Sterling Infrastructure, Inc. Q3 FY2025 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Sterling Infrastructure Third Quarter Webcast and Conference Call. As a reminder, this call is being recorded on Tuesday, November 4, 2025. And I would now like to turn the conference over to Noelle Dilts, Vice President of Investor Relations and Corporate Strategy. Please go ahead.

Good morning to everyone joining us, and welcome to Sterling Infrastructure's 2025 Third Quarter Earnings Conference Call and Webcast. I'm pleased to be here today to discuss our results with Joe Cutillo, Sterling's Chief Executive Officer; and Nick Grindstaff, Sterling's Chief Financial Officer. Joe will open the call with an overview of the company and its performance in the quarter. Nick will then discuss our financial results and guidance, after which Joe will provide a market and full-year outlook. We will then open the call up for questions. As a reminder, there are accompanying slides on the Investor Relations section of our website. These slides include details on our full year 2025 financial guidance. Before turning the call over to Joe, I will read the safe harbor statement. The discussion today may include forward-looking statements. Actual results could differ materially from the statements made today. Please refer to Sterling's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligations to update forward-looking statements as a result of new information, future events, or otherwise. Please also note that management may reference EBITDA, adjusted EBITDA, adjusted net income, or adjusted earnings per share on this call, which are all financial measures not recognized under U.S. GAAP. As required by SEC rules and regulations, these non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in our earnings release issued yesterday afternoon. Our discussion of all results today, including revenue and backlog, refers to figures that adjust prior period results to conform to the current accounting for RHB JV, unless otherwise noted. Additionally, all comparisons are to the prior year quarter unless otherwise noted. I'll now turn the call over to our CEO, Joe Cutillo.

Thanks, Noelle. Good morning, everyone, and thank you for joining today's call. Sterling delivered another outstanding quarter as we achieved strong revenue growth, expanded margins, grew backlog, and generated excellent cash flow. We are pleased to discuss these results today with you, but even more excited about the opportunities ahead of us. Beginning with the third quarter results, revenue grew 32%, fueled by 58% growth in our E-Infrastructure Solutions segment, including 42% organic growth. In addition, our Transportation segment grew 10% in the quarter. We grew adjusted earnings per share by 58% to $3.48 and delivered adjusted EBITDA of $156 million, an increase of 47%. Our gross profit margins expanded 280 basis points from the prior year to reach 24.7%. Additionally, operating cash flow generation in the quarter was again very strong at $84 million. Our backlog position and strong visibility drive our confidence in the future. Backlog at the end of the quarter totaled $2.6 billion, a 64% year-over-year increase. Excluding the contribution from the recent acquisition of CEC, backlog increased a strong 34% year-over-year. E-Infrastructure Solutions backlog of $1.8 billion was up 97% in total and 45%, excluding the contributions from CEC. When you layer in our unsigned awards and pipeline of future phase opportunities, we have visibility into a pool of work in excess of $4 billion for Sterling. The Sterling Way, which is our commitment to take care of our people, our environment, our investors, and our communities while we work to build America's infrastructure, remains our guiding principle as we execute our strategy and grow the company. Now I'd like to discuss our segment results in more detail. In E-Infrastructure, third quarter revenue grew 58% over prior year and over 34% sequentially. Excluding CEC, revenue grew more than 42% over prior year and 21% sequentially. The data center market, again, was a primary growth driver in the quarter, as revenue from this market grew more than 125% year-over-year. Adjusted segment operating income grew 57%, or 48%, excluding CEC. Adjusted operating margins for the legacy E-Infrastructure Site Development business were 28.4% and increased over 140 basis points from prior year levels and 10 basis points sequentially. This was driven by our continued shift towards large mission-critical projects, including data centers, where our superior project management and ability to finish jobs on or as scheduled are extremely valuable to our customers. We are pleased to have closed the CEC acquisition during the quarter. We see tremendous opportunities ahead to leverage our expanded service portfolio and are seeing early positive reception from our customers. CEC contributed $41.4 million of revenue in September and adjusted operating margins that were in line with our expectations. We continue to have very good visibility in the E-Infrastructure business. With the recent CEC acquisition, the aggregate of our E-Infrastructure signed backlog, unsigned electrical awards, and future phase site development opportunities total approximately $3 billion. Moving to Transportation Solutions. Third quarter revenue grew 10% and adjusted operating profit grew 40%, driven by strong market demand and the benefits of the mix shift towards higher-margin services. We ended the quarter with Transportation Solutions backlog of $733 million, a 23% year-over-year increase. Sequentially, segment backlog was roughly flat, with awards keeping pace with burn. As a reminder, the wind down of our Texas low-bid heavy highway operation is impacting backlog to some extent this year, but will ultimately benefit segment margins. Shifting to Building Solutions. In the third quarter, segment revenue declined 1% and adjusted operating income declined 10%. Adjusted operating margins in the quarter were 12%. Overall demand for homes has been impacted as potential buyers struggle with affordability challenges. Revenue from our legacy residential business declined 17%, driven by softness in the overall housing market. Even with these headwinds in Building Solutions, the strength of Sterling's diversified portfolio and strategy to focus on growth in high-margin end markets enabled us to deliver another record quarter. With that, I'd like to turn it over to Nick to give you more details on some of our financial metrics and full-year guidance. Nick?

