UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20192020
OR
¨☐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
Commission File Number1-31993
STERLING CONSTRUCTION COMPANY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE25-1655321
Delaware
25-1655321
(State or other jurisdiction of incorporation

or organization)
(I.R.S. Employer

Identification No.)
1800 Hughes Landing Blvd.
The Woodlands, Texas
 
77380
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code:  (281) 214-0800
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per shareSTRLThe NASDAQ Stock Market LLC
(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
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 filerþ
Non-accelerated filer¨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

The number of shares outstanding of the registrant’s common stock as of August 2, 2019July 31, 2020 – 26,466,675
28,068,334




STERLING CONSTRUCTION COMPANY, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
Page
PART I—FINANCIAL INFORMATION
Page
Item 1.  Condensed Consolidated Financial Statements
3
Statements of Operations
3
Statements of Comprehensive Income (Loss)
4
Balance Sheets
45
Statements of Cash Flows
56
Statements of Changes in Stockholders’ Equity
67
Notes to the Condensed Consolidated Financial Statements
79
1923
2630
2731
PART II—OTHER INFORMATION
2731
2731
2832
2933
3034
 






2

PART I—FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
 
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(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,
2019
2018
2019 2018 2020201920202019
Revenues$264,086

$268,734

$488,035

$491,226
Revenues$400,038  $264,086  $696,726  $488,035  
Cost of revenues(238,590)
(237,688)
(443,036)
(440,346)Cost of revenues(340,439) (238,590) (601,882) (443,036) 
Gross profit25,496

31,046

44,999

50,880
Gross profit59,599  25,496  94,844  44,999  
General and administrative expense(10,774)
(13,203)
(23,263)
(25,543)General and administrative expense(18,451) (10,174) (36,055) (22,063) 
Intangible asset amortizationIntangible asset amortization(2,866) (600) (5,703) (1,200) 
Acquisition related costsAcquisition related costs(139) (262) (612) (262) 
Other operating expense, net(3,538)
(5,694)
(5,832)
(6,509)Other operating expense, net(5,097) (3,276) (7,325) (5,570) 
Operating income11,184

12,149

15,904

18,828
Operating income33,046  11,184  45,149  15,904  
Interest income291

201

655

330
Interest income24  291  123  655  
Interest expense(2,904)
(3,112)
(5,964)
(6,199)Interest expense(7,557) (2,904) (15,360) (5,964) 
Income before income taxes8,571

9,238

10,595

12,959
Income before income taxes25,513  8,571  29,912  10,595  
Income tax expense(706) (97) (869) (138)Income tax expense(7,248) (706) (8,432) (869) 
Net income7,865

9,141

9,726

12,821
Net income18,265  7,865  21,480  9,726  
       
Less: Net income attributable to noncontrolling interests(37)
(967)
(83)
(2,158)Less: Net income attributable to noncontrolling interests(55) (37) (155) (83) 
Net income attributable to Sterling common stockholders$7,828

$8,174

$9,643

$10,663
Net income attributable to Sterling common stockholders$18,210  $7,828  $21,325  $9,643  




 





Net income per share attributable to Sterling common stockholders: 

 
 

 
Net income per share attributable to Sterling common stockholders:   
Basic$0.30

$0.30

$0.37

$0.40
Basic$0.65  $0.30  $0.77  $0.37  
Diluted$0.29

$0.30

$0.36

$0.39
Diluted$0.65  $0.29  $0.76  $0.36  

       
Weighted average common shares outstanding:


 
 

 
Weighted average common shares outstanding:  
Basic26,338

26,887

26,357

26,881
Basic27,941  26,338  27,794  26,357  
Diluted26,623

27,125

26,657

27,162
Diluted27,957  26,623  27,887  26,657  
 
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.




3

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited) 
Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Net income$18,265  $7,865  $21,480  $9,726  
Other comprehensive income, net of tax
Loss on interest rate swap, net of tax (Note 11)(53) —  (7,114) —  
Total comprehensive income18,212  7,865  14,366  9,726  
Less: Comprehensive income attributable to noncontrolling interests(55) (37) (155) (83) 
Comprehensive income attributable to Sterling common stockholders$18,157  $7,828  $14,211  $9,643  
The accompanying Notes are an integral part of these Consolidated Financial Statements.
4

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
 June 30,
2020		December 31,
2019
Assets 
Current assets:
Cash and cash equivalents ($15,877 and $7,538 related to variable interest entities (“VIEs”))$70,612  $45,733  
Accounts receivable, including retainage ($39,085 and $24,642 related to VIEs)269,406  248,247  
Costs and estimated earnings in excess of billings ($5,012 and $8,328 related to VIEs)52,068  42,555  
Receivables from and equity in construction joint ventures ($8,302 and $7,406 related to VIEs)12,396  9,196  
Other current assets ($110 and $503 related to VIEs)11,965  11,790  
Total current assets416,447  357,521  
Property and equipment, net ($6,000 and $5,619 related to VIEs)119,596  116,030  
Operating lease right-of-use assets ($3,951 and $3,817 related to VIEs)17,076  13,979  
Goodwill ($1,501 and $1,501 related to VIEs)192,014  191,892  
Other intangibles, net250,620  256,323  
Deferred tax asset, net21,604  26,012  
Other non-current assets, net153  183  
Total assets$1,017,510  $961,940  
Liabilities and Stockholders’ Equity 
Current liabilities:
Accounts payable ($21,943 and $18,213 related to VIEs)$131,098  $137,593  
Billings in excess of costs and estimated earnings ($15,514 and $9,649 related to VIEs)110,934  85,011  
Current maturities of long-term debt ($6,793 and $39 related to VIEs)54,979  42,473  
Current portion of long-term lease obligations ($1,792 and $1,838 related to VIEs)7,423  7,095  
Income taxes payable3,594  1,212  
Accrued compensation ($2,965 and $1,521 related to VIEs)19,075  13,727  
Other current liabilities ($1,587 and $1,429 related to VIEs)10,589  6,393  
Total current liabilities337,692  293,504  
Long-term debt ($9 and $2 related to VIEs)367,028  390,627  
Long-term lease obligations ($2,159 and $1,979 related to VIEs)9,733  6,976  
Members’ interest subject to mandatory redemption and undistributed earnings53,751  49,003  
Other long-term liabilities ($509 and $0 related to VIEs)8,221  619  
Total liabilities776,425  740,729  
Commitments and contingencies (Note 12)
Stockholders’ equity: 
Common stock, par value $0.01 per share; 38,000 shares authorized, 28,280 and 28,290 shares issued, 28,034 and 27,772 shares outstanding283  283  
Additional paid in capital253,820  251,019  
Treasury Stock, at cost: 246 and 518 shares(3,435) (6,142) 
Retained deficit(3,708) (25,033) 
Accumulated other comprehensive loss(7,323) (209) 
Total Sterling stockholders’ equity239,637  219,918  
Noncontrolling interests1,448  1,293  
Total stockholders’ equity241,085  221,211  
Total liabilities and stockholders’ equity$1,017,510  $961,940  
 June 30,
2019		 December 31,
2018
Assets
  
Current assets:   
Cash and cash equivalents$71,730
 $94,095
Accounts receivable, including retainage157,813
 145,026
Costs and estimated earnings in excess of billings53,896
 41,542
Inventory3,252
 3,159
Receivables from and equity in construction joint ventures14,381
 10,720
Other current assets7,951
 8,074
Total current assets309,023
 302,616
Property and equipment, net49,217
 51,999
Operating lease right-of-use assets14,995
 —
Goodwill85,231
 85,231
Other intangibles, net41,218
 42,418
Other non-current assets, net211
 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 earnings60,571
 62,407
Current maturities of long-term debt12,128
 2,899
Current portion of long-term lease obligations7,059
 —
Income taxes payable101
 318
Accrued compensation12,148
 9,448
Other current liabilities5,183
 4,676
Total current liabilities198,532
 179,174
Long-term debt66,497
 79,117
Long-term lease obligations8,030
 —
Members’ interest subject to mandatory redemption and undistributed earnings48,831
 49,343
Deferred taxes2,211
 1,450
Other long-term liabilities1,101
 1,229
Total liabilities325,202
 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 outstanding271
 271
Additional paid in capital233,559
 233,795
Treasury Stock, at cost: 583 and 467 shares(6,688) (4,731)
Retained deficit(55,291) (64,934)
Total Sterling stockholders’ equity171,851
 164,401
Noncontrolling interests2,842
 7,859
Total stockholders’ equity174,693
 172,260
Total liabilities and stockholders’ equity$499,895
 $482,573
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.


5

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30, Six Months Ended June 30,
2019 2018 20202019
Cash flows from operating activities: 
  
Cash flows from operating activities:  
Net income$9,726
 $12,821
Net income$21,480  $9,726  
Adjustments to reconcile net income to net cash used in operating activities:   
Adjustments to reconcile net income to net cash provided by (used in) operating activities:Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization8,473
 8,307
Depreciation and amortization16,541  8,473  
Amortization of deferred debt costs1,602
 1,610
Amortization of debt issuance costs and non-cash interestAmortization of debt issuance costs and non-cash interest1,762  1,602  
Gain on disposal of property and equipment(441) (470)Gain on disposal of property and equipment(598) (441) 
Deferred tax expense761
 —
Deferred taxesDeferred taxes6,223  761  
Stock-based compensation expense1,670
 1,383
Stock-based compensation expense6,196  1,670  
Changes in operating assets and liabilities (Note 15)(26,116) (31,565)
Net cash used in operating activities(4,325) (7,914)
Loss on interest rate hedgeLoss on interest rate hedge272  —  
Changes in operating assets and liabilities (Note 17)Changes in operating assets and liabilities (Note 17)385  (26,116) 
Net cash provided by (used in) operating activitiesNet cash provided by (used in) operating activities52,261  (4,325) 
Cash flows from investing activities:   Cash flows from investing activities:
Capital expenditures(4,854) (5,263)Capital expenditures(14,574) (4,854) 
Proceeds from sale of property and equipment802
 1,307
Proceeds from sale of property and equipment769  802  
Net cash used in investing activities(4,052) (3,956)Net cash used in investing activities(13,805) (4,052) 
Cash flows from financing activities:   Cash flows from financing activities:
Repayments of long-term debt(5,763) (5,344)
Repayments of debtRepayments of debt(22,644) (5,763) 
Distributions to noncontrolling interest owners(5,100) —
Distributions to noncontrolling interest owners—  (5,100) 
Purchase of treasury stock(3,201) —
Purchase of treasury stock—  (3,201) 
Other76
 (154)Other9,067  76  
Net cash used in financing activities(13,988) (5,498)Net cash used in financing activities(13,577) (13,988) 
Net decrease in cash and cash equivalents(22,365) (17,368)
Net change in cash and cash equivalentsNet change in cash and cash equivalents24,879  (22,365) 
Cash and cash equivalents at beginning of period94,095
 83,953
Cash and cash equivalents at beginning of period45,733  94,095  
Cash and cash equivalents at end of period$71,730
 $66,585
Cash and cash equivalents at end of period$70,612  $71,730  
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

6


STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited) 
 Six Months Ended June 30, 2020
Common StockAdditional Paid in CapitalTreasury StockRetained DeficitAccumulated Other Comprehensive LossTotal Sterling Stockholders’ EquityNon-controlling InterestsTotal Stockholders’ Equity
SharesAmountSharesAmount
Balance at December 31, 201927,772  $283  $251,019  518  $(6,142) $(25,033) $(209) $219,918  $1,293  $221,211  
Net income—  —  —  —  —  3,115  —  3,115  100  3,215  
Loss on interest rate swap—  —  —  —  —  —  (7,061) (7,061) —  (7,061) 
Stock-based compensation—  —  2,234  —  —  —  —  2,234  —  2,234  
Issuance of stock248  —  (2,460) (248) 2,563  —  —  103  —  103  
Shares withheld for taxes(54) —  (104) 46  (668) —  —  (772) —  (772) 
Balance at March 31, 202027,966  $283  $250,689  316  $(4,247) $(21,918) $(7,270) $217,537  $1,393  $218,930  
Net income—  —  —  —  —  18,210  —  18,210  55  18,265  
Loss on interest rate swap—  —  —  —  —  —  (53) (53) —  (53) 
Stock-based compensation—  —  3,962  —  —  —  —  3,962  —  3,962  
Issuance of stock73  —  (740) (73) 844  —  —  104  —  104  
Shares withheld for taxes(5) —  (18) 3  (32) —  —  (50) —  (50) 
Other—  —  (73) —  —  —  —  (73) —  (73) 
Balance at June 30, 202028,034  $283  $253,820  246  $(3,435) $(3,708) $(7,323) $239,637  $1,448  $241,085  
7

 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   Shares Amount   
Balance at December 31, 201826,597
 $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 stock130
 —
 (1,314) —
 (130) 1,314
 —
 —
 —
Shares withheld for taxes(52) —
 —
 —
 45
 (564) (564) —
 (564)
Balance at March 31, 201926,424
 $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 stock49
 —
 (494) —
 (49) 494
 —
 —
 —
Shares withheld for taxes(7) 

