STERLING CONSTRUCTION CO INC
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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[X]
annual report pursuant
to section 13 or 15(
d
) of the securities
exchange act of 1934
For
the fiscal year ended: December 31, 2009
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[ ]
transition report
pursuant to section 13 or 15(
d
) of the securities
exchange act of 1934
For
the transition period from
_______________________________________________________
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Commission
file number
1-31993
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STERLING
CONSTRUCTION COMPANY, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
State
or other jurisdiction of
incorporation
or organization
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25-1655321
(I.R.S.
Employer
Identification
No.)
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20810
Fernbush Lane
Houston,
Texas
(Address
of principal executive offices)
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77073
(Zip
Code)
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Registrant's
telephone number, including area code
(281)
821-9091
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Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
Common
Stock, $0.01 par value per share
(Title
of Class)
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Name
of each exchange on which registered
The
NASDAQ Stock Market LLC
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Securities
registered pursuant to section 12(g) of the Act:
None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ]
Yes [
√
] No
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Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act. [ ]
Yes [
√
] No
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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
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Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate website, if any, every interactive data file
required to be submitted and posted pursuant to rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter prior that the
registrant was required to submit and post such files). [ ]
Yes [ ] No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form
10-K or any amendment to this Form 10-K [
]
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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 definitions of "large accelerated filer,"
"accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer [ ] Accelerated filer [
√
]
Non-accelerated
filer [ ]
(Do not check if a smaller
reporting company)
Smaller reporting company [
]
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Indicate
by check mark if the registrant is a shell company (as defined in Rule
12b-2 of the Act). [ ] Yes [
√
] No
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Aggregate
market value of the voting and non-voting common equity held by
non-affiliates at June 30, 2009: $228,573,765.
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At
March 2, 2010, the registrant had 16,083,038 shares of common stock
outstanding.
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DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission and delivered to stockholders in connection with the Annual
Meeting of Stockholders to be held on May 6, 2010 are incorporated by reference
into Part III of this Form 10-K.
Sterling
Construction Company, Inc.
Annual
Report on Form 10-K
_______________________________________
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PART
I
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3
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Cautionary
Comment Regarding Forward-Looking Statements
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3
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Item
1.
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Business
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4
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Access
to the Company's Filings
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4
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Overview
of the Company's Business
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4
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Our
Business Strategy
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5
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Our
Markets
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6
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Item
1A.
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Risk
Factors
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14
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Risks
Relating to Our Business
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14
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Item
1B.
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Unresolved
Staff Comments
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22
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Item
2.
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Properties
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22
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Item
3.
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Legal
Proceedings
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22
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Item
4.
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Reserved
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23
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PART
II
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23
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Item
5.
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Market
for the Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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23
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Dividend
Policy
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24
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Equity
Compensation Plan Information
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24
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Performance
Graph
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24
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Item
6.
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Selected
Financial Data
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25
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operation
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26
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Results
of Operation
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28
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Historical
Cash Flows
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33
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Liquidity
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34
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Sources
of Capital
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35
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Off-Balance
Sheet Arrangements
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37
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New
Accounting Pronouncements
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37
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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38
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Item
8.
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Financial
Statements and Supplementary Data
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38
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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38
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Item
9A.
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Controls
and Procedures
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39
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Evaluation
of Disclosure Controls and Procedures
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39
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Management's
Report on Internal Control over Financial Reporting
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39
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Changes
in Internal Control over Financial Reporting
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39
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Inherent
Limitations on Effectiveness of Controls
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39
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Item
9B.
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Other
Information
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39
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PART
III
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40
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Item
10.
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Directors
and Executive Officers of the Registrant
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40
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Item
11.
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Executive
Compensation
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40
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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40
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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40
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Item
14.
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Principal
Accounting Fees and Services
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40
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PART
IV
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41
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Item
15.
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Exhibits,
Financial Statements and Schedules
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41
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Financial
Statements
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41
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Exhibits
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42
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SIGNATURES
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43
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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 the
sections entitled "Business," "Risk Factors," and "Management's Discussion and
Analysis of Financial Condition and Results of Operation" 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:
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changes
in general economic conditions, including the current recession,
reductions in federal, state and local government funding for
infrastructure services and changes in those governments’ budgets,
practices, laws and regulations;
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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;
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actions
of suppliers, subcontractors, design engineers, joint venture partners,
customers, competitors, banks, surety companies and others which are
beyond our control, including suppliers’ and subcontractors failure to
perform;
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the
effects of estimates inherent in our 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;
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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;
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our
dependence on a few significant
customers;
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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;
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the
presence of competitors with greater financial resources or lower margin
requirements, and the impact of competitive bidders on our ability to
obtain new backlog at reasonable margins acceptable
to us;
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our
ability to successfully identify, finance, complete and integrate
acquisitions;
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citations
issued by any governmental authority, including the Occupational Safety
and Health Administration;
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the
current instability of financial institutions, which could cause losses on
our cash and cash equivalents and short-term
investments;
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adverse
economic conditions in our markets in Texas, Utah and Nevada;
and
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the
other factors discussed in more detail in Item 1A. —Risk
Factors.
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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.
Access to the
Company's Filings
.
The Company's
Website
. The Company maintains a website at
www.sterlingconstructionco.com on which our latest Annual Report on Form 10-K,
recent Quarterly Reports on Form 10-Q, recent Current Reports on Form 8-K, any
amendments to those filings, and other filings may be accessed free of charge
through a link to the Securities and Exchange Commission's website where those
reports are filed. Our website also has recent press releases, the
Company's Code of Business Conduct & Ethics and the charters of the Audit
Committee, Compensation Committee, and Corporate Governance & Nominating
Committee of the Board of Directors. Information is also provided on
the Company’s “whistle-blower” procedures. Our website content is
made available for information purposes only. It should not be relied
upon for investment purposes, and none of the information on the website is
incorporated into this Report by this reference to it.
The Securities and Exchange
Commission (SEC)
. The public may read and copy any materials
filed by the Company with the SEC at the SEC's Public Reference Room at 100
F Street, NE, Room 1580, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330 (1-800-732-0330). The SEC also maintains an
Internet site at www.sec.gov on which you can obtain reports, proxy and
information statements and other information regarding the Company and other
issuers that file electronically with the SEC.
Overview of the Company's
Business
.
Sterling
Construction Company, Inc. was founded in 1991 as a Delaware
corporation. Our principal executive offices are located at 20810
Fernbush Lane, Houston, Texas 77073, and our telephone number at this address is
(281) 821-9091. Our construction business was founded in 1955 by a
predecessor company in Michigan and is now operated by our subsidiaries, Texas
Sterling Construction Co., a Delaware corporation, or "TSC", Road and Highway
Builders, LLC, a Nevada limited liability company, or "RHB", Road and Highway
Builders Inc. a Nevada corporation, or "RHB Inc", Road and Highway Builders of
California, Inc., a California corporation or "RHB Cal" and Ralph L. Wadsworth
Construction Company, LLC, a Utah limited liability company or
“RLW”. The terms "Company", "Sterling", and "we" refer to Sterling
Construction Company, Inc. and its subsidiaries except when it is clear that
those terms mean only the parent company.
Sterling
is a leading heavy civil construction company that specializes in the building,
reconstruction and repair of transportation and water
infrastructure. Transportation infrastructure projects include
highways, roads, bridges, light rail and commuter rail. Water
infrastructure projects include water, wastewater and storm drainage systems.
Sterling provides general contracting services, including excavating, concrete
and asphalt paving, installation of large-diameter water and wastewater
distribution systems, construction of bridges and similar large structures,
construction of light and commuter rail infrastructure, concrete and asphalt
batch plant operations, concrete crushing and aggregates operations. Sterling
performs the majority of the work required by its contracts with its own crews
and equipment.
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 comprise one reportable segment and one reporting
unit component, heavy civil construction. In making this determination, we
considered that each project has similar characteristics, includes similar
services and similar types of customers and is subject to similar regulatory and
economic environments. We organize, evaluate and manage our financial
information around each project when making operating decisions and assessing
our overall performance.
Sterling
has a history of profitable growth, which we have achieved by expanding both our
service profile and our market areas. This involves adding services, such as
concrete operations, in order to capture a greater percentage of available work
in current and potential markets. It also involves strategically
expanding operations, either by establishing a branch office in a new market,
often after having successfully bid on and completed a project in that market,
or by acquiring a company that gives us an immediate entry into a
market. Sterling extended both its service profile and its geographic
market reach with the 2007 acquisition of RHB, a Nevada construction company,
and the 2009 acquisition of RLW, a Utah construction company.
Sterling
operates in Texas, Utah and Nevada, states that management believes benefit from
both positive long-term demographic trends as well as an historical commitment
to funding transportation and water infrastructure
projects. The Company also has a highway construction contract
in Hawaii. From 2000 to 2008, the populations of Texas, Utah and
Nevada grew 17%, 23% and 30%, respectively, compared to approximately 8% for the
national average. Spending on highways and bridges in 2010 is budgeted or
proposed at approximately $3.8 billion by the Texas Department of
Transportation, or TXDOT, at approximately $600 million by the Utah
Department of Transportation, or UDOT, and between $300 and $400 million by
the Nevada Department of Transportation, or NDOT. Management
anticipates that continued population growth and increased spending for
infrastructure in these markets will positively affect business opportunities
over the coming years.
On
December 3, 2009, we completed the acquisition of privately-owned Ralph L.
Wadsworth Construction Company, LLC, or RLW, which is headquartered in Draper,
Utah, near Salt Lake City. RLW is a heavy civil construction business focused on
the construction of bridges and other structures, roads and highways, and light
and commuter rail projects, primarily in Utah, with licenses to do business in
surrounding states. We paid approximately $63.9 million to acquire 80% of
the equity interests in RLW, and, in 2013, we have the option to purchase, and
the RLW sellers could require us to purchase, the remaining 20% of
RLW.
RLW’s
largest customer is UDOT, which is responsible for planning, constructing,
operating and maintaining the more than 6,000 miles of highway and over
1,700 bridges that make up the Utah state highway system. RLW strives to provide
efficient, timely and profitable execution of construction projects, with a
particular emphasis on structures and innovative construction methods. RLW has
significant experience in obtaining and profitably executing “design-build” and
“CM/GC” (construction manager/general contractor) projects. We believe that
design-build, CM/GC and other alternative project delivery methods are
increasingly being used by public sector customers as alternatives to the
traditional fixed unit price low bid process. Approximately 91.2% of RLW’s
backlog at December 31, 2009 was attributable to design-build and CM/GC
projects. Since its founding in 1975, RLW has experienced profitable growth,
capitalizing on high-quality execution of projects and strong customer
relationships.
We
acquired RLW for a number of reasons, including opportunities to:
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Expand
on RLW’s significant experience in design-build, CM/GC and other project
delivery methods.
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Utilize
RLW’s significant structural construction
expertise.
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Expand
into an attractive market with good long-term growth
dynamics.
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Complement
our existing market locations and advance our strategy of geographical
diversification.
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Partner
with a strong and innovative management team with a similar corporate
culture.
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Benefit
from RLW’s strong financial results and immediate accretion to our
earnings per share.
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Our Business
Strategy
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Key features of our business
strategy include
:
Continue to Add Construction
Capabilities.
By adding capabilities that augment our core
contracting and construction competencies, we are able to improve gross margin
opportunities, and more effectively compete for contracts that might not
otherwise be available to us.
Expand into Attractive New Markets
and Selectively Pursue Strategic Acquisitions.
We will
continue to seek to identify attractive new markets and opportunities in select
western, southwestern and southeastern U.S. areas. We will also continue to
assess opportunities to extend our service capabilities and expand our markets
through acquisitions.
Apply Core Competencies Across our
Markets.
We will seek to capitalize on opportunities to export
our Texas experience constructing water infrastructure projects and our Nevada
earthmoving, aggregates and asphalt paving experience into Utah markets.
Similarly, we believe that RLW’s experience with design-build, CM/GC and other
alternative project delivery methods in Utah can enhance opportunities for us in
our Texas and Nevada markets.
Increase our Market Leadership in
our Core Markets.
We have a strong presence in a number of
markets in Texas, Utah and Nevada and intend to expand our presence in these
states and other states where we believe contracting opportunities
exist.
Position our Business for Future
Infrastructure Spending.
As evidenced by the federal government's
recently enacted economic stimulus legislation, we believe there is a growing
awareness of the need to build, reconstruct and repair our country’s
infrastructure, including transportation infrastructure, such as bridges,
highways, and mass transit systems and water infrastructure, such as water,
wastewater and storm drainage systems. We will continue to build our
expertise to capture this infrastructure spending.
Continue to Attract, Retain and
Develop our Employees.
We believe that our employees are key
to the successful implementation of our business strategy, and we will continue
allocating significant resources in order to attract and retain talented
managers and supervisory and field personnel.
Our
Markets
.
We
operate in the heavy civil construction segment, specializing in transportation
and water infrastructure projects, which we pursue in Texas, Utah, Nevada and
other states where we see contracting opportunities. In July 2009, we were also
the successful bidder for a project in Hawaii on which we began work in the
fourth quarter of 2009. RLW has also completed construction projects in Idaho,
Wyoming and Arizona. We have also bid on construction projects in California but
have not been awarded any such projects in that state.
Demand
for transportation and water infrastructure depends on a variety of factors,
including overall population growth, economic expansion and the vitality of the
market areas in which we operate, as well as unique local topographical,
structural and environmental issues. In addition to these factors, demand for
the replacement of infrastructure is driven by the general aging of
infrastructure and the need for technical improvements to achieve more efficient
or safer use of infrastructure and resources. Funding for this infrastructure
depends on federal, state and local governmental resources, budgets and
authorizations.
Various
factors described in this report have adversely affected the levels of
transportation and water infrastructure capital expenditures in our markets,
reducing bidding opportunities to replace backlog and increasing competition for
new projects. Assuming that these factors continue to affect
infrastructure capital expenditures in our markets in the near term, and taking
into account the amount of backlog we had at December 31, 2009 and the lower
anticipated margin bid on some projects that we have recently been awarded and
expect to start work on in 2010, we currently anticipate that our net income and
diluted earnings per common share of stock attributable to Sterling common
stockholders for 2010 will be substantially below the results we achieved for
2009.
