UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q   (Mark one)
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2017 Or
[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___ to ___
Commission file number 1-31993
STERLING CONSTRUCTION COMPANY, INC. (Exact name of registrant as specified in its charter)
DELAWARE	25-1655321
State or other jurisdiction of incorporation or organization	(I.R.S. Employer Identification No.)
1800 Hughes Landing Blvd. The Woodlands, Texas	77380
(Address of principal executive office)	(Zip Code)
Registrant’s telephone number, including area code  (281) 214-0800
(Former name, former address and former fiscal year, if changed from last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [√] Yes    [ ] No   Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).        [√] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer     [ ] Non-accelerated filer       [ ] (Do not check if a smaller reporting company)	Accelerated filer    [√] Smaller reporting company    [ ] Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes     [√] No
At July 28, 2017, there were 27,030,207 shares outstanding of the issuer’s common stock, par value $0.01 per share.

 

 

STERLING CONSTRUCTION COMPANY, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.  Financial Statements	3
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.  Quantitative and Qualitative Disclosures about Market Risk	30
Item 4.  Controls and Procedures	30
PART II. OTHER INFORMATION
Item 1.  Legal Proceedings	32
Item 1A.  Risk Factors	32
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.  Defaults upon Senior Securities	32
Item 4.  Mine Safety Disclosures	32
Item 5.  Other Information	32
Item 6.  Exhibits	33
SIGNATURES	34

 

 

PART I

Item 1. Financial Statements

 

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share data)

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2017

(Amounts in thousands)

(Unaudited)

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

 

 

 

Property and equipment are summarized as follows (amounts in thousands):

 

 

During the quarter ended June 30, 2017, we entered into a definitive agreement to sell one of our Texas subsidiary’s office, equipment shop and yard facility, which is in Texas. The property had a net book value of $4.1 million, and we expect to receive $3.2 million, after selling costs, once the transaction has closed in the third quarter of 2017. As such, we have reclassified and included in “other current assets” in our condensed consolidated balance sheet and recorded a $0.9 million write-down to fair value that has been recorded in “other operating income (expense), net” for the quarter ended June 30, 2017.

 

Debt consists of the following (in thousands):

 

On April 3, 2017, the Company, as borrower, and certain of its subsidiaries, as guarantors, entered into a Loan and Security Agreement with Wilmington Trust, National Association, as agent, and the lenders party thereto (the “Loan Agreement”), providing for a term loan of $85,000,000 (the “Loan”) with a maturity date of April 4, 2022, which replaced the then existing debt facility. The Loan is secured by substantially all of the assets of the Company and its subsidiaries.

Interest on the Loan is equal to the one-, two-, three- or six-month London interbank rate, or LIBOR, plus 8.75% per annum on the unpaid principal amount of the Loan, subject to adjustment under certain circumstances. Interest on the Loan is generally payable monthly. There are no amortized principal payments; however, the Company is required to prepay the Loan, and in certain cases pay a prepayment premium thereon, with proceeds received from the issuances of debt or equity, transfers, events of loss and extraordinary receipts. The Company is required to make an offer quarterly to the lenders to prepay the Loan in an amount equal to 75% of its excess cash flow, plus accrued and unpaid interest thereon and a prepayment premium.

The Loan Agreement contains various covenants that limit, among other things, the Company’s ability and certain of its subsidiaries’ ability to incur certain indebtedness, grant certain liens, merge or consolidate, sell assets, make certain loans, enter into acquisitions, incur capital expenditures, make investments, and pay dividends. In addition, the Company is required to maintain the following principal financial covenants:

 

·

a ratio of secured indebtedness to EBITDA of not more than 3.10 to 1.00 beginning with the four consecutive quarters ending June 30, 2017, reducing to 1.80 to 1.00 by the four consecutive quarters ending September 30, 2019;

·

daily cash collateral of not less than $10,000,000 commencing on June 30, 2017, increasing to $15,000,000 on October 1, 2017, and potentially further increasing to $18,000,000 beginning on April 4, 2018;

·

a rolling four quarter gross margin in contract backlog of not less than $60,000,000 commencing June 30, 2017, increasing to $70,000,000 by March 31, 2019;

·

the incurrence of net capital expenditures during each four consecutive fiscal quarters shall not exceed $15,000,000;

·

bonding capacity shall be maintained at all times in an amount not less than $1,000,000,000; and

·

the EBITDA of Tealstone Residential Concrete, Inc. shall not be less than $12,000,000 during each four consecutive fiscal quarters, commencing June 30, 2017.

 

The Company is in compliance with these covenants at June 30, 2017.

The Loan Agreement also includes customary events of default, including events of default relating to non-payment of principal or interest, inaccuracy of representations and warranties, breaches of covenants, cross-defaults, bankruptcy and insolvency events, certain unsatisfied judgments, loan documents not being valid, calls under the Company’s bonds, failure of specified individuals to remain employed by the Company, and a change of control. If an event of default occurs, the lenders will be able to accelerate the maturity of the Loan Agreement and exercise other rights and remedies.

Deferred loan costs and discounts totaled $10.4 million, which included attorney fees, investment bank fees as well as amounts paid to the lenders and which were discounted from the loan amount. Warrants valued at $3.5 million were included as well. Refer to Note 11 for additional information on the warrants. The total amount will be amortized on a straight-line basis, which approximates the effective interest method, over the five-year life of the Loan. Amortization expense of $0.5 million has been included in interest expense for the three and six months ended June 30, 2017.