 (98) —
 —
 —
 (98) —
 (98)
Balance at June 30, 201926,466
 $271
 $233,559
 $(55,291) 583
 $(6,688) $171,851
 $2,842
 $174,693
Six Months Ended June 30, 2019
Common StockAdditional Paid in CapitalTreasury StockRetained DeficitAccumulated Other Comprehensive LossTotal Sterling Stockholders’ EquityNon-controlling InterestsTotal Stockholders’ Equity
SharesAmountSharesAmount
Balance at December 31, 2018Balance at December 31, 201826,597  $271  $233,795  467  $(4,731) $(64,934) $—  $164,401  $7,859  $172,260  
Net incomeNet income—  —  —  —  —  1,815  —  1,815  46  1,861  
Stock-based compensationStock-based compensation(1) —  1,021  —  —  —  —  1,021  —  1,021  
Distributions to ownersDistributions to owners—  —  —  —  —  —  —  —  (5,100) (5,100) 
Purchase of treasury stockPurchase of treasury stock(250) —  —  250  (3,201) —  —  (3,201) —  (3,201) 
Issuance of stockIssuance of stock130  —  (1,314) (130) 1,314  —  —  —  —  —  
Shares withheld for taxesShares withheld for taxes(52) —  —  45  (564) —  —  (564) —  (564) 
Balance at March 31, 2019Balance at March 31, 201926,424  $271  $233,502  632  $(7,182) $(63,119) $—  $163,472  $2,805  $166,277  
Net incomeNet income—  —  —  —  —  7,828  —  7,828  37  7,865  
Stock-based compensationStock-based compensation—  —  649  —  —  —  —  649  —  649  
Issuance of stockIssuance of stock49  —  (494) (49) 494  —  —  —  —  —  
Shares withheld for taxesShares withheld for taxes(7) —  (98) —  —  —  —  (98) —  (98) 
Balance at June 30, 2019Balance at June 30, 201926,466  $271  $233,559  583  $(6,688) $(55,291) $—  $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 Shares Amount 
Balance at December 31, 201727,051
 $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, 201827,035
 $270
 $231,607
 $(87,632) —
 $—
 $144,245
 $6,047
 $150,292
Net income—
 —
 —
 8,174
 —
 —
 8,174
 967
 9,141
Stock-based compensation39
 —
 766
 —
 —
 —
 766
 —
 766
Shares withheld for taxes(10) 1
 (108) —
 —
 —
 (107) —
 (107)
Balance at June 30, 201827,064
 $271
 $232,265
 $(79,458) —
 $—
 $153,078
 $7,014
 $160,092
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

8


STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 20192020
($ and share values in thousands, except per share data)
(Unaudited)
1.NATURE OF OPERATIONS
Nature of Operations—Business Summary
Sterling Construction Company, Inc., (“Sterling”Sterling,” “the Company,” “we,” “our” or “the Company”“us”), a Delaware corporation, is a construction company that specializeshas been involved in the construction industry since its founding in 1955. The Company operates through a variety of subsidiaries within three operating groups specializing in heavy civil, infrastructure constructionspecialty services, and infrastructure rehabilitation as well as residential construction projects. We operateprojects in the United States (the “U.S.”), primarily in Arizona,across the southern U.S., the Rocky Mountain States, California Colorado,and Hawaii, Nevada, Texas and Utah, as well as other states in which there are feasibleareas with strategic construction opportunities. Heavy civil constructionincludes infrastructure and rehabilitation projects includefor highways, roads, bridges, airfields, ports, light rail, water, wastewater and storm drainage systems,systems. Specialty services projects include construction site excavation and drainage, drilling and blasting for excavation, foundations for multi-family homes, parking structures and other commercial concrete projects and parking structures.projects. Residential construction projects include concrete foundations for single-family homes.

2.BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation—Presentation
Presentation Basis—The accompanying Condensed Consolidated Financial Statements included herein have been prepared by the Company, without audit, in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures preparedare presented in accordance with accounting principlespolicies generally accepted in the United States of America (“GAAP”) have been either condensed or omitted pursuant to SEC rules and regulations. The Condensed Consolidated Financial Statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the Company’s financial position at June 30, 2019 and the results of operations and cash flows for the periods presented. The December 31, 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 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 footnoteNote 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 Values presented within tables (excluding per share data) are in thousands. Reclassifications have been made to historical financial data in the 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 proportionateconform to the Company’s decision makingcurrent year presentation.
Estimates 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—Judgments—The preparation of the accompanying Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptionsjudgments 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 accounting estimates of the Company’s accounting policiesCompany require a higher degreesdegree 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-lived assets, goodwill, income taxes, and purchase accounting estimates, including goodwill and other intangibles and income taxes.intangible assets. Management continually evaluates all of its estimates and judgments based on available information and experience; however, actual results could differ from these estimates.
Reclassification—Reclassifications have been madeSignificant Accounting Policies
Consistent with Regulation S-X Rule 10-1(a), the Company has omitted significant accounting policies in this quarterly report that would duplicate the disclosures contained in the Company’s annual report on Form 10-K for the year ended December 31, 2019 under “Part II, Item 8. - Notes to Consolidated Financial Statements”.
Receivables, including Retainage—Receivables are generally based on amounts billed to the customer in accordance with contractual provisions. Many of the contracts under which the Company performs work also contain retainage provisions. Retainage refers to that portion of our billings held for payment by the customer pending satisfactory completion of the project. Unless reserved, the Company assumes that all amounts retained by customers under such provisions are fully collectible. Retainage on active contracts is classified as a current asset regardless of the term of the contract and is generally collected within one year of the completion of a contract. At June 30, 2020 and December 31, 2019, receivables included $72,800 and $79,400 of retainage, respectively.
 Receivables are written off based on individual credit evaluation and specific circumstances of the customer, when such treatment is warranted. The Company performs a review of outstanding receivables, historical collection information and existing economic conditions to determine if there are potential uncollectible receivables. At both June 30, 2020 and December 31, 2019, our allowance for doubtful accounts against contracts receivable was 0.
9

Cash and Restricted cash—Our cash is comprised of highly liquid investments with maturities of three months or less. Restricted cash of approximately $4,900 and $4,800 is included in “Other current assets” on the Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019, respectively. This primarily 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 Pronouncements
In June 2016, the FASB issued ASU 2016-13 to add the guidance in ASC 326 on the impairment of financial datainstruments. The ASU introduces an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. The amendments in the ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted this guidance effective January 1, 2020 as required and noted no material impact to the Company’s Condensed Consolidated Financial Statements to conformStatements.
3.PLATEAU ACQUISITION
General—As more fully described in Sterling’s 2019 Annual Report, on October 2, 2019, Sterling consummated the acquisition (the “Plateau Acquisition”) of all of the issued and outstanding shares of capital stock of LK Gregory Construction, Inc. and Plateau Excavation, Inc., and all of the issued and outstanding equity interests in DeWitt Excavation, LLC. The Plateau Acquisition is accounted for using the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations.
Purchase Consideration—Sterling completed the Plateau Acquisition for a purchase price of $427,533, net of cash acquired, detailed as follows:
Cash consideration transferred, net of $2,425 of cash acquired$375,000 
Target working capital adjustment21,323 
Equity consideration transferred (1,245 shares at $13.01 per share(1))
16,195 
Note payable to seller (See Note 9 - Debt)10,000 
Tax basis election5,015 
Total consideration$427,533 
(1) Sterling’s closing stock price on October 1, 2019
Preliminary Purchase Price Allocation—The aggregate purchase price noted above was allocated to the Company’sassets and liabilities acquired based upon their estimated fair values at the acquisition closing date, which were based, in part, upon an external preliminary appraisal and valuation of certain assets, including specifically identified intangible assets. The excess of the purchase price over the preliminary estimated fair value of the net tangible and identifiable intangible assets acquired totaling $106,784, was recorded as goodwill.
The following table summarizes our purchase price allocation at the acquisition closing date, net of cash acquired:
Net tangible assets:
Accounts receivable, including retainage$81,921 
Costs and estimated earnings in excess of billings974 
Other current assets249 
Property and equipment, net65,492 
Other non-current assets, net10 
Accounts payable(22,039)
Billings in excess of costs and estimated earnings(16,540)
Other current and non-current liabilities(7,918)
Total net tangible assets102,149 
Identifiable intangible assets218,600 
Goodwill106,784 
Total consideration transferred$427,533 
10

The purchase price allocation above is subject to further change when additional information is obtained. We have not finalized our assessment of the fair values primarily for intangible assets and property and equipment. We intend to finalize the purchase price allocation as soon as practicable within the measurement period, but in no event later than one year presentation.
Heavy Civil Construction Revenue Recognition—The Company engages in various typesfollowing the closing date of heavy civil construction projects principally for public (government) owners. Revenues are recognized as performance obligations are satisfied over time (formerly known as percentage-of-completion method), using the ratio of costs incurred 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 andPlateau Acquisition. Our final contract settlements,purchase price allocation may result in revisionsadditional adjustments to costsvarious other assets and incomeliabilities, including the residual amount allocated to goodwill during the measurement period.
Identifiable Intangible Assets—Intangible assets identified as part of the Plateau Acquisition are reflected in the table below and are recognized inrecorded at their estimated fair value, as determined by the period inCompany’s management, based on available information which includes a preliminary valuation from external experts. The estimated useful lives for intangible assets were determined based upon the revisionsremaining useful economic lives of the intangible assets that are determined.expected to contribute directly or indirectly to future cash flows.
Change orders, claims and incentives are generally not distinct from
 Weighted Average Life (Years)October 2, 2019
Fair Value
Customer relationships25$191,800  
Trade name2524,800  
Non-compete agreements52,000  
Total$218,600  
Supplemental Pro Forma Information (Unaudited)—The following unaudited pro forma combined financial information (“the existing contract duepro forma financial information”) gives effect to the significant integration service provided in the context of the contract and arePlateau Acquisition, accounted for as a modificationbusiness combination using the purchase method of accounting. The pro forma financial information reflects the Plateau Acquisition and related events as if they occurred at the beginning of the existing contractperiod, and performance obligation. Change orders maygives 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 Plateau following the Plateau Acquisition. The pro forma financial information includes adjustments to: (1) exclude transaction costs that were included in historical results and are expected to be non-recurring, (2) include changes in specifications or designs, manneradditional intangibles amortization and net interest expense associated with the Plateau Acquisition and (3) include the pro forma results of performance, facilities, equipment, materials, sitesPlateau for the three and period of completionsix months ended ended June 30, 2019. This pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of the work. Eitheroperating results that would have been achieved had the Company or its customers may initiate change orders. Change orders that are unapproved aspro forma events taken place on the dates indicated. Further, the pro forma financial information does not purport to both price and scope are evaluated as claims. project the future operating results of the combined company following the Plateau Acquisition.
 Three Months Ended June 30, 2019Six Months Ended June 30, 2019
Pro forma revenue$347,862  $630,471  
Pro forma net income attributable to Sterling$20,992  $28,323  
4.REVENUE FROM CUSTOMERS
Backlog
The Company estimates variable consideration for a performance obligation athad the most likely amount to which thefollowing backlog, by segment:
 June 30,
2020		December 31,
2019
Heavy Civil Backlog$874,822  $834,049  
Specialty Services Backlog258,992  233,976  
Total Heavy Civil and Specialty Services Backlog$1,133,814  $1,068,025  
The Company expects to be entitled (orrecognize approximately 63% of its backlog as revenue during the most likely amountnext twelve months, and the balance thereafter.
11

Revenue Disaggregation
The following tables present the Company’s revenue disaggregated by major end market and contract type:
Three Months Ended June 30,Six Months Ended June 30,
Revenue by major end market2020201920202019
Heavy Highway$152,526  $129,964  $248,900  $223,574  
Aviation34,867  37,061  63,324  66,998  
Water Containment and Treatment16,529  15,515  38,338  30,749  
Other16,526  17,696  25,501  29,420  
Heavy Civil Revenue$220,448  $200,236  $376,063  $350,741  
Land Development$105,639  $—  $181,884  $—  
Commercial30,064  27,894  58,542  58,573  
Specialty Services Revenue$135,703  $27,894  $240,426  $58,573  
Residential Revenue$43,887  $35,956  $80,237  $78,721  
Revenues$400,038  $264,086  $696,726  $488,035  
Revenue by contract type
Fixed-Unit Price$203,692  $185,297  $345,431  $326,516  
Lump Sum147,460  43,666  261,712  82,798  
Residential and Other48,886  35,123  89,583  78,721  
Revenues$400,038  $264,086  $696,726  $488,035  
Each of these contract types presents advantages and disadvantages. Typically, the Company expects to incur inassumes more risk with lump-sum contracts. However, these types of contracts offer additional profits if the case of liquidated damages), utilizing estimation methods that best predict the amount of consideration to which the Company will be entitled (or will be incurred in the case of liquidated damages). The Company includes variable consideration in the estimated transactionwork is completed for less than originally estimated. Under fixed-unit 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 amounts in excess of approved contract prices that the Company 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 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 incontracts, the Company’s favor,profit may vary if actual labor-hour costs vary significantly from the negotiated rates. Also, because some contracts can provide little or tono fee for managing material costs, the extent incentives reflected in transaction price are not earned, there could be reductions in, or reversalscomponents of previously recognized revenue.contract cost can impact profitability.
Variable Consideration
The Company has projects that it is in the 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 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 the Company’s customers and negotiations with the customers are ongoing. If additional progress with an acceptable resolution is not reached, legal action will be taken.
Contract modifications are routineBased upon the Company’s review of the provisions of its contracts, specific costs incurred and other related evidence supporting the unapproved change orders and claims, together in some cases as necessary with the performanceviews of 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 byoutside claim consultants, the Company concluded it was appropriate to include in project price amounts of $8,200 and as such, the Company does not recognize revenue on warranty-related work. The Company generally provides a one to two year warranty for workmanship under 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. The Company had no significant deferred pre-contract costs$3,000, at June 30, 2019.


