STERLING INFRASTRUCTURE, INC. (STRL) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is provided to assist readers in understanding our financial performance during the periods presented and significant trends that may impact our future performance. This discussion should be read in conjunction with our Consolidated Financial Statements and the related notes thereto.

On November 30, 2022, we completed the disposition of our 50% ownership interest in our partnership with Myers & Sons Construction L.P. (“Myers”), which represented a strategic shift that had a major effect on our operations and consolidated financial results. Accordingly, the historical results of Myers have been presented as discontinued operations in our Consolidated Statements of Operations and Consolidated Balance Sheets. Prior to being disclosed as a discontinued operation, the results of Myers were included within our Transportation Solutions segment. The following discussion reflects continuing operations only, unless otherwise indicated.

OVERVIEW

General—On June 1, 2022, we officially changed our legal name from “Sterling Construction Company, Inc.” to “Sterling Infrastructure, Inc.” (“Sterling” or “the Company”). Sterling operates through a variety of subsidiaries within three segments specializing in E-Infrastructure, Transportation and Building Solutions in the United States (the “U.S.”), primarily across the Southern, Northeastern and Mid-Atlantic U.S., the Rocky Mountain States, and Hawaii, as well as other areas with strategic construction opportunities. E-Infrastructure Solutions projects include advanced, large-scale site development systems and services for data centers, e-commerce distribution centers, warehousing, transportation, energy and more. Transportation Solutions includes infrastructure and rehabilitation projects for highways, roads, bridges, airports, ports, light rail and storm drainage systems. Building Solutions projects include residential and commercial concrete foundations for single-family and multi-family homes, parking structures, elevated slabs and other concrete work. From strategy to operations, we are committed to sustainability by operating responsibly to safeguard and improve society’s quality of life. Caring for our people and our communities, our customers and our investors – that is The Sterling Way.

SIGNIFICANT TRANSACTIONS

Myers Disposition—On November 30, 2022, we entered into an agreement (the “Agreement”) and sold the Company’s 50% ownership interest in its partnership with Myers & Sons Construction L.P. for $18 million in cash. In accordance with the Agreement’s payment terms, the Company is to receive $12 million in January of 2023 and a series of three $2 million payments due by various dates in 2023, 2025 and 2027. The disposition is consistent with the Company’s strategic shift to reduce its portfolio of low-bid heavy highway and water containment & treatment projects in order to reduce risk and improve the Company’s margins and to focus on its strategic geographies outside of California. See Note 4 - Dispositions for further discussion.

Petillo Acquisition—On December 30, 2021, we completed our acquisition of Petillo for aggregate consideration of $196.8 million. Petillo is a leading specialty site development contractor based in Flanders, New Jersey, and serves the Northeastern and Mid-Atlantic States, providing large-scale site infrastructure improvement service, including full-service excavation, underground utility construction, environmental remediation, drainage systems for commercial construction and water management and distribution systems. The results of Petillo are included within our E-Infrastructure Solutions segment. See Note 3 - Acquisitions for further discussion.

MARKET OUTLOOK AND TRENDS

The market outlook and trends currently reflect favorable opportunities for long-term growth despite the challenging market pressures, including persistent inflation, supply chain issues and labor challenges. To remain competitive in the current market environments, Sterling remains focused on our strategic business elements and objectives as outlined. We continue to shift our focus from low-bid heavy highway work, which now represents approximately 11% of our total revenue, to increasing our revenue from alternative delivery projects within Transportation Solutions and increasing revenue from our E-Infrastructure and Building Solutions segments and improving our margins in each of our segments.