As part of the extinguishment of our prior credit facility, $0.8 million in debt extinguishment costs was expensed and included as a “loss on extinguishment of debt” on our statement of operations for the three and six months ended June 30, 2017.

Fair Value

The Company’s debt is recorded at its carrying amount in the condensed consolidated balance sheets. As of June 30, 2017 and December 31, 2016, the carrying values of our debt outstanding approximated the fair values and were $85.0 million and $3.5 million, respectively for the Term Loan. There was no revolver as of June 30, 2017 and no amounts outstanding on the prior revolver as of December 31, 2016.

 

Notes and Deferred Payments to Sellers

 

As part of the Tealstone Acquisition, the Company issued $5,000,000 of promissory notes to the sellers and $2,500,000, and $7,500,000 of deferred cash payments. Based on a preliminary 12% discount rate, the Company recorded $11.6 million as notes and deferred payments to sellers in long-term debt on our condensed consolidated balance sheet at the acquisition closing date. Accreted interest for the period was $0.3 million for the three and six months ended June 30, 2017, and was recorded as interest expense.

 

Notes Payable for Transportation and Construction Equipment

The Company has purchased and financed various transportation and construction equipment to enhance the Company’s fleet of equipment. The total long-term notes payable related to the purchase of financed equipment was $2.1 million and $2.7 million at June 30, 2017 and December 31, 2016, respectively. The purchases have payment terms ranging from 3 to 5 years and the associated interest rates range from 3.15% to 6.92% The fair value of these notes payable approximates their book value.

Interest Expense

Interest expense related to our Loan and prior credit facility and other debt for the three and six months ended June 30, 2017 was $3.0 million and $3.1 million, respectively and $0.8 million and $1.7 million for the three and six months ended June 30, 2016, respectively. The increase in interest cost for both periods is due to our new Loan that has a higher amount of principal outstanding

 

 

 

 

Stock Offering

On April 3, 2017, in connection with the Tealstone Acquisition, the Company issued 1,882,058 shares of the Company’s stock as consideration paid to the sellers. The value of the shares issued was $17.1 million based on the average fair value of the shares on the date of acquisition.

On May 9, 2016, the Company completed an underwritten public offering of 5,175,000 shares of the Company’s common stock, which included the full exercise of the sole underwriter’s over-allotment option, at a price to the public of $4.00 per share ($3.77 per share net of underwriting discounts). The net proceeds from the offering of $19.1 million, after deducting underwriting discounts and other offering expenses, were used for working capital, repayment of our indebtedness under the revolving loan portion of our then existing equipment-based credit facility and for general corporate purposes.

Warrants

On April 3, 2017, the Company issued warrants (the “Warrants”) to the lenders under the Loan Agreement (the “Holders”) pursuant to which such holders have the right to purchase, for a period of five years from the date of issuance, up to an aggregate of 1,000,000 shares of the Company’s common stock (the “Warrant Shares”) at an initial exercise price of $10.25 per share, subject to adjustment for stock splits, combinations and similar recapitalization events and weighted-average anti-dilution upon the issuance by the Company of shares of common stock or rights, options or convertible securities exercisable for common stock in the future at a price below the exercise price of the Warrants.

 

The Company valued these Warrants using the Black-Scholes model, which is a type 3 fair value measurement. The key assumptions used in the Black-Scholes Model with respect to these valuations are summarized in the following table:

 

Based on these inputs, the total fair value of the warrants was $3.5 million, which was recorded as a Loan discount and netted against our new Loan and included in “additional paid in capital” on our balance sheet.

 

Stock-Based Compensation

The Company has a stock-based incentive plan that is administered by the Compensation Committee of the Board of Directors. Refer to Note 14 of the Notes to Consolidated Financial Statements included in the 2016 Form 10-K for further information.

During the three and six months ended June 30, 2017, the Company awarded a total of 102,571 and 166,410 shares of common stock, respectively. The Company recorded stock-based compensation expense of $1.4 million and $2.0 million for the three months and six months ended June 30, 2017, respectively, which included costs for acceleration of unvested shares related to the departure of our former CEO of $0.7 million. The Company recorded stock-based compensation expense of $0.4 million and $0.8 million for the three and six months ended June 30, 2016, respectively.

At June 30, 2017 and 2016, total unrecognized compensation cost related to unvested common stock awards was $1.5 million and $2.7 million respectively. This cost is expected to be recognized over a weighted average period of 2.2 years. At June 30, 2017, there were 0.5 million shares of common stock covered by outstanding unvested common stock

 

 

Basic net income (loss) per share attributable to Sterling common stockholders is computed by dividing net income (loss) attributable to Sterling common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share attributable to Sterling common stockholders is the same as basic net income (loss) per share attributable to Sterling common stockholders but includes dilutive unvested stock and warrants using the treasury stock method. The following table reconciles the numerators and denominators of the basic and diluted per common share computations for net income (loss) attributable to Sterling common stockholders (amounts in thousands, except per share data):

 

 

In accordance with the treasury stock method approximately 0.2 million shares of unvested common stock were excluded from the diluted weighted average common shares outstanding for the six months ended June 30, 2016, as the Company incurred a loss during that period and the impact of such shares would have been antidilutive. Approximately, 1.0 million shares of common stock related to our Warrant issuance were excluded from the diluted weighted average common shares outstanding for the three months and six months ended June 30, 2017, as the shares were out of the money and considered anti-dilutive.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Comment Regarding Forward-Looking Statements

This Report includes statements that are, or may be considered to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements are included throughout this Report, including in this section, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. We have used the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar terms and phrases to identify forward-looking statements in this Report.