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, 20192020 and December 31, 2018. This represents cash deposited by the Company into separate accounts2019, respectively, relating to unapproved change orders and designated as collateralclaims. Provisions 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, lesseesestimated losses on uncompleted contracts 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 paymentsmade in the period in which such losses are determined.
Contract Estimates
Accounting for long-term contracts and programs involves the obligation for those payments is incurred. The Company has electeduse of various techniques 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 leasesestimate total contract revenue and 3) whether any expired or existingcosts. For long-term contracts, are or contain leases.
At January 1, 2019, the Company recorded an ROU asset, current maturity of operating lease liabilityestimates the profit on a contract as the difference between the total estimated revenue and long-term operating lease liability of $13,600, $6,200expected costs to complete a contract 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 outrecognizes such profit over the next 2.8 years. The weighted average discount rate used to determine the present valuelife of the Company’s operating leases’ future payments was approximately 6.0%.

contract.

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, 2019, the Company had approximately $909,000 of remaining performance obligations (which is also referred to as “backlog”) in its heavy civil construction segment. The Company expects to recognize approximately 70% of its backlog as revenue during the next twelve months, and the balance thereafter.
Contract Estimates—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.
12

Changes in estimated revenues and gross margin resulted in a net increaseincreases of approximately$2,197 and $2,292 for the three and six months ended June 30, 2020, and net increases of $3,500 and $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, included in “Operating income” on the Condensed Consolidated Statements of Operations. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Variable Consideration—The transaction price for 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. Based upon the Company’s review of the provisions of its contracts, specific costs incurred, and other related evidence supporting the unapproved change orders and claims, the Company concluded that it was appropriate to include amounts of approximately $15,700 and $9,300 at June 30, 2019 and December 31, 2018, respectively, in project price. These amounts, reflected in “Costs and estimated earnings in excess of billings on uncompleted contracts” on the Condensed Consolidated Balance Sheets, primarily relate to extended delays on a 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—The Company’s heavy civil construction segment’s portfolio of products and services consists of approximately 150 active contracts. The following series of tables presents the Company’s heavy civil construction revenue disaggregated by several categories:
 Revenue by major end marketThree Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Heavy Highway$129,964
 $126,554
 $223,574
 $233,962
Commercial28,575
 29,109
 59,425
 57,628
Aviation37,061
 27,832
 66,998
 51,084
Water Containment and Treatment15,515
 15,521
 30,749
 30,516
Other17,015
 24,267
 28,568
 37,334
Total Heavy Civil Construction Revenue$228,130
 $223,283
 $409,314
 $410,524


 Revenue by contract typeThree Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Fixed Unit Price$185,297
 $194,485
 $326,516
 $354,721
Lump Sum and Other42,833
 28,798
 82,798
 55,803
Total Heavy Civil Construction Revenue$228,130
 $223,283
 $409,314
 $410,524
Each of these contract types presents advantages and disadvantages. Typically, the Company assumes more risk with lump-sum contracts. However, these types of contracts offer additional profits when the work is completed for less than originally estimated. Under fixed-unit price contracts, 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. In 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, the Company occasionally receives advances or deposits from 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 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, 2019, were not materially impacted by any other factors.
4.5.CONSOLIDATED 50% OWNED SUBSIDIARIES
The Company has 50% ownership interests in 2 subsidiaries (“Myers” and “RHB”) that it fully consolidates as a result of its exercise of control over the entities. The earnings attributable to the 50% interest in two subsidiaries (Myers and RHB); both subsidiaries have individual provisions which obligateportions the Company to purchase each partner’s 50% interestsdoes not own were approximately $4,600 and $6,300 for $20,000 ($40,000the three and six months ended June 30, 2020, respectively, and $1,400 and $2,700 for the three and six months ended June 30, 2019, respectively, and are eliminated within “Other operating expense, net” in the aggregate), due to circumstances outlined in the partner agreements thatCondensed Consolidated Statements of Operations. Any undistributed earnings for partners are certain to occur. Therefore, the Company has consolidated these two entities and classified these obligations as mandatorily redeemable and has recorded a liabilityincluded in “Members’ interest subject to mandatory redemption and undistributed earnings” onwithin the Condensed Consolidated Balance Sheets. In addition, all undistributed earningsSheets and are mandatorily payable at the time of the noncontrolling owners’ death or permanent disabilitydisability.
These two subsidiaries have individual mandatory redemption provisions which, under circumstances outlined in the partner agreements, are also mandatorily payable. Incertain to occur and obligate the event of either Mr. Buenting’s or Mr. Myers’s death,Company to purchase each partner’s remaining 50% interests for $20,000 ($40,000 in the aggregate). The Company has purchased two separate $20,000 death and permanent total disability insurance policies to mitigate the Company’s cash draw if such events were to occur. These purchase obligations are recorded in “Members’ interest subject to mandatory redemption and undistributed earnings” on the Condensed Consolidated Balance Sheets.
The liability consists of the following:
 June 30,
2019		 December 31,
2018
Members’ interest subject to mandatory redemption$40,000
 $40,000
Net accumulated earnings8,831
 9,343
Total liability$48,831
 $49,343
Fifty percent of the earnings of these consolidated 50% owned subsidiaries for the three and six months ended June 30, 2019 were approximately $1,500 and $2,700, respectively and for the three and six months ended June 30, 2018 were $4,700 and $5,300, respectively. These amounts were included in “Other operating expense, net” on the Company’s Condensed Consolidated Statements of Operations.
 June 30,
2020		December 31,
2019
Members’ interest subject to mandatory redemption$40,000  $40,000  
Net accumulated earnings13,751  9,003  
Total liability$53,751  $49,003  
The Company must determine whether any of its entities, including these two 50% owned subsidiaries, in which it participates, is a variable interest entity (“VIE”).VIE. The Company determined Myers is a VIE, as Sterlingthe Company is the primary beneficiary, as pursuant to the terms of the Myers Operating Agreement the Company is exposed to the majority of potential losses of the partnership.


The following tables present the condensedSummary financial information offor Myers which is reflected in the Company’s Condensed Consolidated Balance Sheets and Statements of Operations:as follows:
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Revenues$54,364  $59,664  $98,726  $102,078  
Operating income$1,049  $2,004  $1,204  $2,281  
Net income$1,051  $2,009  $1,209  $2,291  
 June 30,
2019		 December 31,
2018
Assets 
  
Current assets: 
  
Cash and cash equivalents$6,195
 $8,745
Accounts receivable, including retainage27,011
 24,109
Other current assets14,959
 14,533
Total current assets48,165
 47,387
Property and equipment, net6,369
 7,219
Operating lease right-of-use assets3,232
 —
Goodwill1,501
 1,501
Total assets$59,267
 $56,107
Liabilities   
Current liabilities:   
Accounts payable$23,672
 $22,211
Other current liabilities10,583
 9,811
Total current liabilities34,255
 32,022
Other long-term liabilities1,680
 1,976
Total liabilities$35,935
 $33,998
5.6.CONSTRUCTION JOINT VENTURES
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. The Company selects its joint venture partners based on its analysis of their construction and financial capabilities, expertise in the type of work to be performed and past working relationships with the Company, among other criteria.
Joint ventures with a controlling interest—For theseWhere the Company has a controlling joint ventures,interest in a venture, the equity held by the remaining owners and their portions of net income (loss) are reflected in the Condensed Consolidated Balance Sheets line item “Noncontrolling interests” in “Stockholders’ equity” and the Condensed Consolidated Statements of Operations line item “Net income attributable to noncontrolling interests”,interests,” respectively. The Condensed Consolidated Statements of Changes in Stockholders’ Equity summarize the changes in the noncontrolling owners’ interests in subsidiaries and consolidated joint ventures.

13

Joint ventures with a noncontrolling interest—Where the Company ishas a noncontrolling joint interest in a venture, partner, the Company accounts for theirits share of the operations of such construction joint ventures on a pro-rata basis using proportionate consolidation on its Condensed Consolidated Statements of Operations and as a single line item (“Receivablesin “Receivables from and equity in construction joint ventures”) in the Condensed Consolidated Balance Sheets. This method is an acceptable modification of the equity method of accounting which is a common practice in the construction industry. Condensed combined financial amounts of joint ventures in which the Company has a noncontrolling interest and the Company’s share of such amounts which are included in the Company’s Condensed Consolidated Financial Statements are shown below:
 June 30,
2020		December 31,
2019
Current assets$136,284  $92,710  
Current liabilities$(142,553) $(86,705) 
Sterling’s receivables from and equity in construction joint ventures$12,396  $9,196  
 June 30,
2019		 December 31,
2018
Total combined:   
Current assets$95,991
 $64,815
Less current liabilities(98,192) (74,543)
Net liabilities$(2,201) $(9,728)
    
Sterling’s receivables from and equity in noncontrolling construction joint ventures$14,381
 $10,720


Three Months Ended June 30,Six Months Ended June 30,
Three Months Ended June 30,
Six Months Ended June 30,2020201920202019
2019 2018
2019 2018
Total combined:   
  
  
Revenues$55,306
 $25,463
 $86,690
 $56,820
Revenues$43,466  $55,306  $70,312  $86,690  
Income before tax8,844
 2,192
 10,813
 5,596
Income before tax$4,516  $8,844  $6,673  $10,813  
Sterling’s noncontrolling interest:       Sterling’s noncontrolling interest:
Revenues$25,971
 $12,564
 $41,655
 $27,629
Revenues$19,377  $25,971  $32,459  $41,655  
Income before tax3,116
 1,167
 4,100
 2,858
Income before tax$1,968  $3,116  $3,017  $4,100  
The caption “Receivables from and equity in construction joint ventures”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 completecompleted and the warranty period, if any, has passed.
The Company must determine whether each joint venture in which it participates is a VIE. This determination focuses on identifying which joint venture partner, if any, has the power to direct the activities of a joint venture and the obligation to absorb losses of the joint venture or the right to receive benefits from the joint venture in excess of their ownership interests and could have the effect of requiring us to consolidate joint ventures in which we have a noncontrolling variable interest.
The Company determined that the joint venture between Ralph L Wadsworth Construction, LLC, a subsidiary of the Company (“RLW”) (51% owner) and SEMA Construction Inc (“SEMA”) (49% owner) is a VIE as the Company is the primary beneficiary, as pursuant to the terms of the SEMA Operating Agreement the Company is exposed to 51% of potential losses of the partnership.
Summary financial information for SEMA is as follows:
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Revenues$3,404  $1,027  $7,468  $1,629  
Operating income$375  $75  $671  $113  
Net income$376  $75  $675  $113  

14

6.7.PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
 June 30,
2020		December 31,
2019
Construction and transportation equipment$225,440  $217,945  
Buildings and improvements17,267  14,641  
Land3,891  3,891  
Office equipment2,609  2,767  
Total property and equipment249,207  239,244  
Less accumulated depreciation(129,611) (123,214) 
Total property and equipment, net$119,596  $116,030  
  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
Depreciation Expense—Depreciation expense is primarily included within cost of revenues and was $5,390 and $10,838 for the three and six months ended June 30, 2020, respectively, and $3,571 and $7,273 for the three and six months ended June 30, 2019, respectively.
7.8.OTHER INTANGIBLE ASSETS
The following table presents the Company’s acquired finite-lived intangible assets at June 30, 20192020 and December 31, 2018:2019:
 June 30, 2020December 31, 2019
 Weighted
Average
Life		Gross
Carrying
Amount
Accumulated
Amortization		Gross
Carrying
Amount
Accumulated
Amortization
Customer relationships25 years$232,623  $(11,621) $232,623  $(6,911) 
Trade name23 years30,107  (2,450) 30,107  (1,692) 
Non-competition agreements5 years2,487  (526) 2,487  (291) 
Total24 years$265,217  $(14,597) $265,217  $(8,894) 
   June 30, 2019 December 31, 2018
 Weighted
Average
Life		 Gross
Carrying
Amount		 
Accumulated
Amortization		 Gross
Carrying
Amount		 
Accumulated
Amortization
Customer relationships23 years $40,823
 $(4,062) $40,823
 $(3,159)
Trade name13 years 5,307
 (1,181) 5,307
 (919)
Non-competition agreements7 years 487
 (156) 487
 (121)
Total22 years $46,617
 $(5,399) $46,617
 $(4,199)
The Company's intangible amortization expense was $2,866 and $5,703 for the three and six months ended June 30, 2020, respectively, and $600 and $1,200 for the three and six months ended June 30, 2019.

2019, respectively.