E-Infrastructure Solutions—Sterling’s E-Infrastructure Solutions business is primarily driven by investments in the development of data centers, e-commerce distribution centers, advanced manufacturing centers and warehouses. The continued revenue growth of the Company’s complex site development business is directly related to the continued implementation of publicly announced multi-year capital infrastructure campaigns from end users, Amazon, Facebook and Home Depot, and opportunistic investments in alternative energy components in solar and battery technology, spurred by the Creating Helpful Incentives to Produce Semiconductors (“CHIPS”) Act. We have seen a significant increase in demand for data centers, next-generation factories for solar and EV battery plants, advanced manufacturing and new warehouse and industrial development. This significant increase in demand had been partially offset by a slowdown in large fulfillment center spend in the market.

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Equipment and land availability, material delays, fuel price increases and rising interest rates continue to be challenging factors for the segment, slowing some development from end users.

Transportation Solutions—Sterling’s Transportation Solutions business is primarily driven by federal, state and municipal funding. Federal funds, on average, provide 50% of annual State Department of Transportation capital outlays for highway and bridge projects. In October 2018, the Federal Aviation Administration reauthorized $3.35 billion annually through 2023. In November 2020, various state and local transportation measures were passed securing, and in some cases increasing, funding of major initiatives in Texas ($7.5 billion). On November 5, 2021, Congress passed the Infrastructure Investments and Jobs Act (“IIJA”) that provided a new five-year reauthorization of highway and public transportation programs with historic investment increases of $284 billion for all modes of transportation. On November 15, 2022, the IIJA funding for transportation infrastructure was updated to include $120 billion reserved for roads and bridges, $102 billion reserved for rail, including $66 billion for advanced appropriations and $36 billion in authorized rail funding, and $25 billion reserved for airports. As a result of this bill, Sterling had an increase in bid activity and project awards starting in the third quarter of 2022, and we expect this trend to continue for the foreseeable future.

Building Solutions—Our Building Solutions segment is comprised of our residential and commercial businesses. The revenue growth of our residential business is directly related to the growth of new home starts in its key market of Dallas-Fort Worth and the continued expansion in the Houston and Phoenix markets. The core customer base of our residential business is primarily made up of leading national home builders as well as regional and custom home builders. In 2022, the residential market experienced significant price volatility and availability for key materials including concrete, steel and lumber, as well as increases in subcontractor labor cost and decreases in labor availability. While the Company has worked with customers to pass on the increases in material and labor cost, the Company may not be successful in recouping these additional costs in the future. Increased interest rates and inflation have continued to escalate, which has made new home ownership less affordable. In turn, we saw a decrease in housing starts and reduced demand for single-family homes however, home prices began falling toward the second half of the year. For our commercial business, the demand in the multi-family market has started to increase, helping to offset the decrease in housing starts.

BACKLOG

Our remaining performance obligations on our projects, as defined in ASC 606, do not differ from what we refer to as “Backlog.” Our Backlog represents the amount of revenues we expect to recognize in the future from our contract commitments on projects. The contracts in Backlog are typically completed in 6 to 36 months. Our unsigned low-bid awards (“Unsigned Low-bid Awards”) are excluded from Backlog until the contract is executed by our customer. We refer to the combination of our Backlog and Unsigned Low-bid Awards as “Combined Backlog.” Our book-to-burn ratio, a non-GAAP measure, is determined by taking our additions to Backlog and dividing it by revenue for the applicable period. This metric allows management to monitor the Company’s business development efforts to ensure we grow our Backlog and our business over time, and management believes that this measure is useful to investors for the same reason.

At December 31, 2022, our Backlog was $1.41 billion, as compared to $1.33 billion at December 31, 2021, with a book-to-burn ratio of 1.06 for the year ended December 31, 2022. Backlog includes $18.5 million and $71.5 million attributable to our share of estimated revenues related to joint ventures where we are a noncontrolling joint venture partner at December 31, 2022 and 2021, respectively. We anticipate that approximately 75% of our Backlog will be recognized as revenues during 2023, with substantially all remaining recognized in the twelve months following.

Unsigned Low-bid Awards were $275.0 million at December 31, 2022 and $22.5 million at December 31, 2021. Combined Backlog totaled $1.69 billion at December 31, 2022 and $1.35 billion at December 31, 2021, with a book-to-burn ratio of 1.22 for the year ended December 31, 2022.