Forward-looking statements reflect our current expectations as of the date of this Report regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, that could result in our expectations not being realized or otherwise could materially affect our financial condition, results of operations and cash flows.

Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, the following:

·

changes in general economic conditions, including recessions, reductions in federal, state and local government funding for infrastructure services and changes in those governments’ budgets, practices, laws and regulations;

·

delays or difficulties related to the completion of our projects, including additional costs, reductions in revenues or the payment of liquidated damages, or delays or difficulties related to obtaining required governmental permits and approvals;

·

actions of suppliers, subcontractors, design engineers, joint venture partners, customers, competitors, banks, surety companies and others which are beyond our control, including suppliers’, subcontractors’ and joint venture partners’ failure to perform;

·

factors that affect the accuracy of estimates inherent in our bidding for contracts, estimates of backlog, percentage-of-completion accounting policies, including onsite conditions that differ materially from those assumed in our original bid, contract modifications, mechanical problems with our machinery or equipment and effects of other risks discussed in this document;

·

design/build contracts which subject us to the risk of design errors and omissions;

·

cost escalations associated with our contracts, including changes in availability, proximity and cost of materials such as steel, cement, concrete, aggregates, oil, fuel and other construction materials and cost escalations associated with subcontractors and labor;

·

our dependence on a limited number of significant customers;

·

adverse weather conditions; although we prepare our budgets and bid contracts based on historical rain and snowfall patterns, the incidence of rain, snow, hurricanes, etc., may differ materially from these expectations;

·

the presence of competitors with greater financial resources or lower margin requirements than ours and the impact of competitive bidders on our ability to obtain new backlog at reasonable margins acceptable to us;

·

our ability to successfully identify, finance, complete and integrate acquisitions;

·

citations issued by any governmental authority, including the Occupational Safety and Health Administration;

·

federal, state and local environmental laws and regulations where non-compliance can result in penalties and/or termination of contracts as well as civil and criminal liability;

·

adverse economic conditions in our markets; and

·

the other factors discussed in more detail in our Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”) under “Part I, Item 1A. Risk Factors.”

In reading this Report, you should consider these factors carefully in evaluating any forward-looking statements and you are cautioned not to place undue reliance on any forward-looking statements. Although we believe that our plans, intentions and expectations reflected in, or suggested by, the forward-looking statements that we make in this Report are reasonable, we can provide no assurance that they will be achieved.

 

The forward-looking statements included in this Report are made only as of the date of this Report and we undertake no obligation to update any information contained in this Report or to publicly release the results of any revisions to any forward-looking statements to reflect events or circumstances that occur, or that we become aware of after the date of this Report, except as may be required by applicable securities laws.

 

Overview

Sterling Construction Company, Inc. (“Sterling” or “the Company”), is a leading heavy civil construction company that specializes in building and reconstruction of transportation infrastructure, water infrastructure, and residential and commercial concrete projects in Texas, Utah, Nevada, Colorado, Arizona, California, Hawaii, and other states in which there are construction opportunities. Our heavy civil construction projects include highways, roads, bridges, airfields, ports, light rail, water, wastewater and storm drainage systems, multi-family homes, commercial projects and parking structures. Our residential concrete construction projects include concrete foundations for single-family homes.

 

Although we describe our business in this Report in terms of the services we provide, our base of customers and the geographic areas in which we operate, we have concluded that our operations consist of two reportable segments, two operating segments and two reporting unit components: heavy civil construction and residential construction. In making this determination, the Company considered the discrete financial information used by our Chief Operating Decision Maker (“CODM”). Based on this approach, the Company noted that the CODM organizes, evaluates and manages the financial information around the aggregation of heavy civil construction projects and the entire residential construction division when making operating decisions and assessing the Company’s overall performance. Furthermore, we considered the differences between the types of work performed in each reporting unit. Each heavy civil construction project has similar characteristics, includes similar services, has similar types of customers and is subject to similar economic and regulatory environments. Projects in our heavy civil construction segment typically last for several years, involve several subtasks and are accounted for using the percentage of completion method. Conversely, our residential construction projects typically consist of a high volume of independent units performed for customers that are billed, paid and accounted for as the individual units are completed. Each job performed in our residential construction segment typically takes less than one month to complete.

 

Market Outlook and Trends

Market outlook: Our core heavy civil business, through June 30,2017, was primarily driven by Federal and state funding. The 2015 passage of the federally funded five-year $305 billion surface transportation bill will increase the annual federal highway investment by 15.1% over the five-year period from 2016 to 2020. In addition to the Federal program, several of the states in our key markets have instituted actions to further increase annual spending. In Texas, two constitutional amendments were passed, which will increase the annual funds allocated to transportation projects by $4.0 billion to $4.5 billion per year. In Utah, a 20% gas tax increase was put into effect January 1, 2016, which is the first state gas tax increase in 18 years. Furthermore, in 2017, a bill was passed authorizing the issuance of up to $1 billion in bonds for use in the state’s highway projects. In addition, a 1-cent sales tax increase was approved in Los Angeles, California in 2016 that will provide $3 billion a year for local road, bridge and transit projects. See “Item 1. Business—Our Markets, Competition and Customers” in our 2016 Form 10-K for a more detailed discussion of our markets and their funding sources.

