Greetings, and welcome to the Sterling Construction Company's Q4 and year-end 2021 earnings conference call and webcast. As a reminder, this conference is being recorded and all participants are in listen-only mode. There are company slides on the investor relations section of the company's website. Before turning the call over to Joe Cutillo, Sterling's Chief Executive Officer, I will read the safe harbor statement. Some discussions made today may include forward-looking statements. Actual results could differ materially from the statements made today. Please refer to Sterling's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligations to update forward-looking statements as a result of new information, future events, or otherwise.
Please also note that management may reference EBITDA, adjusted EBITDA, adjusted net income, or adjusted earnings per share on this call, which are all financial measures not recognized under U.S. GAAP. As required by SEC rules and regulations, these non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in our earnings release issued yesterday afternoon. I'll now turn the call over to Mr. Joe Cutillo. Thank you, sir. Please go ahead.
Thanks, Kyle. Good morning, everyone, and welcome to Sterling's Q4 and full year 2021 earnings call. Sterling reported another record Q4 and another record year, exceeding our expectations. Our people and our strategy continue to deliver exceptional performance time and time again, even during a year with significant challenges. This morning, I will cover the highlights for our Q4 and full year, then turn the call over to Ron for his financial commentary. Before I discuss our highlights, I will speak briefly about our journey and reflect on the strategic elements that transformed Sterling from a heavy highway construction company to a leading specialty infrastructure provider with expertise in E-Infrastructure, Building, and Transportation Solutions.
Since 2016, Sterling has been on a transformational journey, born of a strategy and vision that levers our entrepreneurial spirit and our customer-centric culture.
This blueprint for reducing our risk, improving our margins, building a platform for future growth, and consistently outperforming our peers is made up of three fundamental elements, solidifying our base, growing high-margin products, and expanding into higher margin, higher growth adjacent markets. This vision and strategy has not changed and will remain the same in 2022 and beyond. In 2021, we continued to make significant progress towards our vision. Our E-Infrastructure Solutions segment generated 60% of our profits in 2021 and remains our highest margin, fastest-growing segment as it grew 18%. With the acquisition of Kimes and Petillo, both closing in December, we now have an even broader portfolio of capabilities and geographic coverage for 2022.
The Petillo acquisition now expands our E-Infrastructure footprint to cover all the major markets on the East Coast and bring several new large E-Infrastructure customers to our portfolio. Our Building Solutions segment generated over 24% of our profits in 2021 and is our second highest margin and second fastest-growing segment as it grew 15%. In 2021, we continued our expansion in the Houston market and began the additional expansion effort into Phoenix. With the addition of Phoenix, we are now currently in three of the top four housing markets in the U.S. In our Transportation Solutions segment, we continued our shift away from hard bid highway projects to alternative delivery, transportation, and aviation projects. Now less than 20% of Sterling's total revenue is from hard bid heavy highway.
This shift, along with continued improvements in execution and productivity, enabled us to improve our operating income as a percentage of revenue by 500 basis points. This improvement would be impressive in any year, but is even more impressive in a year of hyperinflation. Turning to the Q4 and full year results, we continue to be an industry leader in safety with our incident rates at approximately one-fifth the industry average. Last year, we once again received recognition and accolades for numerous safety awards. We finished second for the Associated General Contractors of America National Safety Award, and we had one of our employees named the AGC's 2021 Construction Safety Champion of the Year. Turning to the financial front, we closed the year with a record Q4 despite the ongoing supply chain and inflation challenges.
Versus prior year, our revenue increased 11%, our gross margin increased to 13.6%, our operating income increased 13%, and our earnings per share increased 43% to $2.15 per share. Our backlog increased to $1.49 billion, with $211 million attributed to the Petillo acquisition. Our strong cash generation continued, resulting in $152 million of cash flow from operations. We used this cash to pay down debt and funded a portion of the Petillo and Kimes acquisitions, enabling us to reduce our leverage to 2.4x EBITDA. As we look forward to 2022, our E-Infrastructure Solutions segment enters 2022 with robust markets throughout the East Coast. The recent pandemic has accelerated demand and increased the size and scope of projects for e-commerce distribution in data centers.
