large construction joint venture projects that were substantially complete by the ~~result~~end of ~~volume driven increases~~2018. This decline was partially offset by increased revenues of ~~approximately $4.1~~$50.4 million ~~a $1.2~~related to fully controlled heavy highway work and increased aviation work. The lower construction joint venture revenues totaled $2.8 million ~~increase from a~~for the six months ended June 30, 2019 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 $8.2 million or 22.1%, compared to the 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$54.4 million in the six months ended June 30, 2018 compared with 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.2018.

Operating income—Operating income

~~The residential construction segment had operating income of $5.8~~ was $6.1 million for the second quarter of ~~2018, an increase~~2019, a decrease of ~~$0.6~~$0.3 million, compared to the $6.4 million in the second quarter of ~~2017. The improvement was the result of volume driven increases, offset by increased earnout expense~~2018 and ~~start-up costs from the expansion into the Houston area. Operating~~operating income was ~~$10.5~~$5.3 million for the six months ended June 30, ~~2018,~~2019, a decrease of $3.0 million, compared to the $8.3 million of income in the six months ended June 30, 2018. The decrease was the result of volume driven decreases from heavy highway work as well as negative weather impacts across our regions in the second quarter of 2019 and the six months ended June 30, 2019.

Residential Construction

Revenues—Revenues were $36.0 million for the second quarter of 2019, a decrease of $9.5 million or 20.9%, compared to the second quarter of 2018. The decrease in revenue was due to severe Texas weather conditions which delayed slab starts with approximately 30 unworkable days during the quarter. These adverse weather conditions decreased completed slabs approximately 22.5% in the second quarter of 2019 as compared to the second quarter of 2018.

Revenues were $78.7 million for the six months ended June 30, 2019, a decrease of $2.0 million or 2.5%, compared to the six months ended June 30, 2018. The decrease in revenue is due to the aforementioned second quarter weather impact, partially offset by completion of fourth quarter weather delayed slab starts that pushed into the first quarter of 2019 and underlying growth in the Dallas-Fort Worth and Houston areas in the first quarter of 2019. Completed slabs decreased approximately 1.8% in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018.

Operating income—Operating income was $5.0 million for the second quarter of 2019, a decrease of $0.7 million, compared to the second quarter of 2018. The decrease was driven by lower volume from revenues as described above. Operating income was $10.6 million for the six months ended June 30, 2019, an increase of ~~$5.6~~$0.1 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.~~

2018.

~~Liquidity and Sources of Capital~~LIQUIDITY AND SOURCES OF CAPITAL

The following table sets forth information about ~~our~~the Company’s cash flows and ~~liquidity (amounts in thousands):~~ liquidity:


	Six Months Ended June 30,						Six Months Ended June 30,
	2018			2017
Net cash (used in) provided by:
(In thousands)							2019			2018
Net cash used in:
Operating activities	$	(9,524	)	$	(12,336	)	$	(4,325	)	$	(7,914	)
Investing activities	(3,956		)	(58,963		)	(4,052		)	(3,956		)
Financing activities	(3,888		)	88,572			(13,988		)	(5,498		)
Total increase (decrease) in cash and cash equivalents	$	(17,368	)	$	17,273
Total decrease in cash and cash equivalents							$	(22,365	)	$	(17,368	)


	June 30, 2018		December 31, 2017
(In thousands)					June 30, 2019		December 31, 2018
Cash and cash equivalents	$	66,585	$	83,953	$	71,730	$	94,095
Working capital	$	114,122	$	96,234	$	110,491	$	123,442

~~The significant non-cash items~~Operating Activities—During the six months ended June 30, 2019, net cash used in operating activities ~~include depreciation and amortization expense, which were $8.3~~was $4.3 million compared to $7.9 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~~

~~During the six months ended June 30, 2018, net cash~~2018. Cash flows used in operating activities ~~was $9.5 million compared to $12.3 million~~were driven by changes in ~~the 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.~~below, partly offset by non-cash items in operating activities. Non-cash items in operating activities include depreciation and amortization expense, which was $8.5 million and $8.3 million in the six months ended June 30, 2019 and 2018.