Bid discipline and project execution: To ensure that we take full advantage of the improved market conditions and maximize profitability we have completed an extensive evaluation of our projects’ historical success based on project size, end customer, product delivered and geography. The knowledge gained has now been incorporated into a more formal and rigorous bid evaluation and approval process, which along with the institution of common processes, we believe will enable us to focus our resources on the most beneficial projects and significantly reduce our risk. In addition, in order to strengthen these processes and capitalize further on the improved market conditions, we appointed a Chief Operating Officer late in the first quarter of 2016.

 

Backlog, backlog gross margin and gross margin trends:

	Backlog	Gross Margin in Backlog
	(Dollar amounts in thousands)
Second quarter of 2017	$923,000	8.4%
First quarter of 2017	$925,000	8.4%
Fourth quarter of 2016	$823,000	8.2%
Third quarter of 2016	$820,000	8.0%
Second quarter of 2016	$810,000	7.8%

Our total margin in backlog has increased approximately 60 basis points, from 7.8% at June 30, 2016 to 8.4% at June 30, 2017. The increases noted above are primarily the result of the improving market conditions and actions that we have taken to improve bid discipline.

 

For purposes of the discussions which follow, “Current Quarter” refers to the three-month period ended June 30, 2017, “Prior Quarter” refers to the three-month period ended June 30, 2016, “Current Period” refers to the six-month period ended June 30, 2017 and “Prior Period” refers to the six-month period ended June 30, 2016.

 

Summary of Financial Results for the Current Quarter and Current Period

 

In the Current Quarter and Current Period, we had operating income of $8.4 million and $6.6 million, respectively, income before income taxes and earnings attributable to noncontrolling interest owners of $4.7 million and $2.8 million, respectively, net income attributable to Sterling common stockholders of $3.7 million and $1.4 million, respectively, and net income per diluted share attributable to Sterling common stockholders of $0.13 and $0.05, respectively.

 

Results of Operations

 

Heavy Civil Backlog at June 30, 2017

At June 30, 2017, our backlog of construction projects, made up solely of our heavy civil construction segment, was $923 million, as compared to $823 million at December 31, 2016. The contracts in this backlog are typically completed in 12 to 36 months. At June 30, 2017 and December 31, 2016, approximately $77 million and $226 million, respectively, was excluded from our consolidated backlog for projects in which we were the apparent low bidder, but had not yet been formally awarded the contract or the contract price had not been finalized (“Unsigned Low-bid Awards”). Total backlog, including Unsigned Low-bid Awards, at June 30, 2017 and December 31, 2016 was $1.0 billion. Backlog includes $39 million and $53 million at June 30, 2017 and December 31, 2016, respectively, attributable to our share of estimated revenues related to joint ventures where we are a noncontrolling joint venture partner.

 

Consolidated Results

 

Results of Operations for the Current Quarter as Compared to the Prior Quarter and for the Current Period as compared to the Prior Period

 

		Three Months Ended June 30,												Six Months Ended June 30,
		2017				2016				% Change				2017				2016				% Change
		(Dollar amounts in thousands)
Revenues		$	246,412			$	189,582				30.0	%		$	399,828			$	316,149				26.5	%
Gross profit		$	25,205			$	15,543				62.2			$	34,492			$	19,091				80.7
General and administrative expenses			(12,812	)			(8,657	)			48.0				(23,416	)			(18,742	)			24.9
Other operating income (expense), net			(4,037	)			(3,505	)			15.2				(4,508	)			(3,434	)			31.3
Operating income (loss)			8,356				3,381				NM				6,568				(3,085	)			NM
Interest income			44				1				NM				85				4				NM
Interest expense			(2,984	)			(812	)			NM				(3,096	)			(1,685	)			83.7
Loss on extinguishment of debt			(755	)			-				NM				(755	)			-				NM
Income (loss) before taxes and earnings attributable to noncontrolling interests			4,661				2,570				81.4				2,802				(4,766	)			NM
Income tax expense			(98	)			(27	)			NM				(125	)			(27	)			NM
Net income (loss)			4,563				2,543				79.4				2,677				(4,793	)			NM
Noncontrolling owners’ interests in earnings of subsidiaries and joint ventures			(901	)			(520	)			73.3				(1,272	)			(512	)			NM
Net income (loss) attributable to Sterling common stockholders		$	3,662			$	2,023				81.0			$	1,405			$	(5,305	)			NM
Gross margin			10.2	%			8.2	%			24.4				8.6	%			6.0	%			43.3
Operating margin (deficit)			3.4	%			1.8	%			88.9				1.6	%			(1.0	)%			NM
NM – Not meaningful.

