Greetings, and welcome to Sterling's First Quarter 2021 Earnings Conference Call and Webcast. As a reminder, this conference is being recorded and all participants are in a listen only mode. There are accompanying slides on the Investor Relations section of the company's website. Before turning the call over to Joe Cotillo, 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 ks and 10 Q filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligation 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 Cotillo. Thank you.
Sir, please go ahead.
Thanks, Maria, and good morning. I'd like to start by thanking everyone for joining today's call. It's always great to start off the year with a record quarter despite all the unexpected weather challenges we faced in February. I stated during our last earnings call that I was walking away from 2020 prouder than ever of our 3,000 plus Sterling employees and their ability to band together, keep each other safe, take care of our customers and give back to our communities, all while delivering another record year. While I stand here today with that same feeling, the response to the weather and inflation challenges we faced in the quarter were once again remarkable and a further indication of our culture and our ability to service our customers and deliver record results even in challenging times.
The results of this quarter demonstrate how we have stayed focused on the strategy that we have been implementing over the past several years to diversify our revenue streams and focus on higher margin, lower risk projects, while building a platform for future accretive growth. This strategy combined with our business structure enables us to lever the entrepreneurial spirit that is alive in our businesses, our leaders and our people and deliver results unparalleled to others. So let's talk about some of those results. Our first priority is always the safety of our people. The innovative efforts of our proactive actions and measures continue to make our work sites safer every day.
For the Q1 2021, we worked over 1,200,000 hours in our wholly owned subsidiaries with 0 incidents. As an industry leader in safety, we will continue to do everything we can to ensure our employees go home safe every evening. On the financial front, our revenues were up 6.3% versus prior year, driven by an 18% increase in our specialty service sector and a 22% increase in our residential sector. Our gross profit was up 28% to a blended average of 14.3%. Our operating income was up 88% and our net income more than tripled.
These results are yet further proof that our strategy focus on growing the bottom line continues to pay off as our net income more than tripled with single digit revenue growth. Also in the Q1, we continued to strengthen our balance sheet with $39,000,000 of cash coming from operations, which we used to pay down $30,000,000 of debt and invested $11,000,000 in CapEx. As the year advances, we expect to further enhance our liquidity, enabling us to continue to execute on our organic growth strategy while evaluating accretive acquisition opportunities that have the potential to add scale to our existing sectors where they could provide us with a new business sector altogether. Now let's talk about our backlog. In the Q1, our backlog in our specialty service sector grew 36% from year end 2020 and we saw 40% growth in our heavy civil sector backlog for a combined growth of 39%.
Our backlog is now at an all time high of over 1.6 $1,000,000,000 and positions us for a strong 2021 and is already building strength into 20222023. As we look at the individual sectors, once again, our specialty service sector was a major contributor to our strong Q1. We continue to execute well on a robust pipeline of projects for large high profile customers as they develop new distribution centers, data centers and warehouses. As mentioned, our backlog in this sector grew 36% and visiting activity remains strong giving us good visibility for the balance of 2021. Our residential sector exceeded our expectations in light of the weather related issues in Dallas, Fort Worth and Houston.
These disruptions caused us to lose more than 2 weeks of work in February. However, the team pulled through to complete a record number of slabs for the quarter. We are seeing similar demand and productivity trends continuing into the 2nd quarter. Regarding the supply chain pressures being felt across the residential markets, our first quarter margins did reflect the impact of the supply chain issues, specifically relating to the cost of concrete, lumber and steel. We are watching these trends closely and have managed to pass on multiple price increases already this year.
Our heavy civil revenues were down, but our operating profit was up and reflects the continued shift away from low bid projects to alternative delivery, particularly at our Rocky Mountain region. We're extremely pleased to see the results of our multi year effort to transform the revenue mix of this sector from low bid projects towards jobs where we can use our extensive experience, assets and skill set to bring more value to our customers and earn higher margins. Based on the Q1 results, we have positioned ourselves to finish the year at the high end of our guidance and have an opportunity to exceed that. With that, I would like to turn it over to Ron to give you more details on the quarter and the 2021 outlook. Ron?
Thanks, Joe, and good morning. I am pleased to provide a summary of our strong 2021 Q1 results. Our slide presentation, which has been posted to our website, includes additional financial details to help further understand our 2021 financial results and our expectations. The presentation also provides additional modeling considerations, which underpin our full year 2021 revenue and earnings guidance. Now let me take you through our financial highlights starting with our backlog metrics on Slide number 5.