Cash and Working ~~Capital~~

Capital—Cash at June 30, ~~2018,~~2019, was ~~$66.6~~$71.7 million, and includes the following ~~components (amounts in thousands):~~components:

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



(In thousands)	June 30, 2019		December 31, 2018
Generally available	$	52,015	42,605
Consolidated 50% owned subsidiaries	14,349		31,026
Construction joint ventures	5,366		20,464
Total cash	$	71,730	$	94,095

The decrease in total cash is primarily due to the Company’s seasonality of cash outflows in the first half of the year and cash inflows in the back half of the year. We expect our full year cash from operations to approximate operating income. The increase in generally available cash is primarily due to ~~our improvement~~the seasonal ramp in ~~net income, partially~~the cash flow cycle, partly offset by ~~$4.7~~the use of cash for operations, $5.8 million of repayments on ~~our Oaktree Facility~~long-term debt, $5.1 million of noncontrolling interest distributions, and $3.2 million for stock repurchases during the ~~first quarter of 2018.~~six months ended June 30, 2019. The decrease in consolidated 50% owned subsidiaries and construction joint venture cash levels iswere driven by ~~project mix and~~seasonality, coupled with the substantial completion of atwo large ~~Rocky Mountain region~~ construction joint venture ~~project and a large project in Hawaii. Our~~projects. The Company’s working capital ~~increased $17.9~~decreased $12.9 million to ~~$114.1~~$110.5 million at June 30, ~~2018~~2019 from ~~$96.2~~$123.4 million at December 31, ~~2017,~~2018, primarily due to seasonality, the cash factors previously described, and the Contract Capital discussion below.

Contract ~~Capital~~

Capital—The need for working capital for ~~our~~the Company’s business varies due to fluctuations in operating activities and investments in ~~our~~its Contract Capital. The changes in the components of Contract Capital were as ~~follows (amounts in thousands):~~follows:


	Six Months Ended June 30, 2018			Six Months Ended June 30, 2017
(In thousands)							Six Months Ended June 30, 2019			Six Months Ended June 30, 2018
Costs and estimated earnings in excess of billings on uncompleted contracts	$	724		$	(4,939	)	$	(12,354	)	$	724
Billings in excess of costs and estimated earnings on uncompleted contracts	(4,070		)	12,513			(1,836		)	(4,070		)
Contracts in progress, net	(3,346		)	7,574			(14,190		)	(3,346		)
Contracts receivable, including retainage	(30,534		)	(40,163		)
Accounts receivable, including retainage							(12,787		)	(30,534		)
Receivables from and equity in construction joint ventures	(386		)	(333		)	(3,661		)	(386		)
Inventories	3,008			1,405			(93		)	3,008
Accounts payable	(1,073		)	12,922			1,916			(1,073		)
Contract Capital, net	$	(32,331	)	$	(18,595	)	$	(28,815	)	$	(32,331	)

The six months ended June 30, ~~2018~~2019 change in Contract Capital ~~decreased~~reduced liquidity by ~~$32.3~~$28.8 million. Fluctuations in ~~our~~the 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~~Backlog. The Company’s Contract Capital is particularly impacted by seasonality, the timing of new awards, and related payments of performing work and the contract billings to the customer as ~~we complete our projects.~~projects are completed. Contract Capital is also impacted at period-end by the timing of accounts receivable collections and accounts payable payments for ~~our~~ projects. ~~We expect~~The Company expects cash flow from operations to improve, principally driven by seasonality.

Investing ~~Activities~~

Activities—During the six months ended June 30, ~~2018,~~2019, net cash used in investing activities was ~~$4.0~~$4.1 million compared to ~~$59.0~~$4.0 million in the six months ended June 30, ~~2017.~~2018. The ~~decrease is the result~~use of ~~our April 3, 2017 Tealstone acquisition which included a~~ cash ~~component~~was driven by purchases of ~~$55.0 million.~~capital equipment. 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 were approximately $4.9 million for the six months ended June 30, 2019 and $5.3 million for the six months ended June 30, ~~2018 and $5.9 million for the six months ended June 30, 2017.~~2018.