State
Highway Markets
According
to 2008 U.S. Census Bureau information, Texas is the second largest state
in population in the U.S., with 24.3 million people and a population growth
of 17% from 2000 to 2008, approximately twice the 8% growth rate for the
U.S. as a whole over the same period. Three of the 10 largest cities in the
U.S. are located in Texas, and we have offices serving the areas in which
each of them is located. Utah, with a population of 2.7 million in 2008,
was the third fastest growing state from 2000 to 2008, with an increase of 23%.
Nevada had even more rapid growth, with the state’s population expanding 30%
from 2.0 million to 2.6 million people in 2008. Texas, Utah and Nevada are
projected by the U.S. Census Bureau to have populations of over
33 million, 3 million and 4 million, respectively, by
2030.
According
to a report prepared by FMI Corporation, a consulting firm specializing in the
Construction industry, U.S. highway infrastructure spending is estimated to
increase by 5.4% in 2010 and 5.1% in 2011, and U.S. water infrastructure
spending is estimated to increase by 2.8% in 2010 and 3.6% in 2011.
Our
highway and related bridge work is generally funded through federal and state
authorizations. The federal government enacted the SAFETEA-LU bill in 2005,
which authorized $244 billion for transportation spending through 2009. The
U.S. Department of Transportation budgeted $39.4 billion under SAFETEA-LU
for federal highway financial assistance to the states for 2009 versus
$37.4 billion for 2008 and $35.2 billion for 2007. Federal highway
gasoline and other highway related tax revenues used to fund SAFETEA-LU
were $7.5 billion less than expended for the federal government’s fiscal year
ended September 30, 2009. A successor federal funding program has not been
passed by the U.S. Congress, although there is a bill pending before the
U.S. House of Representatives that proposes spending of $450 billion
over six years on federal transportation projects. Since the SAFETEA-LU bill
expired on September 30, 2009, the federal government has been extending
interim financial assistance for 2010 on a month-to-month basis, most recently
through March 28, 2010, at approximately 70% of the prior year SAFETEA-LU
levels. Reductions in federal funding may negatively impact the states’ highway
and bridge construction expenditures for 2010. The budget proposed by President
Obama for fiscal 2011 includes $41.4 billion for federal-aid for highways with
approximately $20 billion being transferred from the general fund to offset the
expected shortfall from federal gasoline and other highway related
taxes. At the end of the third quarter of 2009, we had anticipated
these matters would be resolved in late 2009 or early in the first quarter of
2010; however, they have not yet been resolved and we are unable to predict when
or on what terms the federal government might renew the SAFETEA-LU bill, enact
the proposed budget or enact other similar legislation.
In
February 2009, the American Recovery and Reinvestment Act, or federal
economic-stimulus legislation, was enacted by the federal government that
authorizes $26.7 billion for highway and bridge construction. A significant
portion of these funds are to be used for ready-to-go, quick spending highway
projects for which contracts can be awarded quickly. The highway funds
apportioned to Texas, Utah and Nevada approximated $2.7 billion under the
federal economic-stimulus legislation, and the majority of such amount will be
expended in 2009 through 2011. State awards for highway and bridge construction
under the federal economic-stimulus legislation through October 2009 were less
than anticipated. In January 2009, the 2030 Committee, appointed by TXDOT at the
request of the Governor of the State of Texas, submitted its draft report of the
transportation needs of Texas. The report stated that “With [the] population
increase expected by 2030, transportation modes, costs and congestion are
considered a possible roadblock to Texas’ projected growth and prosperity.” The
report further indicated that Texas needs to spend approximately
$313.0 billion (in 2008 dollars) over the period 2009 through 2030 to
prevent worsening congestion and maintain economic competitiveness on its urban
highways and roads, to improve congestion/safety and partial connectivity on its
rural highways, and to replace bridges.
In 2007,
the voters of the State of Texas approved $5.0 billion for highway construction
to be repaid out of the State's general funds and the budget for the biennium
2010-2011 includes $1.9 billion of proceeds from these
bonds. The estimated 2010 TXDOT lettings (contract awards) for
transportation construction projects are $3.8 billion, including stimulus funds
and the portion of the general obligation bonds discussed above versus
approximately $3.5 billion of lettings in 2009 including stimulus
funds.
Texas is
also authorized to sell an additional $1.0 billion of the general
obligation bonds for a revolving fund to be loaned by TXDOT to cities, counties
and other parties for the construction of highways and bridges. Upon the
repayment or sale of these loans, TXDOT may loan the repayment/sales proceeds to
similar parties for construction of additional highways and bridges. In Texas,
substantial funds for transportation infrastructure spending are also being
provided by toll road and regional mobility authorities for construction of toll
roads, which provides Sterling with additional construction contracting
opportunities.
Utah’s
Long Range Transportation Plan for 2007-2030 projects spending for highway and
bridge construction of $18.9 billion; the Utah Governor’s recommendation
for such spending in 2010 is approximately $600 million compared to
approximately $700 million recommended in 2009 and $1.3 billion expended in
2008. According to a report prepared by FMI Corporation, a construction industry
consulting firm, road and bridge construction expenditures in Utah are estimated
to gradually increase in the three years after 2010.
Transportation
construction expenditures as reported by NDOT totaled $447 million in 2008.
Based on press statements by officials of NDOT, we estimate NDOT expenditures in
2009 and 2010 will be between $300 million and $400 million in each of
those fiscal years, including economic-stimulus funds.
Municipal
Markets
Our water
and wastewater, underground utility, light and commuter rail and non-highway
paving work is generally funded by municipalities and other local authorities.
While the size and growth rates of these markets are difficult to compute as a
whole, given the number of municipalities, the differences in funding sources
and variations in local budgets, management estimates that the municipal markets
in Texas and Nevada together funded in excess of $1.0 billion of such
projects during 2009. Two of the many municipalities that we perform work for
are discussed below.
The City
of Houston’s estimated expenditures for 2009 on storm drainage, street and
traffic, waste water and water capital improvements were $538 million. The
2010 Capital Improvement Plan includes $517 million in 2010 and
$507 million in 2011 for transportation and water infrastructure
projects.
The City
of San Antonio has adopted a six-year capital improvement plan for 2009
through 2014, which includes $415 million for streets and $228 million
for drainage. The expenditures will be partially funded by the $550 million
bond program that the voters of the City of San Antonio approved in May
2007. San Antonio’s budget for such projects was $230 million for 2009
and is $290 million for 2010.
We also
do work for other cities, counties, business area redevelopment authorities and
regional water authorities in Texas, which have substantial water and
transportation infrastructure spending budgets.
In
addition, while we currently have no municipal contracts in the City of Las
Vegas, that City’s final budget for roads, flood projects and street
rehabilitation is $289 million in 2010. Management believes that there will
be opportunities for Sterling to bid on and obtain municipal work in Las Vegas
as well as Reno and Carson City and Salt Lake City, Utah.
Our
Customers
We are
headquartered in Houston, and we serve the top markets in Texas, including
Houston, San Antonio, Austin and Dallas/Fort Worth. We expanded our
operations into Nevada in 2007 and into Utah in December 2009, in each case by
acquiring a strong and profitable company with a well-established market
presence and ties to customers in the state.
Although
we occasionally undertake contracts for private customers, the vast majority of
our revenues are attributable to work for public sector customers. In Texas,
these customers include TXDOT, county and municipal public works departments,
the Metropolitan Transit Authority of Harris County, Texas (or Metro), the
Harris County Toll Road Authority, North Texas Transit Authority (or NTTA),
regional transit and water authorities, port authorities, school districts and
municipal utility districts. In Utah, our public sector customers include UDOT
and the Utah Transit Authority. In Nevada, our primary public sector customer
has been NDOT. In 2009, state highway and related bridge work in Texas and
Nevada accounted for 58% of our consolidated revenues, compared with 68% in 2008
and 68% in 2007 (in each case excluding RLW work).
In 2009,
contracts with TXDOT represented 20.9% of our revenues, contracts with NDOT
represented 23.6% of our revenues and contracts with NTTA accounted for 13.4% of
our revenues. For the year 2009, contracts with UDOT represented
72.9% of RLW’s revenues, and other public sector revenue generated in Utah
represented 24.0% of RLW’s revenues. We generally provide services to these
customers pursuant to contracts awarded through competitive bidding
processes.
In Texas,
our municipal customers in 2009 included the City of Houston (8.7% of our 2009
revenues), City of San Antonio (5.6% of our 2009 revenues) and Harris
County, Texas (4.8% of our 2009 revenues). In the past, we have also completed
the construction of certain infrastructure for new light rail systems in
Houston, Dallas and Galveston, and RLW has completed light and commuter rail
infrastructure projects in Utah. We anticipate that expenditures in the Cities
of Houston and San Antonio for road, rail and water infrastructure projects
will continue to increase due to these metropolitan areas’ steady gain in
population through migration of new residents, the annexation of surrounding
communities and the continuing programs to expand storm water and flood control
systems and deliver water to suburban communities. We believe that similar
municipal civil construction opportunities are available in the Salt Lake City,
Las Vegas and Reno areas. We provide services to our municipal
customers exclusively pursuant to contracts awarded through competitive bidding
processes.
Competition
Our
competitors include companies that we bid against for construction contracts and
compete against for short listings, mandates and joint ventures. We have many
competitors of different sizes in the Texas, Utah and Nevada markets that we
primarily serve, and they include large national and regional construction
companies as well as many smaller contractors. Historically, the construction
business has not typically required large amounts of capital for smaller
contracts, which can result in relative ease of market entry for companies
possessing acceptable qualifications.
Factors
influencing our competitiveness include price, our reputation for quality, our
innovativeness, our equipment fleet, our financial strength, our surety bonding
capacity and prequalifications, our knowledge of local markets and conditions,
our project management and estimating abilities, our customer relationships, our
marketing abilities, our ability to enter into strategic relationships with
other contractors and our ability to perform many aspects of each project.
Although some of our competitors are larger than we are and may possess greater
resources or provide more vertically-integrated services, we believe that we are
well-positioned to compete in the markets in which we operate on the basis of
the foregoing factors.
We are
unable to determine the size of many competitors because they are privately
owned, but we believe that we are one of the larger participants in our Texas
markets and one of the largest contractors in Houston and San Antonio
engaged in municipal civil construction work. We believe that being a municipal
civil market contractor provides us with several advantages in the Houston and
San Antonio markets, including greater flexibility to manage our backlog in
order to schedule and deploy our workforce and equipment resources more
efficiently; more cost-effective purchasing of materials, insurance and bonds;
the ability to provide a broader range of services than otherwise would be
provided through subcontractors; and the availability of substantially more
capital and resources to dedicate to each of our contracts. Because we own and
maintain most of the equipment required for our contracts and have the
experienced workforce to handle many types of municipal civil construction, we
are able to bid competitively on many categories of contracts, especially
complex, multi-task projects.
In Utah,
RLW has been competitive, in part, because of successful marketing efforts,
design-build and CM/GC capabilities and development of innovative methods for
completing projects. Competition for design-build projects is not totally
focused on cost factors but is also significantly dependent on successful
marketing efforts, reputation, quality of designs and aesthetics. We believe
that we were one of the first construction companies to utilize accelerated
bridge construction technology to build bridges offsite, move them to their
location, and complete their installation in a short period of time in order to
minimize mobility disruptions. In Nevada, we believe that we are a leading
asphalt paving contractor on suburban and rural highway projects.
In the
state highway markets, most of our competitors are large national and regional
contractors, and individual contracts tend to be larger and require more
specialized skills than those in the municipal markets. Some of these
competitors have the advantage of being more vertically-integrated, or they
specialize in certain types of projects such as construction over water. However
those competitors, particularly in Texas, often have the disadvantage of having
to use a temporary, local workforce to complete each of their state highway
contracts. In contrast, we have a permanent workforce who performs our state
highway contracts in Texas; however, we do rely on a temporary, unionized
workforce for performance of a portion of our state highway contracts in Nevada
and some seasonal workers in Utah.
During
the last quarter of 2008, throughout the year 2009 and continuing into the first
quarter of 2010, the bidding environment in our markets has been much more
competitive. While our business includes only minimal residential and commercial
infrastructure work, the severe fall-off in new projects in those markets has
resulted in some residential and commercial infrastructure contractors bidding
on smaller public sector transportation and water infrastructure projects,
sometimes at bid levels below our break-even pricing, thus increasing
competition and creating downward pressure on bid prices in our markets.
Traditional competitors on larger transportation and water infrastructure
projects also appear to have been bidding at less than normal margins in order
to replenish their reduced backlogs, again sometimes at bid prices below our
breakeven pricing. These factors have limited our ability to maintain or
increase our backlog through successful bids for new projects and have
compressed the profitability on the new projects where we submitted successful
bids. While we have recently been more aggressive in reducing the anticipated
margins we bid on some projects, we have not bid at anticipated loss margins in
order to obtain new backlog.
Backlog
Backlog
is our estimate of the revenues that we expect to earn in future periods on our
construction projects. We generally add the anticipated revenue value of each
new project to our backlog when management reasonably determines that we will be
awarded the contract and there are no known impediments to being awarded the
contract. We deduct from backlog the revenues earned on each project during the
applicable fiscal period. As construction on our projects progresses, we also
increase or decrease backlog to take into account our estimates of the effects
of changes in estimated quantities, changed conditions, change orders and other
variations from initially anticipated contract revenues, including completion
penalties and incentives. At December 31, 2009, our backlog of $647 million
included approximately $79 million of expected revenues for which the
contracts had not yet been officially awarded or finalized as to price.
Historically, subsequent non-awards of contracts or finalization of contract
price have not materially affected our backlog, results of operations or
financial condition.
Substantially
all of the contracts in our contract backlog may be canceled at the election of
the customer; however, we have not been materially adversely affected by
contract cancellations or modifications in the past. See the section below
entitled “— Contracts — Contract Management Process.”
Construction
Delivery Methods
Alternative
construction delivery methods describe different contractual and responsibility
relationships among the owner, the builder and the designer of a project. There
are three primary construction delivery methods: design-bid-build, design-build
and construction management.
The
traditional method by which most of our projects have historically been
completed is design-bid-build. Under this type of construction delivery, the
owner hires a design engineer to design the project and then solicits bids from
construction firms and typically awards the contract to build the pre-designed
project to the lowest qualifying bidder. The contractor to whom the project is
awarded becomes the general contractor and is responsible for completing the
project in accordance with the owner’s designs using the contractor’s own
employees or resources, or subcontractors. Projects under this method are
typically fixed unit prices contracts.