8.9.DEBT
The Company’s outstanding debt at June 30, 2019 and December 31, 2018 was as follows:
 June 30,
2020		December 31,
2019
Term Loan Facility$390,000 ��$400,000  
Revolving Credit Facility20,000  20,000  
Credit Facility410,000  420,000  
Note payable to seller, Plateau Acquisition10,000  10,000  
Notes and deferred payments to sellers, Tealstone Acquisition—  12,230  
Finance leases and other debt10,451  805  
Total debt430,451  443,035  
Less - Current maturities of long-term debt(54,979) (42,473) 
Less - Unamortized debt issuance costs(8,444) (9,935) 
Total long-term debt$367,028  $390,627  
15

 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 equipment1,015
 612
Total debt84,327
 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
OaktreeCredit Facility—At June 30,On October 2, 2019, the Company, had $71,602 outstanding underas borrower, and certain of its subsidiaries, as guarantors, entered into a Credit Agreement (the “Credit Agreement”) with BMO Harris Bank N.A., as administrative agent (the “Agent”), Bank of America, N.A., as syndication agent, and BMO Capital Markets Corp. and BofA Securities, Inc., as joint lead arrangers and joint book runners. The Credit Agreement provides the Company with senior secured debt financing in an $85,000amount up to $475,000 in the aggregate, consisting of (i) a senior secured first lien revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of $75,000 (with a $75,000 limit for the issuance of letters of credit and a $15,000 sublimit for swing line loans) and (ii) a senior secured first lien term loan with Wilmington Trust, National Association, as agent, andfacility (the “Term Loan Facility”) in the lenders party thereto (the “Oaktreeamount of $400,000 (collectively, the “Credit Facility”). The five-year Oaktreeobligations under the Credit Facility which matures in April, 2022, isare secured by substantially all of the assets of the Company and its subsidiaries. Interestthe subsidiary guarantors, subject to certain permitted liens and interests of other parties. The Credit Facility will mature on October 2, 2024.
The Revolving Credit Facility bears interest at either the Oaktree Facility is equal to theBase Rate plus a margin (4.25% and 3.50% per annum, respectively at June 30, 2020), or one-, two-, three-, six- or, six-month London Interbank Offered Rate, orif available, twelve-month LIBOR plus 8.75%an applicable margin (0.19% and 4.50% per annum, respectively at June 30, 2020, using a one-month LIBOR rate), at the Company’s election. In addition to interest on debt borrowings, we are assessed quarterly commitment fees on the unpaid principal amountunutilized portion of the Oaktreefacility as well as letter of credit fees on outstanding instruments. Interest under the Revolving Credit Facility is payable (i) with respect to LIBOR borrowings, on the last day of each applicable interest period (one, two, three, six or twelve months), unless the applicable interest period is longer than three months, then on each day occurring every three months after the commencement of such interest period, and on the maturity date, and (ii) with respect to Base Rate borrowings, on the last day of every calendar quarter and on the maturity date. At June 30, 2020, we had $20,000 of outstanding borrowings under the facility, providing $55,000 of available capacity. During the six months ended June 30, 2020, our weighted average interest rate on borrowings under the Revolving Credit Facility was approximately 7.15%. The Revolving Credit Facility may be repaid in whole or in part at any time, with final payment of all principal and interest then outstanding due on October 2, 2024.
Interest under the Term Loan Facility is payable at the same frequencies and bears interest at the same rate options as the Revolving Credit Facility. We utilize an interest rate swap to hedge against $350,000 of the outstanding Term Loan Facility, which resulted in a weighted average interest rate of approximately 5.80% per annum during the six months ended June 30, 2020. At June 30, 2020, we had $390,000 of outstanding borrowings under the facility. Principal payments on the Term Loan Facility total $30,000, $50,000, $50,000, $50,000 and $220,000 for each of the years ending 2020, 2021, 2022, 2023, and 2024, respectively. A final payment of all principal and interest then outstanding on the Term Loan Facility is due on October 2, 2024.
The Credit Agreement contains various affirmative and negative covenants that may, subject to adjustment under certain circumstances,exceptions, restrict the ability of us and is generally payable monthly. There are no amortized principal payments; however,our subsidiaries to, among other things, grant liens, incur additional indebtedness, make loans, advances or other investments, make non-ordinary course asset sales, declare or pay dividends or make other distributions with respect to equity interests, purchase, redeem or otherwise acquire or retire capital stock or other equity interests, or merge or consolidate with any other person, among various other things. In addition, the Company is required to prepaymaintain the Oaktreefollowing financial covenants:
•a Total Leverage Ratio (as defined in the Credit Agreement) at the last day of each fiscal quarter not to be greater than 4.00 to 1.00 ending on December 31, 2019 through and including June 30, 2020, 3.75 to 1.00 ending on September 30, 2020, 3.50 to 1.00 ending on December 31, 2020 through and including March 31, 2021, 3.25 to 1.00 ending on June 30, 2021 through and including September 30, 2021, and 3.00 to 1.00 ending on December 31, 2021 and thereafter; and
•a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of not less than 1.20 to 1.00 as of the last day of each fiscal quarter of the Company, commencing with the fiscal quarter ending December 31, 2019.
Debt issuance costs—The costs associated with the Term Loan Facility and in certain cases payRevolving Credit Facility are reflected on the Balance Sheets as a prepayment premium thereon, with proceeds receiveddirect reduction from the issuancesrelated debt liability and amortized over the terms of the respective facilities. Amortization of debt issuance costs was $740 and $1,491 for the three and six months ended June 30, 2020, respectively, and $518 and $1,037 for the three and six months ended June 30, 2019, respectively, and was recorded as interest expense.
Note Payable to Seller, Plateau Acquisition—As part of the Plateau Acquisition, the Company issued a $10,000 subordinated promissory note to one of the Plateau sellers that bears interest at 8% with interest payments due quarterly beginning January 1, 2020. The subordinated promissory note has no scheduled payments, however, it may be repaid in whole or equity, transfers, eventsin part at any time, subject to certain payment restrictions under a subordination agreement with the Agent under our Credit Agreement, without premium or penalty, with final payment of lossall principal and extraordinary receipts. The Company is required to make an offer quarterly to the lenders to prepay the Oaktree Facility in an amount equal to 75% of its excess cash flow, plus accrued and unpaid interest thereon and a prepayment premium.then outstanding due on April 2, 2025.
Notes and Deferreddeferred Payments to Sellers,— Tealstone Acquisition—At June 30, 2019,2020 the Company had $11,710 outstanding, net of debt discounts, of0 balance remaining on the combined Promissory Notespromissory 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, 20192020, the Company paid $5,000 of deferred cash payments and $300$7,500 on promissory notes that were due on April 3, 2020.
16

Finance Leases and $600 for the three and six months ended June 30, 2018, and was recorded as interest expense.
Notes Payable for Construction and Transportation EquipmentOther Debt—The Company has purchasedhad finance leases of $659 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$764 at June 30, 20192020 and December 31, 2018,2019, respectively. The notesfinance leases 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, Additionally, during the three and six months ended June 30, 2020, the Company’s ability2 50% owned subsidiaries received 3 short-term Paycheck Protection Program loans totaling approximately $9,800. The loans may be fully or partially forgiven if the funds are used for payroll related costs, interest on mortgages, rent, and certain of its subsidiaries’ abilityutilities, and as long as our employee headcount and salary levels remain consistent with our baseline period over an eight to incur certain indebtedness, grant certain liens, merge or consolidate, sell assets, make certaintwenty-four week period following the date the loans enter into acquisitions, incur capital expenditures, make investments, and pay dividends. In addition,were received, otherwise the Company is required to maintain theloans will be repaid following principal financial covenants:
a ratio of secured indebtedness to EBITDA of not more than 1.9 to 1.00 for the trailing four consecutive fiscal quarters ending March 31, 2019, reducing to 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;
gross margin in contract backlog of not less than $70,000 for the averagesix month deferral at a 1% interest rate. Any forgiveness of the trailing four consecutive fiscal quarters;loans is subject to approval by the Small Business Administration. The loans have been classified as short-term debt on the Condensed Consolidated Balance Sheets at June 30, 2020.
net capital expenditures during the trailing four consecutive fiscal quarters shall not exceed $15,000;
bonding capacity shall be maintained at all times in an amount not less than $1,000,000;Compliance and
the EBITDA other—As of Tealstone Residential Concrete, Inc. shall not be less than $12,000 for each of the trailing four consecutive fiscal quarters.
The Company isJune 30, 2020, we were in compliance with these covenantsall of our restrictive and financial covenants. The Company’s debt is recorded at its carrying amount in the Condensed Consolidated Balance Sheets. As of June 30, 2019.

2020 and December 31, 2019, the carrying values of our debt outstanding approximated the fair values.

9.10.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 58 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,Six Months Ended June 30,
 2020201920202019
Operating lease cost$2,075  $1,960  $4,234  $4,171  
Short-term lease cost$3,745  $3,269  $7,026  $8,012  
Finance lease cost:
Amortization of right-of-use assets$49  $39  $105  $71  
Interest on lease liabilities7  1  15  3  
Total finance lease cost$56  $40  $120  $74  
 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 liabilities1
 3
Total finance lease cost$40
 $74
Supplemental cash flow information related to leases was as follows:
Six Months Ended June 30,
 20202019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$4,336  $4,466  
Operating cash flows from finance leases$15  $3  
Financing cash flows from finance leases$105  $71  
Right-of-use assets obtained in exchange for lease obligations (noncash):
Operating leases$5,633  $6,311  
Finance leases$—  $770  
17

 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,
2020		December 31,
2019
Operating Leases
Operating lease right-of-use assets$17,076  $13,979  
Current portion of long-term lease obligations$7,423  $7,095  
Long-term lease obligations9,733  6,976  
Total operating lease liabilities$17,156  $14,071  
Finance Leases
Property and equipment, at cost$1,479  $1,479  
Accumulated depreciation(592) (482) 
Property and equipment, net$887  $997  
Current maturities of long-term debt$195  $204  
Long-term debt464  560  
Total finance lease liabilities$659  $764  
Weighted Average Remaining Lease Term
Operating leases3.42.5
Finance leases3.74.0
Weighted Average Discount Rate
Operating leases5.8 %6.0 %
Finance leases4.2 %4.2 %
 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 obligations8,030
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 debt626
Total finance lease liabilities$860
  
Weighted Average Remaining Lease Term 
Operating leases2.8
Finance leases4.4
  
Weighted Average Discount Rate 
Operating leases6.0%
Finance leases4.2%


Maturities of lease liabilities are as follows:
 Operating
Leases		Finance
Leases
Year Ending December 31,
2020 (excluding the six months ended June 30, 2020)$3,662  $112  
20216,294  208  
20224,300  161  
20232,767  154  
2024806  77  
Thereafter1,438  —  
Total lease payments$19,267  $712  
Less imputed interest(2,111) (53) 
Total$17,156  $659  
18
 
Operating
Leases
 
Finance
Leases
Year Ending December 31,   
2019 (excluding the six months ended June 30, 2019)$4,206
 $157
20205,885
 209
20214,231
 186
20222,087
 161
2023399
 154
Thereafter5
 77
Total lease payments$16,813
 $944
Less imputed interest(1,724) (84)
Total$15,089
 $860

10.11.COMMITMENTFINANCIAL INSTRUMENTS
Derivatives
Interest Rate Derivative—We continue to utilize a swap arrangement to hedge against interest rate variability associated with $350,000 of the $390,000 outstanding under the Term Loan Facility. The Company has designated its interest rate swap agreement as a cash flow hedging derivative. To the extent the derivative instrument is effective and the documentation requirements have been met, changes in fair value are recognized in other comprehensive income (loss) (“OCI”) until the underlying hedged item is recognized in earnings. The total fair value of the contract was a net loss of $9,694 at June 30, 2020.
Financial Instruments Disclosures
Fair Value—Financial instruments are required to be categorized within a valuation hierarchy based upon the lowest level of input that is significant to the fair value measurement. The three levels of the valuation hierarchy are as follows:
•Level 1—Fair value is based on quoted prices in active markets.
•Level 2—Fair value is based on internally developed models that use, as their basis, readily observable market parameters. Our derivative positions are classified within level 2 of the valuation hierarchy as they are valued using quoted market prices for similar assets and liabilities in active markets. These level 2 derivatives are valued utilizing an income approach, which discounts future cash flow based on current market expectations and adjusts for credit risk.
•Level 3—Fair value is based on internally developed models that use, as their basis, significant unobservable market parameters. The Company did not have any level 3 classifications at June 30, 2020 or December 31, 2019.
        The following table presents the fair value of the interest rate derivative by valuation hierarchy and balance sheet classification:
June 30, 2020December 31, 2019
Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Derivative Assets
Other current assets$—  $—  $—  $—  $—  $216  $—  $216  
Other non-current assets—  —  —  —  —  —  —  —  
Total assets at fair value$—  $—  $—  $—  $—  $216  $—  $216  
Derivative Liabilities
Other current liabilities$—  $(4,925) $—  $(4,925) $—  $(61) $—  $(61) 
Other non-current liabilities—  (4,769) —  (4,769) —  (398) —  (398) 
Total liabilities at fair value$—  $(9,694) $—  $(9,694) $—  $(459) $—  $(459) 
        The carrying values of the Company's cash and cash equivalents, accounts receivable and accounts payable approximate their fair values because of the short-term nature of these instruments. At June 30, 2020, the fair value of the term loan, based upon the current market rates for debt with similar credit risk and maturities, approximated its carrying value as interest is based on LIBOR plus an applicable margin.
OCI—The following table presents the total value recognized in OCI and reclassified from accumulated other comprehensive income (loss)(“AOCI”) into earnings during the three and six months ended June 30, 2020 for derivatives designated as cash flow hedges:
Three Months Ended June 30, 2020Six Months Ended June 30, 2020
Before Tax AmountTax
Amount		Net of Tax
Amount		Before Tax AmountTax
Amount		Net of Tax
Amount
Net gain (loss) recognized in OCI$(1,031) $232  $(799) $(10,205) $2,296  $(7,909) 
Net amount reclassified from AOCI into earnings963  (217) 746  1,026  (231) 795  
Change in other comprehensive income$(68) $15  $(53) $(9,179) $2,065  $(7,114) 
(1) Net unrealized losses totaling $4,683 are anticipated to be reclassified from AOCI into earnings during the next 12 months due to settlement of the associated underlying obligations.
19

