Sterling Announces Amendment to Road and Highway Builders, LLC Operating Agreement

Rhea-AI Summary

Sterling Infrastructure (STRL) announced an amendment to its Road and Highway Builders, (RHB) Operating agreement on December 31, 2024. While the amendment doesn't affect RHB's contribution to Sterling's consolidated net income, it changes how RHB results are reported under GAAP. Sterling has held a 50% ownership in RHB since 2012, with Rich Buenting owning the other 50%.

The amendment modifies succession planning and introduces four alternatives in case of Buenting's death or disability. Under the new GAAP requirements, Sterling will no longer consolidate RHB's results. RHB's expected revenue of $230-240 million in 2024 will not be included in Sterling's consolidated revenue for 2025. Additionally, Sterling's consolidated backlog figures will exclude RHB's estimated backlog of $425-475 million as of December 31, 2024.

Positive

• No change to RHB's historical or future contribution to Sterling's consolidated net income
• RHB consistently delivers strong growth and profitability
• Expected RHB revenue of $230-240 million in 2024
• Strong RHB backlog of $425-475 million at year-end 2024

Negative

• Sterling's consolidated revenue will decrease by $230-240 million annually starting 2025
• Consolidated backlog will decrease by $425-475 million

Insights

Financial Accounting Expert

This amendment represents a significant accounting change that will impact Sterling's financial reporting structure, though not its economic reality. The shift from full consolidation to equity method accounting will reduce reported revenues by approximately $230-240 million annually and remove $425-475 million from the backlog. While this change creates a one-time non-cash gain in 2024, the underlying economics and Sterling's share of profits remain unchanged. The modification primarily affects balance sheet presentation, with RHB's position now appearing as a single line item rather than being fully consolidated. This accounting treatment better reflects Sterling's actual control position in the joint venture. For investors, it's important to understand that while reported revenues will decrease, the actual economic benefit to Sterling remains identical - they'll still receive 50% of RHB's operating income. The new succession planning provisions also add clarity and stability to the long-term partnership structure.

Corporate Strategy Analyst

The amendment demonstrates sophisticated strategic planning regarding business continuity and partnership stability. The four clearly defined succession scenarios - maintaining status quo, buyout by either party, or joint sale - create a robust framework for potential future transitions. This structured approach mitigates operational risk and protects shareholder interests by ensuring an orderly process in case of unexpected events. The continuation of this joint venture arrangement, which has been successful since 2012, speaks to the strength of the partnership and its value creation potential. RHB's substantial backlog of $425-475 million indicates strong market positioning and business momentum. While the accounting changes might initially confuse some investors, the underlying business fundamentals and value creation mechanics remain intact. This type of proactive succession planning is particularly important in construction and infrastructure businesses where leadership continuity and operational stability are critical success factors.

THE WOODLANDS, Texas, Jan. 7, 2025 /PRNewswire/ -- Sterling Infrastructure, Inc. (NasdaqGS: STRL) ("Sterling" or "the Company") today announced that it executed an amendment to its Road and Highway Builders, LLC ("RHB") Operating agreement on December 31, 2024. This amendment changes the way that RHB results are reported under Generally Accepted Accounting Principles ("GAAP"), but does not change RHB's historical or future contribution to Sterling's consolidated net income.

Since 2012, Sterling has held a 50% ownership interest in Road and Highway Builders, LLC ("RHB"), with Rich Buenting holding the remaining 50% ownership interest. On December 31, 2024, both parties executed an amendment to the operating agreement to ensure the continuation of this mutually beneficial relationship while addressing the evolving needs and interests of both parties. This amendment modified the way RHB would be dispositioned in the event of the death or disability of Mr. Buenting and provides that in such event, Sterling and Mr. Buenting's estate must agree with one of four alternatives: (1) continuation of the existing ownership structure; (2) acquisition of Sterling's 50% interest by Mr. Buenting's estate at fair value; (3) acquisition of Mr. Buenting's 50% interest by Sterling at fair value; or (4) the joint sale of RHB to a third party at fair market value.