Design-build
is increasingly being used by public entities as a method of project delivery.
Unlike traditional projects where the owner first hires a design firm or designs
a project itself and then puts the project out to bid for construction,
design-build projects provide the owner with a single point of responsibility
and a single contact for both final design and construction. The owner selects a
builder who hires the design team as required and construction typically starts
before the design is complete. This project delivery method is typically
undertaken through either fixed unit price contracts or lump sum
contracts.
Construction
management is a newer method of delivering a project whereby a contractor agrees
to manage a project for the owner for an agreed-upon fee, which may be fixed or
may vary based upon negotiated factors. The owner of the project typically hires
the contractor as a construction manager early in the design phase of the
project. The construction manager works with the design team to help ensure that
the design is something that can in fact be built within the owner’s desired
cost and other parameters and that the ultimate construction contractor will be
able to understand the design drawings and specifications. There are two basic
types of construction management: construction manager as advisor and
construction manager at risk. In the construction manager as advisor variation,
the construction manager acts as a technical consultant to the owner of the
project and has no legal responsibility for the performance of the actual
construction work. In the construction manager at risk variation, the
construction manager becomes the prime contractor during the construction phase
and awards subcontracts for portions of the work to be performed or performs the
work itself. We more typically are a construction manager at risk through a
construction manager/general contractor (CM/GC) relationship. In either type of
construction management process, portions of a project are often submitted for
bid during the course of the construction manager relationship, with the
construction manager bidding, and oftentimes having the first right to bid, on
portions of the project.
Among
other alternative project delivery methods, RLW’s expertise includes employing
accelerated bridge construction methods, or “ABC”, an innovative technology
being implemented by many of the departments of transportation in the U.S.
today. The use of ABC methods dramatically decrease bridge installation
durations by a factor of months, thereby significantly reducing traffic delays
and commuter fuel costs. UDOT is working to adopt ABC as a standard for
many future bridge reconstruction projects. RLW has performed
approximately 12 ABC bridge installations since 2008.
Using
ABC, bridge structures are completely prefabricated off-site on temporary
abutments and then transported to the installation site via Self-Propelled
Modular Transporters (SPMT’s). For example, in a typical ABC bridge
installation, a three to six-million pound bridge is prefabricated completely
off-site without any traffic delays. The SPMT’s pick up, rotate and
transport at one mile per hour the new bridge from the staging area to the
installation site and position it on top of new pre-fabricated bridge abutments
with usually less than an inch tolerance on each side of the bridge. The old
bridge demolition and new bridge installation is performed within 24-48 hours,
generally over a week-end, so that freeway traffic can reopen for Monday morning
rush-hour traffic.
Contracts
Types
of Contracts
We
provide our services primarily by using traditional general contracting
arrangements, including fixed unit price contracts, lump sum contracts and cost
plus contracts.
Fixed
unit price contracts are generally used in competitively-bid public civil
construction contracts. Contractors under fixed unit price contracts are
generally committed to provide all of the resources required to complete the
contract for a fixed price per unit. These contracts are generally subject to
negotiated change orders, frequently due to differences in site conditions from
those initially anticipated. Some fixed unit price contracts provide for
penalties, if the contract is not completed on time, or incentives, if it is
completed ahead of schedule.
Under a
lump sum contract, the contractor typically agrees to deliver a completed
project in accordance with the contract’s requirements for a specific price, and
the customer agrees to pay the price upon completion of the work or according to
a negotiated payment schedule. In developing a lump sum bid, the contractor
estimates the costs of labor, subcontracts and materials and adds an amount for
overhead and profit. The amount of the profit may be increased based on the
builder’s assessment of risk. If the actual costs of labor, subcontracts,
materials and overhead are higher than the contractor’s estimate, the profit
will be reduced or become a loss; if the actual costs are lower, the contractor
gets more profit.
In a cost
plus contract, the owner of a project generally agrees to pay the cost of all of
the contractor’s labor, subcontracts and materials plus an amount for contractor
overhead and profit (usually as a percentage of the labor, subcontracts and
material cost). If actual costs are lower than the estimate, the owner benefits
from the cost savings. If actual costs are higher than the estimate, the owner
bears the economic burden of the additional costs.
Contract
Management Process
We
identify potential contracts from a variety of sources, including through
subscriber services that notify us of contracts out for bid; through
advertisements by federal, state and local governmental entities; through our
business development efforts; through contacts at government agencies; and
through meetings with other participants in the construction industry. After
determining which contracts are available, we decide which contracts to pursue
based on such factors as the relevant skills required, the contract size and
duration, the availability of our personnel and equipment, the size and makeup
of our current backlog, our competitive advantages and disadvantages, prior
experience, the contracting agency or customer, the source of contract funding,
geographic location, likely competition, construction risks, gross margin
opportunities, penalties or incentives and the type of contract.
As a
condition to pursuing some contracts, we are required to complete a
prequalification process with the applicable agency or customer. Some customers,
such as TXDOT, NDOT and UDOT, require yearly prequalification, and other
customers have experience requirements specific to the contract. The
prequalification process generally limits bidders to those companies with the
operational experience and financial capability to effectively complete the
particular contract in accordance with the plans, specifications and
construction schedule.
There are
several factors that can create variability in contract performance and
financial results compared to our bid assumptions on a contract. The most
significant of these include the completeness and accuracy of our original bid
analysis, recognition of costs associated with added scope changes, extended
overhead due to customer and weather delays, subcontractor availability and
performance issues, changes in productivity expectations, site conditions that
differ from those assumed in the original bid, and changes in the availability
and proximity of materials. In addition, our original bids for some contracts
are based on the contract customer’s estimates of the quantities needed to
complete a contract. If the quantities ultimately needed are different, our
backlog and financial performance on the contract will change. All of these
factors can lead to inefficiencies in contract performance, which can increase
costs and lower profits. Conversely, if any of these or other factors is more
positive than the assumptions in our bid, contract profitability can improve.
Design-build projects carry additional risks such as design error risk and the
risk associated with estimating quantities and prices before the project design
is completed. Design errors may result in higher than anticipated construction
costs and additional liability to the contract owner. Although we manage this
additional risk by adding contingencies to our bid amounts, obtaining errors and
omissions insurance and obtaining indemnifications from our design consultants
where possible, there is no guarantee that these risk management strategies will
always be successful.
The
estimating process for our traditional fixed unit price competitive bid
contracts typically involves three phases. Initially, we consider the level of
anticipated competition and our available resources for the prospective project.
If we then decide to continue considering a project, we undertake the second
phase of the contract process and spend up to six weeks performing a detailed
review of the plans and specifications, summarizing the various types of work
involved and related estimated quantities, determining the contract duration and
schedule and highlighting the unique and riskier aspects of the contract.
Concurrent with this process, we estimate the cost and availability of labor,
material, equipment, subcontractors and the project team required to complete
the contract on time and in accordance with the plans and specifications.
Substantially all of our estimates are made on a per-unit basis for each line
item, with the typical contract containing 50 to 400 line items. The final phase
consists of a detailed review of the estimate by management, including, among
other things, assumptions regarding cost, approach, means and methods,
productivity, risk and the estimated profit margin. This profit amount will vary
according to management’s perception of the degree of difficulty of the
contract, the current competitive climate and the size, availability of
resources and makeup of our backlog. Our project managers are intimately
involved throughout the estimating and construction process so that contract
issues, and risks, can be understood and addressed on a timely
basis.
Although
the factors described above are relevant in determining the appropriate amount
bid, the contracting process is managed differently if the project is to be
performed on a design-build basis or a CM/GC basis. For design-build projects
for UDOT, we assemble a team that may include project managers, engineers,
quality managers and surveyors, to learn about a project that we have identified
as one on which we may desire to bid. For some projects with UDOT,
pre-qualification for the project is required wherein we and the other
contractors prepare a description of financial strengths, past experience on
similar types of projects and the persons who will be on the project management
and design team, after which, UDOT will usually set forth a short list of three
to five contractors to respond to a request for proposal, generally within three
months. Utilizing the limited design specifications provided by UDOT, we
generally meet weekly over a two to three month period with design engineers to
generate a bid containing quantities, prices, timing and a description of our
approach for completing the project. UDOT then reviews the bids and selects the
one that has the best value to price, and considers factors such as contractor
qualifications, the time estimated to complete the project and the price
bid.
For our
UDOT CM/GC projects, UDOT typically sends out a request for proposal to general
contractors for a project. UDOT scores each contractor that submits a bid based
on the unit prices submitted for five to twenty items that comprise
approximately 10% to 20% of the project design, the profit margin proposed, the
experience of the contractor for similar types of projects, the contractor’s
approach to completing the specific project and whether the contractor
understands the CM/GC process. A committee reviews each bid and determines the
best value winner to be the general contractor. If we are the winning general
contractor, we work with UDOT and the engineer to design the project. As various
phases of the project are designed, we usually submit bids to construct each
phase of the project for which we are qualified. If our bid is within 5% of the
cost estimates determined by UDOT and the engineer, then we will generally be
awarded the contract for a particular phase; if there is more than a 10%
difference, then UDOT negotiates with us on the appropriate contract price; and
if those negotiations are not successful, then UDOT can terminate our
contract.
To manage
risks of changes in material prices and subcontracting costs used in tendering
bids for construction contracts, we generally obtain firm price quotations from
our suppliers and subcontractors, except for fuel and trucking, before
submitting a bid. For fixed unit price contracts, these quotations do not
include any quantity guarantees, and we have no obligation for materials or
subcontract services beyond those required to complete the respective contracts
that we are awarded for which quotations have been provided. For design-build
and CM/GC projects, lump sum subcontracts are often executed with
subcontractors.
During
the construction phase of a contract, we monitor our progress by comparing
actual costs incurred and quantities completed to date with budgeted amounts and
the contract schedule, and periodically prepare an updated estimate of total
forecasted revenue, cost and expected profit for the contract.
During
the normal course of most contracts, the customer, and sometimes the contractor,
initiates modifications or changes to the original contract to reflect, among
other things, changes in quantities, specifications or design, method or manner
of performance, facilities, materials, site conditions and the period for
completion of the work. In many cases, final contract quantities may differ from
those specified by the customer. Generally, the scope and price of these
modifications are documented in a “change order” to the original contract and
reviewed, approved and paid in accordance with the normal change order
provisions of the contract. We are often required to perform extra or change
order work under our fixed unit price contracts as directed by the customer even
if the customer has not agreed in advance on the scope or price of the work to
be performed. This process may result in disputes over whether the work
performed is beyond the scope of the work included in the original contract
plans and specifications or, even if the customer agrees that the work performed
qualifies as extra work, the price that the customer is willing to pay for the
extra work. These disputes may not be settled to our satisfaction. Even when the
customer agrees to pay for the extra work, we may be required to fund the cost
of the work for a lengthy period of time until the change order is approved and
funded by the customer. In addition, any delay caused by the extra work may
adversely impact the timely scheduling of other work on the contract (or on
other contracts) and our ability to meet contract milestone dates.
The
process for resolving contract claims varies from one contract to another but,
in general, we attempt to resolve claims at the project supervisory level
through the normal change order process or, if necessary, with higher levels of
management within our organization and the customer’s organization. Regardless
of the process, when a potential claim arises on a contract, we typically have
the contractual obligation to perform the work and must incur the related costs.
We do not recoup the costs unless and until the claim is resolved, which could
take a significant amount of time.
Most of
our construction contracts provide for termination of the contract for the
convenience of the customer, with provisions to pay us only for work performed
through the date of termination. Our backlog and results of operations have not
been materially adversely affected by these provisions in the past.
We act as
the prime contractor on the majority of the construction contracts that we
undertake. We generally complete the majority of the work on our contracts with
our own resources, and we typically subcontract only specialized activities,
such as traffic control, electrical systems, signage, trucking and, in Utah,
earthmoving. As the prime contractor, we are responsible for the performance of
the entire contract, including subcontract work. Thus, we are subject to
increased costs associated with the failure of one or more subcontractors to
perform as anticipated. We manage this risk by reviewing the size of the
subcontract, the financial stability of and prior experience with the
subcontractor and other factors. Although we generally do not require that our
subcontractors furnish a bond or other type of security to guarantee their
performance, we require performance and payment bonds on some specialized or
large subcontract portions of our contracts. Disadvantaged business enterprise
regulations require us to use our best efforts to subcontract a specified
portion of contract work performed for governmental entities to certain types of
subcontractors, including minority- and women-owned businesses. We have not
experienced significant costs associated with subcontractor performance issues
in the past.
Joint
Ventures
We
participate in joint ventures with other large construction companies and other
partners, typically for large, technically complex projects, including
design-build projects, when it is desirable to share risk and resources in order
to seek a competitive advantage or when the project is too large for us to
obtain sufficient bonding. Joint venture partners typically provide
independently prepared estimates, furnish employees and equipment, enhance
bonding capacity and often also bring local knowledge and expertise. We select
our joint venture partners based on our analysis of their construction and
financial capabilities, expertise in the type of work to be performed and past
working relationships with us, among other criteria.
Under a
joint venture agreement, one partner is typically designated as the sponsor. The
sponsoring partner typically provides all administrative, accounting and most of
the project management support for the project and generally receives a fee from
the joint venture for these services. We have been designated as the sponsoring
partner in certain of our current joint venture projects and are a
non-sponsoring partner in others.
The joint
venture’s contract with the project owner typically imposes joint and several
liability on the joint venture partners. Although our agreements with our joint
venture partners provide that each party will assume and pay 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 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.
Insurance
and Bonding
All of
our buildings and equipment are covered by insurance, at levels which our
management believes to be adequate. In addition, we maintain general liability
and excess liability insurance, all in amounts consistent with our risk of loss
and industry practice. Except for RLW, which has workers compensation insurance,
we self-insure our workers’ compensation and health claims subject to stop-loss
insurance coverage.