Financing ~~Activities~~

Activities—During the six months ended June 30, ~~2018,~~2019, net cash used in financing activities was ~~$3.9~~$14.0 million compared to ~~net cash provided by financing activities of $88.6~~$5.5 million in the six months ended June 30, ~~2017,~~2018. The use of cash was driven by $5.8 million of repayments on debt (primarily consisting of $3.0 million of repayments on the Oaktree Facility ~~to fund~~and $2.4 million of deferred cash payments for the Tealstone ~~Acquisition during~~Acquisition), $5.1 million of distributions to the ~~six months ended June 30, 2017.~~Company’s noncontrolling interest partners, and $3.2 million for the purchase of treasury stock.

Credit Facility and Other Sources of ~~Capital~~

Capital—In addition to ~~our~~the Company’s available cash, cash equivalents and cash provided by operations, from time to time, ~~we use~~the Company uses borrowings to finance acquisitions, ~~our~~ capital expenditures and working capital needs.

~~Borrowings~~

Borrowings—Average borrowings under ~~our~~the Oaktree Facility for the six months ended June 30, 2019 was $72.8 million and for the six months ended June 30, 2018 was $81.6 ~~million and for the six months ended June 30, 2017 was $85.0~~ million. Based on ~~our~~the Company’s average borrowings and ~~our 2018~~its 2019 forecasted cash needs, ~~we continue~~the Company continues to believe that ~~the Company~~it has sufficient liquid financial resources to fund ~~our~~its requirements for the next twelve months of operations, including ~~our~~its bonding requirements. ~~Furthermore, the~~

Capital Strategy—The Company ~~is continually assessing ways to increase revenues and reduce costs to improve liquidity.~~

~~Capital Strategy~~

We will continue to explore additional revenue growth and capital alternatives to strengthen ~~our~~its financial position in order to take advantage of the improving heavy civil infrastructure market. ~~We expect~~The Company expects to pursue strategic uses of ~~our~~its cash, ~~to invest~~such as, investing in projects or businesses that meet ~~our~~its gross margin targets and overall profitability, ~~and other requirements, as well as~~ managing ~~our~~its debt balances, ~~invest~~and investing in adjacent markets or other opportunities.

~~Inflation~~INFLATION

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

When ~~we are~~the Company is the successful bidder on a heavy civil construction project, ~~we execute~~the Company executes 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~~the Company has no obligation for materials and services beyond those required to complete the contracts with ~~our~~its customers. There can be no assurance that increases in prices of oil and fuel used in ~~our~~the Company’s business will be adequately covered by the estimated escalation ~~we have~~the Company has included in ~~our~~its bids and there can be no assurance that all of ~~our~~its vendors will fulfill their pricing and supply commitments under their purchase orders and contracts with the Company. ~~We adjust our~~The Company adjusts the total estimated costs on ~~our~~ projects when ~~we believe~~it is believed it is probable that wethere will ~~have~~be 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 completed in less than one month.

~~Off-Balance Sheet Arrangements and Joint Ventures~~OFF-BALANCE SHEET ARRANGEMENTS AND JOINT VENTURES

~~We participate~~The Company participates 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~~the Company’s agreements with ~~our~~its joint venture partners provide that each party will assume and fund its share of any losses resulting from a project, if one of ~~our~~its partners is unable to pay its share, wethe Company would be fully liable for such share under ~~our~~its 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 wethe Company could incur should the partner fail to provide the services and resources toward project completion ~~that had been~~to which it committed to in the joint venture agreement.

At June 30, ~~2018,~~2019, there was approximately ~~$56~~$71.8 million of construction work to be completed on unconsolidated construction joint venture contracts, of which ~~$28~~$34.3 million represented ~~our~~the Company’s proportionate share. Due to the joint and several liability under ~~our~~the Company’s joint venture arrangements, if one of ~~our~~its joint venture partners fails to perform, wethe Company and the remaining joint venture partners would be responsible for completion of the outstanding work. As of June 30, ~~2018, we are~~2019, the Company was not aware of any situation that would require usit to fulfill responsibilities of ~~our~~its joint venture partners pursuant to the joint and several liability provisions under ~~our~~its contracts.

~~Off-balance sheet arrangements~~

CRITICAL ACCOUNTING ESTIMATES

The discussion and analysis of the financial condition and results of operations are based on the Company’s Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these Condensed Consolidated Financial Statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. The Company continually evaluates its estimates based on historical experience and various other assumptions that the Company believes to ~~operating leases~~be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies involve more significant judgments and estimates used in the preparation of the Condensed Consolidated Financial Statements.