12.COMMITMENTS AND CONTINGENCIES
The Company is required by its insurance providers to obtain and hold a standby letterletters of credit. These letters of credit serve as a guarantee by the banking institution to pay the Company’s insurance providers the incurred claim costs attributable to its general liability, workers compensation and automobile liability claims, up to the amount stated in the standby letters of credit, in the event that these claims were not paid by the Company. The Company has cash collateralized theThese letters of credit are cash collateralized, resulting in the cash being designated as restricted.
The Company, including its construction joint ventures and its consolidated 50% owned subsidiaries, is the subject of certain other claimsnow and lawsuits occurringmay in the normalfuture be involved as a party to various legal proceedings that are incidental to the ordinary course of business. Management, after consultation with legal counsel, does not believe that the outcome of these actions will have a material impact on the Condensed Consolidated Financial Statements of the Company.
11.13.INCOME TAXES
The Company and its subsidiaries are based in the U.S. and file U.S. federal and various U.S. state income tax returns. CurrentThe components of the provision for 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 of Operations.were as follows:
Due to net operating loss carryforwards, the Company does not expect a current federal liability. The Company may incur current state tax liabilities in states in which the Company does not have net operating loss carry forwards. Current income tax expense of $86 and $108 was recorded for the three and six months ended June 30, 2019, respectively and for the three and six months ended June 30, 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.
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Current tax expense$1,938  $86  $2,209  $108  
Deferred tax expense5,310  620  6,223  761  
Income tax expense$7,248  $706  $8,432  $869  
Cash paid for income taxes$—  $—  $44  $—  
The effective income tax rate varied from the 21% federal statutory rate primarily as a result of the change in thetax valuation allowance, state income taxes and 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,In addition, 2019 included a reduction in the tax valuation allowance that reduced income tax expense and 2020 includes state taxes related to Plateau.
Due to the net operating loss carryforwards, the Company estimates an annual effectiveexpects no cash payments for federal income taxes for 2020 or 2019. The Company makes cash payments for state income taxes in states in which the Company does not have net operating loss carry forwards.
At December 31, 2019 the Company had federal and state net operating loss (“NOL”) carryforwards of $83,270 and $44,857, respectively, which expire at various dates in the next 18 years for U.S. federal income tax rate and applies that ratein the next 8 to year-to-date operating results.18 years for the various state jurisdictions where we operate. Such NOL carryforwards expire beginning in 2028 through 2038.
As a result of the Company’s analysis, management has determined that the Company does not have any material uncertain tax positions.


12.14.STOCK INCENTIVE PLAN AND OTHER EQUITY ACTIVITY
General—The Company has a stock incentive plan (the “Stock Incentive Plan”) and a employee stock purchase plan (the “ESPP”) that isare 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 sharesshare units (“PSUs”). Changes in common stock, additional paid in capital and treasury stock during the six months ended June 30, 20192020 primarily relate to activity associated with the Stock Incentive Plan, the ESPP, and share repurchases.
Share Grants—During the six months ended June 30, 2019,2020, the Company had the following share grants associated with the Stock Incentive Plan:
SharesWeighted Average Grant-Date Fair Value per Share
RSAs47  $8.24  
RSUs127  $14.08  
PSUs (at target)173  $14.08  
Total shares granted347  
20

  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, 2019,2020, the Company had the following share issuances associated with the Stock Incentive Plan:
Plan and the ESPP:
Shares
RSARSAs (issued upon grant)5247 
RSUs (issued upon vesting)7349 
PSUs (issued upon vesting)5490 
ESPP (issued upon sale)25 
Total shares issued179211 
Stock-Based Compensation Expense—During the three and six months ended June 30, 2020, the Company recognized $3,962 and $6,196, respectively, of stock-based compensation expense, and 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,respectively, primarily within general and administrative expenses. The Company recognizes forfeitures as they occur, rather than estimating expected forfeitures.
Share Repurchases—During Included within total stock-based compensation expense for the three and six months ended June 30, 2019,2020 is $18 and $36, respectively, of expense related to the Company repurchased 250ESPP. At June 30, 2020, 762 authorized shares of the Company’s outstanding common stockremained available for $3,201issuance under the stock repurchase plan, all of which were purchased in the first quarter of 2019. ESPP.
Shares Withheld for Taxes—The Company also repurchased 7withheld 3 and 5949 shares for taxes withheld on stock-based compensation vestings for $98$32 and $662$700 during the three and six months ended June 30, 2019.2020, respectively.
Warrants—During the six months ended June 30, 2020, certain holders of warrants elected the cashless exercise option and the Company issued 110 common shares on the exercise of 470 warrants with a market value of $1,477.
AOCI—During the three and six months ended June 30, 2020, changes in AOCI were a result of net gains (losses) recognized in OCI and amounts reclassified from AOCI into earnings related to our interest rate derivative. See Note 11 - Financial Instruments for further discussion of our cash flow hedge.
13.15.EARNINGS PER SHARE
Basic net income per share attributable to Sterling common stockholders is computed by dividing net income attributable to Sterling common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per common share attributable to Sterling common stockholders is the same as basic net income per share attributable to Sterling common stockholders but includes dilutive unvested stock awards and warrants using the treasury stock method. The following table reconciles the numerators and denominators of the basic and diluted per common share computations for net income attributable to Sterling common stockholders:
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Numerator:    
Net income attributable to Sterling common stockholders$18,210  $7,828  $21,325  $9,643  
Denominator:
Weighted average common shares outstanding — basic27,941  26,338  27,794  26,357  
Shares for dilutive unvested stock and warrants16  285  93  300  
Weighted average common shares outstanding — diluted27,957  26,623  27,887  26,657  
Basic net income per share attributable to Sterling common stockholders$0.65  $0.30  $0.77  $0.37  
Diluted net income per share attributable to Sterling common stockholders$0.65  $0.29  $0.76  $0.36  
21
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Numerator: 
  
  
  
Net income attributable to Sterling common stockholders$7,828
 $8,174
 $9,643
 $10,663
Denominator:       
Weighted average common shares outstanding — basic26,338
 26,887
 26,357
 26,881
Shares for dilutive unvested stock and warrants285
 238
 300
 281
Weighted average common shares outstanding — diluted26,623
 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



14.16.SEGMENT INFORMATION
SegmentThe Company’s internal and public segment reporting isare aligned based upon the services offered by twoits operating groups, which represent the followingreportable segments. The Company’s operations consist of 3 reportable segments: heavy civil constructionHeavy Civil, Specialty Services and residential construction.Residential. 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, 20192020 and 2018:2019:
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Revenue    
Heavy Civil$220,448  $200,236  $376,063  $350,741  
Specialty Services135,703  27,894  240,426  58,573  
Residential43,887  35,956  80,237  78,721  
Total Revenue$400,038  $264,086  $696,726  $488,035  
Operating Income  
Heavy Civil$3,896  $5,747  $274  $3,600  
Specialty Services23,246  865  34,360  1,913  
Residential6,043  4,834  11,127  10,653  
Subtotal33,185  11,446  45,761  16,166  
Acquisition related costs(139) (262) (612) (262) 
Total Operating Income$33,046  $11,184  $45,149  $15,904  
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Revenues 
  
  
  
Heavy Civil Construction$228,130
 $223,283
 $409,314
 $410,524
Residential Construction35,956
 45,451
 78,721
 80,702
Total Revenues$264,086
 $268,734
 $488,035
 $491,226
        
Operating Income 
  
  
  
Heavy Civil Construction$6,146
 $6,395
 $5,299
 $8,340
Residential Construction5,038
 5,754
 10,605
 10,488
Total Operating Income$11,184
 $12,149
 $15,904
 $18,828
15.17.SUPPLEMENTAL CASH FLOW INFORMATION
Operating assets and liabilities—The following table summarizes the changes in the components of operating assets and liabilities:
Six Months Ended June 30,
20202019
Accounts receivable, including retainage$(21,159) $(12,787) 
Contracts in progress, net16,410  (14,190) 
Receivables from and equity in construction joint ventures(3,200) (3,661) 
Other current and non-current assets(372) 128  
Accounts payable(6,495) 1,916  
Accrued compensation and other liabilities10,453  2,990  
Members' interest subject to mandatory redemption and undistributed earnings4,748  (512) 
Changes in operating assets and liabilities$385  $(26,116) 
22
 Six Months Ended June 30,
 2019 2018
Accounts receivable, including retainage$(12,787) $(30,534)
Contracts in progress, net(14,190) (3,346)
Receivables from and equity in construction joint ventures(3,661) (386)
Other assets128
 1,562
Accounts payable1,916
 (1,073)
Accrued compensation and other liabilities2,990
 1,761
Member’s interest subject to mandatory redemption and undistributed earnings(512) 451
Changes in operating assets and liabilities$(26,116) $(31,565)



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary CommentStatement Regarding Forward-Looking Statements
This Report, including the documents incorporated herein by reference,quarterly report on Form 10-Q (“Report”) contains statements that are, or may be considered forward-looking statements withinto be, “forward-looking statements” regarding the meaning of the federal securities laws.Company which represent our expectations and beliefs concerning future events. These forward-looking statements are subjectintended to a numberbe covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995 as set forth in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The forward-looking statements included herein 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, 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 includedthat could result 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 guarantees of future performance, and we cannot assure any reader that such statements will bebeing realized or the forward-looking eventsotherwise could materially affect our financial condition, results of operations and circumstances will occur.cash flows.
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•potential risks and local government funding for infrastructure services and changes in those governments’ budgets, practices, laws and regulations;
delays or difficulties relateduncertainties relating to the completionultimate impact of projects,COVID-19, 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 beyondgeographic spread, the controlseverity of the Company, including suppliers’, subcontractors’disease, the duration of the COVID-19 outbreak, actions that may be taken by governmental authorities to contain the COVID-19 outbreak or to address its impact, and joint venture partners’ failure to perform;the potential negative impact of COVID-19 on the global economy and financial markets;
•factors that affect the accuracy of estimates inherent in the bidding for contracts, estimates of backlog, and over time recognition accounting policies, including onsite conditions that differ materially from those assumed in the original bid, contract modifications, mechanical problems with machinery or equipment and effects of other risks discussed in this document;herein;
design/build contracts•actions of suppliers, subcontractors, design engineers, joint venture partners, customers, competitors, banks, surety companies and others which subject the Companyare beyond our control, including suppliers’, subcontractors’ and joint venture partners’ failure to the risk of design errors and omissions;perform;
•cost escalations associated with our contracts, including changes in availability, proximity and cost of materials such as steel, cement, concrete, aggregates, oil, fuel and other construction materials, including changes in U.S. trade policies and retaliatory responses from other countries, and cost escalations associated with subcontractors and labor;
•changes in costs to lease, acquire or maintain our equipment;
•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 the Companyours, and the impact of competitive bidders on the Companiesour ability to obtain new backlog at reasonable margins acceptable to us;
•a shutdown of the Company;federal government;
•our ability to qualify as an eligible bidder under government contract criteria;
•changes in general economic conditions, including recessions, reductions in federal, state and local government funding for infrastructure services, changes in those governments’ budgets, practices, laws and regulations and adverse economic conditions in our geographic markets, such as those caused by the ongoing COVID-19 pandemic;
•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;
•design/build contracts which subject us to the risk of design errors and omissions;
•our ability to obtain bonding or post letters of credit;
•our ability to raise additional capital on favorable terms;
•our ability to attract and retain key personnel;
•increased unionization of our workforce or labor costs and any work stoppages or slowdowns;
•adverse weather conditions;
•our ability to successfully identify, finance, complete and integrate acquisitions;acquisitions, including the Plateau Acquisition;
•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; and
adverse economic conditions in •the Company’s markets; and
the other factors discussed in more detail in the Company’s Annual Reportannual report on Form 10-K for the year ended December 31, 2018 (“20182019 (the “2019 Form 10-K”) under “Part I, Item 1A. Risk Factors.”Factors” and “Part II, Item 1A. Risk Factors” of this Report.
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 the Company’sour forward-looking statements are based are likely to change after the forward-looking statements are made. Further, the Companywe may make changes to theirour business plans that could affect theirour results. Although the Company believeswe believe that itsour plans, intentions and expectations reflected in, or suggested by, the forward-looking statements that the Company makeswe make in this Report are reasonable, the Companywe can provide no assurance that they will be achieved.
The forward-looking statements included herein are made only as of the date hereof, and the Company undertakeswe undertake 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 the Company becomeswe become aware of after the date of this Report.