As a
normal part of the construction business, we are generally required to provide
various types of surety and payment bonds that provide an additional measure of
security for our performance under the contract. Typically, a bidder for a
contract must post a bid bond, generally for 5% to 10% of the amount bid, and on
winning the bid, must post a performance and payment bond for 100% of the
contract amount. Upon completion of a contract, before receiving final payment
on the contract, a contractor must post a maintenance bond for generally 1% of
the contract amount for one to two years. Our ability to obtain surety bonds
depends upon our capitalization, working capital, aggregate contract size, past
performance, management expertise and external factors, including the capacity
of the overall surety market. Surety companies consider such factors in light of
the amount of our backlog that we have currently bonded and their current
underwriting standards, which may change from time to time. As is customary, we
have agreed to indemnify our bonding company for all losses incurred by it in
connection with bonds that are issued, and we have granted our bonding company a
security interest in certain assets as collateral for such
obligation.
Government
and Environmental Regulations
Our
operations are subject to compliance with numerous regulatory requirements of
federal, state and local agencies and authorities, including regulations
concerning safety, wage and hour, and other labor issues, immigration controls,
vehicle and equipment operations and other aspects of our business. For example,
our construction operations are subject to the requirements of the Occupational
Safety and Health Act, or OSHA, and comparable state laws directed toward the
protection of employees. In addition, most of our construction contracts are
entered into with public authorities, and these contracts frequently impose
additional governmental requirements, including requirements regarding labor
relations and subcontracting with designated classes of disadvantaged
businesses.
All of
our operations are also subject to federal, state and local laws and regulations
relating to the environment, including those relating to discharges into air,
water and land, climate change, the handling and disposal of solid and hazardous
waste, the handling of underground storage tanks and the cleanup of properties
affected by hazardous substances. For example, we must apply water or chemicals
to reduce dust on road construction projects and to contain contaminants in
storm run-off water at construction sites. In certain circumstances, we may also
be required to hire subcontractors to dispose of hazardous wastes encountered on
a project in accordance with a plan approved in advance by the customer. Certain
environmental laws impose substantial penalties for non-compliance and others,
such as the federal Comprehensive Environmental Response, Compensation and
Liability Act, or CERCLA, impose strict, retroactive, joint and several
liability upon persons responsible for releases of hazardous
substances.
CERCLA
and comparable state laws impose liability, without regard to fault or the
legality of the original conduct, on certain classes of persons that contributed
to the release of a “hazardous substance” into the environment. These persons
include the owner or operator of the site where the release occurred and
companies that disposed or arranged for the disposal of the hazardous substances
found at the site. Under CERCLA, these persons may be subject to joint and
several liability for the costs of cleaning up the hazardous substances that
have been released into the environment, for damages to natural resources and
for the costs of certain health studies. CERCLA also authorizes the federal
Environmental Protection Agency, or EPA, and, in some instances, third parties,
to act in response to threats to the public health or the environment and to
seek to recover from the responsible classes of persons the costs they
incur.
Solid
wastes, which may include hazardous wastes, are subject to the requirements of
the Federal Solid Waste Disposal Act, the Federal Resource Conservation and
Recovery Act, referred to as RCRA, and comparable state statutes. Although we do
not generate solid waste, we occasionally dispose of solid waste on behalf of
customers. From time to time, the EPA considers the adoption of stricter
disposal standards for non-hazardous wastes. Moreover, it is possible that
additional wastes will in the future be designated as “hazardous wastes.”
Hazardous wastes are subject to more rigorous and costly disposal requirements
than are non-hazardous wastes.
Employees
As of
December 31, 2009, on a combined basis Sterling, including RLW, had
approximately 1,100 employees, including 25 project managers and approximately
75 superintendents. Of such employees, approximately 24 are headquarter's
personnel located in Houston, with most of the others being field personnel. Of
our Nevada employees, 16 were union members represented by three unions at
December 31, 2009.
Our
business is dependent upon a readily available supply of management, supervisory
and field personnel. Substantially all of our employees who work on our
contracts in Texas are a permanent part of our workforce, and we generally do
not rely on temporary employees to complete these contracts. In contrast, many
of our employees who work on our contracts in Utah and Nevada are seasonal
employees. In the past, we have been able to attract sufficient numbers of
personnel to support the growth of our operations.
We
conduct extensive safety training programs, which have allowed us to maintain a
high safety level at our worksites. All newly-hired employees undergo an initial
safety orientation, and for certain types of projects, we conduct specific
hazard training programs. Our project foremen and superintendents conduct weekly
on-site safety meetings, and our full-time safety inspectors make random site
safety inspections and perform assessments and training if infractions are
discovered. In addition, all of our superintendents and project managers are
required to complete an OSHA-approved safety course.
The risks
described below are those we believe to be the material risks we
face. Any of the risk factors described below could significantly and
adversely affect our business, prospects, financial condition, results of
operations and cash flows.
Risks Relating to
Our Business
.
If we are unable
to accurately estimate the overall risks, requirements or costs when
we bid on
or negotiate a contract that is ultimately awarded to us, we may achieve
a
lower than
anticipated profit or incur a loss on the contract.
The
majority of our revenues and backlog are derived from fixed unit price
contracts. Some of our revenues are derived from lump sum contracts. Fixed unit
price contracts require us to perform the contract for a fixed unit price based
on approved quantities irrespective of our actual costs. Lump sum contracts
require that the total amount of work be performed for a single price
irrespective of our actual costs. We realize a profit on our contracts only if
we successfully estimate our costs and then successfully control actual costs
and avoid cost overruns, and our revenues exceed actual costs. If our cost
estimates for a contract are inaccurate, or if we do not execute the contract
within our cost estimates, then cost overruns may cause us to incur losses or
cause the contract not to be as profitable as we expected. The final results
under these types of contracts could negatively affect our cash flow, earnings
and financial position.
The costs
incurred and gross profit realized on our contracts can vary, sometimes
substantially, from our original projections due to a variety of factors,
including, but not limited to:
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onsite
conditions that differ from those assumed in the original bid or
contract;
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failure
to include materials or work in a bid, or the failure to estimate properly
the quantities or costs needed to complete a lump sum
contract;
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delays
caused by weather conditions;
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contract
or project modifications creating unanticipated costs not covered by
change orders;
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changes
in availability, proximity and costs of materials, including steel,
concrete, aggregates and other construction materials (such as stone,
gravel, sand and oil for asphalt paving), as well as fuel and lubricants
for our equipment;
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inability
to predict the costs of accessing and producing aggregates and purchasing
oil required for asphalt paving
projects;
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availability
and skill level of workers in the geographic location of a
project;
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failure
by our suppliers, subcontractors, designers, engineers, joint venture
partners or customers to perform their
obligations;
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fraud,
theft or other improper activities by our suppliers, subcontractors,
designers, engineers, joint venture partners or customers or our own
personnel;
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mechanical
problems with our machinery or
equipment;
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citations
issued by any governmental authority, including the Occupational Safety
and Health Administration;
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difficulties
in obtaining required governmental permits or
approvals;
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changes
in applicable laws and
regulations; and
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claims
or demands from third parties for alleged damages arising from the design,
construction or use and operation of a project of which our work is
part.
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Many of
our contracts with public sector customers contain provisions that purport to
shift some or all of the above risks from the customer to us, even in cases
where the customer is partly at fault. Our experience has often been that public
sector customers have been willing to negotiate equitable adjustments in the
contract compensation or completion time provisions if unexpected circumstances
arise. Public sector customers may seek to impose contractual risk-shifting
provisions more aggressively, and we could face increased risks, which may
adversely affect our cash flow, earnings and financial position.
We may be unable
to sustain our historical revenue growth rate and maintain our
profitability.
Our
revenue has grown rapidly in recent years. However, we may be unable to sustain
these recent revenue growth rates for a variety of reasons, including decreased
government funding for infrastructure projects, limits on additional growth in
our current markets, reduced spending by our customers, an increased number of
competitors, less success in competitive bidding for contracts, limitations on
access to necessary working capital and investment capital to sustain growth,
limitations on access to bonding to support increased contracts and operations,
inability to hire and retain essential personnel and to acquire equipment to
support growth, and inability to identify acquisition candidates and
successfully acquire and integrate them into our business. Due to some of these
factors, we currently anticipate that our net income and diluted earnings per
share of stock attributable to Sterling common stockholders for 2010 will be
substantially below the results that we achieved in 2009. A substantial decline
in our revenue could have a material adverse effect on our financial condition
and results of operations if we are unable to also reduce our operating
expenses.
Economic
downturns or reductions in government funding of infrastructure projects
could
reduce our revenues and profits and have a material adverse effect on our
results of
operations.
Our
business is highly dependent on the amount and timing of infrastructure work
funded by various governmental entities, which, in turn, depends on the overall
condition of the economy, the need for new or replacement infrastructure, the
priorities placed on various projects funded by governmental entities and
federal, state or local government spending levels. Spending on infrastructure
could decline for numerous reasons, including decreased revenues received by
state and local governments for spending on such projects, including federal
funding. The nationwide decline in home sales, the increase in foreclosures and
a prolonged recession have resulted in decreases in property taxes and some
other local taxes, which are among the sources of funding for municipal road,
bridge and water infrastructure construction. State spending on highway and
other projects can be adversely affected by decreases or delays in, or
uncertainties regarding, federal highway funding, which could adversely affect
us. We are reliant upon contracts with TXDOT, UDOT and NDOT for a significant
portion of our revenues.
Recent
reductions in miles driven in the U.S. and more fuel efficient vehicles
have reduced federal and state gasoline taxes and tolls collected. In addition,
the federal government has not renewed the SAFETEA-LU bill, which provided
states with substantial funding for transportation infrastructure projects.
Since the SAFETEA-LU bill expired on September 30, 2009, the federal
government has been extending interim financial assistance on a month-to-month
basis, most recently through the end of February 2010, at approximately 70% of
the prior year SAFETEA-LU levels. Reductions in federal funding may negatively
impact the states’ highway and bridge construction expenditures for 2010. We are
unable to predict when or on what terms the federal government might renew the
SAFETEA-LU bill or enact other similar legislation.
While our
business includes only minimal residential and commercial infrastructure work,
the severe fall-off in new projects in those markets has resulted in some
residential and commercial infrastructure contractors bidding on smaller public
sector transportation and water infrastructure projects, sometimes at bid levels
below our break-even pricing. Traditional competitors on larger transportation
and water infrastructure projects also appear to have been bidding at less than
normal margins and in some cases at bid levels below our break-even pricing in
order to replenish their reduced backlogs. These conditions have increased
competition and created downward pressure on bid prices in our markets. These
and other factors have limited our ability to maintain or increase our backlog
through successful bids for new projects and have limited the profitability of
new projects that we do obtain through successful bids. These adverse
competitive trends may continue or worsen.
We operate in
Texas, Utah, Nevada and to a small extent in other states, and adverse
changes to
the economy and business environment in those states have had an adverse
effect on,
and could continue to adversely affect, our operations, which could lead
to lower
revenues and reduced profitability.
Because
of this concentration in specific geographic locations, we are susceptible to
fluctuations in our business caused by adverse economic or other conditions in
these regions, including natural or other disasters. The stagnant or depressed
economy, to varying degrees, in Texas, Utah and Nevada have adversely affected,
and could continue to adversely effect, our business and results of
operations.
The cancellation
of significant contracts or our disqualification from bidding for
new contracts
could reduce our revenues and profits and have a material adverse
effect on our
results of operations.
Contracts
that we enter into with governmental entities can usually be canceled at any
time by them with payment only for the work already completed. In addition, we
could be prohibited from bidding on certain governmental contracts if we fail to
maintain qualifications required by those entities. A cancellation of an
unfinished contract or our debarment from the bidding process could cause our
equipment and work crews to be idled for a significant period of time until
other comparable work became available, which could have a material adverse
effect on our business and results of operations.
Our
acquisition strategy involves a number of risks.
We intend
to continue pursuing growth through the acquisition of companies or assets that
may enable us to expand our project skill-sets and capabilities, enlarge our
geographic markets, add experienced management and enhance our ability to bid on
larger contracts. However, we may be unable to implement this growth strategy if
we cannot reach agreements for potential acquisitions on acceptable terms or for
other reasons. Moreover, our acquisition strategy involves certain risks,
including:
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difficulties
in the integration of operations and
systems;
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difficulties
applying our expertise in one market into another
market;
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regulatory
requirements that impose restrictions on bidding for certain projects
because of historical operations by Sterling or the acquired
company;
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the
key personnel, customers and project partners of the acquired company may
terminate or diminish their relationships with the acquired
company;
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we
may experience additional financial and accounting challenges and
complexities in areas such as tax planning and financial
reporting;
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we
may assume or be held liable for risks and liabilities (including for
environmental-related costs and liabilities) as a result of our
acquisitions, some of which we may not discover during our due
diligence;
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we
may not adequately anticipate competitive and other market factors
applicable to the acquired company;
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our
ongoing business may be disrupted or receive insufficient management
attention; and
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we
may not be able to realize cost savings or other financial benefits we
anticipated.
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Future
acquisitions may require us to obtain additional equity or debt financing, as
well as additional surety bonding capacity, which may not be available on terms
acceptable to us or at all. Moreover, to the extent that any acquisition results
in additional goodwill, it will reduce our tangible net worth, which might have
an adverse effect on our credit and bonding capacity.
Our industry is
highly competitive, with a variety of companies competing against us,
and our
failure to compete effectively could reduce the number of new contracts
awarded to
us or adversely affect our margins on contracts awarded.
A
majority of the contracts on which we bid are awarded through a competitive bid
process, with awards generally being made to the lowest bidder, but sometimes
recognizing other factors, such as shorter contract schedules or prior
experience with the customer. For our design-build, CM/GC and other alternative
methods of delivering projects, reputation, marketing efforts, quality of design
and minimizing public inconvenience are also significant factors considered in
awarding contracts, in addition to cost. Within our markets, we compete with
many national, regional and local construction firms. Some of these competitors
have achieved greater market penetration than we have in the markets in which we
compete, and some may have greater financial and other resources than we do. In
addition, there are a number of national companies in our industry that are
larger than we are and that, if they so desire, could establish a presence in
our markets and compete with us for contracts.
In some
markets where residential and commercial projects have significantly diminished,
the bidding environment in our markets has been much more competitive as
construction companies that lack available work in those markets have begun
bidding on projects in our markets, sometimes at bid levels below our break-even
pricing. In addition, traditional competitors on larger transportation and water
infrastructure projects also appear to have been bidding at less than normal
margins, and in some cases at below our break-even pricing, in order to
replenish their reduced backlogs. As a result, we may need to accept lower
contract margins in order to compete against competitors that have the ability
to accept awards at lower prices or have a pre-existing relationship with a
customer.