Revenue Recognition

Performance Obligations Satisfied Over Time—Revenue for the heavy civil construction segment contracts that satisfy the criteria for over time recognition is recognized as the work progresses. The Company measures transfer of control of the performance obligation utilizing the cost-to-cost measure of progress, with cost of revenue including direct costs, such as materials and labor, and indirect costs that are ~~discussed~~attributable to contract activity. Under the cost-to-cost approach, the use of estimated costs to complete each performance obligation is a significant variable in ~~“Item 7. Management’s Discussion~~the process of determining recognized revenue and ~~Analysis~~is a significant factor in the accounting for such performance obligations. Significant estimates that impact the cost to complete each performance obligation are: materials, components, equipment, labor and subcontracts; labor productivity; schedule durations, including subcontractor or supplier progress; contract disputes, including claims; achievement of ~~Financial Condition~~contractual performance requirements; and ~~Results~~contingency, among others. The cumulative impact of ~~Operations – Liquidity~~revisions in total cost estimates during the progress of work is reflected in the period in which these changes become known, including, to the extent required, the reversal of profit recognized in prior periods and ~~Sources~~the recognition of ~~Capital − Contractual Obligations”~~losses expected to be incurred on performance obligations in progress. Due to the various estimates inherent in our ~~2017 Form 10-K.~~contract accounting, actual results could differ from those estimates, which could result in material changes to the Company’s Condensed Consolidated Financial Statements and related disclosures.

Goodwill

At June 30, 2019, the Company’s goodwill balance was $85.2 million. Goodwill is not amortized to earnings, but instead is reviewed for impairment at least annually, absent any indicators of impairment or when other actions require an impairment assessment. The Company performs an annual impairment assessment during the fourth quarter of each year based on balances as of October 1. During the fourth quarter 2018, the Company performed a qualitative assessment of goodwill, and based on this assessment, no indicators of impairment were present. Additionally, during the six months ended June 30, 2019, the Company noted no indicators of impairment.

Other Intangible Assets

The Company amortizes finite-lived intangible assets on a straight-line basis with lives ranging from 5 to 25 years, absent any indicators of impairment. The Company reviews tangible assets and finite-lived intangible assets for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. If a recoverability assessment is required, the estimated future cash flow associated with the asset or asset group will be compared to their respective carrying amounts to determine if an impairment exists. During the six months ended June 30, 2019, the Company noted no indicators of impairment. See Note 7 to the Financial Statements for further discussion of the Company’s other intangible assets.

Income Taxes

Deferred Tax Realization Assessments—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 valuation allowance of approximately $31.7 million has been applied to the Company’s net deferred tax assets as of June 30, 2019. As part of this analysis, the Company monitors its quarterly results. Based on the Company’s continued positive income trend and current forecast for the full year of 2019, we believe that there could be enough positive evidence to remove the valuation allowance in the fourth quarter of 2019. Deferred tax liabilities are a consideration in the analysis of whether to apply a valuation allowance because taxable temporary differences may be used as a source of taxable income to support the realization of deferred tax assets. A deferred tax liability that relates to an asset with an indefinite life, such as goodwill, may not be considered a source of income and should not be netted against deferred tax assets for valuation allowance purposes. The Company expects to have a deferred tax liability for the excess of book over tax basis difference in its goodwill.

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

NEW ACCOUNTING STANDARDS

See the applicable section of Note 2 to the Condensed Consolidated Financial Statements for a discussion of new accounting standards.

Item 3. Quantitative and Qualitative Disclosures ~~about~~About Market Risk

Changes in interest rates are one of ~~our~~the Company’s sources of market risk. Interest on outstanding indebtedness under ~~our~~the Oaktree Facility is equal to the one-, two-, three- or six-month London ~~interbank rate,~~Interbank Offered Rate, or LIBOR, plus 8.75% per annum on the unpaid principal amount of the Loan, subject to adjustment under certain circumstances. The Company’s interest rates for the periods ended June 30, 2019, December 31, 2018 and June 30, 2018 were 11.14%, 11.18% and 10.87% respectively. This represents an increase of approximately 2.7 basis points year over year. 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. At June 30, ~~2018, we~~2019, the Company had a term loan of ~~$80.3~~$71.6 million outstanding under this facility. A 1% increase in ~~our~~the interest rate would increase interest expense by ~~$0.8~~$0.7 million per year.