Thanks, Joe, and good morning. I'll start with our consolidated backlog metrics, adjusted to exclude RHB for the previous year. Our third quarter backlog reached $2.58 billion, reflecting a 64% increase from the second quarter of last year. CEC contributed $475 million to this backlog. When excluding CEC, the backlog still grew by 33.8% year-over-year. We ended the quarter with a combined backlog of $3.44 billion, which is an 88% increase. Without CEC, the combined backlog increased by 43.5% year-over-year. For the third quarter of 2025, book-to-burn ratios excluding CEC were 1.23x for backlog and 1.76x for combined backlog. Year-to-date book-to-burn ratios without CEC were 1.31x for backlog and 1.58x for combined backlog. Now, regarding our cash flow metrics. Cash flow from operating activities for the first nine months of 2025 was a solid $253.9 million, compared to $322.8 million in the previous year. Cash flow used for investing activities during the first nine months of 2025 included $46.9 million in net CapEx and $484.2 million for acquisitions, including CEC. Year-to-date cash flow from financing activities showed an outflow of $80.7 million, largely due to share repurchases totaling $48.5 million at an average price of $135.96 per share. We have $80.9 million remaining under the current repurchase authorization. Our balance sheet is in great shape. We finished the quarter with a strong liquidity position, consisting of $306.4 million in cash and $294.6 million in debt, resulting in a net cash balance of $11.8 million. Our $150 million revolving credit facility was not utilized during this period. Now, regarding our guidance. The strong factors supporting our business put us on track for another record year at Sterling in 2025. We are raising our guidance ranges to: revenue of $2.375 billion to $2.390 billion, which marks over a 5% increase at the midpoint compared to our previous guidance; diluted EPS of $8.73 to $8.87; adjusted diluted EPS of $10.35 to $10.52 representing a 9% increase at the midpoint from our prior guidance; EBITDA of $448 million to $453 million; and adjusted EBITDA of $486 million to $491 million, a 6% increase at the midpoint over our previous guidance. Financially, we are well-positioned to leverage both organic and inorganic growth opportunities in the future. Now I will turn the call back to Joe.