In
addition, if the use of design-build, CM/GC and other alternative project
delivery methods continues to increase and we are not able to further develop
our capabilities and reputation in connection with these alternative delivery
methods, we will be at a competitive disadvantage, which may have a material
adverse effect on our financial position, results of operations, cash flows and
prospects. If we are unable to compete successfully in our markets, our relative
market share and profits could also be reduced.
Our dependence on
subcontractors and suppliers of materials (including
petroleum-based
products) could increase our costs and impair our ability to complete
contracts
on a timely basis or at all, which would adversely affect our profits and
cash
flow.
We rely
on third-party subcontractors to perform some of the work on many of our
contracts. We generally do not bid on contracts unless we have the necessary
subcontractors committed for the anticipated scope of the contract and at prices
that we have included in our bid, except for trucking arrangements needed for
our Nevada operations. Therefore, to the extent that we cannot engage
subcontractors, our ability to bid for contracts may be impaired. In addition,
if a subcontractor is unable to deliver its services according to the negotiated
terms for any reason, including the deterioration of its financial condition, we
may suffer delays and be required to purchase the services from another source
at a higher price or incur other unanticipated costs. This may reduce the profit
to be realized, or result in a loss, on a contract.
We also
rely on third-party suppliers to provide most of the materials (including
aggregates, cement, asphalt, concrete, steel, pipe, oil and fuel) for our
contracts, except in Nevada where we source and produce most of the aggregates
we use. We do not own or operate any quarries in Texas or Utah. We normally do
not bid on contracts unless we have commitments from suppliers for the materials
and subcontractors for certain of the services required to complete the contract
and at prices that we have included in our bid, except for some aggregates we
use in our Nevada construction projects. Thus, to the extent that we cannot
obtain commitments from our suppliers for materials and subcontractors for
certain of the services, our ability to bid for contracts may be impaired. In
addition, if a supplier or subcontractor is unable to deliver materials or
services according to the negotiated terms of a supply/services agreement for
any reason, including the deterioration of its financial condition, we may
suffer delays and be required to purchase the materials/services from another
source at a higher price or incur other unanticipated costs. This may reduce the
profit to be realized, or result in a loss, on a contract.
Diesel
fuel and other petroleum-based products are utilized to operate the plants and
equipment on which we rely to perform our construction contracts. In addition,
our asphalt plants and suppliers use oil in combination with aggregates to
produce asphalt used in our road and highway construction projects. Decreased
supplies of such products relative to demand, unavailability of petroleum
supplies due to refinery turnarounds, higher prices charged for petroleum based
products and other factors can increase the cost of such products. Future
increases in the costs of fuel and other petroleum-based products used in our
business, particularly if a bid has been submitted for a contract and the costs
of such products have been estimated at amounts less than the actual costs
thereof, could result in a lower profit, or a loss, on a contract.
We may not
accurately assess the quality, and we may not accurately estimate the
quality,
quantity, availability and cost, of aggregates we plan to produce,
particularly for
projects in rural areas of Nevada, which could have a material
adverse effect on
our results of operations.
Particularly
for projects in rural areas of Nevada, we typically estimate the quality,
quantity, availability and cost for anticipated aggregate sources that we have
not previously used to produce aggregates, which increases the risk that our
estimates may be inaccurate. Inaccuracies in our estimates regarding aggregates
could result in significantly higher costs to supply aggregates needed for our
projects, as well as potential delays and other inefficiencies. As a result, our
failure to accurately assess the quality, quantity, availability and cost of
aggregates could cause us to incur losses, which could materially adversely
affect our results of operations.
We
may not be able to fully realize the revenue anticipated by our reported
backlog.
Backlog
is our estimate of the revenues that we expect to earn in future periods on our
construction projects. We generally add the anticipated revenue value of each
new project to our backlog when management reasonably determines that we will be
awarded the contract and there are no known impediments to being awarded the
contract. We deduct from backlog the revenues earned on each project during the
applicable fiscal period. As construction on our projects progresses, we also
increase or decrease backlog to take into account our estimates of the effects
of changes in estimated quantities, changed conditions, change orders and other
variations from initially anticipated contract revenues, including completion
penalties and bonuses. Actual results may differ from the expectations and
estimates we rely upon in determining backlog.
Most of
the contracts with our public sector customers can be terminated at their
discretion. If a customer cancels, suspends, delays or reduces a contract, we
may be reimbursed for certain costs but typically will not be able to bill the
total amount that had been reflected in our backlog. Cancellation of one or more
contracts that constitute a large percentage of our backlog, and our inability
to find a substitute contract, would have a material adverse effect on our
business, results of operations and financial condition.
If we are unable
to attract and retain key personnel and skilled labor, or if we
encounter labor
difficulties, our ability to bid for and successfully complete
contracts may be
negatively impacted.
Our
ability to attract and retain reliable, qualified personnel is a significant
factor that enables us to successfully bid for and profitably complete our work.
This includes members of our management, project managers, estimators,
supervisors, foremen, equipment operators and laborers. The loss of the services
of any of our management could have a material adverse effect on us. Our future
success will also depend on our ability to hire and retain, or to attract when
needed, highly-skilled personnel. If competition for these employees is intense,
we could experience difficulty hiring and retaining the personnel necessary to
support our business. If we do not succeed in retaining our current employees
and attracting, developing and retaining new highly-skilled employees, our
reputation may be harmed and our operations and future earnings may be
negatively impacted.
We rely
heavily on immigrant labor. We have taken steps that we believe are sufficient
and appropriate to ensure compliance with immigration laws. However, we cannot
provide assurance that we have identified, or will identify in the future, all
illegal immigrants who work for us. Our failure to identify illegal immigrants
who work for us may result in fines or other penalties being imposed upon us,
which could have a material adverse effect on our operations, results of
operations and financial condition.
In
Nevada, a substantial number of our equipment operators and laborers are
unionized. Any work stoppage or other labor dispute involving our unionized
workforce would have a material adverse effect on our operations and operating
results in Nevada.
Our contracts may
require us to perform extra or change order work, which can result
in disputes and
adversely affect our working capital, profits and cash
flows.
Our
contracts often require us to perform extra or change order work as directed by
the customer even if the customer has not agreed in advance on the scope or
price of the extra work to be performed. This process may result in disputes
over whether the work performed is beyond the scope of the work included in the
original project plans and specifications or, if the customer agrees that the
work performed qualifies as extra work, the price that the customer is willing
to pay for the extra work. These disputes may not be settled to our
satisfaction. Even when the customer agrees to pay for the extra work, we may be
required to fund the cost of such work for a lengthy period of time until the
change order is approved by the customer and we are paid by the
customer.
To the
extent that actual recoveries with respect to change orders or amounts subject
to contract disputes or claims are less than the estimates used in our financial
statements, the amount of any shortfall will reduce our future revenues and
profits, and this could have a material adverse effect on our reported working
capital and results of operations. In addition, any delay caused by the extra
work may adversely impact the timely scheduling of other project work and our
ability to meet specified contract milestone dates.
Our failure to
meet schedule or performance requirements of our contracts could
adversely affect
us.
In most
cases, our contracts require completion by a scheduled acceptance date. Failure
to meet any such schedule could result in additional costs, penalties or
liquidated damages being assessed against us, and these could exceed projected
profit margins on the contract. Performance problems on existing and future
contracts could cause actual results of operations to differ materially from
those anticipated by us and could cause us to suffer damage to our reputation
within the industry and among our customers.
The design-build
project delivery method subjects us to the risk of design errors and
omissions.
In the
event of a design error or omission causing damages with respect to one of our
design-build projects, we could be liable. Although we pass design
responsibility on to the engineering firms that we engage to perform design
services on our behalf for these projects, in the event of a design error or
omission causing damages, there is risk that the engineering firm, its
professional liability insurance, and the errors and omissions insurance that
they and we purchase will not fully protect us from costs or liabilities. Any
liabilities resulting from an asserted design defect with respect to our
construction projects may have a material adverse effect on our financial
position, results of operations and cash flows.
Adverse weather
conditions may cause delays, which could slow completion of our
contracts and
negatively affect our revenues and cash flow.
Because
all of our construction projects are built outdoors, work on our contracts is
subject to unpredictable weather conditions, which could become more frequent or
severe if general climatic changes occur. For example, evacuations in Texas due
to Hurricanes Rita and Ike resulted in our inability to perform work on all
Houston-area contracts for several days. Lengthy periods of wet or cold winter
weather will generally interrupt construction, and this can lead to
under-utilization of crews and equipment, resulting in less efficient rates of
overhead recovery. For example, during the fourth quarter of 2009, we
experienced an above-average number of days of rainfall and cold weather across
our Texas markets, which impeded our ability to work on construction projects
and reduced our revenues and gross profit. During the late fall to early spring
months of the year, our work on construction projects in Nevada and Utah may
also be curtailed because of snow and other work-limiting weather. While
revenues can be recovered following a period of bad weather, it is generally
impossible to recover the cost of inefficiencies, and significant periods of bad
weather typically reduce profitability of affected contracts both in the current
period and during the future life of affected contracts. Such reductions in
contract profitability negatively affect our results of operations in current
and future periods until the affected contracts are completed.
Timing of the
award and performance of new contracts could have an adverse effect on
our
operating results and cash flow.
It is
generally very difficult to predict whether and when new contracts will be
offered for tender, as these contracts frequently involve a lengthy and complex
design and bidding process, which is affected by a number of factors, such as
market conditions, funding arrangements and governmental approvals. Because of
these factors, our results of operations and cash flows may fluctuate from
quarter to quarter and year to year, and the fluctuation may be
substantial.
The
uncertainty of the timing of contract awards may also present difficulties in
matching the size of our equipment fleet and work crews with contract needs. In
some cases, we may maintain and bear the cost of more equipment and ready work
crews than are currently required, in anticipation of future needs for existing
contracts or expected future contracts. If a contract is delayed or an expected
contract award is not received, we would incur costs that could have a material
adverse effect on our anticipated profit.
In
addition, the timing of the revenues, earnings and cash flows from our contracts
can be delayed by a number of factors, including adverse weather conditions,
such as prolonged or intense periods of rain, snow, storms or flooding; delays
in receiving material and equipment from suppliers and services from
subcontractors; and changes in the scope of work to be performed. Such delays,
if they occur, could have adverse effects on our operating results for current
and future periods until the affected contracts are completed.
Our participation
in construction joint ventures exposes us to liability and/or harm
to our reputation
for failures of our partners.
As part
of our business, we are a party to joint venture arrangements, pursuant to which
we typically jointly bid on and execute particular projects with other companies
in the construction industry. Success on these joint projects depends upon
managing the risks discussed in the various risks described in these “Risk
Factors” and on whether our joint venture partners satisfy their contractual
obligations.
We and
our joint venture partners are generally jointly and severally liable for all
liabilities and obligations of our joint ventures. If a joint venture partner
fails to perform or is financially unable to bear its portion of required
capital contributions or other obligations, including liabilities stemming from
lawsuits, we could be required to make additional investments, provide
additional services or pay more than our proportionate share of a liability to
make up for our partner’s shortfall. Furthermore, if we are unable to adequately
address our partner’s performance issues, the customer may terminate the
project, which could result in legal liability to us, harm our reputation and
reduce our profit on a project.
In
connection with acquisitions, including the RLW acquisition, certain
counterparties to joint venture arrangements, which may include our historical
direct competitors, may not desire to continue such arrangements with us and may
terminate the joint venture arrangements or not enter into new arrangements. Any
termination of a joint venture arrangement could cause us to reduce our backlog
and could materially and adversely affect our business, results of operations
and financial condition.
Our dependence on
a limited number of customers could adversely affect our business
and results of
operations.
Due to
the size and nature of our construction contracts, one or a few customers have
in the past and may in the future represent a substantial portion of our
consolidated revenues and gross profits in any one year or over a period of
several consecutive years. For example, in 2009, approximately 20.9% of our
revenue was generated from TXDOT, and approximately 23.6% of our revenue was
generated from NDOT. Approximately 72.9% of RLW’s revenue for the
year 2009 was generated from UDOT. Similarly, our backlog frequently reflects
multiple contracts for individual customers; therefore, one customer may
comprise a significant percentage of backlog at a certain point in time.
Examples of this are TXDOT, which comprised 18.3% of our backlog and UDOT which
comprised 36.2% of our backlog at December 31, 2009. The loss of business from
any one of such customers could have a material adverse effect on our business
or results of operations. Because we do not maintain any reserves for payment
defaults by customers, a default or delay in payment on a significant scale
could materially adversely affect our business, results of operations and
financial condition.
We may incur
higher costs to lease, acquire and maintain equipment necessary for our
operations,
and the market value of our owned equipment may decline.
We have
traditionally owned most of the construction equipment used to build our
projects. To the extent that we are unable to buy construction equipment
necessary for our needs, either due to a lack of available funding or equipment
shortages in the marketplace, we may be forced to rent equipment on a short-term
basis, which could increase the costs of performing our contracts.
The
equipment that we own or lease requires continuous maintenance, for which we
maintain our own repair facilities. If we are unable to continue to maintain the
equipment in our fleet, we may be forced to obtain third-party repair services,
which could increase our costs. In addition, the market value of our equipment
may unexpectedly decline at a faster rate than anticipated.
An inability to
obtain bonding could limit the aggregate dollar amount of contracts
that we are able
to pursue.
As is
customary in the construction business, we are required to provide surety bonds
to our customers to secure our performance under construction contracts. Our
ability to obtain surety bonds primarily depends upon our capitalization,
working capital, past performance, management expertise and reputation and
certain external factors, including the overall capacity of the surety market.
Surety companies consider such factors in relationship to the amount of our
backlog and their underwriting standards, which may change from time to time.
Events that adversely affect the insurance and bonding markets generally may
result in bonding becoming more difficult to obtain in the future, or being
available only at a significantly greater cost. Our inability to obtain adequate
bonding, and, as a result, to bid on new contracts, could have a material
adverse effect on our future revenues and business prospects.
Our operations
are subject to hazards that may cause personal injury or property
damage, thereby
subjecting us to liabilities and possible losses, which may not be
covered by
insurance.