This aligns well with our strategy and competitive advantages. During the quarter, we booked new business, including Plateau and Petillo, bringing our total E-Infrastructure Solutions backlog to $433 million. In addition to the strong markets, we believe we will begin recovering some of the lost margin related to inflation back in 2022. For our Building Solutions segment, we expect the demand in our markets from our top customers to grow at double-digit rates in 2022. In addition, we believe we have the opportunity to double on growth in Phoenix in 2022 versus 2021. Our Transportation Solutions segment will remain disciplined and focused on margin growth and the continued shift of our portfolio towards alternative delivery, highway, and aviation projects.
Our diverse portfolio continues to position Sterling in the right markets with the right solutions for our customers at the right time.
Our strategic actions in 2021, along with the strong end markets in our E-Infrastructure and Building Solutions segments, have positioned us for yet another record year in 2022. In 2022, our revenues will be between $1.825 billion and $1.875 billion. Our net income will be between $83 million and $89 million. With that, I'd like to turn it over to Ron to give you more details on the quarter and the full year. Ron?
Thanks, Joe, and good morning. I am pleased to discuss our record Q4 and full year performance. Our updated investor relations presentation and the December 31, 2021 earnings release has been posted to our website and includes additional financial details to help further understand our 2021 financial results. The presentation also provides additional modeling considerations which underpin our 2022 revenue and earnings guidance. Additionally, as you may recall, we closed on Petillo and Kimes acquisitions on December 30 and December 28, respectively. Given the proximity to the year-end, these acquisitions had minimal impact on our 2021 income statement. With these acquisitions, we realigned our operating groups into three reportable segments: Transportation, E-Infrastructure, and Building Solutions. Our new segment presentation also breaks out corporate related costs.
For a better understanding of our realigned segment reporting, we have included the historical quarterly segment information for both 2020 and 2021 in the updated investor relations presentation and in our 2021 earnings release, both of which are available on our website. Let me take you through our financial highlights, starting with our backlog metrics. At December 31, 2021, our backlog totaled a year-end record high of $1.493 billion, up $318 million over the beginning of the year. The end-of-year 2020 backlog includes $211 million relating to December 2021 acquisitions. The gross margin of our December 2021 backlog was 12.2%, a 20 basis point increase over 2020.
Unsigned low bid awards at the end of 2021 were $23 million, and our full year 2021 book-to-burn factor for backlog was 123%. Note that residential slab revenue is excluded from this computation as it is not a backlog driven business. Revenues for the quarter were $401 million, up $54 million or 16% over our 2020 comparable quarter. Each of our three reporting segments reported increased revenues and segment operating income for both the current quarter and the full year. Consolidated segment operating income increased by 21% in the current quarter, reflecting the continued revenue mix improvements driven by our higher growth rates from our highest return segments.
Our full year 2021 revenues totaled $1.582 billion, up $154 million or 11% over 2020. Transportation Solutions revenues increased $19 million in the current quarter and $42 million or 5.5% for the year. The increases were primarily due to the ramp up of large design-build contracts and offset by an $80 million strategic reduction of our low-bid heavy highway revenues in 2021. This revenue shift was a principal driver of the improved current year operating margins. E-Infrastructure Solutions revenues increased $27 million in the current quarter, and $72 million or 18% for the year. The increases were driven by the continued high demand for large-scale site development opportunities within the Southeast and Mid-Atlantic region.
Both E-Infrastructure Solutions' current quarter and full year operating margins declined by 210 basis points. These reductions were driven by continued headwinds from supply chain issues and the related impact on productivity and efficiencies, as well as a lower project mix in the periods. Building Solutions revenues increased $19 million in the current quarter and $42 million or 14.9% for the year. Residential revenues increased 27%, while commercial revenues declined by 3%. The number of residential slabs completed during 2021 increased 24% over 2020. The increase in slabs was primarily attributable to the continued market strength in the Dallas-Fort Worth area and continued expansion into the Houston and Arizona markets.