 

Revenues

Revenues increased $56.8 million, or 30.0% in the Current Quarter compared with the Prior Quarter and increased $83.7 million, or 26.5% in the Current Period compared with the Prior Period. The increase in both the Current Quarter as compared to the Prior Quarter and the Current Period as compared to the Prior Period is primarily the result of the April 3, 2017, Tealstone Acquisition. Revenues increased approximately $43 million related to the Tealstone Acquisition. The majority of the remaining net increase of $14 million in the Current Quarter is attributable to Utah projects as a result of a ramp up in a new 2017 construction joint venture project. The majority of the remaining $41 million net increase in the Current Period was also primarily attributable to Utah projects as a result of a ramp up in a new 2017 construction joint venture project and projects in Texas where improved weather conditions aided in increased productivity.

Gross profit

Gross profit increased $9.7 million for the Current Quarter compared with the Prior Quarter and $15.4 million for the Current Period compared with the Prior Period. Our gross margins increased to 10.2% and 8.6% in the Current Quarter and Current Period, respectively, as compared to 8.2% and 6.0% in the Prior Quarter and Prior Period, respectively. The increase in gross margin during the Current Quarter as compared to the Prior Quarter and the increase in the Current Period as compared to the Prior period was primarily attributable to the Tealstone Acquisition adding approximately 2.0% gross margin to the Current Quarter and 1.4% gross margin to the Current Period.

At June 30, 2017 and 2016, we had approximately 139 and 124 heavy civil contracts-in-progress, respectively, which were less than 90% complete. 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 we are able to refine our estimate of total revenues (including incentives, delay penalties, change orders and claims), 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 increased $4.2 million to $12.8 million during the Current Quarter from $8.7 million in the Prior Quarter and increased $4.7 million to $23.4 million during the Current Period from $18.7 million in the Prior Period. The increase in the Current Quarter compared to the Prior Quarter and the Current Period to the Prior Period is primarily the result of the Tealstone Acquisition, stock based compensation costs related to the acceleration of our former CEO’s unvested shares, and increased recruiting and pre-bid contract costs in our Utah market.

As a percent of revenues, general and administrative expenses increased 0.6% to 5.2% and remained flat in the Current Quarter and Current Period, respectively, compared with 4.6% and 5.9% in the Prior Quarter and Prior Period, respectively. The decrease in general and administrative expenses, as a percentage of revenue, for the Current Quarter and Current Period is primarily the result of the decrease in employee benefit costs and the non-recurring employee severance costs paid in the Prior Period as mentioned above, along with an increase in revenue in both periods.

 

Other operating income (expense), net

 

Other operating income (expense), net, includes 50% of earnings and losses related to members’ interests and other miscellaneous operating income or expense. Members’ interest earnings are treated as an expense and increases our liability account “Members’ interest subject to mandatory redemption and undistributed earnings.” The change in other operating income (expense) income, net of $0.5 million during the Current Quarter and $1.1 million during the Current Period was primarily due to a fair value write-down of $0.9 million on one of our Texas buildings that is under contract to be sold in the third quarter and transaction costs of $0.3 million related to the Tealstone Acquisition.

 

Income taxes

Our effective income tax rates for the Current Quarter and Prior Quarter were minimal. As our market improves and we increasingly benefit from the Tealstone Acquisition, we are expecting a current federal alternative minimum tax liability for the year. A minimal tax expense was recorded for each quarter and period.

 

Segment Results

		Three Months Ended June 30,																Six Months Ended June 30,
		2017				% of Total				2016				% of Total				2017				% of Total				2016				% of Total
Revenue
Heavy Civil Construction		$	209,194				85	%		$	189,582				100	%		$	362,610				91	%		$	316,149				100	%
Residential Construction			37,218				15	%			-				0	%			37,218				9	%			-				0	%
Total Revenue		$	246,412							$	189,582							$	399,828							$	316,149
Operating Income
Heavy Civil Construction		$	3,141				38	%		$	3,381				100	%		$	1,667				25	%		$	(3,085	)			100	%
Residential Construction			5,215				62	%			-				0	%			4,901				75	%			-				0	%
Total Operating Income		$	8,356							$	3,381							$	6,568							$	(3,085	)

 

Revenue

Revenue was $246.4 million and $399.8 million for the Current Quarter and Current Period, respectively. This represented an increase in our heavy civil construction segment of $19.6 million, or 10% and $46.5 million, or 15% for the Current Quarter and Current Period compared to the Prior Quarter and Prior Period, coupled with $37.2 million in additional revenue related to our new residential construction segment.

Operating Income

Operating Income was $8.4 million and $6.6 million for the Current Quarter and Current Period, respectively. This represented a decrease of $0.2 million, or 7% in our heavy civil construction segment compared to the Prior Quarter and an increase of $4.8 million, or 154% in our heavy civil construction segment compared to the Prior Period, coupled with $4.9 million in additional income related to our new residential construction segment.

 

Liquidity and Sources of Capital

The following table sets forth information about our cash flows and liquidity (amounts in thousands):

 

		Six Months Ended
		June 30,
		2017				2016
Net cash (used in) provided by:
Operating activities		$	(12,336	)		$	26,735
Investing activities			(58,963	)			(4,676	)
Financing activities			88,572				16,150
Total increase in cash and cash equivalents		$	17,273			$	38,209
		June 30, 2017				December 31, 2017
Cash and cash equivalents		$	60,058			$	42,785
Working capital		$	73,426			$	29,316

Operating Activities.

During the Current Period, net cash used by operating activities was $12.3 million compared to net cash provided of $26.7 million in the Prior Period. The drivers of operating activities cash flows were primarily the result of our improvement in net income discussed above, non-cash items, the change in our accounts receivable, inventory, net contracts in progress and accounts payable balances (collectively, “Contract Capital”) as discussed below.