Our
workers are subject to the usual hazards associated with providing construction
and related services on construction sites, plants and quarries. Operating
hazards can cause personal injury and loss of life, damage to or destruction of
property, plant and equipment and environmental damage. Except for RLW, which
has workers compensation insurance, we self-insure our workers’ compensation and
health claims, subject to stop-loss insurance coverage. We also maintain
insurance coverage in amounts and against the risks that we believe are
consistent with industry practice, but this insurance may not be adequate to
cover all losses or liabilities that we may incur in our
operations.
Insurance
liabilities are difficult to assess and quantify due to unknown factors,
including the severity of an injury, the determination of our liability in
proportion to other parties, the number of incidents not reported and the
effectiveness of our safety program. If we were to experience insurance claims
or costs above our estimates, we might also be required to use working capital
to satisfy these claims rather than to maintain or expand our operations. To the
extent that we experience a material increase in the frequency or severity of
accidents or workers’ compensation and health claims, or unfavorable
developments on existing claims, our operating results and financial condition
could be materially and adversely affected.
Environmental and
other regulatory matters could adversely affect our ability to
conduct our
business and could require expenditures that could have a material
adverse effect on
our results of operations and financial condition.
Our
operations are subject to various environmental laws and regulations relating to
the management, disposal and remediation of hazardous substances, climate change
and the emission and discharge of pollutants into the air and water. We could be
held liable for such contamination created not only from our own activities but
also from the historical activities of others on our project sites or on
properties that we acquire or lease. Our operations are also subject to laws and
regulations relating to workplace safety and worker health, which, among other
things, regulate employee exposure to hazardous substances. Immigration laws
require us to take certain steps intended to confirm the legal status of our
immigrant labor force, but we may nonetheless unknowingly employ illegal
immigrants. Violations of such laws and regulations could subject us to
substantial fines and penalties, cleanup costs, third-party property damage or
personal injury claims. In addition, these laws and regulations have become, and
enforcement practices and compliance standards are becoming, increasingly
stringent. Moreover, we cannot predict the nature, scope or effect of
legislation or regulatory requirements that could be imposed, or how existing or
future laws or regulations will be administered or interpreted, with respect to
products or activities to which they have not been previously applied.
Compliance with more stringent laws or regulations, as well as more vigorous
enforcement policies of the regulatory agencies, could require us to make
substantial expenditures for, among other things, pollution control systems and
other equipment that we do not currently possess, or the acquisition or
modification of permits applicable to our activities.
Our
aggregate quarry lease in Nevada could subject us to costs and liabilities. As
lessee and operator of the quarry, we could be held responsible for any
contamination or regulatory violations resulting from activities or operations
at the quarry. Any such costs and liabilities could be significant and could
materially and adversely affect our business, operating results and financial
condition.
Terrorist attacks
have impacted, and could continue to negatively impact, the U.S.
economy and the
markets in which we operate.
Terrorist
attacks, like those that occurred on September 11, 2001, have contributed
to economic instability in the United States, and further acts of terrorism,
violence or war could affect the markets in which we operate, our business and
our expectations. Armed hostilities may increase, or terrorist attacks, or
responses from the United States, may lead to further acts of terrorism and
civil disturbances in the United States or elsewhere, which may further
contribute to economic instability in the United States. These attacks or armed
conflicts may affect our operations or those of our customers or suppliers and
could impact our revenues, our production capability and our ability to complete
contracts in a timely manner.
Risks
Related to Our Financial Results and Financing Plans
Actual results
could differ from the estimates and assumptions that we use to prepare
our
financial statements.
To
prepare financial statements in conformity with GAAP, management is required to
make estimates and assumptions, as of the date of the financial statements,
which affect the reported values of assets and liabilities, revenues and
expenses, and disclosures of contingent assets and liabilities. Areas requiring
significant estimates by our management include: contract costs and profits and
application of percentage-of-completion accounting and revenue recognition of
contract change order claims; provisions for uncollectible receivables and
customer claims and recoveries of costs from subcontractors, suppliers and
others; impairment of long-term assets; valuation of assets acquired and
liabilities assumed in connection with business combinations; accruals for
estimated liabilities, including litigation and insurance reserves; and
stock-based compensation. Our actual results could differ from, and could
require adjustments to, those estimates.
In
particular, as is more fully discussed in “Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Critical Accounting
Policies,” we recognize contract revenue using the percentage-of-completion
method. Under this method, estimated contract revenue is recognized by applying
the percentage of completion of the contract for the period (based on the ratio
of costs incurred to total estimated costs of a contract) to the total estimated
revenue for the contract. Estimated contract losses are recognized in full when
determined. Contract revenue and total cost estimates are reviewed and revised
on a continuous basis as the work progresses and as change orders are initiated
or approved, and adjustments based upon the percentage of completion are
reflected in contract revenue in the accounting period when these estimates are
revised. To the extent that these adjustments result in an increase, a reduction
or an elimination of previously reported contract profit, we recognize a credit
or a charge against current earnings, which could be material.
We may need to
raise additional capital in the future for working capital, capital
expenditures
and/or acquisitions, and we may not be able to do so on favorable terms
or at all,
which would impair our ability to operate our business or achieve our
growth
objectives.
Our
ability to obtain additional financing in the future will depend in part upon
prevailing credit and equity market conditions, as well as conditions in our
business and our operating results; such factors may adversely affect our
efforts to arrange additional financing on terms satisfactory to us. We have
pledged the proceeds and other rights under our construction contracts to our
bond surety, and we have pledged substantially all of our other assets as
collateral in connection with our credit facility and mortgage debt. As a
result, we may have difficulty in obtaining additional financing in the future
if such financing requires us to pledge assets as collateral. In addition, under
our credit facility, we must obtain the consent of our lenders to incur any
amount of additional debt from other sources (subject to certain exceptions). If
future financing is obtained by the issuance of additional shares of common
stock, our stockholders may suffer dilution. If adequate funds are not
available, or are not available on acceptable terms, we may not be able to make
future investments, take advantage of acquisitions or other opportunities, or
respond to competitive challenges.
We are subject to
financial and other covenants under our credit facility that could
limit our
flexibility in managing our business.
We have a
credit facility that restricts us from engaging in certain activities, including
restrictions on our ability (subject to certain exceptions) to:
|
·
|
make
distributions, pay dividends and buy back
shares;
|
|
·
|
incur
liens or encumbrances;
|
|
·
|
incur
indebtedness;
|
|
·
|
guarantee
obligations;
|
|
·
|
dispose
of a material portion of assets or otherwise engage in a merger with a
third party;
|
|
·
|
make
acquisitions; and
|
|
·
|
incur
losses for two consecutive
quarters.
|
Our
credit facility contains financial covenants that require us to maintain
specified fixed charge coverage ratios, asset ratios and leverage ratios, and to
maintain specified levels of tangible net worth. Our ability to borrow funds for
any purpose will depend on our satisfying these tests. If we are unable to meet
the terms of the financial covenants or fail to comply with any of the other
restrictions contained in our credit facility, an event of default could occur.
An event of default, if not waived by our lenders, could result in the
acceleration of any outstanding indebtedness, causing such debt to become
immediately due and payable. If such an acceleration occurs, we may not be able
to repay such indebtedness on a timely basis. Acceleration of our credit
facility could result in foreclosure on and loss of our operating assets. In the
event of such foreclosure, we would be unable to conduct our business and forced
to discontinue operations.
If we were
required to write down all or part of our goodwill, our net earnings and
net worth
could be materially and adversely affected.
We had
approximately $114.7 million of goodwill recorded on our consolidated
balance sheet at December 31, 2009. Goodwill represents the excess of cost over
the fair value of net assets acquired in business combinations. A shortfall in
our revenues or net income or changes in various other factors from that
expected by securities analysis and investors could significantly reduce the
market price of our common stock. If our market capitalization drops
significantly below the amount of net equity recorded on our balance sheet, it
might indicate a decline in our fair value and would require us to further
evaluate whether our goodwill has been impaired. We perform an annual review of
our goodwill and intangible assets to determine if they have become impaired,
which would require us to write down the impaired portion of these
assets. On an interim basis, we also review the factors that have or
may affect our operations or market capitalization for events that may trigger
impairment testing. If we were required to write down all or a
significant part of our goodwill, our net earnings and net worth could be
materially and adversely affected.
None
We own
our headquarters office building in Houston, Texas, which is located on a
seven-acre parcel of land on which our Texas equipment repair center is also
located. We also own land in Dallas and San Antonio on which we plan to
construct offices and repair facilities. Pending completion of these offices, we
lease office facilities in these locations. In order to complete most contracts
in Texas, we lease small parcels of real estate near the site of a contract job
site to store materials, locate equipment, conduct concrete crushing and pugging
operations, and provide offices for the contracting customer, its
representatives and our employees.
Our Utah
operations leases office space in Draper, Utah, near Salt Lake City, and repair
facilities in West Jordan City, Utah from entities owned by the non-controlling
interest owners of RLW – see Note 14 to the accompanying financial
statements.
For our
Nevada operations, we lease office space in Reno, Nevada, and own our office and
repair facilities located on a forty-five acre parcel of land in Lovelock,
Nevada. We also lease the right to mine stone and sand at a quarry in Carson
City, Nevada. Unlike in Texas and Utah where we acquire aggregates from
third-party suppliers, in Nevada, we generally source and produce our own
aggregates, either from the Carson City quarry or from other sources near job
sites where we enter into short-term leases to acquire the aggregates necessary
for the job. As in Texas and Utah, in order to complete most contracts in
Nevada, we also lease small parcels of real estate near the site of a contract
job site to store materials, locate equipment, and provide offices for the
contracting customer, its representatives and our employees.
We are
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 in the future to have a material adverse impact on our consolidated
results of operations, financial position or cash flows.
Executive
Officers of the Registrant
(At March
1, 2010)
The
following is a list of the Company's four executive officers, their ages,
positions, offices and the year they became executive officers and a brief
description of their business experience.
|
Name
|
Age
|
Position/Offices
|
Executive
Officer Since
|
|
Patrick
T. Manning
(1)
|
64
|
Chairman
& Chief Executive Officer
|
2001
|
|
Joseph
P. Harper, Sr.
(1)
|
64
|
President
& Chief Operating Officer, Treasurer
|
2001
|
|
James
H. Allen, Jr.
|
69
|
Senior
Vice President & Chief Financial Officer
|
2007
|
|
Roger
M. Barzun
|
68
|
Senior
Vice President & General Counsel, Secretary
|
2006
|
(1)
Member of the Board of Directors.
Each
executive officer is elected by the Board of Directors and, subject to the terms
of his employment agreement with the Company, holds office for such term as the
Board of Directors may prescribe or until his death, disqualification,
resignation or removal.
Messrs.
Manning and Harper have been executive officers of the Company for more than the
last five years and have been directors since 2001.
Mr. Allen
spent approximately 30 years with Arthur Andersen & Co., including 19 years
as an audit and business advisory partner and as head of the firm’s Houston
office construction industry practice. After being retired for
several years, he became chief financial officer of a process chemical
manufacturer and served in that position for over three years prior to joining
the Company. Mr. Allen is a certified public
accountant.
Mr.
Barzun has been an officer of the Company for more than the last five years and
also serves as general counsel to other corporations from time to time on a
part-time basis. He is a member of the bar of New York and
Massachusetts.
|
|
Item
4.
|
Reserved
by the Securities and Exchange
Comission
|
|
|
Item 5.
|
Market for the Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
.
|
The
Company's common stock is traded on the NASDAQ Global Select Market
("NGS"). The table below shows the market high and low closing sales
prices of the common stock for 2008 and 2009 by quarter and for the period from
January 1, through February 28, 2010.
|
High
$
|
Low
$
|
|||||||
|
Year Ended December 31,
200
8
First Quarter
|
21.84 | 16.37 | ||||||
|
Second Quarter
|
21.02 | 18.70 | ||||||
|
Third Quarter
|
20.80 | 16.16 | ||||||
|
Fourth Quarter
|
19.30 | 9.40 | ||||||
|
Year Ended December 31,
200
9
First Quarter
|
19.69 | 14.01 | ||||||
|
Second Quarter
|
19.88 | 12.59 | ||||||
|
Third Quarter
|
18.25 | 14.48 | ||||||
|
Fourth Quarter
|
19.90 | 15.61 | ||||||
|
January
1 through February 28, 2010
|
20.99 | 17.64 | ||||||
On
February 26, 2010, there were 1,165 holders of record of our common
stock.
Dividend
Policy
. We have never paid any cash dividends on our common
stock. For the foreseeable future, we intend to retain any earnings
in our business, and we do not anticipate paying any cash
dividends. Whether or not we declare any dividends will be at the
discretion of the Board of Directors considering then-existing conditions,
including the Company's financial condition and results of operations, capital
requirements, bonding prospects, contractual restrictions (including those under
the Company's Credit Facility) business prospects and other factors that our
Board of Directors considers relevant.
Equity
Compensation Plan Information
.
Certain
information about the Company's equity compensation plans is incorporated into
Item 11. — Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder Matters
from the Company's proxy statement for its 2010 Annual Meeting of
Stockholders.
Performance
Graph.
The following graph compares the percentage change in
the Company's cumulative total stockholder return on its common stock for the
last five years with the
Dow
Jones US Index
, a broad market index, and the
Dow Jones US Heavy Construction
Index,
a group of companies whose marketing strategy is focused on a
limited product line, such as civil construction. Both indices are
published in
The
Wall Street
Journal.