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 June 30, ~~2018~~2019 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~~Company’s management including the principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in ~~our~~ internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, ~~2018~~2019 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 –~~ II—OTHER INFORMATION

Item 1. Legal Proceedings

~~We are~~The Company is now and may in the future be involved as a party to various legal proceedings that are incidental to the ordinary course of business. WeThe Company regularly ~~analyze~~analyzes 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~~the Condensed Consolidated results of ~~operations, financial position~~Operations, Financial Position or ~~cash flows.~~

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 2017~~the 2018 Form 10-K. You should carefully consider such risk factors, which could materially affect ~~our~~the 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 repurchased from employees holding shares of the ~~Company's~~Company’s common stock that had been awarded to them by the Company ~~repurchased in~~and that were released from Company-imposed transfer restrictions. The repurchase was to enable the ~~quarter ended June 30, 2018.~~ 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 and Talent Development Committee of the Board of Directors.

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 —
$ —
—
—



Period	Total Number of Shares Purchased	Average Price Paid Per Share
April 1 - April 30, 2019	7,355	$	13.37
May 1 - May 31, 2019	—	$	—
June 1 - June 30, 2019	—	$	—
Total	7,355	$	13.37

~~(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. 6. Exhibits

The following exhibits are filed with this ~~Report.~~

Report:



Exhibit No.	Exhibit Title
3.1⁽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⁽¹⁾	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~~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 to Loan and Security Agreement, dated April 3, 2018, by and among Sterling Construction Company, Inc.~~10.1^{(1), 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).}(4)
~~10.4~~	Sterling Construction Company, Inc. ~~2018~~2019 Employee Stock ~~Incentive~~Purchase 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~~2019 (SEC File No. 001-31993)).
31.1* 31.1 ⁽²⁾	Certification of ~~Joseph A. Cutillo,~~ Chief Executive Officer ~~of Sterling Construction Company, Inc.~~pursuant to Rule 13a-14(a)/15d-14(a)
31.2* 31.2 ⁽²⁾	Certification of ~~Ronald A. Ballschmiede, Executive Vice President &~~ Chief Financial Officer ~~of Sterling Construction Company, Inc.~~pursuant to Rule 13a-14(a)/15d-14(a)
~~32.1+~~ 32.1 ⁽³⁾	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 &~~pursuant to 18 U.S.C. Section 1350
32.2 ⁽³⁾	Certification of Chief Financial Officer ~~of Sterling Construction Company, Inc.~~pursuant to 18 U.S.C. Section 1350
101.INS*101.INS	XBRL Instance Document
101.SCH*101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL*101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

~~_______________~~ (1) Incorporated by reference to the filing indicated

#(2) Filed herewith

(3) Furnished herewith

(4) Management contract or compensatory plan or ~~arrangement.~~

* Filed herewith.

~~+ Furnished herewith.~~arrangement

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


~~Date: August 2, 2018~~6, 2019	By:	/s/ Ronald A. Ballschmiede
		Ronald A. Ballschmiede
		Chief Financial Officer and Duly Authorized Officer

3230



	Page
PART I. I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements	3

Statements of Operations	3

Balance Sheets	4

Statements of Cash Flows	5

Statements of Changes in Stockholders’ Equity	6

Notes to the Condensed Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2219

Item 3. Quantitative and Qualitative Disclosures ~~about~~About Market Risk	2926

Item 4. Controls and Procedures	2927

PART ~~II.~~ II—OTHER INFORMATION

Item 1. Legal Proceedings	3027

Item 1A. Risk Factors	3027

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3028

Item 3.6. Exhibits	3129

~~SIGNATURES~~Signatures	30



	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



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



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



	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



	June 30, 2018			December 31, 2017
Construction equipment	$	120,857		$	118,868
Transportation equipment	17,758			17,511
Buildings	9,738			9,577
Office equipment	2,706			3,339
Leasehold Improvement	914			914
Construction in progress	279			258
Land	2,348			2,348
Water rights	—			200
	154,600			153,015
Less accumulated depreciation	(102,874		)	(98,609		)
Total property and equipment, net	$	51,726		$	54,406



		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	)



	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