23


OVERVIEW


General—Sterling Construction Company, Inc. (“Sterling” or “the Company”), is a construction company that specializeshas been involved in the construction industry since its founding in 1955. The Company operates through a variety of subsidiaries within three operating groups specializing in heavy civil, infrastructure constructionspecialty services, and infrastructure rehabilitation as well as residential construction projects. The Company operatesprojects in the United States (the “U.S.”), primarily in Arizona,across the southern U.S., the Rocky Mountain States, California Colorado,and Hawaii, Nevada, Texas and Utah, as well as other states in which there are feasibleareas with strategic construction opportunities. Heavy civil constructionincludes infrastructure and rehabilitation projects includefor highways, roads, bridges, airfields, ports, light rail, water, wastewater and storm drainage systems,systems. Specialty services projects include construction site excavation and drainage, drilling and blasting for excavation, foundations for multi-family homes, parking structures and other commercial concrete projects and parking structures.projects. Residential construction projects include concrete foundations for single-family homes.
Plateau Acquisition—On October 2, 2019, the Company consummated the acquisition of Plateau and entered into a credit agreement with the financial institutions from time to time party thereto as lenders, BMO Harris Bank N.A., as administrative agent, Bank of America, N.A., as syndication agent, and BMO Capital Markets Corp. and BofA Securities, Inc., as joint lead arrangers and joint book runners. The Credit Agreement provides the Company with senior secured debt financing in an amount up to $475 million in the aggregate with a maturity date of October 2, 2024. With the acquisition of Plateau, we now have three reportable segments: Heavy Civil, Specialty Services and Residential. Refer to Note 9 - Debt for a discussion of our financing arrangements and Note 16 - Segment Information for a discussion of reportable segments and related financial information.
Impact of COVID-19—On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, and on March 13, 2020, the U.S. President announced a National Emergency relating to COVID-19. Federal, state, and local authorities have advised social distancing and many imposed shelter-in-place and stay-at-home orders, including some mandatory business closures. Although authorities in some areas of the U.S. began to relax these quarantine and isolation measures, a recent resurgence of COVID-19 infections in many regions of the country, including some areas where the Company does business, has, in some cases caused authorities to either defer the phasing out of these restrictions, or re-impose quarantine and isolation measures. The impact from the rapidly changing market and economic conditions due to the COVID-19 pandemic remains uncertain, but these conditions have already had, and are expected to continue to have, serious adverse effects on the U.S. and global economies. The Company continues to closely monitor the actual and expected impacts of the COVID-19 pandemic on our business, financial condition and results of operations. Sterling’s business has been identified as a component of “Essential Critical Infrastructure” per the National Cybersecurity and Infrastructure Agency, and to date, we have not experienced significant shutdowns of project sites or operational interruptions. Consistent with governmental orders and public health guidelines, the Company has continued to operate across its footprint. For the Company’s office based personnel, the Company is social distancing and, where practical, working from home. For personnel onsite at the Company’s construction sites, the Company has taken mitigation measures to prevent the spread of COVID-19, including but not limited to, social distancing, wellness checks, providing sanitation stations and wearing personal protective equipment. While the Company has not incurred significant disruptions thus far from the COVID-19 pandemic, the pandemic may impact our business, condensed consolidated results of operations and financial condition in the future. However, the significance of the impact on our operations going forward is not yet certain and depends on numerous evolving factors as discussed further in Part II, Item 1A "Risk Factors" in this Form 10-Q.
MARKET OUTLOOK AND TRENDS
Heavy Civil Construction—Sterling’s heavy civil construction business is primarily driven by federal, state and municipal funding. 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, Sterlingthis is inthe final year four of the five-year $305 billion 2015 federally funded five-year $305 billion 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. With the FAST Act set to expire nextthis year, the federal government is currently working towards a bipartisan Federal Infrastructure Bill (America’s Transportation Infrastructure Act) that would further stabilizeboth increase and solidify funding for the Highway Trust Fund.next five years. Should the federal government approve this incremental infrastructure investment, in 2019, it would be an additional growth catalyst; however, it would be unlikely to create a significant business impact before late 2020 or 2021. The Heavy Civil segment continues to see an unfavorable productivity impact related to the pandemic as customers and back offices began to work virtually and new procedures and protocol were developed and implemented into field operations beginning in the first quarter of 2020.
Bid Discipline
24

Specialty Services—Sterling’s specialty services business is primarily driven by investments from end users and Project Execution—To ensure thatdevelopers. Key end users, including Amazon and Home Depot, have begun implementing publicly announced multi-year capital infrastructure campaigns. In our primary market in the Company takes full advantage ofsoutheastern United States, and specifically Georgia, the improved market conditionsavailability rate remains low and maximizes profitability,positive new square footage development trends continue. In our key commercial markets forecasted net absorption continues to be positive, with more space leased than supplied to the Company has completed an extensive evaluation ofmarket. Additionally, the lending environment continues to sustain new development within our specialty services space. However, the outlook for multifamily vacancy rate continues to be below its historical success on heavy civil construction projects based on project size, end customer, product deliveredlong-term average and geography. The knowledge gained has now been incorporated intowe are experiencing a more formal and rigorous bid evaluation and approval process which, along with the institution of common processes, will enable the Company to focus its resources on the most beneficial projects and significantly reduce its risk.
Backlog—At June 30, 2019, backlog of construction projects, which is made up solely of the heavy civil construction segment, was $909.0 million, as compared to $850.7 million at December 31, 2018. The contractsslowdown in investment in this backlog are typically completed in 12 to 36 months. Contracts for which the Company is the apparent low bidder on the project (“Unsigned Low-bid Awards”) are excluded from backlog until the contract has been executed by its customer. Unsigned Low-bid Awards were $314.9 million at June 30, 2019 as compared to $292.7 million at December 31, 2018. The combination of backlog and Unsigned Low-bid Awards, which the Company refers to as “Combined Backlog,” totaled $1.2 billion and $1.1 billion, respectively at June 30, 2019 and December 31, 2018. Backlog includes $34.3 million and $33.6 million at June 30, 2019 and December 31, 2018, respectively, attributable to the Company’s share of estimated revenues related to joint ventures where the Company is a noncontrolling joint venture partner.space.
The Company’s margin in backlog has increased from 8.5% at December 31, 2018 to 8.8% at June 30, 2019 and the Combined Backlog margin increased from 8.9% at December 31, 2018 to 9.1% at June 30, 2019, driven by a greater mix of heavy highway awards.
Residential Construction—Continuing revenue growth of theThe Company’s residential construction business is directly related to the growth of new home starts in its key markets. The Company’s core customer base is primarily made up of leading national home builders as well as regional and custom home builders. The Company’s customers’ expected average growth during 2019 is approximately 10% in the Dallas-Fort Worth Metroplex, however some of this growth may have been dampened by significant Texas weather impacts during the year. The Company has continued its expansion of theits residential business into the Houston market. Although our customers anticipated a slowdown in the housing market and surrounding areas.demand for new developments for the second quarter of 2020, our actual revenues exceeded those expectations. However, due to the recent resurgence of COVID-19 infections, we may still experience a slowdown in the demand for new developments in future periods.


BACKLOG

At June 30, 2020, our Backlog of construction projects, made up of our Heavy Civil and Specialty Services segments, was $1.13 billion, as compared to $1.07 billion at December 31, 2019. The contracts in Backlog are typically completed in 6 to 36 months. Contracts in which we are the apparent low bidder for projects (“Unsigned Low-bid Awards”) are excluded from Backlog until the contract is executed by our customer. Unsigned Low-bid Awards were $437 million at June 30, 2020 and $273 million at December 31, 2019. The combination of our Backlog and Unsigned Low-bid Awards, which we refer to as “Combined Backlog” totaled $1.57 billion and $1.34 billion as of June 30, 2020 and December 31, 2019, respectively.
The Company’s margin in Backlog has increased from 11.5% at December 31, 2019 to 12.9% at June 30, 2020 and the Combined Backlog margin increased from 11.0% at December 31, 2019 to 11.7% at June 30, 2020, driven by a greater mix of Specialty Services awards.
RESULTS OF OPERATIONS
Consolidated Results
Summary—For the second quarter of 2019,2020, the Company had operating income of $11.2$33.0 million, income before income taxes of $8.6$25.5 million, net income attributable to Sterling common stockholders of $7.8$18.2 million and net income per diluted share attributable to Sterling common stockholders of $0.29.$0.65.
Consolidated financial highlights for the three and six months ended June 30, 20192020 as compared to 2018the three and six months ended June 30, 2019 are as follows:
 Three Months Ended June 30,Six Months Ended June 30,
(In thousands)2020201920202019
Revenues$400,038  $264,086  $696,726  $488,035  
Gross profit59,599  25,496  94,844  44,999  
General and administrative expenses(18,451) (10,174) (36,055) (22,063) 
Intangible asset amortization(2,866) (600) (5,703) (1,200) 
Acquisition related costs(139) (262) (612) (262) 
Other operating expense, net(5,097) (3,276) (7,325) (5,570) 
Operating income33,046  11,184  45,149  15,904  
Interest, net(7,533) (2,613) (15,237) (5,309) 
Income before income taxes25,513  8,571  29,912  10,595  
Income tax expense(7,248) (706) (8,432) (869) 
Less: Net income attributable to noncontrolling interests(55) (37) (155) (83) 
Net income attributable to Sterling common stockholders$18,210  $7,828  $21,325  $9,643  
Gross margin14.9 %9.7 %13.6 %9.2 %
25

 Three Months Ended June 30, Six Months Ended June 30,
(In thousands)2019 2018 2019 2018
Revenues$264,086
 $268,734
 $488,035
 $491,226
Gross profit25,496
 31,046
 $44,999
 $50,880
General and administrative expense(10,774) (13,203) (23,263) (25,543)
Other operating expense, net(3,538) (5,694) (5,832) (6,509)
Operating income11,184
 12,149
 15,904
 18,828
Interest, net(2,613) (2,911) (5,309) (5,869)
Income tax expense(706) (97) (869) (138)
Less: Net income attributable to noncontrolling interests(37) (967) (83) (2,158)
Net income attributable to Sterling common stockholders$7,828
 $8,174
 $9,643
 $10,663
Gross margin9.7% 11.6% 9.2% 10.4%
Operating margin4.2% 4.5% 3.3% 3.8%
Revenues—Revenues decreased $4.6were $400.0 million or 2% for the second quarter of 20192020, an increase of $136.0 million or 51.5% compared with the second quarter of 2018.2019. The decreaseincrease in the second quarter of 20192020 was driven by a $9.5 million decrease in residential construction and by a $4.8$107.8 million increase in heavy civil construction.Specialty Services due to the inclusion of the full quarter results from Plateau, which was acquired on October 2, 2019, a $20.2 million increase in Heavy Civil, and a $7.9 million increase in Residential. Revenues decreased $3.2were $696.7 million or 1% infor the six months ended June 30, 20192020, an increase of $208.7 million or 42.8% compared with the six months ended June 30, 2018.2019. The decreaseincrease in the six months ended June 30, 20192020 was driven by a $1.2$181.9 million decreaseincrease in heavy civil constructionSpecialty Services due to the inclusion of six months of results from Plateau, a $25.3 million increase in Heavy Civil, and a $2.0$1.5 million decreaseincrease in residential construction. Both of our operating segments were negatively impacted by unusually severe weather in the first half of 2019.Residential.
Gross profit—Gross profit decreased $5.6was $59.6 million for the second quarter of 20192020, an increase of $34.1 million or 133.7% compared withto the second quarter of 2018.2019. The Company’s gross margin as a percent of revenue decreasedincreased to 14.9% in the second quarter of 2020, as compared to 9.7% in the second quarter of 2019, as compared to 11.6% in the second quarter of 2018.2019. The decreaseincreases in gross profit and gross margin duringas a percent of revenue are primarily driven by Specialty Services due to the secondinclusion of a full quarter results from Plateau. Additionally, Heavy Civil and Residential also reported higher gross profit and gross margin as a percent of 2019 asrevenue compared to the second quarter of 2018 was driven by lower revenues from our higher margin residential construction segment and a lower margin mix of heavy civil construction projects.2019. Gross profit decreased $5.9was $94.8 million for the six months ended June 30, 20192020, an increase of $49.8 million or 110.7% compared with the six months ended June 30, 2018.2019. The Company’s gross margin as a percent of revenue decreasedincreased to 13.6% in the six months ended June 30, 2020, as compared to 9.2% in the six months ended June 30, 2019,2019. The increase in gross profit and gross margin as compareda percent of revenue are primarily driven by Specialty Services due to 10.4% in the inclusion of six months endedof results from Plateau operations in 2020.
Contracts in progress which were not substantially completed totaled approximately 210 and 130 at June 30, 2018. The decrease in gross margin during the six months ended June 30,2020 and 2019, as compared to the six months ended June 30, 2018 was driven by a decrease in heavy civil construction and residential construction’s lower volume from revenues.
At June 30, 2019 and 2018, the Company had approximately 134 and 184 heavy civil contracts-in-progress, respectively, which were less than 90% complete.respectively. These contracts are of various sizes, of different expected profitability and in various stages of completion. The nearer a contract progresses toward completion, the more visibility the Company is able to refinehas in refining its estimate of total revenues (including incentives, delay penalties, and change orders and claims)orders), costs and gross profit. Thus, gross profit as a percent of revenues can increase or decrease from comparable and subsequent quarters due to variations among contracts and depending upon the stage of completion of contracts.
General and administrative expenses—General and administrative expenses decreased $2.4were $18.5 million for the second quarter of 2020, an increase of $8.3 million compared to $10.8the second quarter of 2019. General and administrative expenses were $36.1 million for the six months ended June 30, 2020, an increase of $14.0 million compared to the six months ended June 30, 2019. These increases were primarily due to the inclusion of the results from Plateau operations in 2020 and higher stock compensation and other corporate related cost.
Intangible asset amortization—Intangible asset amortization was $2.9 million for the second quarter of 2020, an increase of $2.3 million compared to the second quarter of 2019. Intangible asset amortization was $5.7 million for the six months ended June 30, 2020, an increase of $4.5 million compared to the six months ended June 30, 2019. The increases were a result of the Plateau Acquisition.
Acquisition related costs—The Company had acquisition related costs of $0.1 million and $0.3 million during the second quarter of 2020 and 2019, from $13.2respectively, and $0.6 million in the second quarter of 2018. As a percent of revenues, general and administrative expenses decreased approximately 90 basis points to 4.1% during the three months ended June 30, 2019. General and administrative expenses decreased $2.2$0.3 million to $23.3 million duringfor the six months ended June 30, 2020 and 2019, from $25.5 million duringrespectively, all of which related to the six months ended June 30, 2018, primarily due to higher business development costs in 2018. As a percent of revenues, general and administrative expenses decreased approximately 40 basis points to 4.8% during the six months ended June 30, 2019.Plateau Acquisition.