The significant non-cash items included in operating activities include depreciation and amortization expense, which were $8.4 million in the Current Period and $8.1 million in the Prior Period. Depreciation and amortization expense has increased from the Prior Period to the Current Period as a result of our April 3, 2017 acquisition where we acquired identified intangible assets and have amortized $0.5 million in the Current Period. Depreciation expense decreased as part of our efforts to maintain our current fleet of equipment and supplement it as necessary with more economical project specific leased equipment.

The need for working capital for our business varies due to fluctuations in operating activities and investments in our Contract Capital. The Components of Contract Capital at June 30, 2017 and 2016 and changes during the Current Quarter and Prior Quarter were as follows (amounts in thousands):

 

		Changes in Components of Contract Capital for the Period Ended
		June 30, 2017				June 30, 2016				Variance
Costs and estimated earnings in excess of billings on uncompleted contracts		$	(4,939	)		$	(8,486	)		$	3,547
Billings in excess of costs and estimated earnings on uncompleted contracts			12,513				26,358				(13,845	)
Contracts in progress, net			7,574				17,872				(10,298	)
Contracts receivable, including retainage			(40,163	)			(24,483	)			(15,680	)
Receivables from and equity in construction joint ventures			(333	)			5,565				(5,898	)
Inventories			1,405				(1,190	)			2,595
Accounts payable			12,922				20,894				(7,972	)
Contract Capital, net		$	(18,595	)		$	18,658			$	(37,253	)

 

The Current Period change in Contract Capital decreased liquidity by $18.6 million. Fluctuations in our Contract Capital balance and its components are not unusual in our business and are impacted by the size of our projects and changing type and mix of projects in our backlog. Our Contract Capital is particularly impacted by the timing of new awards and related payments of performing work and the contract billings to the customer as we complete our projects. Contract Capital is also impacted at period-end by the timing of accounts receivable collections and accounts payable payments for our projects.

Investing Activities.

During the Current Period, net cash used in investing activities was $59.0 million compared to $4.7 million in the Prior Period. The primary driver of investing activities cash flows was the $55 million paid on April 3, 2017, as part of the Tealstone Acquisition.

 

Capital equipment is acquired as needed to support changing levels of production activities and to replace retiring equipment. Expenditures for the replacement of certain equipment and to expand our construction fleet totaled $5.9 million for the Current Period. Proceeds from the sale of property and equipment totaled $1.9 million for the Current Period with an associated net gain of $0.4 million. For the Prior Period, expenditures totaled $6.1 million, while proceeds from the sale of property and equipment totaled $1.4 million with an associated net gain of $0.3 million. The level of expenditures in the Current Period decreased by $0.2 million compared to the Prior Period. This decrease was the result of our efforts to maintain our current fleet of equipment and supplement it as necessary with more economical project-specific leased equipment.

 

Financing Activities.

 

During the Current Period, net cash provided by financing activities was $88.6 million compared to $16.2 million in the Prior Period. The increase in cash provided by financing activities was primarily a result of net proceeds of $85.0 million received as part of our new Loan Agreement, compared to net proceeds of $19.1 million received from the issuance of common stock in the Prior Period.

 

Cash and Working Capital.

 

Cash at June 30, 2017, was $60.1 million, which increased based on the items mentioned above. Cash includes $2.3 million that was held by our VIE which is also a majority-owned subsidiary, $17.4 million belonging to another majority-owned subsidiary and $19.7 million belonging to majority-owned joint ventures which generally cannot be used for purposes outside the joint venture. Our working capital increased $44.1 million to $73.4 million at June 30, 2017 from $29.3 million at December 31, 2016.

 

Credit Facility and Other Sources of Capital

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.

Loan Agreement

On April 3, 2017, the Company, as borrower, and certain of its subsidiaries, as guarantors, entered into a Loan and Security Agreement with Wilmington Trust, National Association, as agent, and the lenders party thereto (the “Loan Agreement”), providing for a term loan of $85,000,000 (the “Loan”) with a maturity date of April 4, 2022, which replaced the then existing debt facility. The Loan is secured by substantially all of the assets of the Company and its subsidiaries.

Interest on the Loan is equal to the one-, two-, three- or six-month London interbank rate, or LIBOR, plus 8.75% per annum on the unpaid principal amount of the Loan, subject to adjustment under certain circumstances. Interest on the Loan is generally payable monthly. There are no amortized principal payments; however, the Company is required to prepay the Loan, and in certain cases pay a prepayment premium thereon, with proceeds received from the issuances of debt or equity, transfers, events of loss and extraordinary receipts. The Company is required to make an offer quarterly to the lenders to prepay the Loan in an amount equal to 75% of its excess cash flow, plus accrued and unpaid interest thereon and a prepayment premium.