The Company’s margin in Backlog has increased from 12.6% at December 31, 2021 to 14.3% at December 31, 2022 and the Combined Backlog margin increased from 12.6% at December 31, 2021 to 14.2% at December 31, 2022, driven by a greater mix of E-Infrastructure Solutions backlog and an improved backlog margin mix within Transportation Solutions.

Backlog and gross margin:

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RESULTS OF OPERATIONS

Consolidated Results

Financial highlights for 2022 as compared to 2021 and 2020 are as follows:

2022 compared to 2021

Revenues—Revenues were $1.77 billion for 2022, an increase of $355.1 million or 25.1% compared to the prior year. The increase was driven by a $436.5 million increase in E-Infrastructure Solutions (including $288.8 million related to the acquired Petillo operations) and a $4.2 million increase in Building Solutions, partly offset by a $85.6 million decrease in Transportation Solutions.

Gross profit—Gross profit was $274.6 million for 2022, an increase of $71.0 million or 34.9% compared to the prior year. The increase was driven by the inclusion of Petillo operations and higher volume from organic growth within E-Infrastructure Solutions, and the recovery of increased costs within Building Solutions, partly offset by continued headwinds from inflation, labor and material supply issues primarily within E-Infrastructure Solutions and Building Solutions.

Gross margin—The Company’s gross margin as a percent of revenue increased to 15.5% in 2022, as compared to 14.4% in the prior year, driven by an increased proportion of revenue from the higher margin E-Infrastructure Solutions segment, improved margin mix from Transportation Solutions, and the recovery of increased costs from Building Solutions.

Contracts in progress that were not substantially complete totaled approximately 230 and 150 at December 31, 2022 and 2021, 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 has in refining its estimate of total revenues (including incentives, delay penalties and change 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.

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General and administrative expenses—General and administrative expenses were $86.5 million, or 4.9% of revenue, for 2022, compared to $69.2 million, or 4.9% of revenue, in the prior year. The increase is primarily due to the inclusion of $12.1 million of general and administrative expense generated from Petillo operations in 2022, as well as higher employee and insurance related costs, continued supply-chain challenges, and increasing inflation.

Acquisition related costs—The Company had acquisition related costs of $0.8 million and $3.9 million in the years ended 2022 and 2021, respectively. These costs relate primarily to the acquisition of Petillo in 2021 and completing its integration in 2022 and the CCS business acquisition in 2022.

Other operating expense, net—Other operating expense, net, includes 50% of earnings and losses related to members’ interest of our consolidated 50% owned subsidiary, 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 an increase of $1.3 million during 2022 compared to the prior year. Members’ interest earnings increased by $1.8 million during 2022 to $13.3 million from $11.5 million in the prior year, as a result of improved margin mix from our 50% owned subsidiary. Earn-out expense decreased by $0.5 million during 2022 to zero compared to $0.5 million in the prior year as the result of the end of the earn-out period in the second quarter of 2021.

Interest expense—Interest expense was $20.6 million in 2022 compared to $19.3 million in the prior year. The increase is due to additional borrowings related to the Petillo Acquisition and increasing interest rates in 2022.

Income taxes—The effective income tax rate was 29.8% in 2022 and 28.0% in the prior year. The rates varied from the statutory rate primarily as a result of state income taxes, non-taxed PPP loan forgiveness, non-deductible compensation and other permanent differences. The Company makes cash payments for state income taxes in states in which the Company does not have net operating loss carry forwards. The Company expects to pay federal taxes in 2023 due to the full utilization of its net operating loss carryforward. See Note 14 - Income Taxes for more information.