Other operating expense, net—Other operating expense, net, includes 50% of earnings and losses related to Members’ interest of consolidated 50% owned subsidiaries (included within Heavy Civil), earn-out expense, and other miscellaneous operating income or expense. Members’ interest earnings are treated as an expense and increase the liability account. The change in other operating expense, net, was $2.2 million during the second quarter. Earn-out expense decreased by $0.5$1.8 million during the second quarter of 20192020 compared to the second quarter of 2019. Earn-out expense was $0.5 million for both the second quarter of 2020 and 2019. Members’ interest earnings increased by $1.8 million during the second quarter of 2020 to $4.6 million from $1.0$2.8 million in the second quarter of 2018, driven by the lower income generated by residential construction. Members’ interest earnings decreased by $1.9 million during the second quarter of 2019 to $2.8 million from $4.7 million in the second quarter of 2018, reflecting decreased revenue and project mix.
2019. The change in other operating expense, net, was $0.7$1.8 million during the six months ended June 30, 2020 compared to the six months ended June 30, 2019. Earn-out expense was $1.0 million for the six months ended June 30, 2020, compared to $1.5 million in the six months ended June 30, 2019. Members’ interest earnings increased by $0.3$2.2 million during the six months ended June 30, 20192020 to $1.5$6.3 million from $1.2$4.1 million in the six months ended June 30, 2018, driven by an increase2019.
Interest expense—Interest expense was $7.6 million in the firstsecond quarter of 2020 compared to $2.9 million in the second quarter of 2019 partly offset by the aforementioned second quarter 2019 decrease. Members’and interest earnings decreased by $1.2 million during the six months ended June 30, 2019 to $4.1 million from $5.3expense was $15.4 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 20192020 compared to $3.1 million in the six months ended June 30, 2018 and interest expense was $6.0 million in the six months ended June 30, 2019 compared2019. The increases were due to $6.2 millionborrowings related to the Plateau Acquisition.
Income taxes—The effective income tax rate was 28.4% and 28.2% in the second quarter of 2018. The interest expense on lower comparative debt levels was partially offset by higher interest rates. The interest expense is primarily related to borrowings under the Oaktree Facility.
Operating Group Results
The Company’s revenue2020 and income from operations by reportable segment 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 Construction35,956
 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 Construction5,038
 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 2019, an increase of $4.8 million or 2.2% compared to the second quarter of 2018. The 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 end of 2018. The lower construction joint venture revenues totaled $1.5 million for the second quarter compared to $23.4 million in the second quarter of 2018.
Revenues were $409.3 million for the six months ended June 30, 2019, a decrease of $1.2 million or 0.3%2020, respectively, compared to the six months ended June 30, 2018. The decrease was driven by lower revenue of $51.6 million related to two large construction joint venture projects that were substantially complete by the end of 2018. This decline was partially offset by increased revenues of $50.4 million related to fully controlled heavy highway work and increased aviation work. The lower construction joint venture revenues totaled $2.8 million for the six months ended June 30, 2019 compared to $54.4 million8.2% in the six months ended June 30, 2018.
Operating income—Operating income was $6.1 million for the second quarter of 2019, a decrease of $0.3 million, compared to the $6.4 million in the second quarter of 2018 and operating income was $5.3 million for the six months ended June 30, 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 inboth the second quarter of 2019 and the six months ended June 30, 2019. The increases in both periods are in part due to a reduction in the tax valuation allowance that reduced the effective income tax rate in 2019 and in part due to additional state taxes in 2020 primarily related to Plateau. Due to its net operating loss carryforwards,

26


the Company expects no cash payments for federal income taxes for 2020 or 2019. See Note 13 - Income Taxes for more information.
Residential ConstructionSegment Results
 Three Months Ended June 30,Six Months Ended June 30,
(In thousands)2020% of
Revenue		2019% of
Revenue		2020% of
Revenue		2019% of
Revenue
Revenue        
Heavy Civil$220,448  55%$200,236  75%$376,063  53%$350,741  72%
Specialty Services135,703  34%27,894  11%240,426  35%58,573  12%
Residential43,887  11%35,956  14%80,237  12%78,721  16%
Total Revenue$400,038   $264,086  $696,726  $488,035  
Operating Income     
Heavy Civil$3,896  1.8%$5,747  2.9%$274  0.1%$3,600  1.0%
Specialty Services23,246  17.1%865  3.1%34,360  14.3%1,913  3.3%
Residential6,043  13.8%4,834  13.4%11,127  13.9%10,653  13.5%
Subtotal33,185  8.3%11,446  4.3%45,761  6.6%16,166  3.3%
Acquisition related costs(139) (262) (612) (262) 
Total Operating Income$33,046  8.3%$11,184  4.2%$45,149  6.5%$15,904  3.3%
Heavy Civil
Revenues—Revenues were $36.0$220.4 million for the second quarter of 2019, a decrease2020, an increase of $9.5$20.2 million or 20.9%,10.1% compared to the second quarter of 2018.2019. The decrease inincrease was driven by higher heavy highway 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% infor the second quarter of 2019 as2020 compared to the second quarter of 2018.
2019. Revenues were $78.7$376.1 million for the six months ended June 30, 2019,2020, an increase of $25.3 million or 7.2% compared to the six months ended June 30, 2019. The increase was driven by higher heavy highway revenue for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.
Operating Income—Operating income was $3.9 million for the second quarter of 2020, a decrease of $2.0$1.8 million, compared to the second quarter of 2019. The decrease was the result of greater project mix shift to our 50% owned subsidiaries which increased members interest expense by $1.8 million and additional costs associated with COVID-19 pandemic impacts. Operating income was $0.3 million for the six months ended June 30, 2020, a decrease of $3.3 million, compared to the six months ended June 30, 2019. The decrease was the result of the aforementioned second quarter impact and first quarter seasonality which drove lower absorption of fixed costs.
Specialty Services
Revenues—Revenues were $135.7 million for the second quarter of 2020, an increase of $107.8 million compared to the second quarter of 2019. The increase was driven by the inclusion of three months of revenue from Plateau operations in the second quarter of 2020 and increased Commercial revenues. Revenues were $240.4 million for the six months ended June 30, 2020, an increase of $181.9 million compared to the second quarter of 2019. The increase was primarily attributable to the inclusion of six months of revenue from Plateau operations in 2020.
Operating income—Operating income was $23.2 million for the second quarter of 2020, an increase of $22.3 million, compared to the second quarter of 2019 and operating income was $34.4 million for the six months ended June 30, 2020, an increase of $32.4 million, compared to the six months ended June 30, 2019. The increases were primarily attributable to the inclusion of operating income generated from Plateau operations in 2020.
Residential
Revenues—Revenues were $43.9 million for the second quarter of 2020, an increase of $7.9 million or 2.5%22.1%, compared to the second quarter of 2019. The increase in revenue was a result of heavy rainfall in the first quarter of 2020 which pushed work on our projects and resulting revenues into April of 2020, as well as continued ramp-up of operations in Houston. Revenues were $80.2 million for the six months ended June 30, 2020, an increase of $1.5 million or 1.9%, compared to the six months ended June 30, 2018.2019. The decreaseincrease in revenue is due towas primarily the aforementioned second quarter weather impact, partially offset by completionresult of fourth quarter weather delayed slab starts that pushed into the first quartercontinued ramp-up of 2019 and underlying growthwork 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.Houston.
27

Operating income—Operating income was $5.0$6.0 million for the second quarter of 2019, a decrease2020, an increase of $0.7$1.2 million, compared to the second quarter of 2018. The decrease was driven by lower volume from revenues as described above. Operating2019 and operating income was $10.6$11.1 million for the six months ended June 30, 2019,2020, an increase of $0.1$0.5 million, compared to the six months ended June 30, 2018.2019. The increase was driven by the ramp-up of operations and scale in Houston. Houston as a percentage of completed slabs was 14% for the second quarter of 2020 compared to 6% for the second quarter of 2019. Operating income as a percent of revenue increased 40 basis points compared to the second quarter of 2019 and the six months ended June 30, 2019, driven by the ramp-up of operations and scale in Houston.
LIQUIDITY AND SOURCES OF CAPITAL
Cash—Cash at June 30, 2020, was $70.6 million, and includes the following components:
(In thousands)June 30,
2020		December 31,
2019
Generally Available$31,760  $29,659  
Consolidated 50% Owned Subsidiaries31,346  12,004  
Construction Joint Ventures7,506  4,070  
Total Cash$70,612  $45,733  
The following table setstables set forth information about the Company’sour cash flows and liquidity:
Six Months Ended June 30,
(In thousands)20202019
Net cash provided by (used in):  
Operating activities$52,261  $(4,325) 
Investing activities(13,805) (4,052) 
Financing activities(13,577) (13,988) 
Net change in cash and cash equivalents$24,879  $(22,365) 
 Six Months Ended June 30,
 (In thousands)2019 2018
Net cash used in: 
  
Operating activities$(4,325) $(7,914)
Investing activities(4,052) (3,956)
Financing activities(13,988) (5,498)
Total decrease in cash and cash equivalents$(22,365) $(17,368)
 (In thousands)June 30,
2019		 December 31,
2018
Cash and cash equivalents$71,730
 $94,095
Working capital$110,491
 $123,442
Operating Activities—During the six months ended June 30, 2019,2020, net cash provided by operating activities was $52.3 million compared to net cash used in operating activities wasof $4.3 million compared to $7.9 million in the six months ended June 30, 2018.2019. Cash flows used inprovided by operating activities were driven by net income, adjusted for various non-cash items and changes in accounts receivable, inventory, net contracts in progress and accounts payable balances (collectively, “Contract Capital”), as discussed below, partly offset by non-cash itemsand other accrued liabilities.
Changes in Contract Capital—The change in operating activities. Non-cash items in operating activities include depreciationassets 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—Cash at June 30, 2019, was $71.7 million, and includes the following components:
(In thousands)June 30,
2019		 December 31,
2018
Generally available$52,015
 42,605
Consolidated 50% owned subsidiaries14,349
 31,026
Construction joint ventures5,366
 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 the seasonal ramp in the cash flow cycle, partly offset by the use of cash for operations, $5.8 million of repayments on long-term debt, $5.1 million of noncontrolling interest distributions, and $3.2 million for stock repurchases during the six months ended June 30, 2019. The decrease in consolidated 50% owned subsidiaries and construction joint venture cash levels were driven by seasonality, coupled with the substantial completion of two large construction joint venture projects. The Company’s working capital decreased $12.9 million to $110.5 million at June 30, 2019 from $123.4 million at December 31, 2018, primarily due to seasonality, the cash factors previously described, and the Contract Capital discussion below.


Contract Capital—The need for working capital for the Company’s businessliabilities varies due to fluctuations in operating activities and investments in its Contract Capital. The changes in the components of Contract Capital were as follows:
(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$(12,354) $724
Billings in excess of costs and estimated earnings on uncompleted contracts(1,836) (4,070)
Contracts in progress, net(14,190) (3,346)
Accounts receivable, including retainage(12,787) (30,534)
Receivables from and equity in construction joint ventures(3,661) (386)
Inventories(93) 3,008
Accounts payable1,916
 (1,073)
Contract Capital, net$(28,815) $(32,331)
Theduring the six months ended June 30, 2020 and 2019 were as follows:
Six Months Ended June 30,
(In thousands)20202019
Costs and estimated earnings in excess of billings$(9,513) $(12,354) 
Billings in excess of costs and estimated earnings25,923  (1,836) 
Contracts in progress, net16,410  (14,190) 
Accounts receivable, including retainage(21,159) (12,787) 
Receivables from and equity in construction joint ventures(3,200) (3,661) 
Accounts payable(6,495) 1,916  
Change in Contract Capital, net$(14,444) $(28,722) 
During the six months ended June 30, 2020, the change in Contract Capital reduceddecreased liquidity by $28.8$14.4 million. Fluctuations in theThe Company’s Contract Capital balance and its components are not unusual andfluctuations are impacted by the size of projects and changing type and mix of projects in Backlog. The Company’s Contract Capital is particularly impacted byBacklog, seasonality, the timing of new awards, and related payments of performingfor work performed and the contract billings to the customer as projects are completed. Contract Capital is also impacted at period-end by the timing of accounts receivable collections and accounts payable payments for projects. The Company expects cash flow from operations to improve, principally driven by seasonality.