Thanks, Nick. As we look to the future, we remain very bullish on the multiyear opportunity in each of our markets. Our strong backlog, future phase opportunities, and discussions with our customers contribute to our confidence. First, in E-Infrastructure site development, we anticipate that the current strength in data center demand will continue for the foreseeable future. Our customers are discussing multiyear capital deployment plans and our focus on how to align with the right partners to support these plans. We are getting pulled into new geographies by our customers, including Texas, where we are now performing site development work. In the manufacturing market, we are seeing a fairly steady pace of activity in 2025. As we look out to 2026 and 2027, there remains a very big pool of megaprojects on the horizon. This would include planned semiconductor fabrication facilities. The e-commerce market has strengthened significantly in 2025. We have built a sizable level of backlog and believe we should continue to see momentum in 2026. Together, these dynamics support strong growth opportunities over a multiyear period. Moving to CEC. We have very good momentum heading into 2026. Customer demand is very strong, particularly in the data center market, and the organization has booked several large projects in recent months. We continue to see opportunities for margin expansion over the next couple of years. We have a high degree of confidence in our ability to leverage the combination of site development and electrical services as we head into the new year. For 2025, we expect to deliver E-Infrastructure revenue growth of 30% or higher on an organic basis and approaching 50%, including CEC. Adjusted operating profit margins for E-Infrastructure should approximate 25% for the full year including CEC, as compared to 23.7% in 2024. In Transportation Solutions, we are approaching the final year of the current federal funding cycle, which concludes September 2026. We have built over 2 years of backlog and continue to see good levels of bid activity. For 2025, we anticipate continued growth in our core Rocky Mountain and Arizona markets. The downsizing of our low-bid heavy highway business in Texas is progressing according to plan, resulting in some moderation of Transportation Solutions top line and backlog, but should drive meaningful margin improvements as we move through the year. We expect Transportation Solutions revenue growth in the low teens on an adjusted basis in 2025. We forecast adjusted operating profit margins in the 13.5% to 14% range compared to 9.6% in 2024. In Building Solutions, we continue to believe the business is well positioned for growth over a multiyear period. Our key geographies of Dallas-Fort Worth, Houston, and Phoenix are expected to see continued population growth, driving new home demand. Additionally, there is a significant opportunity for share gain in Houston and Phoenix. In the near term, we are anticipating a continuation of soft market conditions driven by affordability challenges. For full year Building Solutions revenue, we forecast a mid- to high single-digit decline. We anticipate adjusted operating margins in the low double digits as compared to 14.8% in 2024. As a reminder, from a seasonality perspective, our fourth quarter and first quarter tend to be slower than our second and third quarter, with the first quarter typically our lowest of the year. On the acquisition front, we are continuing to look for small to midsized acquisitions that are the right strategic fit to enhance our service offerings and geographic footprint. Moving to our full year guidance. The midpoint of our increased 2025 guidance range would represent 27% revenue growth year-over-year as adjusted for RHB, 47% adjusted EPS growth, and 42% adjusted EBITDA growth.

The first question comes from Brent Thielman at D.A. Davidson.

Joe, I have a question. It appears that both signed and unsigned work for CEC has significantly increased since the June deal announcement. I'm curious about what is driving this momentum and the award activity in that area. Additionally, it seems like there are some large data center projects involved. How should we consider the conversion of these projects over the next 12 months or so?

They had very good and strong bookings and wins in the quarter, primarily focused on the data center front, along with a few other significant projects outside of that area. They had a fantastic bookings quarter, and we are excited about the positive feedback from our customers in the relevant markets from this combination. We are in the early stages of discussing several projects for 2026 and exploring how to package them together instead of handling them individually. We are thrilled about this. As mentioned during the call, we have begun site development in Texas, which we believe will grow rapidly as we approach 2026. The teams are working hard to collaborate and tackle the upcoming major projects. I'm extremely pleased with our progress. The team spent two weeks working closely together, and I left even more enthusiastic about the opportunities identified between the site development and electrical teams.

And Joe, it sounded as though you're optimistic around some margin expansion opportunities there or some specific things that you're seeing in the award activity that gives you some confidence there. What drives that margin expansion?

Yes. A combination of factors is at play. The size of our projects is increasing, and our customers are discussing larger upcoming projects, which is great for us. On the electrical and site development front, we have realized significant productivity improvements from the small dry conduit business we integrated at the start of January, leading to a 40% increase in margins from that combination. We see opportunities to leverage that further with CEC. Additionally, as CEC expands into the data center sector, those higher margins contribute positively to their overall margin. Strengthening their portfolio and backlog in that area will also enhance their margins. Overall, we are optimistic about ongoing margin improvements across the segment.

Okay. Just last one, I think, along those lines on the E-Infrastructure business and that the current backlog, I guess, for the legacy Site Development side. Joe, could you talk about maybe how the size of projects even within mission-critical has evolved over the last 12-plus months? I know mission-critical is bigger for you now, but how is that sort of being redefined with the projects you're putting in backlog now?

I don't know that we're really redefining it. The only incremental add to E-Infrastructure is obviously the CEC acquisition piece. But the base business was up, was it 34%, I think in backlog. And so for us, mission-critical, again, is data centers, manufacturing, e-commerce distribution is kind of what I'll call the 3 core elements of it. Did I miss anything?

45%.

Yes, we have seen a 45% increase in that area. We haven't changed our approach, just the scale of these data center projects. With the upcoming chip plants, which are substantial, we expect to see continued improvements in our margins. It's important to note that while we mentioned our presence in Texas, we are also actively exploring other geographic areas for expansion. This is not due to the existence of large projects currently but rather because our customers have indicated the potential for significant projects in the next 2 to 3 years. We are aiming to establish our presence early and be prepared for these opportunities.