Discontinued Operations—Revenues were $196.1 million for 2022, an increase of $28.7 million or 17.2% compared to the prior year. The increase was driven by higher heavy highway and water containment and treatment revenue, partly offset by lower aviation revenue. Operating loss was $7.3 million for 2022, a decrease of $7.6 million, compared to the prior year. The decrease was primarily the result of cost overruns on several water containment and treatment projects and higher professional fees. Pretax loss was $4.8 million for 2022, a decrease of $6.1 million compared to the prior year. The decrease was driven by the aforementioned operating loss, partly offset by a gain on the forgiveness of a PPP loan. The Company recognized a pretax gain of $16.7 million in 2022, as the result of the disposition of the Company’s 50% ownership interest in its partnership with Myers & Sons Construction L.P.

2021 compared to 2020

Revenues—Revenues were $1.41 billion for 2021, an increase of $187.6 million or 15.3% compared to the prior year. The increase was driven by a $75.0 million increase in Transportation Solutions, a $71.5 million increase in E-Infrastructure Solutions and a $41.1 million increase in Building Solutions.

Gross profit—Gross profit was $203.5 million for 2021, an increase of $23.9 million or 13.3% compared to the prior year. The Company’s gross margin decreased to 14.4% in 2021, as compared to 14.6% in the prior year, driven by lower project margin mix.

Contracts in progress that were not substantially complete totaled approximately 150 at both December 31, 2021 and 2020. 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 has in refining its estimate of total revenues (including incentives, delay penalties and change 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 were $69.2 million, or 4.9% of revenue, for 2021, compared to $64.3 million, or 5.2% of revenue, in the prior year. The increased expense was primarily due to higher employee and insurance related costs.

Acquisition related costs—The Company had acquisition related costs of $3.9 million and $1.0 million in the years ended 2021 and 2020, respectively. These costs related primarily to the acquisition of Petillo in 2021 and completing the integration of Plateau in 2020.

Other operating expense, net—Other operating expense, net, includes 50% of earnings and losses related to members’ interest of consolidated 50% owned subsidiary, earn-out expense and other miscellaneous operating income or expense.

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Members’ interest earnings are treated as an expense and increase the liability account. The change in other operating expense, net, was an increase of $1.8 million during 2021 compared to the prior year. Members’ interest earnings increased by $2.8 million during 2021 to $11.5 million from $8.7 million in the prior year, as a result of improved margin mix from our 50% owned subsidiary. Earn-out expense decreased by $1.0 million during 2021 to $0.5 million from $1.5 million in the prior year as the result of the end of the earn-out period in the second quarter of 2021.

Interest expense—Interest expense was $19.3 million in 2021 compared to $29.3 million in the prior year. The decrease was in part due to a 2% lower applicable interest rate provided under the amended Credit Agreement (as defined below), which was amended in the second quarter of 2021, and in part due to the Company’s declining original Term Loan Facility (as defined below) balance, as the Company paid down $48.1 million of the balance in 2021.

Income taxes—The effective income tax rate was 28.0% in 2021 and 30.7% in the prior year. The decrease was primarily due to reduction in state income taxes and other permanent differences. Due to its net operating loss carryforwards, the Company had no cash payments for federal income taxes in 2021 or 2020. The Company makes cash payments for state income taxes in states in which the Company does not have net operating loss carryforwards. See Note 14 - Income Taxes for more information.

Discontinued Operations—Revenues were $167.4 million for 2021, a decrease of $33.3 million or 16.6%, compared to the prior year. The decrease was driven by lower aviation, water containment and treatment, and heavy highway revenue. Operating income was $0.3 million for 2021, a decrease of $2.0 million, compared to the prior year. The decrease was primarily the result of higher employee cost and professional fees, partly offset by an improved margin mix. Pretax income was $1.2 million for 2021, a decrease of $1.0 million compared to the prior year. The decrease was driven by the aforementioned operating loss, partly offset by a gain on the forgiveness of a PPP loan.