Investing Activities—During the six months ended June 30, 2019,2020, net cash used in investing activities was $4.1$13.8 million compared to $4.0$4.1 million in the six months ended June 30, 2018.2019. The use of cash was driven by purchases of capital equipment.equipment and buildings and improvements. 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 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.
28

Financing Activities—During the six months ended June 30, 2019,2020, net cash used in financing activities was $14.0$13.6 million compared to $5.5net cash used of $14.0 million in the six months ended June 30, 2018.prior year. The use offinancing cash outflow was driven by $5.8$22.6 million of repayments on debt, (primarilyprimarily consisting of $3.0$12.5 million in payments on the combined promissory notes and deferred cash payments issued as part of the Tealstone Acquisition and $10.0 million in repayments on the Oaktree Facility and $2.4 million of deferred cash payments for the Tealstone Acquisition), $5.1 million of distributions to the Company’s noncontrolling interest partners, and $3.2 million for the purchase of treasury stock.Term Loan Facility.
Credit Facility and Other Sources of Capital—In addition to the Company’s available cash, cash equivalents and cash provided by operations, from time to time, the Company uses borrowings to finance acquisitions, capital expenditures and working capital needs.
Borrowings—Average borrowings under 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. Based on the Company’s average borrowings and its 2019 forecasted cash needs, the Company continues to believe that it has sufficient liquid financial resources to fund its requirements for the next twelve months of operations, including its bonding requirements.
Capital Strategy—Strategy—The Company will continue to explore additional revenue growth and capital alternatives to improve leverage and strengthen its financial position in order to take advantage of trends in the improving heavy civil infrastructure market.and specialty services markets. The Company expects to pursue strategic uses of its cash, such as, investing in projects or businesses that meet its gross margin targets and overall profitability and managing its debt balances, and investing in adjacent markets or other opportunities.balances.
INFLATION
Inflation generally has not had a material impact on the Company’s financial results; however, from time to time, increases in oil, fuel and steel prices have affected its cost of operations. Anticipated cost increases and reductions are considered in the Company’s bids to customers on proposed new construction projects.


When the Company is the successful bidder on a heavy civil construction project, 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 the Company has no obligation for materials and services beyond those required to complete the contracts with its customers. There can be no assurance that increases in prices of oil and fuel used in the Company’s business will be adequately covered by the estimated escalation the Company has included in its bids and there can be no assurance that all of its vendors will fulfill their pricing and supply commitments under their purchase orders and contracts with the Company. The Company adjusts the total estimated costs on projects when it is believed it is probable that there will be cost increases which will not be recovered from customers, vendors or re-engineering.
Inflation affects residential construction projects minimally as these projects are typically completed in less than one month.
OFF-BALANCE SHEET ARRANGEMENTS AND JOINT VENTURES
The Company participatesWe participate in various construction joint venturesventure partnerships in order to share expertise, risk and resources for certain highly complex projects. The joint venture’s contract with the project owner typically requires joint and several liability among the joint venture partners. Although the Company’sour agreements with itsour joint venture partners provide that each party will assume and fund its share of any losses resulting from a project, if one of itsour partners iswas unable to pay its share, the Companywe would be fully liable for such share under itsour 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 incursincurred a loss or additional costs that the Companywe could incur should the partner fail to provide the services and resources toward project completion that had been committed to which it committed in the joint venture agreement. See the 2019 Form 10-K under “Part I, Item 1A. Risk Factors,” as updated herein.
At June 30, 2019,2020, there was approximately $71.8$625.1 million of construction work to be completed on unconsolidated construction joint venture contracts, of which $34.3$278.8 million represented the Company’sour proportionate share. Due to the joint and several liability under the Company’sour joint venture arrangements, if one of itsour joint venture partners fails to perform, the Companywe and the remaining joint venture partners would be responsible for completion of the outstanding work. As of June 30, 2019, the Company was2020, we are not aware of any situation that would require itus to fulfill responsibilities of itsour joint venture partners pursuant to the joint and several liability provisions under itsour contracts.
NEW ACCOUNTING STANDARDS
See the applicable section of Note 2 - Basis of Presentation and Significant Accounting Policies for a discussion of new accounting standards.
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 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 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 the process of determining recognized revenue and 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 contractual performance requirements; and contingency, among others. The cumulative impact of 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 the recognition of losses expected to be incurred on performance obligations in progress. Due to the various estimates inherent in our 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.

29


Valuation of Long-Lived Assets

Goodwill
At June 30, 2019, the Company’s goodwill balance was $85.2 million. Goodwill is not amortized to earnings, but instead isLong-lived assets, which include property, equipment and acquired intangible assets, are 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 whenwhenever 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. DuringActual useful lives and cash flows could be different from those estimated by management, and this could have a material effect on operating results and financial position. For the three and six months ended June 30, 2020 and the year ended December 31, 2019, there were no events or changes in circumstances that would indicate a material impairment of our long-lived assets.
Goodwill
At June 30, 2020 and December 31, 2019, we had goodwill with a carrying amount of $192.0 million and $191.9 million, respectively. 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 the annual impairment assessment during the fourth quarter of each year based on balances as of October 1. During the fourth quarter 2019, the Company performed a qualitative assessment of goodwill, and based on this assessment, no indicators of impairment were present. Additionally, during the three and six months ended June 30, 2020, 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 atDeferred tax assets and liabilities are recognized for the endfuture tax consequences attributable to differences between the financial statement carrying amounts of each reporting periodexisting assets and liabilities and their respective tax basis using currently enacted income tax rates for the years in which the differences are expected to determine whetherreverse. A valuation allowance is provided to offset any net deferred tax assets (“DTA(s)”) if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets are expectedDTAs will not be realized. The realization of our net DTAs depends upon our ability to be realized ingenerate sufficient future years. Based upon this analysis, a valuation allowancetaxable income 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 trendappropriate character 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.

appropriate jurisdictions.
As a result of the Company’s analysis, management has determined that the Company does not have any material uncertain tax positions. If our estimates or assumptions regarding our current and deferred tax items are inaccurate or are modified, these changes could have potentially material impacts on our earnings.


Purchase Accounting Estimates
NEW ACCOUNTING STANDARDS
SeeThe aggregate purchase price for the applicable section of Note 2Plateau Acquisition was allocated to the major categories of assets and liabilities acquired based upon their estimated fair values as of October 2, 2019, which were based, in part, upon an external preliminary appraisal and valuation of certain assets, including specifically identified intangible assets and property and equipment. The excess of the purchase price over the preliminary estimated fair value of the net tangible and identifiable intangible assets acquired, totaling $106.8 million, was recorded as goodwill. The purchase price allocation is subject to further change when additional information is obtained. We intend to finalize the purchase price allocation as soon as practicable within the measurement period, but no later than one year following the closing date of the Plateau Acquisition. Our final purchase price allocation may result in additional adjustments to various other assets and liabilities, including the residual amount allocated to goodwill during the measurement period. See Note 3 - Plateau Acquisition to our Condensed Consolidated Financial Statements for a discussion of new accounting standards.further discussion.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Changes inInterest Rate Risk
We continue to utilize a swap arrangement to hedge against interest rates are onerate variability associated with $350,000 of the Company’s sources of market risk. Interest on$390,000 outstanding indebtedness under the Oaktree FacilityTerm Loan Facility. The Company has designated its interest rate swap agreement as a cash flow hedging derivative. To the extent the derivative instrument is equal toeffective and the one-, two-, three- or six-month London Interbank Offered Rate, or LIBOR, plus 8.75% per annum ondocumentation requirements have been met, changes in fair value are recognized in other comprehensive income (loss) until the unpaid principal amountunderlying hedged item is recognized in earnings. The total fair value of the Loan, subject to adjustment under certain circumstances. The Company’s interest rates for the periods endedcontract was a net loss of approximately $9.7 million at June 30, 2019, December 31, 20182020. For the $40 million remaining portion of the Term Loan Facility not associated with the interest rate swap hedge and the $20 million of the Revolving Credit Facility, at June 30, 2018 were 11.14%, 11.18% and 10.87% respectively. This represents an2020 a 100-basis point (or 1%) 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, 2019, the Company had a term loan of $71.6 million outstanding under this facility. A 1% increasedecrease in the interest rate would increase or decrease interest expense by $0.7approximately $0.6 million per year.
See “Inflation” above regarding risks associated
30

Other
The carrying values of the Company’s cash and cash equivalents (primarily consisting of bank deposits), accounts receivable and accounts payable approximate their fair values because of the short-term nature of these instruments. At June 30, 2020, the fair value of the term loan, based upon the current market rates for debt with materialssimilar credit risk and fuel purchases required to complete construction contracts.

maturities, approximated its carrying value as interest is based on LIBOR plus an applicable margin.

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 Securities Exchange Act).Act of 1934) as of June 30, 2020. As previously disclosed, we completed the Plateau Acquisition on October 2, 2019 and, as permitted by SEC guidance for newly acquired businesses, we have elected to exclude the acquired operations of Plateau from the scope of design and operation of our disclosure controls and procedures for the quarter ended June 30, 2020. 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, 20192020 to ensure that the information required to be disclosed by the Company in this Report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Company’s management including the principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 20192020 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Internal control over financial reporting may not prevent or detect all errors and all fraud. Also, projections of any evaluation of effectiveness of internal control to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
The Company, including its construction joint ventures and its consolidated 50% owned subsidiaries, 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. The Company regularly analyzes current information about these proceedings and, as necessary, provideprovides 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 the Condensed Consolidated resultsResults of Operations, Financial Position or Cash Flows.
Item 1A. Risk Factors
There have not been any material changes from the risk factors previously disclosed in “Part I, Item 1A. Risk Factors” of the 20182019 Form 10-K, except as provided below. In addition, many of the other risks described in Part I, Item 1A. “Risk Factors” of our 2019 Form 10-K may be heightened by the risks described below as well as other impacts of COVID-19 or other global or regional health pandemics, epidemics or similar public health threats. The below discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this Report and the 2019 Form 10-K. The below information should be read in conjunction with the risk factors previously disclosed in “Part I, Item 1A. Risk Factors” of the 2019 Form 10-K, as updated by Part I, Item 1A. Risk Factors” of our quarterly report on Form 10-Q for the quarter ended March 31, 2020, and with the other portions of this Report, including “Cautionary Statement Regarding Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in
31

Item 2 of Part I and the Condensed Financial Statements and related notes in Item 1 of Part I. You should carefully consider such risk factors, which could materially affect the business, financial condition or future results.

Risk Related to the COVID-19 Pandemic

The COVID-19 pandemic could disrupt the Company’s operations and adversely affect its business, results of operations, and financial condition.
On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, and on March 13, 2020, the U.S. President announced a National Emergency relating to COVID-19. Federal, state, and local authorities have advised social distancing and many imposed shelter-in-place and stay-at-home orders, including some mandatory business closures. Although authorities in some areas of the U.S. began to relax these quarantine and isolation measures, a recent resurgence of COVID-19 infections in many regions of the country, including some areas where the Company does business, has,in some cases caused authorities to either defer the phasing out of these restrictions,or re-imposequarantine and isolation measures. The impact from the rapidly changing market and economic conditions due to the COVID-19 pandemic remains uncertain, but these conditions have already had, and are expected to continue to have, serious adverse effects on the U.S. and global economies. This outbreak, which has continued to spread worldwide, has adversely affected workforces, customers, economies, and financial markets globally. While we have not incurred significant disruptions thus far from the COVID-19 outbreak, the pandemic may impact our business, condensed consolidated results of operations and financial condition in the future. However, the significance of the impact on the Company's operations, if any, is not yet certain and depends on numerous evolving factors that the Company may not be able to accurately predict or effectively respond to, including, without limitation: the duration and scope of the outbreak; actions taken by governments, businesses, and individuals in response to the outbreak; the effect on economic activity and actions taken in response; the effect on customers and their demand for the Company's products and services; the ability of our subcontractors to perform under their contracts due to their own financial or operational difficulties; the availability of subcontractors and other talent; and the Company's ability to continue operations, including without limitation as a result of supply chain challenges, facility closures, social distancing, restrictions on travel, fear or anxiety by the populace and shelter-in-place orders.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table shows shares 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 and Talent Development Committee of the Board of Directors.
PeriodTotal Number of
Shares
Purchased		Average
Price Paid
Per Share
April 1 – April 30, 20201,806  $9.86  
May 1 – May 31, 2020—  $—  
June 1 – June 30, 2020—  $—  
Total1,806  $9.86  

Items 3, 4, and 5 are not applicable and have been omitted.
32
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




Item 6. Exhibits
The following exhibits are filed with this Report:
Exhibit No.Exhibit Title
3.1 (1)
3.2 (1)
10.131.1  (1), (4)(2)
31.1 (2)
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
31.2 (2)
32.1 (3)
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2 (3)
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
101.INSInline XBRL Instance DocumentDocument—The instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)
(1) Incorporated by reference to the filing indicated
(2) Filed herewith
(3) Furnished herewith
(4) Management contract or compensatory plan or arrangement

33




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 6, 20194, 2020By:/s/ Ronald A. Ballschmiede
Ronald A. Ballschmiede
Chief Financial Officer and Duly Authorized Officer


3034