The
returns are calculated assuming that an investment with a value of $100 was made
in the Company's common stock and in each index at the end of 2004 and that all
dividends were reinvested in additional shares of common stock; however, the
Company has paid no dividends during the periods shown. The graph
lines merely connect the measuring dates and do not reflect fluctuations between
those dates. The stock performance shown on the graph is not intended
to be indicative of future stock performance.
|
December
2004
($)
|
December
2005
($)
|
December
2006
($)
|
December
2007
($)
|
December
2008
($)
|
December
2009
($)
|
|||||||||||||||||||
|
Sterling
Construction Company, Inc.
|
100.00 | 324.28 | 419.27 | 420.42 | 357.03 | 368.79 | ||||||||||||||||||
|
Dow
Jones US
|
100.00 | 106.32 | 122.88 | 130.26 | 81.85 | 105.42 | ||||||||||||||||||
|
Dow
Jones US Heavy Construction
|
100.00 | 144.50 | 180.25 | 342.40 | 153.66 | 175.65 | ||||||||||||||||||
The
following table sets forth selected financial and other data of the Company and
its subsidiaries and should be read in conjunction with both
Item 6. —Management’s Discussion and
Analysis of Financial Condition and Results of Operation
, which follows,
and
Item 7. — Financial
Statements and Supplementary Data
.
|
Year
Ended December 31
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(Amounts
in thousands except per-share data)
|
||||||||||||||||||||
|
Operating
Results:
|
||||||||||||||||||||
|
Revenues
|
$ | 390,847 | $ | 415,074 | $ | 306,220 | $ | 249,348 | $ | 219,439 | ||||||||||
|
Income
from continuing operations before income taxes and earnings attributable
to non-controlling interests
|
$ | 37,795 | $ | 28,999 | $ | 22,396 | $ | 19,204 | $ | 13,329 | ||||||||||
|
Income
tax (expense)/benefit
|
(12,267 | ) | (10,025 | ) | (7,890 | ) | (6,566 | ) | (2,788 | ) | ||||||||||
|
Income
from continuing operations
|
25,528 | 18,974 | 14,506 | 12,638 | 10,541 | |||||||||||||||
|
Income
from discontinued operations, including gain on sale in
2006
|
-- | -- | -- | 682 | 559 | |||||||||||||||
|
Net
income
|
25,528 | 18,974 | 14,506 | 13,320 | 11,100 | |||||||||||||||
|
Earnings
attributable to non-controlling interests
|
(1,824 | ) | (908 | ) | (62 | ) | -- | -- | ||||||||||||
|
Net
income attributable to Sterling common stockholders
|
$ | 23,704 | $ | 18,066 | $ | 14,444 | $ | 13,320 | $ | 11,100 | ||||||||||
|
Basic
and diluted per share amounts attributable to Sterling common
Stockholders:
|
||||||||||||||||||||
|
Basic
earnings per share from -
|
||||||||||||||||||||
|
Continuing
operations
|
$ | 1.77 | $ | 1.38 | $ | 1.31 | 1.19 | $ | 1.36 | |||||||||||
|
Discontinued
operations
|
-- | -- | -- | 0.06 | 0.07 | |||||||||||||||
|
Basic
earnings per share
|
$ | 1.77 | $ | 1.38 | 1.31 | 1.25 | $ | 1.43 | ||||||||||||
|
Basic
weighted average shares outstanding
|
13,359 | 13,120 | 11,044 | 10,583 | 7,775 | |||||||||||||||
|
Diluted
earnings per share from -
|
||||||||||||||||||||
|
Continuing
operations
|
$ | 1.71 | $ | 1.32 | $ | 1.22 | $ | 1.08 | $ | 1.11 | ||||||||||
|
Discontinued
operations
|
-- | -- | -- | $ | 0.06 | $ | 0.05 | |||||||||||||
|
Diluted earnings per
share
|
$ | 1.71 | $ | 1.32 | $ | 1.22 | $ | 1.14 | $ | 1.16 | ||||||||||
|
Diluted weighted average shares
outstanding
|
13,856 | 13,702 | 11,836 | 11,714 | 9,538 | |||||||||||||||
|
Cash
dividends declared
|
$ | -- | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||||
|
Balance
Sheet:
|
||||||||||||||||||||
|
Total
assets
|
$ | 385,741 | $ | 289,615 | $ | 274,515 | $ | 167,772 | $ | 118,455 | ||||||||||
|
Long-term
debt
|
40,409 | 55,483 | 65,556 | 30,659 | 14,570 | |||||||||||||||
|
Equity
attributable to Sterling common stockholders
|
230,766 | 159,116 | 138,612 | 90,991 | 48,612 | |||||||||||||||
|
Book
value per share of outstanding common stock attributable to Sterling
common stockholders
|
14.35 | 12.07 | 10.66 | 8.37 | 5.95 | |||||||||||||||
|
Shares
outstanding
|
16,082 | 13,185 | 13,007 | 10,875 | 8,165 | |||||||||||||||
Overview
We are a
leading heavy civil construction company that operates in one segment, heavy
civil construction, through its subsidiaries, which specialize in the building,
reconstruction and repair of transportation and water infrastructure primarily
in large and growing markets in Texas, Utah and Nevada. Transportation
infrastructure projects include highways, roads, bridges and light and commuter
rail. Water infrastructure projects include water, wastewater and storm drainage
systems. Sterling provides general contracting services primarily to public
sector clients, including excavating, concrete and asphalt paving, installation
of large-diameter water and wastewater distribution systems, construction of
bridges and similar large structures, construction of light and commuter rail
infrastructure, concrete and asphalt batch plant operations, concrete crushing
and aggregate operations. We perform the majority of the work required by our
contracts with our own crews and equipment.
Our
business was founded in 1955 and has a history of profitable growth, which we
have achieved by expanding both our service profile and our market areas. This
involves adding services, such as concrete operations, in order to capture a
greater percentage of available work in current and potential markets. It also
involves strategically expanding operations, either by establishing an office in
a new market, often after having successfully bid on and completed a project in
that market, or by acquiring a company that gives us an immediate entry into a
market. On December 3, 2009, we acquired an 80% interest in Ralph L.
Wadsworth Construction Company, LLC ("RLW") and on October 31, 2007, we acquired
a 91.67% interest in Road and Highway Builders, LLC ("RHB"), which have
primarily performed construction projects in Utah and Nevada,
respectively.
Critical
Accounting Policies
Our
significant accounting policies are described in Note 1 of Notes to
Consolidated Financial Statements for the year ended December 31, 2009,
included in this document, and conform to the FASB’s Accounting Standards
Codification (or GAAP or ASC).
We
operate in one segment and have only one reportable segment and one reporting
unit component, heavy civil construction. In making this determination, we
considered that each project has similar characteristics, includes similar
services and similar types of customers and is subject to similar regulatory and
economic environments. We organize, evaluate, and manage our
financial information around each project when making operating decisions and
assessing overall performance. Even if our local offices were to be considered
separate components of our heavy civil construction operating segment, those
components could be aggregated into a single reporting unit for purposes of
testing goodwill for impairment under ASC 280 and EITF D-101 because our local
offices all have similar economic characteristics and are similar in all of the
following areas:
|
·
|
The
nature of the products and services — each of our local offices
perform similar construction projects — they build, reconstruct and
repair roads, highways, bridges, light and commuter rail and water, waste
water and storm drainage systems.
|
|
·
|
The
nature of the production processes — our heavy civil construction
services rendered in the construction production process for each of our
construction projects performed by each local office is the same —
they excavate dirt, remove existing pavement and pipe, lay aggregate or
concrete pavement, pipe and rail and build bridges and similar large
structures in order to complete our
projects.
|
|
·
|
The
type or class of customer for products and services — substantially
all of our customers are federal and state departments of transportation,
cities, counties, and regional water, rail and toll-road authorities. A
substantial portion of the funding for the state departments of
transportation to finance the projects we construct is furnished by the
federal government.
|
|
·
|
The
methods used to distribute products or provide services — the heavy
civil construction services rendered on our projects are performed
primarily with our own field work crews (laborers, equipment operators and
supervisors) and equipment (backhoes, loaders, dozers, graders, cranes,
pug mills, crushers, and concrete and asphalt
plants).
|
|
·
|
The
nature of the regulatory environment — we perform substantially all
of our projects for federal, state and municipal governmental agencies,
and all of the projects that we perform are subject to substantially
similar regulation under U.S. and state department of transportation
rules, including prevailing wage and hour laws; codes established by the
federal government and municipalities regarding water and waste water
systems installation; and laws and regulations relating to workplace
safety and worker health of the U.S. Occupational Safety and Health
Administration and to the employment of immigrants of the
U.S. Department of Homeland
Security.
|
The
economic characteristics of our local offices are similar. While profit margin
objectives included in contract bids have some variability from contract to
contract, our profit margin objectives are not differentiated by our chief
operating decision maker or our office management based on local office
location. Instead, the projects undertaken by each local office are primarily
competitively-bid, fixed-unit or negotiated lump-sum price contracts, all of
which are bid based on achieving gross margin objectives that reflect the
relevant skills required, the contract size and duration, the availability of
our personnel and equipment, the makeup and level of our existing backlog, our
competitive advantages and disadvantages, prior experience, the contracting
agency or customer, the source of contract funding, anticipated start and
completion dates, construction risks, penalties or incentives and general
economic conditions.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our business involves making significant estimates
and assumptions in the normal course of business relating to our contracts due
to, among other things, different project scopes and specifications, the
long-term duration of our contract cycle and the type of contract utilized.
Therefore, management believes that “Revenue Recognition” is the most important
and critical accounting policy. The most significant estimates with regard to
these financial statements relate to the estimating of total forecasted
construction contract revenues, costs and profits for each project in accordance
with accounting for long-term contracts. Actual results could differ from these
estimates and such differences could be material.
Our
estimates of contract revenue and cost are highly detailed. We believe, based on
our experience, that our current systems of management and accounting controls
allow management to produce reliable estimates of total contract revenue and
cost for each project during any accounting period. However, many factors can
and do change during a contract performance period, which can result in a change
to contract profitability from one financial reporting period to another. Some
of the factors that can adversely change the estimate of total contract revenue,
cost and profit include differing site conditions (to the extent that contract
remedies are unavailable), the failure of major material suppliers to deliver on
time, the failure of subcontractors to perform as agreed, unusual weather
conditions, our failure to achieve expected productivity and efficient use of
labor and equipment and the inaccuracies of our original bid estimate. Because
we have a large number of projects in process at any given time, these changes
in estimates can sometimes offset each other without affecting overall
profitability. However, significant changes in cost estimates, particularly on
larger, more complex projects, can have a material impact on our financial
statements and are reflected in our results of operations when they become
known.
When
recording revenue from change orders on contracts that have been approved as to
scope but not price, we include in revenue an amount equal to the amount that we
currently expect to recover from customers in relation to costs incurred by us
for changes in contract specifications or designs, or other unanticipated
additional costs. Revenue relating to change order claims is recognized only if
it is probable that the revenue will be realized. When determining the
likelihood of eventual recovery, we consider such factors as evaluation of
entitlement, settlements reached to date and our experience with the customer.
When new facts become known, an adjustment to the estimated recovery is made and
reflected in the current period results.
Revenue
Recognition
The
majority of our contracts with our customers are “fixed unit price.” Under such
contracts, we are committed to providing materials or services required by a
contract at fixed unit prices (for example, dollars per cubic yard of concrete
poured or per cubic yard of earth excavated). To minimize increases in the
material prices and subcontracting costs used in submitting bids, we obtain firm
quotations from our suppliers and subcontractors. After we are advised that our
bid is the winning bid, we enter into firm contracts with most of our materials
suppliers and sub-contractors, thereby mitigating the risk of future price
variations affecting those contract costs. Such quotations do not include any
quantity guarantees, and we therefore have no obligation for materials or
subcontract services beyond those required to complete the respective contracts
that we are awarded for which quotations have been provided. As a result, we
have rarely been exposed to material price or availability risk on contracts in
our contract backlog. Assuming performance by our suppliers and subcontractors,
the principal remaining risks under our fixed price contracts relate to labor
and equipment costs and productivity levels. Most of our state and municipal
contracts provide for termination of the contract for the convenience of the
owner, with provisions to pay us only for work performed through the date of
termination.
We use
the percentage of completion accounting method for construction contracts.
Revenue is recognized as costs are incurred in an amount equal to cost plus the
related expected profit based on the percentage of completion method of
accounting in the ratio of costs incurred to estimated final costs. Contract
cost consists of direct costs on contracts, including labor and materials,
amounts payable to subcontractors and equipment expense (primarily depreciation,
fuel, maintenance and repairs). Depreciation is computed using the straight-line
method for construction equipment. Contract cost is recorded as incurred, and
revisions in contract revenue and cost estimates are reflected in the accounting
period when known.
The
accuracy of our revenue and profit recognition in a given period is dependent on
the accuracy of our estimates of the cost to finish uncompleted contracts. Our
cost estimates for all of our significant contracts use a highly detailed
“bottom up” approach, and we believe our experience allows us to produce
reliable estimates. However, our projects can be highly complex, and in almost
every case, the profit margin estimates for a contract will either increase or
decrease to some extent from the amount that was originally estimated at the
time of bid. Because we have a large number of projects of varying levels of
size and complexity in process at any given time, these changes in estimates can
sometimes offset each other without materially impacting our overall
profitability. However, large changes in revenue or cost estimates can have a
significant effect on profitability.
There are
a number of factors that can contribute to changes in estimates of contract cost
and profitability. The most significant of these include the completeness and
accuracy of the original bid, recognition of costs associated with scope
changes, extended overhead due to customer-related and weather-related delays,
subcontractor and supplier performance issues, site conditions that differ from
those assumed in the original bid (to the extent contract remedies are
unavailable), the availability and skill level of workers in the geographic
location of the project and changes in the availability and proximity of
materials. The foregoing factors, as well as the stage of completion of
contracts in process and the mix of contracts at different margins, may cause
fluctuations in gross profit between periods, and these fluctuations may be
significant.
Valuation
of Long-Lived Assets
Long-lived
assets, which include property, equipment and acquired identifiable intangible
assets, including goodwill, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Impairment evaluations involve fair values and management
estimates of useful asset lives and future cash flows. Actual useful lives and
cash flows could be different from those estimated by management, and this could
have a material effect on operating results and financial position. At December
31, 2009, we had goodwill with a carrying amount of approximately $114.7 million
which must be reviewed for impairment at least annually. We completed our annual
impairment review for historical goodwill during the fourth quarter of 2009, and
it did not result in an impairment.
Income
Taxes
Deferred
tax assets and liabilities are recognized based on the differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities. We regularly review our deferred tax assets for recoverability and,
where necessary, establish a valuation allowance. We are subject to the
alternative minimum tax, or AMT, and payments of AMT result in a reduction of
our deferred tax liability.
Our
deferred tax assets related to prior year NOLs for financial statement purposes
were fully utilized during 2007. In addition to the utilization of those NOLs,
we had available to us the excess tax benefit resulting from exercise of a
significant number of non-qualified in-the-money options, which we utilized in
the preparation of our 2007 and 2008 federal income tax returns. Accordingly,
because we will no longer have offsets provided by the NOLs, a comparison of our
future cash flows to our historic cash flows may not be meaningful.
Results of
Operations
.