Building Solutions operating margins increased in the Q4 by 260 basis points, reflecting progress in recouping the 2021 cost increases experienced in the first three quarters of 2021. Full year operating margins declined by 70 basis points to 10.3%. The full year operating margin decrease was driven by temporary price concessions due to COVID and an increase in lumber, concrete, and steel costs earlier in the year. General and administrative expenses for 2021 and 2022 were 5% of revenues consistent with our expectations. The dollar increase over the prior year was attributed to higher employee and insurance-related costs. We also incurred acquisition-related costs of $3.9 million, or $0.10 per share, relating to the Petillo and Kimes transactions. For comparative purposes, we have added back expense in our "as adjusted" results.
Our current quarter operating income was $19.8 million, down slightly from 2020 operating income of $20.9 million. As adjusted, operating income was $23.7 million compared to $20.9 million in the prior year. For the year ended December 31, 2021, operating income was $107 million compared to $95 million in the prior year. Adjusted operating income was $111 million, or an increase of 16% for the year ended December 31, 2021, compared to $96 million in 2020. Interest expense for 2021 was $19.3 million compared to $29.4 million in 2020. The 2021 $10 million decline in interest expense reflects lower average debt balances during 2021 and the reduced interest provided by the June 2021 debt amendment.
We expect our full year of 2022 interest expense to be in the $19 billion-$21 billion range. Our effective income tax rate for 2021 and 2020 were 27.7% and 34.4%, respectively. The net decline was driven by more favorable 2021 permanent tax differences. Of our full year 2021 income tax expense of $24.9 million, $21.5 million was non-cash as taxable income was absorbed by our net operating loss carryforwards. Cash income tax expense totaled $3.4 million in the current quarter, principally for state income tax payments. We expect to have approximately the same non-cash cash income tax expense relationship in 2022.
The net effect of all these items resulted in current year net income of $62.6 million, or an EPS of $2.15, and a Q4 net income of $10.9 million, with earnings per share of $0.37. Adjusted net income and adjusted EPS in the current year were $65.6 million and $2.25 per share. Moving to our balance sheet liquidity. Our year-end cash totaled $82 million compared to $66 million at the beginning of the year. Our debt at the end of 2021 totaled $462 million compared to $375 million at the end of 2020, or an increase of $87 million.
During 2021, we repaid $48 million of debt and borrowed $140 million through a new term loan to fund part of our December 2021 acquisitions. At the end of 2020, our forward-looking coverage ratio was 2.7x EBITDA, compared to 2.4 x at the beginning of 2022. We remain comfortable with a target ratio range of ±2 x EBITDA. At the end of 2021, we had no borrowings on our revolver credit facility, and accordingly, we have full availability of the $75 million line. Our current year adjusted EBITDA was $143 million, an increase of 12% over 2020.
2020 adjusted EBITDA of $128 million. In addition, our 2021 cash flow from operating activities totaled a record $157 million, an improvement of $31 million or 25% for the current year. This strong operating cash flow provided us with the opportunity to make debt repayments of $48 million while investing $43 million in net capital expenditures, investing $45 million of cash for acquisitions, and finally, enable us to grow our cash balance by $16 million. With that, I'll turn it back over to Joe.
Thanks, Ron. It's always nice to finish with a record quarter and a record year. What is even better is being positioned to have an even stronger year ahead. I'm proud to say we will enter 2022 in the strongest position ever with record backlog, better margins, and our highest growth coming from our lowest risk, highest margin businesses. Our strong markets, our diverse workforce, and proven strategy continue to pay off. We remain committed to the safety and well-being of our people, to increasing customer and shareholder value, while also protecting our communities and the environment. We enter 2022 a completely different business than we were just a few years ago. As our strategy and vision drive us forward, we are at just the beginning of what we will become.
To reiterate our 2022 guidance, our revenue will be between $1.825 billion and $1.875 billion, and our net income will be between $83 million and $89 million. With that, I'd like to turn it over for questions.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Brent Thielman with D.A. Davidson. Please proceed with your question.
Great. Thanks. Good morning, Joe and Ron.
Good morning.
Good morning, Brent.
Maybe for Ron, just wondering what margins you've embedded into the guidance for the three business segments now that they are, they're realigned here.