The Loan Agreement contains various covenants that limit, among other things, the Company’s ability and certain of its subsidiaries’ ability to incur certain indebtedness, grant certain liens, merge or consolidate, sell assets, make certain loans, enter into acquisitions, incur capital expenditures, make investments, and pay dividends. In addition, the Company is required to maintain the following principal financial covenants:

 

·

a ratio of secured indebtedness to EBITDA of not more than 3.10 to 1.00 beginning with the four consecutive quarters ending June 30, 2017, reducing to 1.80 to 1.00 by the four consecutive quarters ending September 30, 2019;

·

daily cash collateral of not less than $10,000,000 commencing on June 30, 2017, increasing to $15,000,000 on October 1, 2017, and potentially further increasing to $18,000,000 beginning on April 4, 2018;

·

a rolling four quarter gross margin in contract backlog of not less than $60,000,000 commencing June 30, 2017, increasing to $70,000,000 by March 31, 2019;

·

the incurrence of net capital expenditures during each four consecutive fiscal quarters shall not exceed $15,000,000;

·

bonding capacity shall be maintained at all times in an amount not less than $1,000,000,000; and

·

the EBITDA of Tealstone Residential Concrete, Inc. shall not be less than $12,000,000 during each four consecutive fiscal quarters, commencing June 30, 2017.

 

 

The Company is in compliance with these covenants at June 30, 2017.

The Loan Agreement also includes customary events of default, including events of default relating to non-payment of principal or interest, inaccuracy of representations and warranties, breaches of covenants, cross-defaults, bankruptcy and insolvency events, certain unsatisfied judgments, loan documents not being valid, calls under the Company’s bonds, failure of specified individuals to remain employed by the Company, and a change of control. If an event of default occurs, the lenders will be able to accelerate the maturity of the Loan Agreement and exercise other rights and remedies.

Deferred loan costs and discounts totaled $10.4 million, which included attorney fees, investment bank fees as well as amounts payed to the lenders and which were discounted from the loan amount. Warrants valued at $3.5 million were included as well. Refer to Note 11 for additional information on the warrants. The total amount will be amortized on a straight-line basis, which approximates the effective interest method, over the five-year life of the Loan. The amortization expense was $0.5 million has been included in interest expense for the three and six months ended June 30, 2017.

As part of the extinguishment of our prior credit facility, $0.8 million in debt extinguishment costs was expensed and included as a “loss on extinguishment of debt” on our statement of operations for the three and six months ended June 30, 2017.

 

Notes and Deferred Payments to Sellers

 

As part of the Tealstone Acquisition, the Company issued $5,000,000 of promissory notes to the sellers and $2,500,000, and $7,500,000 of deferred cash payments. Based on a preliminary 12% discount rate the Company recorded $11.6 million as notes and deferred payments to sellers in long-term debt on our condensed consolidated balance sheet at the acquisition closing date. Accreted interest for the period was $0.3 million for the three and six months ended June 30, 2017, and was recorded as interest expense.

 

Warrants

 

On April 3, 2017, the Company issued warrants (the “Warrants”) to the lenders under the Loan Agreement (the “Holders”) pursuant to which the Holders have the right to purchase, for a period of five years from the date of issuance, up to an aggregate of 1,000,000 shares of the Company’s common stock (the “Warrant Shares”) at an initial exercise price of $10.25 per share, subject to adjustment for stock splits, combinations and similar recapitalization events and weighted-average anti-dilution upon the issuance by the Company of shares of common stock or rights, options or convertible securities exercisable for common stock in the future at a price below the exercise price of the Warrants. The total fair value of the Warrants was $3.5 million, which was recorded as a Loan discount and netted against our new Loan and included in “additional paid in capital” on our balance sheet.

Average borrowings under our Loan and prior credit facility for the Current Quarter and Current Period were $85.0 million and $44.1 million, respectively. Average borrowings under the prior equipment-based credit facility for the 2016 fiscal year were $18.1 million.

Based on our average borrowings for 2016 and our 2017 forecasted cash needs, we continue to believe that the Company has sufficient liquid financial resources to fund our requirements for the next twelve months of operations, including our bonding requirements. 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, or we continue to incur losses, our working capital could be materially and adversely affected. Refer to “Part I, Item 1A. Risk Factors” in the 2016 Form 10-K for further discussion of liquidity related risks.

We will continue to explore additional capital alternatives to further strengthen our financial position in order to take advantage of this improving transportation infrastructure market. This could include the potential sale of assets, businesses or equity, the favorable resolution of outstanding contract claims, or a combination thereof. We expect to use proceeds from these initiatives to invest in projects meeting our gross margin, overall profitability and other requirements, as well as pursuing projects or investments in adjacent markets.

 

Inflation

Inflation generally has not had a material impact on our financial results; however, from time to time, increases in oil, fuel and steel prices have affected our cost of operations. Anticipated cost increases and reductions are considered in our bids to customers on proposed new construction projects.

Where we are the successful bidder on a heavy civil construction project, we execute purchase orders with material suppliers and contracts with subcontractors covering the prices of most materials and services, other than oil and fuel products, thereby mitigating future price increases and supply disruptions. These purchase orders and contracts do not contain quantity guarantees and we have no obligation for materials and services beyond those required to complete the contracts with our customers. There can be no assurance that increases in prices of oil and fuel used in our business will be adequately covered by the estimated escalation we have included in our bids and there can be no assurance that all of our vendors will fulfill their pricing and supply commitments under their purchase orders and contracts with the Company. We adjust our total estimated costs on our projects when we believe it is probable that we will have cost increases which will not be recovered from customers, vendors or re-engineering.

Inflation affects our residential construction projects minimally as these projects typically last one month or less.