Yes, Brent, this is Noelle. I would just say we're now over 80% of our work is mission-critical in backlog, looking at kind of data centers, manufacturing, et cetera. So that continues to move higher. And then to Joe's point, even within that bucket of mission-critical, the projects are getting larger and more complex in that there's underground infrastructure, which is great for us. And so that intensity of the work we're doing continues to expand.

Yes. To add to that thought, we have been discussing how data centers are becoming larger. Additionally, every aspect of mission-critical jobs is also increasing in size, particularly due to the resurgence of e-commerce distribution, which has seen a backlog growth of 150%. These jobs are roughly 2 to 2.5 times larger than historical ones. The footprints are expanding, and as mentioned, the infrastructure for an e-commerce distribution center is starting to resemble that of a data center. This includes the electric vehicles used by companies like Amazon and the underground utilities needed for charging stations, which resemble a mini duct bank. This evolution adds to the complexity, size, and scope of the work, which aligns perfectly with our capabilities. Now, incorporating the electrical aspect allows us to easily visualize how we can integrate both elements into a cohesive package.

The next question comes from Julio Romero of Sidoti & Company.

I wanted to hone in on the combined backlog plus the forward pipeline of future phase work of $4 billion plus that you mentioned. Help us think about the mix of end markets or customers that are driving the growth of that forward pipeline? And then secondly, what's your estimation of when that forward pipeline begins to convert into orders?

Well, I think you got to break it down into the pieces. The backlog, we're either converting or we'll be converting shortly into work. The low unsigned, those are projects that we either have letters of intent or we have won the physical job or negotiating terms of contracts or there's a final design work that's taking place. Those are likely to start in '26. Depending on the actual project, when in '26 could vary. And some may start first quarter, second quarter, third quarter. A lot of the big design-build highway projects, I will tell you, are going to start second and third quarter of next year, kind of in the process there. And then that future phase work, the way to look at it is as we burn off current backlog, the work we're working on today, that then flows into current backlog. So that spreads out over what I'll call a '26, '27 and into '28 time frame in which that will hit.

Got it. That was very helpful. Please continue.

I'm sorry. I just want to make sure I answered everything you're looking for there, really.

I would say in terms of the composition...

Well, if you take a look at it, $3 billion of the $4 billion is in E-Infrastructure. And the highest percentage of that is going to be data center, which would probably be 75% or 80% of that piece there.

Got it. Extremely helpful there. And then maybe just turning to Transportation Solutions, really notable margin strength there, here in the third quarter. If you could help us unpack the drivers there? I don't think the impact of low-bid phase is starting to come through, unless I'm mistaken. And then just talk about the margin profile of what you have in Transportation backlog and unsigned awards.

I believe many people underestimate the advancements made by the Transportation group. We have top-tier margins that are improving. This improvement is largely due to our focus on project selection and a shift towards more design-build or alternative delivery projects, including aviation and rail, which helps diversify our portfolio and boost margins. We haven't yet seen a significant impact from this shift, although there has been some reduction from the winding down of our Texas low-bid business. The effects of this will become more evident in 2026 as we reduce that backlog. Most of this will likely be resolved in the first half of 2026.

The next question comes from Adam Thalhimer at Thompson Davis.

Joe, I wanted to ask you about the large pool of megaprojects in 2026 and 2027. Your capacity to bid on megaprojects isn't unlimited, so how do you prioritize your bids? Additionally, how do you approach pricing that work?

Yes, that's a good question, Adam. We do have additional capacity, and we've been preparing for this by having discussions on some of these projects for a couple of years now with our customers. Internally, we've been working on a program to develop future project managers, which has been effective in increasing our capacity over the last 4 to 5 years. However, I want to emphasize that we might choose to pass on certain megaprojects if the pricing isn't right, the margins are unfavorable, or the contracts are too complex. We feel confident in our ability to make informed decisions based on the visibility we have regarding data centers and other critical projects on the horizon. We're committed to building our capacity as needed, but it's important to note that if we have a year to prepare, we can scale up significantly. If someone approaches us tomorrow with three jobs valued at $500 million that need to start in 60 days, that would be a challenge for us. Our customers, particularly the hyperscalers and major chip manufacturers, have been quite proactive and have provided us with good insight into what's coming. Additionally, the chip projects have taken longer to commence than many builders expected, giving us a heads-up for the last two years. So, we will be prepared.

I was curious about your expansion into Texas for site preparation. Are you doing that organically? What are you planning to do with the assets from the Texas highway work that is coming to a close?