Our first quarter ending backlog was at an all time high 1,639,000,000 dollars a 39% increase over the end of 2020. The gross margin in our Q1 backlog was 11.8%, down from 12% at the end of 2020. This slight decrease reflects a change in the mix of our Q1 backlog as our heavy civil backlog growth of 40% exceeded the higher margin specialty services growth of 36%. Unsigned low bid awards totaled $76,000,000 at March 31, 2021, a decrease of $357,000,000 at the beginning of the quarter. Essentially all of our large unsigned projects at December 31, 2020 are now under contract and beginning contract activities.
We finished the record for the Q1 with a record combined backlog of $1,750,000,000 a 12% increase over the end of 2020. Our gross profit and combined backlog was 11.7% compared to 11.8% at the beginning of the quarter. Our 1st quarter book to burn factors were 2 71% and 167% for backlog and combined backlog respectively. Residential, which accounted for 14% of our consolidated revenues, does not report backlog reflecting the short performance cycle of residential concrete slabs. Slide 6 provides a summary of our consolidated and segment results.
Revenues for the Q1 were $315,000,000 an increase of $18,600,000 or 6.3% over the prior year. The revenue increase was attributable to our Specialty Services and Residential businesses, partially offset by lower heavy civil revenues. Consistent with our expectations, 1st quarter heavy civil revenues were 147,100,000 dollars a decrease of $8,600,000 from the prior year quarter. We expect sequential quarter over quarter Heavy Civil revenue growth for the balance of the year as we continue to ramp up several large design build projects in the Rocky Mountain region. 1st quarter Specialty Services and Residential revenues increased significantly by 18% 22% respectively.
I'll provide color on the individual segment results in a moment. Consolidated gross profit was $45,000,000 an increase of $9,800,000 over the comparable prior year quarter. Consolidated gross margin reached a 1st quarter high mark of 14.3 percent, an increase of 2 40 basis points over the prior year quarter. Each of our 3 business segments reported increased gross profits. G and A expense decreased slightly in 2020, 2021 compared with the prior year.
That provided operating income for the quarter to be $22,800,000 an increase from $12,100,000 for the comparable period, substantially all driven by improved 2021 gross profit levels. Our first quarter operating margin was 7.2% compared to 4.1% in the 2020 quarter. Both the 2021 operating profit and operating margins were the strongest first quarter in our history. Our first quarter effective income tax rate was 29%, an increase from 27% from the prior year quarter. We continue to expect our full year effective tax rate to be approximately 30%.
Our non cash portion of our effective tax rate will continue to be approximately 24% of pre tax income. The net effect of all these items resulted in 1st quarter net income of $10,600,000 or diluted earnings per share of $0.37 compared to the prior year comparable quarter net income of $3,100,000 or diluted EPS of $0.11 Our Q1 EBITDA totaled $29,900,000 an increase of 48% over last year's Q1. As a percent of revenues, EBITDA improved to 9.5 percent of revenues for the quarter, up from 6.8% for the prior year comparable period. As you'll see, each of our segments reported increased operating profits. Heavy Civil reported an increase in operating profit of $4,700,000 on lower revenues.
This improvement reflects the progress made in shifting our heavy civil revenue mix from low margin low bid heavy highway revenues to alternative delivery highway work and other highway higher margin from a distant space opportunities. In the quarter, our low bid heavy highway revenues declined $20,000,000 This decline, which was more than offset by other more profitable alternative delivery work, enhanced our gross profit to the for the Q1. Specialty Services revenues increased $19,400,000 driving operating income up by $5,100,000 and delivering an operating margin of 13%. Substantially, all the improvement was driven by increased land development revenue, while our commercial revenues remained substantially flat. The overall improvement in operating margin reflects a higher mix of land development revenues, which was 78% of the segment's revenue, up from 73% in the prior year quarter.
Residential reported record completed slabs and revenues reflecting continued strength in the housing markets within our Texas footprint, despite losing half of the workdays in February due to inclement weather. While Q1 2021 operating profit increased by $400,000 operating margins declined to 12.4% from 14% for the prior year quarter. The margin decline reflected the impact of supply chain pressures, specifically related to the cost of key materials. We continue to watch these trends closely and have already implemented price increases in 2021. Now let's move to Slide 7, which summarizes our increased EBITDA, cash flow and deleveraging strategy and the related progress.
Historically, Sterling's Q1 is its slowest quarter from both a cash flow and earnings standpoint. As a result, we have historically had the lowest cash flow and income in the Q1. Our cash flow typically then level off in the 2nd quarter and we historically generate cash in the 3rd and 4th quarters. The Plateau acquisition and the heavy civil migration towards higher margin work has significantly changed the aforementioned seasonal trends. Cash generated from operations was a very strong $38,700,000 compared to $10,800,000 in the comparable 2020 quarter.