 

Off-Balance Sheet Arrangements and Joint Ventures

We participate in various construction joint ventures in order to share expertise, risk and resources for certain highly complex projects. The venture’s contract with the project owner typically requires joint and several liability among the joint venture partners. Although our agreements with our joint venture partners provide that each party will assume and fund its share of any losses resulting from a project, if one of our partners is unable to pay its share, we would be fully liable for such share under our contract with the project owner. Circumstances that could lead to a loss under these guarantee arrangements include a partner’s inability to contribute additional funds to the venture in the event that the project incurs a loss or additional costs that we could incur should the partner fail to provide the services and resources toward project completion that had been committed to in the joint venture agreement.

At June 30, 2017, there was approximately $76 million of construction work to be completed on unconsolidated construction joint venture contracts, of which $39 million represented our proportionate share. Due to the joint and several liability under our joint venture arrangements, if one of our joint venture partners fails to perform, we and the remaining joint venture partners would be responsible for completion of the outstanding work. As of June 30, 2017, we are not aware of any situation that would require us to fulfill responsibilities of our joint venture partners pursuant to the joint and several liability provisions under our contracts.

Off-balance sheet arrangements related to operating leases are discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations –Liquidity and Sources of Capital− Contractual Obligations” in our 2016 Form 10-K.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Changes in interest rates are one of our sources of market risks. Outstanding indebtedness under our Loan Agreement bears interest at floating rates (LIBOR), so our results from operations could be impacted from a change in interest rates. A 1% increase in our interest rate would increase interest expense by $0.9 million per year. However, the Company does not expect interest rate fluctuations to have a material adverse effect on the Company’s financial results.

See “Inflation” above regarding risks associated with materials and fuel purchases required to complete our construction contracts.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures include, but are not limited to, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is accumulated and communicated to the issuer’s management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

The Company’s principal executive officer and principal financial officer reviewed and evaluated the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective at June 30, 2017 to ensure that the information required to be disclosed by the Company in this Report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Company's management including the principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

We acquired Tealstone on April 3, 2017 and have not yet included Tealstone in our assessment of the effectiveness of our internal control over financial reporting. Accordingly, pursuant to the Securities and Exchange Commission's general guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment in the year of acquisition, the scope of our assessment of the effectiveness of disclosure controls and procedures does not include internal control over financial reporting related to Tealstone. For the second quarter 2017, Tealstone accounted for $43 million of our total revenues and as of June 30, 2017 had total assets of $108 million.

Changes in Internal Control over Financial Reporting

Except as noted above, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Internal control over financial reporting may not prevent or detect all errors and all fraud. Also, projections of any evaluation of effectiveness of internal control to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are now and may in the future be involved as a party to various legal proceedings that are incidental to the ordinary course of business. We regularly analyze current information about these proceedings and, as necessary, provide accruals for probable liabilities on the eventual disposition of these matters.

In the opinion of management, after consultation with legal counsel, there are currently no threatened or pending legal matters that would reasonably be expected to have a material adverse impact on our condensed consolidated results of operations, financial position or cash flows.

 

Item 1A. Risk Factors

 

There have not been any material changes from the risk factors previously disclosed in “Part I, Item 1A. Risk Factors” of our 2016 Form 10-K. You should carefully consider such risk factors, which could materially affect our business, financial condition or future results.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table shows, by month, the number of shares of the Company's common stock that the Company repurchased in the quarter ended June 30, 2017.

 

Period				Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares (or Units) Purchased as Part of Publicly- Announced Plans or Program				Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
	May 1—May 31, 2017				2,466	(1)		$	10.42				-				-

 

(1)

These shares were repurchased from employees holding shares of the Company's common stock that had been awarded to them by the Company and that were released from Company-imposed transfer restrictions. The repurchase was to enable the employees to satisfy the Company's tax withholding obligations occasioned by the release of the restrictions. The repurchase was made at the election of the employees pursuant to a procedure adopted by the Compensation Committee of the Board of Directors.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

 

 

 

Item 6. Exhibits

 

Exhibit No.		Description
31.1*		Certification of Joseph A. Cutillo, Chief Executive Officer of Sterling Construction Company, Inc.
31.2*		Certification of Ronald A. Ballschmiede, Chief Financial Officer of Sterling Construction Company, Inc.
32*		Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) of Joseph A. Cutillo, Chief Executive Officer, and Ronald A. Ballschmiede, Chief Financial Officer
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

 

_______________ 

* Filed herewith.

 

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	STERLING CONSTRUCTION COMPANY, INC.
Date:        August 2, 2017	By:	/s/ Joseph A. Cutillo
		Joseph A. Cutillo
		Chief Executive Officer
Date:        August 2, 2017	By:	/s/ Ronald A. Ballschmiede
		Ronald A. Ballschmiede
		Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

STERLING CONSTRUCTION COMPANY, INC.

Quarterly Report on Form 10-Q for Period Ended June 30, 2017

Exhibit Index

 

 

Exhibit No.		Description
31.1*		Certification of Joseph A. Cutillo, Chief Executive Officer of Sterling Construction Company, Inc.
31.2*		Certification of Ronald A. Ballschmiede, Chief Financial Officer of Sterling Construction Company, Inc.
32*		Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) of Joseph A. Cutillo, Chief Executive Officer, and Ronald A. Ballschmiede, Chief Financial Officer.
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

 

_____________

*        Filed herewith.

 

 

 

35