Sure. I think there. One of the things we did is to help you, we did the eight quarters of history to match up with how we're going forward. I think it helps a lot on understanding the operating income characteristics of the units by breaking out the corporate expense. Take a look at those. I think certainly a few things by segment here. I'll start with the Transportation Solutions group. We will continue to see margin leverage on that coming from the continued shift to, you know, moving to higher margin projects and et cetera. We probably got one more.
We're continuing to reduce the low bid side of that world.
That continues to tick up a little bit. You know, we got 20 basis points in margin expansion in backlog, but you know, look, we expect more than that, more out of that than 20 basis points for the full year. On the Building Solutions side, special note to the Q4 margins. We essentially recouped what we would have had but for the pressures on supply chains and inflation for the year. You know, a Q4 doesn't make a year, but we certainly had a great recovery on that. Probably for the Q2 in a row, we had revenues per slab growing faster than the number of slabs done. What that means is more price per slab, obviously.
We expect year-over-year to have that Q4 booking results continue into 2022, maybe a little bit lumpy. Last, E-Infrastructure Solutions obviously we'll pick up Petillo in that segment. Margin characteristics are very similar to those of-
Plateau.
I think the challenge will be how fast can we continue to recover from the supply chain and inflation side of it. As time goes by, that tends to run through backlog and improve, but we expect that to get better in 2022.
The biggest shift in going from prior segments to the new one is our commercial business comes out of what used to be the specialty segment, which is now E-Infrastructure, and that goes into Building Solutions. That margin is a little lower than our historical residential business. You'll see that impact to a small degree.
Yeah. That, of course, helps operating margins for the E-
Infrastructure.
Infrastructure group and reduces margins for just standalone residential in the overall.
Okay. Appreciate that. Maybe just on the outlook question around the cash from operations expectation. Just wondering why it couldn't be significantly higher this year, just given the addition of Petillo.
You know, we start the year with a consistent belief that our cash flow from operating activities will approximate our operating income. That bounces a little bit around quarters you know, just due to the seasonality of our work. That's where we start every year. I think our goal is to see if we can continue that and string them all together, because I don't think it's reasonable to beat that number year after year after year. It's just not. You know, it beat that relationship year after year. That's kind of where we start the year. Over the past few years, we kind of see that average out about that level.
The bandwidth we put around that in the model is, you know, really around operating income is our expectation of cash flow from ops.
Okay, that's helpful, Ron. Maybe just last one for me. You seem to offer a fairly optimistic outlook on the residential side. Maybe any other feedback you're getting from your home builder customers just regarding plans for this year? That seems to be an area that might be of some worry to people out there, but doesn't sound like things are slowing for you. Any help there would be great.
Yeah. We haven't. The feedback is we haven't seen anything slowing. If they have any concerns around potential risks, it's more around land availability and developing land at faster rates. As you can imagine, they far exceeded their 2021 expectations on builds, which eats up land at a quicker pace than their three-year plan anticipates in a lot of cases. So I know that they're working diligently to develop that next wave of land. As we step back and we just think of it objectively, you know, we certainly are cognizant of the rates increase and potential rate increase on inflation. The builders still have a lot of levers they can pull.
They're making very high margins on the properties they're selling today, and they don't want that to slow down anytime soon. We think through 2022, barring something catastrophic, everything they're telling us is they're gonna see what I'll call low double-digit growth going into this year in the three markets we're in, which are really the top three markets in the U.S. right now. Phoenix bounces back and forth, but we're number one, number two, and number three.
Of course, we would expect market share improvement for both our expansions in Houston and in Phoenix.
Yep. Okay. Thanks, guys. Appreciate it.
Our final question comes from Sean Eastman with KeyBanc. Please proceed with your question.
Joe, Ron, good morning. Thanks for taking my questions. It would be helpful to just get a bit more of a flavor of the kind of operating conditions you've contemplated in the initial 2022 outlook here. Seems like the residential business is sort of out of the woods in a sense, based on the Q4 results here. I guess the other element is sort of that equipment lead time in the E-Infrastructure Solutions business. Just sort of what did you guys see around those dynamics through, you know, kind of exiting the Q4 and, you know, have you contemplated those potential risk factors in the guidance?