All three segments contributed to this $28,000,000 improvement. Cash used for finance activities was $32,500,000 driven by debt reductions of $30,500,000 which included $18,000,000 of non scheduled term loan payments. Our first quarter CapEx net of disposals totaled $11,000,000 compared to $6,800,000 in the 2020 comparable period. The incremental investment in CapEx is driven by the continued growth of our land development business. Our full 2021 anticipated net CapEx continues to be in the $30,000,000 to 35,000,000 range.
The graph presents our deleveraging expectations beginning with the October 2019 plateau acquisition and the new 5 year credit facility. Our October 2019 pro form a forward looking EBITDA coverage ratio was approximately 3.5 times. At that time, we set the objective to bring our coverage ratio down to 2.5 times by the end of 2021. As you can see, our EBITDA debt coverage has declined to 2.4 times at March 31, 2021. This deleveraging milestone was achieved over 9 months earlier than our October 2019 stretch goal of 2.5 times by the end of 2021.
Based on our term loan scheduled payments for the balance of 2021, we now expect our year end coverage ratio to be approximately 2.1 times compared to our 2.5 times original objective. Now, I'll turn the call back over to Joe.
Thanks Ron. 2021 represents our 6th year of transforming our company and our culture. Our strategic core elements remain the same as we continue to focus on bottom line growth while reducing risk and building a platform for accretive future growth. We will continue to solidify the base through price and productivity in our heavy civil sector, shifting away from low bid heavy highway work to alternative delivery, aviation, rail and core. We're growing our high margin products through geographic expansion and have begun exploring bolt on acquisition opportunities as well as acquisitions that would enable us to add a 4th sector.
In addition, we will begin highlighting the things we do every day to protect our environment and improve our communities, which we refer to internally as the Sterling Way. The Q1 was a fantastic start to a new year. Our markets remain strong and our backlog is in an all time high. We want to reaffirm our full year 2021 guidance and believe the Q1 results have positioned us to finish the year at the higher end of guidance with a good opportunity to exceed the guidance range. With that, I'd like to turn it over for questions.
At this time, we will be conducting a question and answer Our first question is from Sean Eastman with KeyBanc Capital Markets. Please proceed with your question.
Good morning, gentlemen. Nice strong start to the year.
Thanks, Scott. I appreciate it.
So you're keeping the guidance ranges intact, but kind of effectively raising by saying you expect to be at the high end now. And just looking through the presentation, it looks like now you're expecting gross margins to be at the high end of that 13% to 14% range you had outlined last quarter. It looks like the non controlling interest in JV number went up a little bit. Just kind of hoping you could bridge us to this sort of fine tuned outlook for 'twenty one, maybe just what segments are driving us to the upside to the upper end of the previous range?
Yes. And so let me tell you first how we get to the upper end. Our Q1 exceeded our expectations by a bit. So what we've done is reforecasted that in for the remainder of the year. Candidly, the Q2 looks very strong.
And if the Q2 comes in where we anticipate, I would see us formally raising that guidance for the rest of the year as we get through the quarters. But 1 quarter doesn't make a year, right? There's a lot of dynamics happening out there in the marketplace. The good news is what's causing us to get there is all three segments. Great growth in our specialty sector, great growth in our residential, a little bit of headwinds on some of the inflation stuff, but we're passing through price increases.
We're kind of chasing that right now. We'll catch up to it when it levels off. But I don't want to underestimate the great margin improvement that we're seeing in the heavy civil sector and really that transformation from low bid, which is now much less than 20% of our revenue to these alternative deliveries or continue to move that needle up on the margins there. So we've got if you remember at the end of our last call, I said we've got the best tailwinds we've had coming into a year. We really have some very good tailwinds.
Each one of the sectors are clicking. And our biggest challenge in the Q1 was a little bit of inflation, which we continue to see more so in the residential business. And then obviously, for our residential team, it just shows that the makeup power they have to have 2 weeks plus down in February and come through with an all time record quarter of SLED's PORDS is really, really impressive.
Yes. Biggest factor in the short term, if you remember at the end of early March, we talked last and that was after a horrendous weather pattern in Texas. And while we had great confidence that our Specialty Services and Residential business would catch up because they have the ability to do that, we didn't think it would all happen in the Q1. They essentially delivered what we thought they would in the Q1, which absent that would have had our margin obviously lower. And so that's the largest individual component this quick in the year that switched from really our March 3rd or whatever day our call was last time through the reporting period.