Segment Results

The Company’s operations consist of three reportable segments: E-Infrastructure Solutions, Transportation Solutions, and Building Solutions. We incur expenses at the corporate level that relate to our business as a whole. Certain of these amounts have been charged to our business segments by various methods, largely on the basis of usage, with the unallocated remainder reported in the “Corporate” line. The segment information for the prior periods has been recast to conform to the current presentation of continuing operations.

2022 compared to 2021

E-Infrastructure Solutions

Revenues—Revenues were $905.3 million for 2022, an increase of $436.5 million or 93.1% compared to the prior year. The increase was primarily driven by the inclusion of $288.8 million of revenue generated from Petillo operations, as well as higher volume from organic growth.

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Operating income—Operating income was $121.5 million for 2022, an increase of $41.0 million compared to the prior year. The increase in operating income was driven by the inclusion of Petillo operations and higher volume, partly offset by continued headwinds from inflation and supply chain issues and the related impact on productivity and efficiency, but also seasonality of weather in the Northeastern and Mid-Atlantic U.S. region in the first quarter of 2022. The decrease in operating margin was primarily due to the inclusion of certain projects with lower margin scopes of work within Petillo’s operations and the aforementioned headwinds.

Transportation Solutions

Revenues—Revenues were $542.6 million for 2022, a decrease of $85.6 million or 13.6% compared to the prior year. The decrease was driven by lower heavy highway and aviation revenue due to the timing of backlog execution, partly offset by an increase in other revenue. During 2022, our low-bid heavy highway revenue decreased by $32.7 million compared to the prior year, consistent with our strategy.

Operating income—Operating income was $26.6 million for 2022, an increase of $6.7 million compared to the prior year. The increase was the result of improved margin mix with the ramp up of construction on large design-build projects and the continued execution of our strategic plan to reduce revenue from lower margin low-bid heavy highway work, partly offset by lower volume.

Building Solutions

Revenues—Revenues were $321.6 million for 2022, an increase of $4.2 million or 1.3% compared to the prior year. The increase in revenue was the result of a $5.7 million increase in commercial revenues, partly offset by a $1.5 million decrease in residential revenues. The increase was primarily driven by higher demand in the multi-family market, partly offset by a decline in single family housing demand as home ownership became less affordable due to increasing interest rates and inflation in 2022. Some builders have initiated incentive programs in late 2022 to help customers offset the rising inflation and financing costs; however, it is uncertain if or when these programs will impact demand for new single family homes.

Operating income—Operating income was $36.7 million for 2022, an increase of $4.1 million compared to $32.6 million in the prior year. The increase in operating income and margin were driven by the aforementioned higher volume and by our successful efforts to work with customers to pass on the increases in material and labor cost. Our operating margins may continue to be impacted by higher material costs for concrete, steel and lumber, and the lack of consistent availability of these materials, as well as labor shortages and increased subcontractor labor costs, and while the Company continues to work with customers to pass on the increases in material and labor cost, the Company may not be successful in recouping these additional costs in the future.

Corporate

Operating expense—Corporate overhead is primarily comprised of corporate headquarters facility expense, the cost of the executive management team, and expenses pertaining to certain centralized functions that benefit the entire Company but are not directly attributable to the businesses, such as corporate human resources, legal, governance and finance functions. The corporate overhead element of general and administrative expenses, which is not allocated to the business segments, was $24.1 million for 2022, an increase of $2.0 million compared to the prior year. The increase was primarily due to higher employee and insurance related costs.

2021 compared to 2020

E-Infrastructure Solutions

Revenues—Revenues were $468.8 million for 2021, an increase of $71.5 million or 18.0% compared to the prior year. The increase was primarily driven by a higher volume of site development.

Operating income—Operating income was $80.5 million for 2021, an increase of $4.0 million compared to the prior year. The increase was primarily driven by higher volume; however, it was partly offset by headwinds from supply chain issues and the related impact on productivity and efficiency.

