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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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 Mr. Joe Cutillo, Sterling Construction'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 refer EBITDA, adjusted EBITDA, adjusted net income or adjusted earnings per share on this call, all of which are all financial measures not recognized under US GAAP. As required by SEC rules and regulations, these non-GAAP financial measures are reconciled to the 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 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 3000 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 their 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 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 worksite safer every day. For the first quarter 2021 we worked over 1.2 million hours in our wholly owned subsidiaries with zero 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 focused on growing the bottom line continues to pay off as our net income more than tripled with single digit revenue growth.
Also in the first quarter, we continued to strengthen our balance sheet with $39 million of cash coming from operations, which we used to pay down $30 million of debt and invested $11 million 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 or they could provide us with a new business sector altogether.
Now, let's talk about our backlog. In the first quarter, our backlog in our Specialty Service sector grew 36% from year end 2020. And we saw a 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 billion and positions us for a strong 2021 and is already building strength into 2022 and 2023.
As we look at the individual sectors, once again, our Specialty Service sector was a major contributor to our strong first quarter. 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 bidding 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 two weeks of work in February. However, the team pulled through to complete a record number of slabs for the quarter. We're seeing similar demand and productivity trends continuing into the second quarter. Regarding the supply chain pressures being felt across the residential market, our first quarter margins did reflect the impact of the supply chain issues, specifically relating to the cost of concrete, lumber and steel. We're 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 the 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 first quarter 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 first quarter 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 billion a 39% increase over the end of 2020. The gross margin in our first quarter backlog was 11.8% down from 12% at the end of 2020. This slight decrease reflects a change in the mix of our first quarter backlog, as our Heavy Civil backlog growth of 40% exceeded the higher margin Specialty Services growth of 36%.
Unsigned low bid awards totaled $76 million at March 31, 2021, a decrease of $357 million at the beginning of the quarter. Simply all of our large unsigned projects at December 31, 2020 are now under contract and beginning contract activities.
We finished for first quarter with a record combined backlog of $1.750 billion, 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 first quarter book the burn factors were 271% 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 first quarter were $315 million, an increase of $18.6 million 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, first quarter Heavy Civil revenues were $147.1 million, a decrease of $8.6 million 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.
First Quarter Specialty Services and Residential revenues increased significantly by 18% and 22%, respectively. I'll provide color on individual segment results in a moment. Consolidated gross profit was $45 million, an increase of $9.8 million over the comparable prior year quarter.
Consolidated gross margin reached a first quarter high mark of 14.3% an increase of 240 basis points over the prior year report. Each of our three business segments reported increased gross profits.
G&A expense decreased slightly in 2020, '21 compared with the prior year. That provided operating income for the quarter to be 22.8% - $22.8 million an increase from $12.1 million 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 '21 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-net effect of all these items resulted in first quarter net income of $10.6 million, or diluted earnings per share of $0.37 compared to the prior year comparable quarter net income of $3.1 million or diluted EPS of $0.11.
Our first quarter EBITDA totaled $29.9 million, an increase of 48% over last year's first quarter. As a percent of revenues, EBITDA improved to 9.5% 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 $4.7 million 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 margins from adjacent space opportunities.
In the quarter our low bid heavy highway revenues declined $20 million. This decline which was more than offset by other more profitable alternative delivery work, enhanced our gross profit to be [Technical Difficulty] for the first quarter.
Specialty Services revenues increased $19.4 million striving operating income up by $5.1 million and delivering an operating margin of 13%. So essentially all the improvement was driven by increased land development revenue, while our commercial revenues remained substantially flat. The overall improvement in operating margin reflects the higher mix of land development revenues, which was 78% of the segments revenue up from 73% in the prior year quarter.
Residential reported record completed slabs and revenues reflecting continue straight in the housing markets within our Texas print 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 first quarter 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 first quarter. Our cash flow typically does level off in the second quarter, and we historically generate cash in the third and fourth quarters.
Our 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 $38.7 million compared to 10.8 million in the comparable 2020 quarter. All three segments contributed to this $28 million improvement.
Cash used for financing activities was $32.5 million driven by debt reductions of $30.5 million, which included $18 million of non-scheduled term loan payments. Our first quarter CapEx net of disposals, totaled $11 million compared to $6.8 million 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 million to $35 million range.
The graph presents deleveraging expectations beginning with the October 2019 Plateau acquisition and the new five-year credit facility. Our October 2019 pro forma forward-looking EBITDA coverage ratio was approximately 3.5 times. At that time, we set the objective to bring our coverage ratio down to two 2.5 times by the end of 2021.
As you can see, our EBITDA debt coverage has declined to 2.4 million - 2.4 times at March 31, 2021. This deleveraging milestone was achieved over nine 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 sixth 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 fourth 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 first quarter was a fantastic start to a new year. Our markets remain strong and our backlog is at an all-time high. We want to reaffirm our full year 2021 guidance and believe the first quarter 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 like to turn it over for questions.
At this time, we will be conducting a question-and-answer session. [Operator Instructions] 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 Sean and 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 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 '21. Maybe just what segments are driving us to the upside - to the upper end of the previous range?