So it was a heck of a March.
Got it. That's helpful. And the other thing that stands out to me is just that we've got the full year gross margin expectation set at 14%. You guys did 14.3% in the Q1. I mean, typically, the Q1 would be that low watermark of the year.
So the model just looks a little funny, so maybe there's a nuance there that would be helpful to flesh out.
No real nuance. That's as we get into the rest of the year that we would anticipate those margins continue to improve because we get a little leverage of volume. Our volume picks up in that second and third quarter. We see a dip back down in the Q4. But if anything, again, the performance and the mix in the Q1 along with the improvement on the heavy civil side is what really put that together and it was a little higher than we anticipated, which is a good thing.
The other one that sticks out in the quarter is so last year's second, third, Q4, our planned development business was running $100,000,000 plus or minus of revenue. It that ramped pretty significantly in the Q2 last year. This year you see the planned development revenues in the 90s. So that is that was expected to be up over last year's comp. So I think that's the other thing that makes the Q1 when you look at the Q1 from the operating income side and these are going forward likelihoods too.
The Q1 will no longer be our by far lowest margin business or the lowest business. Can you do the math on where the margin comes from? It's not we get decent returns on our heavy civil side, but the real returns that are driving the numbers are both Specialty Services and Residential. Yes.
And the only thing I would add to it is we've got the heavy civil sector making money in the Q1. We're historically shot. We've always lost money in that sector in the first quarter. And that swing really makes a difference in the overall margin. So a combination of some of the cost reductions and mix shift that we've done in that sector really are paying dividends.
Okay. Got it. And then in terms of the residential segment inflationary pressure, have those price increases all stuck? Are there any instances where you can't sort of pass through that inflation and are there any other considerations in civil or specialty around this supply chain pressure dynamic?
Yes, so let's start with residential. The first one was probably the hardest for the team to get through, but they were successful with that, got another one through. I think the builders are you know we're not the only ones with lumber increases. As you can imagine, the framers use a lot more than we do. So the increases are real.
The other thing that we've began to see and this is actually in a strange way helped us to some degree is some allocations a couple of the markets on concrete. The good news is we have continued to get our supply of concrete. Some of the smaller players have been cut off, which has also helped us get the price increases through. Our bigger challenge right now is we're kind of 30 to 45 days behind the price increase to get it through. We're normally in a normal year we would see 1, abnormal year we would see 2 concrete increases.
We've seen 3 or 4 already this year. So it's hard for us just to keep up and keep with them. So we're probably lagging, you know I'll call it 30 to 45 days from the time we get an increase to the time before able to get that through. Once it stabilizes, you know that should give us the ability to catch up, but these guys still did a phenomenal job. On the highway side, you know most of our pricing and supplies are locked in at time of bid and we hedge that with the supplier.
They give us a multiyear price on it. We haven't seen significant pushback on that as of this time. But if we do, we also have clauses in our contracts that we can pass that on to the end customer. On the heavy around the specialty service sector, the biggest inflationary issue is in 2 areas. One is around the pipe that we run, so the storm water, some of that stuff around the sites.
They've had some delays in availability on that. So it's just pushed out some time. But probably the biggest impact in the quarter was on fuel. As you can imagine fuel is up $1 or so a gallon. But as you can see with their margins they were able to absorb that.
They build in some of that price into their bid process and expectations, but they burn a lot of fuel. On just one project alone, we'll burn about 600,000 gallons of fuel in a year. That's just one project. So you can see it would normally be sizable. On a positive news, you can see how well they've done at hedging that with their bid process and stuff because we didn't see a significant impact in the Q1.
Okay, really helpful. I'm going to ask one more. The forward looking EBITDA coverage ratio now expected to exit the year at 2.1x versus the prior 2.5x. I just wanted to make sure I understand the arithmetic there. I assume one part of it is maybe EBITDA now looking like it's going to hit the high end of the range, so higher EBITDA in the denominator, but also maybe a lower net debt number as well, higher cash flow.
I just wanted to make sure I have the two pieces there because that's a pretty notable update.
Yes, we continue to use midpoint guidance for our EBITDA. Obviously, we drop off the Q1 and add on another quarter, but our assumed growth obviously doesn't that our Q1 2022 plan yet. We simply add 2% or 3% growth in the quarter on EBITDA, some kind of inflationary number just to make it responsive. By far, the lion's share of that is lower leverage. So over $100,000,000 got paid last year.