Transportation Solutions

Revenues—Revenues were $628.2 million for 2021, an increase of $75.0 million or 13.6% compared to the prior year. The increase was driven by higher heavy highway and aviation revenue. The increase in heavy highway revenue was primarily due to the ramp up of construction on large design-build joint venture projects. During 2021, our low-bid heavy highway revenue decreased by $62.7 million, which was offset by an increase of $113.6 million from heavy highway design build and other revenues compared to the prior year.

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Operating income—Operating income was $19.9 million for 2021, an increase of $7.9 million compared to the prior year. The increase was the result of improved margin mix with the ramp up of construction on large design-build joint venture projects and the continuation of our strategic revenue reduction from lower margin low-bid heavy highway work.

Building Solutions

Revenues—Revenues were $317.4 million for 2021, an increase of $41.1 million or 14.9% compared to the prior year. The increase in revenue was primarily the result of a $44.5 million increase in residential revenues, partly offset by a $3.4 million decrease in commercial revenues. Despite inclement weather in Texas in the first half of 2021, the Company’s revenue increased due to a record number of concrete slabs poured in 2021.

Operating income—Operating income was $32.6 million for 2021, an increase of $2.1 million compared to the prior year. The increase was driven by the aforementioned higher volume; however, operating margins declined due to higher material costs for concrete, steel and lumber, and the lack of consistent availability of these materials, as well as labor shortages and increased subcontractor labor costs.

Corporate

Operating expense—Corporate overhead is primarily comprised of corporate headquarters facility expense, the cost of the executive management team, and expenses pertaining to certain centralized functions that benefit the entire Company but are not directly attributable to the businesses, such as corporate human resources, legal, governance and finance functions. The corporate overhead element of general and administrative expenses, which is not allocated to the business segments, was $22.0 million for 2021, a decrease of $3.3 million compared to the prior year.

LIQUIDITY AND SOURCES OF CAPITAL

Cash and Cash Equivalents—Total cash and cash equivalents at December 31, 2022 and 2021 were $181.5 million and $81.8 million, respectively, and included the following components:

The following table presents consolidated information about our cash flows:

Operating Activities—During 2022, net cash provided by operating activities was $219.1 million compared to net cash provided by operating activities of $158.9 million in the prior year. Cash flows provided by operating activities were driven by higher net income, adjusted for various non-cash items and changes in accounts receivable, net contracts in progress and accounts payable balances (collectively, “Contract Capital”), as discussed below, and other assets and accrued liabilities.

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Changes in Contract Capital—The change in operating assets and liabilities varies due to fluctuations in operating activities and investments in Contract Capital. The changes in components of Contract Capital during the years ended December 31, 2022 and 2021 were as follows:

During 2022, the change in Contract Capital increased liquidity by $21.3 million. The Company’s Contract Capital fluctuations are impacted by the mix of projects in Backlog, seasonality (particularly with the acquired Petillo operations), the timing of new awards and related payments for 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.

Investing Activities—During 2022, net cash used in investing activities was $89.8 million, compared to net cash used of $223.4 million in the prior year. In 2022, the cash used in investing activities was driven by purchases of capital equipment less cash proceeds from the sale of property and equipment, and to a lesser extent, acquisitions, primarily from the CCS business acquisition. During 2022, the net cash used in investing activities also included the removal of cash, cash equivalents and restricted cash due to the disposition of Myers. This cash outflow will be offset by the $18 million to be received from the sale of Myers, with $12 million to be received in January of 2023 and by a series of three $2 million payments due by various dates in 2023, 2025 and 2027. Capital equipment is acquired as needed to support changing levels of production activities and to replace retiring equipment.

Financing Activities—During 2022, net cash used in financing activities was $32.8 million compared to net cash provided of $80.6 million in the prior year. In 2022, the cash used in financing activities was driven by $23.4 million in repayments on the Term Loan Facility (as defined below) and $9.4 million for withholding taxes paid on the net share settlement of vested equity awards.