Prior to the amendment, Sterling fully consolidated RHB with all of RHB's assets and liabilities included in Sterling's Consolidated Balance Sheets on a line by line basis and with Mr. Buenting's interest reported as a liability within "Members' interest subject to mandatory redemption and undistributed earnings". Additionally, all of RHB's Revenue, Cost of Revenue, and General and administrative expense were included in Sterling's Consolidated Statements of Operations with Mr. Buenting's 50% share of RHB's operating income included as an other operating expense.

Under GAAP, this contractual change requires that Sterling no longer consolidate RHB's results. Therefore, Sterling's interest in RHB's balance sheet will be presented in Sterling's 2024 Consolidated Balance Sheet on one line. Sterling anticipates recognizing a significant non-cash net gain on the transaction in its 2024 Consolidated Statement of Operations in accordance with the accounting requirements.

Starting in 2025, 50% of RHB's operating income will be presented on one line in Sterling's Consolidated Statements of Operations. RHB's revenue, which is expected to be between $230 million and $240 million in 2024, will no longer be included in Sterling's consolidated revenue in 2025. Additionally, Sterling consolidated backlog figures as of December 31, 2024 will no longer include RHB backlog, which on a stand alone basis is estimated to be between $425 million to $475 million at the end of the year.

CEO Remarks

"Rich Buenting is an excellent business leader and has been a trusted and valued joint venture partner for more than a decade," stated Joe Cutillo, Sterling's Chief Executive Officer. "RHB consistently delivers strong growth and profitability and we look forward to continuing this mutually beneficial relationship in the years ahead."

About Sterling

Sterling operates through a variety of subsidiaries within three segments specializing in E-Infrastructure, Transportation and Building Solutions in the United States, primarily across the Southern, Northeastern, Mid-Atlantic and Rocky Mountain regions and the Pacific Islands. E-Infrastructure Solutions provides advanced, large-scale site development services for manufacturing, data centers, e-commerce distribution centers, warehousing, power generation and more. Transportation Solutions includes infrastructure and rehabilitation projects for highways, roads, bridges, airports, ports, rail and storm drainage systems. Building Solutions includes residential and commercial concrete foundations for single-family and multi-family homes, parking structures, elevated slabs, other concrete work and plumbing services for new single-family residential builds. 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.

Joe Cutillo, CEO, "We build and service the infrastructure that enables our economy to run,
our people to move and our country to grow."

Important Information for Investors and Stockholders

Cautionary Statement Regarding Forward-Looking Statements

This press release contains statements that are considered forward-looking statements within the meaning of the federal securities laws. Any such statements are subject to risks and uncertainties, including those risks identified in the Company's filings with the Securities and Exchange Commission. Accordingly, such statements should be considered in light of these risks. The forward-looking statements speak only as of the date made, and we undertake no obligation to publicly update or revise any forward-looking statements for any reason, whether as a result of new information, future events or developments, changed circumstances, or otherwise, notwithstanding any changes in our assumptions, changes in business plans, actual experience or other changes. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

Sterling Infrastructure Contacts:
Noelle Dilts, VP of Investor Relations and Corporate Strategy
281-214-0795
noelle.dilts@strlco.com

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SOURCE Sterling Infrastructure, Inc.

FAQ

How will the December 2024 RHB amendment affect Sterling's (STRL) financial reporting?

The amendment changes how RHB results are reported under GAAP, requiring Sterling to no longer consolidate RHB's results. Starting 2025, 50% of RHB's operating income will be presented on one line in Sterling's financial statements.

What is the expected impact on Sterling's (STRL) revenue in 2025?

Sterling's consolidated revenue will decrease by $230-240 million annually starting in 2025, as RHB's revenue will no longer be included in the consolidated figures.

What happens to Sterling's (STRL) stake in RHB in case of Rich Buenting's death?

The amendment provides four alternatives: continuing existing ownership, Sterling's stake being bought by Buenting's estate, Sterling buying Buenting's stake, or jointly selling RHB to a third party.

What is RHB's estimated backlog value for Sterling (STRL) at the end of 2024?

RHB's standalone backlog is estimated to be between $425 million to $475 million at the end of 2024, which will no longer be included in Sterling's consolidated backlog figures.