We've already paid $30,000,000 this year. We have scheduled payments for the balance of the year of, let's see, $37,500,000 on our term loan and then some other debt. So if we just make scheduled payments, it gets into the 4.1 with a midpoint delivery of EBITDA together with that low single digit anticipation for increased EBITDA in 2022.
Yes. So Sean, the way I look at it is the good news is we get there the old fashioned way. We generate a whole bunch of cash and we buy down debt. The better news is you're exactly on it, is our EBITDA target continues to increase. That ratio only gets better.
Yes, got it. All right, great. Thanks for the responses, guys. I'll turn it over.
Thanks, Chuck.
Our next question is with Brent Thielman with D. A. Davidson. Please proceed with your question.
Good morning, Joe and Ron. Hey, Brent. How are you? Doing well. Thanks.
Hey, Joe, I want to follow-up on some of the commentary around the residential segment and the inflationary pressures. I mean, the Q1 margins still look pretty good considering all that went on. I guess, question is, could there be some further erosion in the margins in the near term as these inflationary pressures work through and the price increases step up or do you think we sort of hit a baseline here in the Q1?
Yes, I think you never know that we've never seen crazy inflation like this. But my based on talking to the team, based on everything, I would say we've kind of hit that point. It may move a little bit, but I would be shocked to see any significant movement in margin. Again, we've been successful in passing on the prices. It's more of a delay than people coming back and saying, hell no.
They always say hell no the first time and then you had to stay on it. But it's become part of the norm for this point in time. It's certainly a challenge. Our guys are fighting that battle every day. But I don't anticipate us seeing a big incremental movement from where we are.
Yes. The challenge has been the volatility, right? So and it still continues to be extraordinarily volatile with thicker lumber and concrete. So by the time you demonstrate that the price is there to stay and then put together the price increase, as Joe mentioned earlier, 45 days goes by. And if it comes down, you probably don't get anything.
If it goes up, you probably got what you asked for and you have to do the cycle again. So it is not something that just goes away one time or two times at least in Q1, which is extraordinarily volatile.
Sure. Okay. And I apologize if you said this, but did you say what proportion with Houston versus Dallas Fort Worth in terms of slabs this quarter
or revenue? We did not. What was the Yes. Houston is kind of continuing its run rate
kind of between 13% to 15% slabs are in Houston continuing to pump up, but a lot of the growth side in the quarter was up in downhole.
The thing I'll the thing we didn't talk about and we're at the early stages, so I don't want to talk too much about it, but we are getting pulled very, very hard by a couple of our biggest customers to get into Phoenix and the Austin market. So we're running hard to see our original intention was to do that next year. We're working diligently to see if we could possibly pull off some further expansion in the current calendar year.
Joe, what would be the hesitation around those markets?
It's really us making sure we can get the manpower and the teams in place to deliver that. The reason they're pulling us there isn't because the color of our trucks or our price or anything. It's the fact that we can deliver more faster than anybody else and the numbers are staggering what we're doing compared to their competitors in those markets. So we want to make sure we've got the right people and the right crews in place building the way we build so that we can deliver that same quality of service. And therefore, we think over the next 3 to 5 years, we become the market leader versus just making a splash and getting in and out.
Okay. On the cash flow, appreciate the color around the composition of the businesses contributing this quarter. I seem to remember talking about Q1 last year being pretty good to free cash flow. So I just wanted to ask whether there are any other extraordinary things going on in the Q1 that might have popped this up above your expectations?
No, it was really you know it was a meat and potatoes Q1 from the operations just doing their job and business is doing well and fighting, putting out the fires ahead and overcoming the challenges. So yes, nothing crazy on the positive side that we got a big payment on a claim or anything like that.
Right. And then the on the specialty business that great growth this quarter and solid bookings you guys came out with. I guess the question is, is the pipeline is good to continue to support that sort of level of bookings ahead or is anything extraordinary in that $170,000,000 you talked about a few days ago?
Right now, the pipeline looks phenomenal. It's really all of the whether it's e commerce or the data centers, these guys are all full steam ahead right now.
Okay, great. Thanks for taking the time.
Ladies and gentlemen, we have reached the end of our question and answer session. And I would like to turn the call back over to Mr. Joe Killett for closing remarks.
Thanks, Mary. I'd like to thank everyone again for joining today's call. If you have any follow-up questions or wish to schedule a call, please refer to the information provided in the press release associated with our Investor Relations group at Sterling or our partners at the Equity Group. I hope everybody has a great day and I thank you again for participating.