Discontinued Operations—Cash flows from discontinued operations are disclosed below and in Note 4 - Dispositions, rather than separately presented in the statement of cash flows. The Company does not expect the absence of the cash flows from discontinued operations to have a significant impact on future liquidity and capital resources.

The following table presents the cash flows from discontinued operations. The year ended December 31, 2022 represents the period ending November 30, 2022, the date of disposition.

Credit Facilities, Debt and Other Capital

General—In addition to our available cash, cash equivalents and cash provided by operations, from time to time we use borrowings to finance acquisitions, our capital expenditures and working capital needs.

Credit Facility—Our amended credit agreement (as amended, the “Credit Agreement”) provides the Company with senior secured debt financing in an initial principal amount of up to $615 million in the aggregate (collectively, the “Credit Facility”), consisting of (i) a senior secured first lien term loan facility (the “Term Loan Facility”) in the aggregate principal amount of $540 million and (ii) a senior secured first lien revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of $75 million (with a $75 million limit for the issuance of letters of credit and a $15 million sublimit for swing line loans). At December 31, 2022, we had $423.7 million of outstanding borrowings under the Term Loan Facility and

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no outstanding borrowings under the Revolving Credit Facility. The obligations under the Credit Facility are secured by substantially all assets of the Company and the subsidiary guarantors, subject to certain permitted liens and interests of other parties. The Credit Facility will mature on October 2, 2024.

Other Debt—Other debt primarily consists of a subordinated promissory note to the Plateau seller. As part of the Plateau Acquisition, the Company issued a $10 million subordinated promissory note to one of the Plateau sellers that bears interest at 8% with interest payments due quarterly. The subordinated promissory note has no scheduled payments; however, it may be repaid in whole or in 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 all principal and interest then outstanding due on April 2, 2025. At inception, the subordinated promissory note’s interest rate approximated market.

Compliance and Other—The Credit Agreement contains various affirmative and negative covenants that may, subject to certain exceptions, restrict the ability of us and 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 maintain certain financial covenants. As of December 31, 2022, we were in compliance with all of our restrictive and financial covenants. The Company’s debt is recorded at its carrying amount in the Consolidated Balance Sheets. As of December 31, 2022 and 2021, the carrying values of our debt outstanding approximated the fair values.

Borrowings—Based on our average borrowings for 2022 and our 2023 forecasted cash needs, we continue to believe that the Company has sufficient liquid financial resources to fund our requirements for the next year of operations. Furthermore, the Company is continually assessing ways to increase revenues and reduce costs to improve liquidity. However, in the event of a substantial cash constraint and if we were unable to secure adequate debt financing, our liquidity could be materially and adversely affected.

Issuance Common Stock—On December 20, 2022, in connection with the acquisition of the business of CCS, the Company issued 157 thousand shares of the Company’s stock as consideration paid to the sellers. The value of the shares issued was $4.9 million based on Sterling’s closing stock price on December 19, 2022. On December 30, 2021, in connection with the acquisition of Petillo, the Company issued 759 thousand shares of the Company’s stock as consideration paid to the Petillo sellers. The value of the shares issued was $20.4 million based on Sterling’s closing stock price on December 29, 2021. See Note 3 - Acquisitions for further discussion.

Bonding—As is customary in the construction business, we are required to provide surety bonds to secure our performance under construction contracts. Our ability to obtain surety bonds primarily depends upon our capitalization, working capital, past performance, management expertise and reputation and certain external factors, including the overall capacity of the surety market. Surety companies consider such factors in relationship to the amount of our backlog and their underwriting standards, which may change from time to time. We have pledged all proceeds and other rights under our construction contracts to our bond surety company. Events that affect the insurance and bonding markets may result in bonding becoming more difficult to obtain in the future, or being available only at a significantly greater cost. To date, we have not encountered difficulties or material cost increases in obtaining new surety bonds.

Capital 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 civil infrastructure and E-infrastructure 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.