Yeah. What Ron talked about how we factored in some of the inflation coming back. The good news is we saw and we had said all through, if you remember, 2021, if we can get I'll call it a slowdown in rate increases, we could start catching up to recoup some of that in the price increases that we're passing through. In the Q4 , we saw that. Now we're gonna continue to see some increases throughout 2022. They've already announced some concrete increases, et cetera. You know, we've done a much better job. We've got some visibility to recouping that in 2022.
We also hope to start recouping on the Subtle Specialty Services or now the E-Infrastructure Solutions some of that as we get into 2022 and the new bid projects begin. We've done that. On the equipment side and capacity side we have factored in the equipment capacity we have with the equipment capacity that we know we're gonna get added in the quarter. But I'll be honest you know for the first time we're actually turning away work in the E-Infrastructure segment just because we're making sure we take care of our core customers. We're making sure we've got capacity for the projects they've got on the books for the year and we're not getting over our skis.
Frankly, if we had more equipment, we would be taking on more work now than we have. We factored that into the 2022 forecast.
Yeah, I would add that, you know, for the combined backlog of the E-Infrastructure group of just under $470 million, that's a backlog of about two-thirds our, you know, revenue expectations or our run rates that we have, including Petillo. That's pretty strong compared to history, that relationship. What that means is we have the backlog, and of course, as we roll through that backlog, we did roll through it in 2021 and into 2022. We've learned a lot about, you know, contingency planning around pricing and productivity and things like that. It's pretty simple that, you know, as we've rolled off the old backlog, we have better insights over what we think it'll be in 2022. That's gonna help us.
Certainly, the backlog is gonna provide us, you know, two-thirds of the year, give or take. I think we're looking forward to that performance.
Got it. Okay, good stuff. How much revenue growth and EPS accretion is in this outlook from Petillo?
I don't have that number exactly, in front of me. I wanna say it's between $0.15 and $0.20.
$0.15 and $0.20. Got it.
Yeah.
Um-
I'll have a better. I didn't bring my pro formas in, but I'll have better ones when
We can give you more detailed information on that, Sean.
Yep.
Yeah. I just wanted to work out the organic growth, the underlying organic growth.
Yes.
If I look at the backlog in the Q4 , you know, pull out Petillo, it looks like book-to-bill was below 1x. You know, obviously commentary, you know, demand outlook commentary from you guys is pretty robust here. Just curious how we should anticipate the, you know, backlog trajectory over the next couple quarters here. You know, whether there's some stuff that's getting ready to load in, whether chunky awards on the transportation side or some E-Infrastructure stuff coming in. Just curious how to think about that.
What we'll see is, I think we could continue to see backlog decline. If you go back, and we said this last year and coming into this year, and it's playing out pretty accurate.
Yeah. Make sure you break out the backlog.
Yeah. Backlog for Transportation is declining. Backlog for E-Infrastructure is improving. If you remember, Sean, at the beginning of last year, we booked several really large design-build jobs in the quarter that had been sitting in won but not signed for a long period of time. That skews the spike up to some degree, and we're burning that off. There's not, you know, those mega projects to replace that. We're still hitting singles and doubles and making sure we're focusing on the small quick-turn projects and higher margin. I think on the Transportation side, we'll see that continued decline as we get through the first half of this year.
Frankly, you know, the results of the new infrastructure bill, we have not seen a significant increase in bid activity, and there's yet another factor that is taking place. We've won probably a half dozen or more jobs in the last couple months, of which none of them are being awarded because our DOTs did their engineering estimates pre-inflation, have not adjusted the engineer's estimates. We're seeing all the jobs that are being won coming in anywhere from 30%-60% higher than the original engineer's estimate. They go back into the cycle and re-estimate those, and then they'll bring them out for rebid versus what you would normally do is just course correct the material prices because that's where all the issues are. We think that'll continue to decline.
In the E-Infrastructure space, again, one of the nice things that's happening as a result of COVID and some of the inflation, where we have seen, if you remember us talking about some of the big data centers and some of the big e-commerce distribution build outs, a lot of times they would buy 100 ac, 200 ac, 300 ac and develop that over phases. We'd come do the rough cut of the entire thing. We'd finish phase I. They'd build the data center. A year or two later, we come back, we finish phase II. They build the data center year three. What we're seeing them do is ask us on the projects we've recently won to do all phases at one time.