Yes. Another good question. Well, you may see those on a site development job or two. The smaller assets that we have there are very capable of doing some of the utility and underground work. With CEC and those assets combined, now we can start doing duct banks in Texas. So I think over the next 6 to 12 months, if you go to one of our sites, you may see some stuff that has a TSC logo on.

Cool. Finally, you mentioned that you are still looking at small and midsized deals. Is that just relevant to the residential segment, or does it apply to the whole company?

We're primarily focused on opportunities within E-Infrastructure. While we remain open to exploring options in Building Solutions, currently about 95% of our discussions and potential deals involve enhancements in capabilities, geographic expansion, or acquisitions related to E-Infrastructure.

The next question comes from Noah Levitz at William Blair.

To start off on the transportation side, has there been any impact from the government shutdown on transportation funding? Also, you previously mentioned a potential successor bill to the IIJA. Can you provide an update on whether you think that is progressing? Should it be larger? Anything additional you can share?

Yes, there have been no impacts from the government shutdown. The funding for these jobs has already been allocated, so there is no effect on that. While some grant projects may experience delays, I'm not aware of any issues affecting us. The current bill is scheduled to end in September 2026. I met with the DC team about four or five weeks ago, and things are progressing well. However, given the nature of government, it is important to remain cautious. They are likely about six months ahead of their usual schedule, and I am hopeful that developments will happen promptly. We are not concerned because we will enter September with approximately two years of backlog. If there is no resolution or new bill passed, an extension will likely be implemented, typically reflecting current spending rates plus an inflation adjustment. This means our operations continue without interruption. Usually, during periods of uncertainty, states tend to focus on smaller projects rather than large multiyear ones due to funding uncertainties. Nevertheless, spending will continue under the current bill, and there are still around two years of expenditures remaining that need to be addressed. We anticipate maintaining this backlog and possibly accumulating more, depending on how projects are managed in the remaining time until the next bill.

That's helpful. For my last question, you mentioned that data center growth exceeded 125%, which is impressive, especially considering last quarter's growth was more than double. Can you provide more details on that? Is the growth coming from existing projects, new projects starting up, or larger phases of work being completed during the quarter?

Yes, it's a combination. I think if you talk to our teams out in the field, one of the things we're most proud about in the quarter isn't the great quarter they had and the results they were able to deliver. But it was really impressive for them to grow total backlog with the burn rates that they have. But some of that is new projects. And the way to look at it is if we didn't get new projects and we just shifted from future phase to backlog, our total would have decreased, right? So we not only shifted future phase to backlog, but we won enough new projects to offset that burn rate and grow that total backlog.

The next question comes from Alex Rygiel at Texas Capital.

Very nice quarter. A lot of good answers here so far on the call, but I've got a few here, questions for you. Do you generally experience any permitting issues that possibly delay project starts historically?

The permitting process is definitely longer now than it was before COVID. Even before COVID, it was a lengthy process, but now it takes even longer to obtain permits. Generally, the delays in site development are not from the time we receive the contracts to begin work, but rather from the wait to get those contracts. We are confident that the projects are coming and that we will secure them, but it could take an extra month or even a quarter to win them. Historically, we haven't faced delays once we have the equipment ready and are prepared to start. Unfortunately, the time to acquire permits has increased significantly, from around six weeks to three months, and sometimes even five months in certain markets. This delay contributes to why some megaprojects, like chip plants, are taking so long to commence. We are aware of their existence and are anticipating their arrival, but they are still in the permitting stage, which is tied to securing utilities and other requirements. If the U.S. can resolve the regulatory and permitting challenges, it would significantly expedite the launch of these projects and the associated funding and spending.

And then within Building Solutions, are you seeing any signs of green shoots?

I'm sorry. Say that again?

Within Building Solutions, are you seeing any signs that 2026 could start to improve again?

No, we honestly don’t expect anything significant to happen until at least the second half of 2026. Interest rates are gradually decreasing, and builders have several programs in place. We’ve reached a plateau, which is the positive aspect; the situation isn’t deteriorating. However, we haven’t observed any indication that suggests an improvement is on the horizon.

Thank you. We have no further questions. I will turn the call back over to Joe Cutillo for closing comments.

Thank you everyone for joining today's call. If you have any follow-up questions or would like to arrange a conversation, please reach out to Noelle Dilts. The contact information is available in our earnings release. I hope everyone has a great day, and I appreciate your time. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask you that you please disconnect your lines.