Material Cash Requirements

The following table sets forth our material cash requirements from contractual obligations at December 31, 2022:

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(1) Mandatory redemption is based on the death or disability of the interest holder. Undistributed earnings can be distributed upon unanimous consent from the members and for tax distribution. At this time we cannot predict when such a distribution will be made. The Company has purchased a $20 million death and permanent total disability insurance policy to mitigate the Company’s cash draw if such an event were to occur.

Capital Expenditures—Capital equipment is acquired as needed by increased levels of production and to replace retiring equipment. Capital expenditures, net of disposals, incurred in 2022 were $56 million. Management expects net capital expenditures in 2023 to be in the range of $55 to $60 million; however, the award of a project requiring significant purchases of equipment or other factors could result in increased expenditures.

NEW ACCOUNTING STANDARDS

There were no new accounting standards adopted during the year ended December 31, 2022.

CRITICAL ACCOUNTING ESTIMATES

The discussion and analysis of the financial condition and results of operations are based on the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting policies generally accepted in the U.S. (“GAAP”). The preparation of these 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 estimates involve more significant judgment used in the preparation of the Consolidated Financial Statements.

Revenue Recognition

Performance Obligations Satisfied Over Time—Revenue for 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 contingencies, 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 contract accounting, actual results could differ from those estimates, which could result in material changes to the Company’s Consolidated Financial Statements and related disclosures. See “Contract Estimates” within Note 5 - Revenue from Customers for further discussion.

Fair Value Measurements

The Company may use fair value measurements that involve the input of estimates that require significant judgment. The Company’s use of these fair value measurements include:

•determining the purchase price allocation for an acquired business;

•goodwill impairment testing when a quantitative analysis is deemed necessary; and

•long-lived asset (such as property, equipment and intangible assets) impairment testing when impairment indicators are present.

When performing quantitative fair value or impairment evaluations, the Company estimates the fair value of assets by considering the results of income-based and/or a market-based valuation method. Under the income-based method, a discounted cash flow valuation model uses recent forecasts to compare the estimated fair value of each asset to its carrying value. Cash flow forecasts are discounted using the weighted-average cost of capital for the applicable reporting unit at the date of evaluation. The weighted-average cost of capital is comprised of the cost of equity and the cost of debt with a weighting for each that reflects the Company’s current capital structure. Preparation of long-term forecasts involve significant judgments involving consideration of backlog, expected future awards, customer attribution, working capital assumptions and general market trends and conditions. Significant changes in these forecasts or any valuation assumptions, such as the discount rate selected, could affect the estimated fair value of our assets and could result in impairment. Under the market-based method,

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market information such as multiples of comparable publicly traded companies and/or completed sales transactions are used to develop or validate our fair value conclusions, when appropriate and available.

Purchase Price Allocations—The aggregate purchase price for the CCS, Petillo, and Kimes acquisitions were allocated to the major categories of assets and liabilities acquired based upon their estimated fair values as of the closing date, which were based, in part, upon internal and external valuations of certain assets, including specifically identified intangible assets and property and equipment. The valuations were based on the income-based and market-based valuation methods noted above. The excess of the purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired was recorded as goodwill. See Note 3 - Acquisitions for further discussion.

Goodwill—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 of 2022, 2021 and 2020, the Company performed a qualitative assessment of goodwill, and based on this assessment, no indicators of impairment were present. Factors considered include macroeconomic, industry and competitive conditions, financial performance and reporting unit specific events. These are discussed in a number of places including Item 1A “Risk Factors.” Our annual assessments indicated there was no impairment of goodwill during the years ended December 31, 2022, 2021 and 2020.

Long-lived Assets—Long-lived assets, which include property, equipment and acquired intangible assets, are reviewed for impairment whenever 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. Actual 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 years ended December 31, 2022, 2021 and 2020, there were no events or changes in circumstances that would indicate a material impairment of our long-lived assets.