Yeah, but - and so let me tell you first how we get to the upper end. Our first quarter exceeded our expectations by a bit. So what we've done is re-forecasted that in for the remainder of the year. Candidly, the second quarter looks very strong. And if the second quarter 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 one 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 Specialty sector, great growth in our Residential, little bit of headwinds on some of the inflation stuff that we're passing through it, 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 are continuing 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 first quarter 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 the makeup power they have to have two weeks plus down in February and come through with an all-time record quarter of sludge boards is really, really impressive.
Yeah, factor in the short-term, as 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 first quarter. They essentially delivered what we thought they would in the first quarter 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 you really our March 3 or whatever day I'll 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 first quarter. I mean typically the first quarter would be that low watermark of the year. So yeah, the model just looks a little funny. So maybe there's a nuance there that would be helpful to flesh out.
No, no real nuance. That's - as we get into the to the rest of the year that we would anticipate those margins continue to improve, because we get a little average of volume or volume picks up in that second and third quarter, we see a dip back down in the fourth quarter. But if anything, again, the performance and the mix in the first quarter, along with the improvement on the Heavy Civil side is what really - and put that together and it was a little higher than we anticipated, which is a good thing.
Yeah. The other one that stick that in the quarter is so last year's, second, third and fourth quarter our land development business was running 100 million plus or minus of revenue. That ramped pretty significantly in second quarter last year. This year, you see that ramp up in 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 first quarter - when you look at the first quarter from an operating income side and these are going forward likelihoods too, the first quarter will no longer be our by far the lowest margin business or lowest business because you do the math on where the margin comes from, it's not - yeah, we get decent returns on our Heavy Civil side, but the real returns that are driving the numbers are both Specialty Services and Residential.
Yeah, and the only thing I would add to it is, we've got the Heavy Civil sector making money in the first quarter where historically Sean, we've always lost money in that sector. 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, 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?
Yeah, 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 - 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 begin - we've began to see and this is actually in a strange way helped us to some degree is some allocations in 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 also helps 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 where normally - in a normal year, we would see one abnormal year, we would see two concrete increases, we've seen three or four already this year. So it's hard for us just to keep up and keep with them. So we're probably lagging I'll call it 30 to 45 days from the time we get an increase to the time we were able to get that through. Once it stabilizes that should give us the ability to catch up, but these guys still did a phenomenal job.
On the highway side most of our pricing and supplies are locked in the time of bid. And we hedge that with the supplier that 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 two areas. One is around the pipe that we run through 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 fuel. As you can imagine, fuel was 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 and just one project alone will 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. It's hedging that with their bid process and stuff because we didn't see a significant impact in the first quarter.
Okay, really helpful. I'm going to ask one more. The forward-looking EBITDA coverage ratio now expected to exit the year at 2.1 times versus the prior 2.5 times. 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 want to make sure I have the two pieces there because that's a pretty notable update.
Yeah, we continue to use midpoint guidance for our EBITDA. Obviously, we drop off the first quarter and add on another quarter. But our assumed growth has obviously done better first quarter 2022 plan. Yeah, we simply add 2% or 3% growth in the quarter on EBITDA some kind of inflationary number [Technical Difficulty] responsive. By far the lion's share of that is lower leverage, so over $100 million got paid last year. We've already paid 30 million this year. We have scheduled payments for the balance of the year of let's see 37.5 on our term loan and then some other debt. So if we just make scheduled payments that gets into the 41 with a midpoint delivery of EBITDA, together with that low single digit anticipation for increased EBITDA in 2022.
Yeah. 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.
Yeah, got it. All right. Great. Thanks for the responses, guys. I'll turn it over.
Thanks Sean.
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 wanted to follow up on some of the commentary around the Residential segment and the inflationary pressures. I mean, the first quarter 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 had a baseline here in the first quarter?
Yeah, I think - you never know that - we've never seen crazy inflation like this, but I - my - based on talking to the team based on everything, I would say we've kind of hit that point. We 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 really 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.
Yeah, the challenge has been the volatility, right. So and it still continues to be extraordinarily volatile with bigger numbers in 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 to adjust for it 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 extraordinarily [indiscernible].
Sure. Okay. And I apologize if you'd said this. But did you say what proportion was Houston versus Dallas, Fort Worth in terms of slabs this quarter?
Within that what was the -
Yeah, Houston is kind of continuing its run rates kind of between 13% to 15% slabs in Houston, continuing to pump up, but a lot of the growth side in the quarter was up and down.
The thing I'll - the thing we didn't talk about, and we're - at the early stages, so don't 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.
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 could 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 three to five years, we become the market leader versus just making a splash and getting in and out.
Okay, on the cash flow, I appreciate the color and the composition of the businesses contributing this quarter. I seem to remember talking about first quarter last year being pretty good for free cash flow. So I just wanted to ask whether there are any other extraordinary things going on in the first quarter that might have popped up above your expectations.
No, it was really - it was a meat and potatoes first quarter from operations just doing their job and business is doing well and fighting - putting out the fires they had and overcoming the challenges, so yeah, nothing crazy on the positive side that we got a big payment on a claim or anything like that.
Great. And then the - on the Specialty business that - great growth this quarter and solid bookings you guys came out with. I guess question is the pipeline as good to continue to support that sort of level of bookings ahead or is anything extraordinary in that 170 million you talked about few days ago?
Right now the pipeline looks phenomenal. It's really - all of the - whether its ecommerce 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 Cutillo for closing remarks.
Thanks, Maria. 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.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.