They're bigger, they're more complex, which is great for us reduces the playing field out there on the competition, but also keeps us there at one location longer and bigger. Those are beneficial. That's why, you know, candidly, we're turning away some of the mid-range and smaller work to make sure we got the capacity for the line of sight of jobs we see coming out in 2022. Does that help?
Interesting. Yeah, definitely. It helps massively. Last one from me. I think you guys are exiting the year here around 2.4 x leverage. You know, not crazy there. You know, I'm just curious what's next here. Do we just focus on funding organic growth and delever? Or do you stay on the offensive? What's the message there?
Yeah, I think both. You know, right now, we'll continue to buy down debt, right?
Yep.
I won't tell you that we're not out looking for tuck-ins that fit for strategic adds in the three segments that we have. At some point in time, I mean, we're looking. We just haven't found that right fourth leg to broaden it. You know, today, as we sit here, we're buying down the debt. But I will tell you, we are constantly and actively beating the bushes. The other nice thing that is starting to happen is we are, in a lot of cases, the first or earliest look in a lot of deals. That gives us kind of a first chance at some deals that we may not have had a few years ago. That's a nice position to be in.
Yeah. In my comments, I meant it. I hope it was helpful from the standpoint of we've been very clear now on we are very comfortable with a 2.5 kind of plus or minus future EBITDA kind of calculation. I think one of the reasons we are is because the cash flow that we've enjoyed since transforming the business has been consistent and strong. The other interesting point is with the Petillo acquisition being funded a little, you know, $20 million worth of our stock, but majority of it by some debt and almost $50 million of cash we had on our balance sheet, it's immediately accretive, and it reduced our leverage ratio. We can find more transactions like that.
We won't be slow at taking advantage of premier economics, if you will.
I think the one thing, John, that and I'm sure you get it, and Brad gets it, that we spend a lot of time on. The cash flow that we are throwing off from this business, the fact that we're able to take, you know, kind of I call it a third bite on debt, buy capital and buy businesses last year and bring down the total debt leverage is really an impressive part of what we've been able to do. It is something we're gonna continue to do and is part of the acquisition strategy, looking for those businesses that either continue that trend or help it even more.
Okay. Again, very helpful. I'm gonna sneak one more in here. Just in the spirit of, you know, kinda setting up appropriate numbers early in the year, you know, is there anything you'd point out from an EPS cadence perspective within this full year outlook? I mean, you know, particularly, I don't know, maybe first half, back half weighting or, you know, any, you know, strange comp nuances early in the year you'd point out here.
Not really. I mean, our Q1 is always our slowest quarter, right?
Yep.
If you look through history, our Q4 have, as we've kind of transformed the company, have become stronger than they were early on.
Yep.
We don't see any significant changes in seasonality. To me, as I look at it, as we get to the back half, if we continue to pick up pricing, and continue to see normalization of inflation, that's where we kinda have, I think, some potential upside, through the year, as we go forward. Nothing of significance from a quarter or back half loaded. It's loaded just like our other plans.
Yeah. I think the shift that we saw in 2021 becomes a new norm by quarter of how that lays out, because it's changed pretty significantly from the risk of the Transportation Solutions business being lumpy and weather and things like that. I think with the mix of operating earnings, it'll probably look similar to what we had in 2021. It should theoretically improve a little bit smoother because Petillo and Plateau would expect the same kind of less seasonality in the business, but still feel some in that Q1 .
All right. All really solid responses. I'll let you guys get back to business. Thanks very, very much.
Thanks, Sean. Appreciate it.
We have reached the end of the question and answer session. I will now turn the call over to Mr. Joe Cutillo for closing remarks.
Thanks, Kyle. I'd like to thank everyone again for joining today's call. If you have any follow-up questions, please refer to the information provided in the press release related to our investor relations group at Sterling or our partners at the Equity Group. I hope everyone has a great day, and thanks again for joining the call.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for participating.