Backlog
at December 31, 2009
At
December 31, 2009, our backlog of construction projects was $647 million,
including $303 million of our newly acquired operations in Utah. Excluding our
Utah operations, our backlog at December 31, 2009, was $344 million as compared
to $448 million at December 31, 2008. Our Texas and Nevada operations were
awarded or were the apparent low bidder on $285 million of new contracts in
2009, including $43 million in the fourth quarter of 2009, compared to
$413 million of new contracts in 2008. Our contracts are typically
completed in 12 to 36 months. At December 31, 2009, there was approximately
$79 million of our consolidated backlog where we were the apparent low
bidder, but had not yet been formally awarded the contract or the contract price
had not been finalized. Historically, subsequent non-awards of low bids or
finalization of contract prices have not materially affected our backlog or
financial condition. Consolidated and Utah backlog include RLW's $137
million share of the estimated revenues related to a joint venture in which RLW
is a participant, which was selected in December 2009 by UDOT as the best
fixed-price, best-design proposal for the expansion and reconstruction of the
I-15 corridor near Salt Lake City, Utah.
During
the last quarter of 2008, throughout the year 2009 and continuing into the first
quarter of 2010, the bidding environment in our markets has been much more
competitive because of the following:
|
·
|
While
our business includes only minimal residential and commercial
infrastructure work, the severe fall-off in new projects in those markets
has resulted in some residential and commercial infrastructure contractors
bidding on smaller public sector transportation and water infrastructure
projects, sometimes at bid levels below our break-even pricing, thus
increasing competition and creating downward pressure on bid prices in our
markets.
|
|
·
|
Traditional
competitors on larger transportation and water infrastructure projects
also appear to have been bidding at less than normal margins, sometimes at
bid levels below our break-even pricing, in order to replenish their
reduced backlogs.
|
These
factors have limited our ability to maintain or increase our backlog through
successful bids for new projects and have compressed the profitability on the
new projects where we submitted successful bids. While we have recently been
more aggressive in reducing the anticipated margins we use to bid on some
projects, we have not bid at anticipated loss margins in order to obtain new
backlog.
Recent
reductions in miles driven in the U.S. and more fuel efficient vehicles
have reduced federal and state gasoline taxes and tolls collected. In addition,
the federal government has not renewed the SAFETEA-LU bill, which provided
states with substantial funding for transportation infrastructure projects.
Since the SAFETEA-LU bill expired on September 30, 2009, the federal
government has been extending interim financial assistance on a month-to-month
basis, most recently through March 28 2010, at approximately 70% of the prior
year SAFETEA-LU levels. Reductions in federal funding may negatively impact the
states’ highway and bridge construction expenditures for 2010. At the end of the
third quarter of 2009, we had anticipated these matters would be resolved in
late 2009 or early in the first quarter of 2010; however, they have not yet been
resolved and we are unable to predict when or on what terms the federal
government might renew the SAFETEA-LU bill or enact other similar
legislation.
Further,
the nationwide decline in home sales, the increase in foreclosures and a
prolonged recession have resulted in decreases in property taxes and some other
local taxes, which are among the sources of funding for municipal road, bridge
and water infrastructure construction.
These and
other factors have adversely affected the levels of transportation and water
infrastructure capital expenditures in our markets, reducing bidding
opportunities to replace backlog and increasing competition for new projects.
Assuming that these factors continue to affect infrastructure capital
expenditures in our markets in the near term, and taking into account the amount
of backlog we had at December 31, 2009 and the lower anticipated margin bid on
some projects the Company has recently been awarded and expects to start work on
in 2010, we currently anticipate that the Company’s net income and diluted
earnings per common share of stock attributable to Sterling common stockholders
for 2010 will be substantially below the results we achieved for
2009.
We do,
however, expect that our markets will ultimately recover from the conditions
described above and that our backlog, revenues and net income will return to
levels more consistent with historical levels. However, we cannot predict the
timing of such a return to historical normalcy in our markets. We believe that
the Company is in a sound financial condition and has the resources and
management experience to weather current market conditions and to continue to
compete successfully for projects as they become available at acceptable profit
margin levels. See “Business — Markets and Customers — Our Markets”
for a more detailed discussion of our markets and their funding
sources.
Fiscal
Year Ended December 31, 2009 (2009) Compared with Fiscal Year Ended December 31,
2008 (2008)
|
|
2009
|
2008
|
%
Change
|
|||||||||
|
(Dollar
amounts in thousands)
|
||||||||||||
|
Revenues
|
$ | 390,847 | $ | 415,074 | (5.8 | %) | ||||||
|
Gross
profit
|
54,369 | 41,972 | 29.5 | % | ||||||||
|
Gross margin
|
13.9 | % | 10.1 | % | ||||||||
|
General
and administrative expenses, net
|
(14,971 | ) | (13,763 | ) | 8.8 | % | ||||||
|
Unusual
items
|
(2,211 | ) | -- |
NM
|
||||||||
|
Other
income (loss)
|
270 | (81 | ) | 433.3 | % | |||||||
|
Operating
income
|
37,457 | 28,128 | 33.2 | % | ||||||||
|
Operating
margin
|
10.1 | % | 6.8 | % | ||||||||
|
Interest
income
|
572 | 1,070 | (46.5 | %) | ||||||||
|
Interest
expense
|
(234 | ) | (199 | ) | 17.6 | % | ||||||
|
Income
before taxes
|
37,795 | 28,999 | 30.3 | % | ||||||||
|
Income
taxes
|
(12,267 | ) | (10,025 | ) | 22.4 | % | ||||||
|
Net
Income
|
25,528 | 18,974 | 34.5 | % | ||||||||
|
Net
income attributable to non-controlling interest in earnings of
subsidiaries
|
(1,824 | ) | (908 | ) | (100.9 | %) | ||||||
|
Net
income attributable to Sterling common stockholders
|
$ | 23,704 | $ | 18,066 | 31.2 | % | ||||||
|
Contract
backlog, end of year
|
$ | 647,000 | $ | 448,000 | 44.4 | % | ||||||
|
NM
– not measurable
|
||||||||||||
Revenues
.
Revenues
decreased $24.2 million, or 5.8%, from 2008 to 2009. The decrease was
due to the Company winning fewer contracts as a result of an increase
in the number of competitors bidding at lower prices in our
Texas and Nevada markets for new work bid during 2009 and more days of rain in
Texas during the fourth quarter of 2009 than the comparable 2008 period.
Further, some of our competitors in those markets appear to have been bidding at
margins which were less than our break-even pricing apparently in order to
replenish their backlogs. This trend has continued into the first quarter of
2010. The increase in competitors and consequent lower bid prices are due to the
market conditions discussed above under
Backlog at December 31,
2009.
Offsetting the decrease in revenues in our Texas and Nevada markets were
December 2009 revenues of $10.2 million of our Utah operations which were
acquired effective December 3, 2009.
During
the last half of 2009, we began to reduce the number of our crews as a result of
completing certain projects without replacement contracts in backlog. At
December 31, 2009, our employees, excluding 198 people in our Utah operations,
totaled 913 versus approximately 1,200 employees at December 31,
2008.
Contracts
receivables increased $19.7 million at December 31, 2009 versus December 31,
2008, as a result of the acquisition of the Utah operations offset by the effect
of the decrease in revenues in Texas. An increase occurred in
accounts payable for the same reasons, but to a lesser extent.
Revenues
in the fourth quarter of 2009 were $37.6 million less than those in the
comparable quarter of 2008 because of increased competition and adverse weather
in Texas, which has continued to affect our Texas operations during the first
quarter of 2010. Revenues in Texas during the fourth quarter of 2009
were the lowest revenues we have had in Texas since the first quarter of
2005. The decrease in fourth quarter 2009 revenues was after
including revenues for the month of December 2009 of our Utah operations in
consolidated revenues.
Gross
Profit.
During 2009 and 2008, our Texas and Nevada operations have had as
many as 60 contracts-in-progress at any one time, of various sizes, of different
expected profitability and in various stages of completion. The
nearer a contract progresses toward completion, the more visibility we have in
refining our estimate of total revenues (including incentives, delay penalties
and change orders), costs and gross profit. Thus gross profit as a
percent of revenues can increase or decrease from comparable and sequential
years and quarters due to variations among contracts and depending upon which
contracts are just commencing or are at a more advanced stage of completion. At
December 31, 2009, our contracts were on average at a more advanced stage of
completion than were those in progress at the comparable 2008 period
end.
The
increase in gross profit of $12.4 million for the year 2009 over the year 2008
was due primarily to better execution on contracts-in-progress, differences, as
discussed above, in the mix in the stage of completion and profitability of
contracts in progress at December 31, 2009 compared to December 31, 2008 and one
month of gross profit of $2.1 million on the revenues earned by our newly
acquired Utah operations. The gross margin of 13.9% in the 2009
period is not expected to be indicative of the gross margin that the Company
will achieve in 2010 due to the market conditions discussed above under
Backlog at December 31,
2009
.
Gross profit for the fourth quarter of 2009 of $7.4 million was $2.1 million
less than the comparable 2008 period because of the lower quarterly revenues and
adverse weather in Texas offset by our Utah operation's gross
profit. See Note 16 to the Company's consolidated financial
statements for unaudited quarterly financial information.
General
and administrative expenses, net of other income.
General and
administrative expenses, net of other income, for 2009 increased by $1.2 million
over 2008. The primary reason for the increase was the G&A expenses incurred
by our Utah operations for the month of December 2009. As a percent of revenues,
G&A expenses were 3.8% in 2009 versus 3.3% in 2008. The higher level of
G&A as a percent of revenues in 2009 vs. 2008 was primarily due to the
impact of the decrease in revenues in 2009 as G&A and other income do not
vary directly with the volume of work performed on contracts.
Unusual
Items.
During 2009, the Company incurred $1.2 million in
direct cost of the acquisition of RLW which under GAAP, effective January 1,
2009, must be charged to expense rather than capitalized as part of the
acquisition cost. Also, in January, 2010, a jury awarded $1.0 million
to a subcontractor plaintiff against the Company which has been recorded as an
expense at December 31, 2009. The Company plans to appeal the verdict
– see Note 13 to the accompanying consolidated financial
statements.
Income
taxes
. The decrease in the effective income tax rate of 32.5%
in 2009 versus 34.6% in 2008 is due to higher net income attributable to
non-controlling interest owners which are taxed to those owners rather than
Sterling and higher domestic production activities deduction in 2009 than
2008.
Net
income attributable to non-controlling interests
.
The net income
attributable to non-controlling interest owners increased because of increased
earnings in 2009 in Nevada versus 2008 and the acquisition of our Utah
operations in December 2009.
Fiscal
Year Ended December 31, 2008 (2008) Compared with Fiscal Year Ended December 31,
2007 (2007)
|
|
2008
|
2007
|
%
Change
|
|||||||||
|
(Dollar
amounts in thousands)
|
||||||||||||
|
Revenues
|
$ | 415,074 | $ | 306,220 | 35.5 | % | ||||||
|
Gross
profit
|
41,972 | 33,686 | 24.6 | % | ||||||||
|
Gross margin
|
10.1 | % | 11.0 | % | ||||||||
|
General
and administrative expenses, net
|
(13,763 | ) | (13,231 | ) | 4.0 | % | ||||||
|
Other
income (loss)
|
(81 | ) | 549 | (114.8 | %) | |||||||
|
Operating
income
|
28,128 | 21,004 | 33.9 | % | ||||||||
|
Operating
margin
|
6.8 | % | 6.9 | % | ||||||||
|
Interest
income
|
1,070 | 1,669 | (35.9 | %) | ||||||||
|
Interest
expense
|
(199 | ) | (277 | ) | 28.2 | % | ||||||
|
Income
before taxes
|
28,999 | 22,396 | 29.5 | % | ||||||||
|
Income
taxes
|
(10,025 | ) | (7,890 | ) | 27.1 | % | ||||||
|
Net
income
|
18,974 | 14,506 | 30.8 | % | ||||||||
|
Net
income attributable to non-controlling interest in
earnings of subsidiary
|
(908 | ) | (62 | ) | (1,364.5 | %) | ||||||
|
Net
income attributable to Sterling Stockholders
|
$ | 18,066 | $ | 14,444 | 25.1 | % | ||||||
|
Contract
backlog, end of year
|
$ | 448,000 | $ | 450,000 | (0.4 | %) | ||||||
Revenues
.
Revenues
increased $109 million, or 35.5%, from 2007 to 2008. A majority of the increase
was due to the revenues earned by our Nevada operations, acquired on October 31,
2007, which were included in the consolidated results of operations for the full
year of 2008 versus only two months in 2007. The remainder of the
increase in revenues is the result of an increase in work performed by our Texas
operations as a result of better weather throughout 2008 than
2007. Management estimates that revenues would have been $10 to $12
million greater had our Houston operations not been interrupted by Hurricane Ike
and it's after effects in September, 2008. Additionally, one of our
oil suppliers in Nevada filed for bankruptcy in July 2008 and failed to furnish
contracted oil for our production of asphalt on two of our jobs-in-progress,
which delayed job performance and deferred approximately $25.0 million of
revenue into 2009. The profitability on these contracts was not
materially impacted by this matter.
Contract
receivables are directly related to revenues and include both amounts currently
due and retainage. The increase of $6.2 million in contracts receivable to $60.6
million at December 31, 2008 versus 2007 is due to the increase in revenue for
the year 2008. The days revenue in contract receivables is approximately 53 days
and 65 days at December 31, 2008 and 2007, respectively. The days
revenue in contract receivables would have been similar for the two years if the
revenues of our Nevada operations had been included in our revenues for a full
year in 2007.
Revenue
in the fourth quarter of 2008 increased $21 million to $109 million versus 2007
for the same reasons as discussed above for the full year. See note
16 to the consolidated financial statements for unaudited quarterly financial
information.
Gross profit
.
Gross
profit increased $8.3 million in 2008 over 2007. This was due to the
contribution of our Nevada operations in 2008 and better weather in Texas during
most of 2008 than during 2007 (other than for the period during Hurricane Ike),
which allowed our crews and equipment to be more productive. While
Hurricane Ike affected our work in 2008, a hurricane usually does not adversely
affect our profitability as much as the consistent rainy periods we had in
2007. Our gross margin decreased in 2008 from 2007 because of
operating inefficiencies on certain contracts in Texas, higher fuel costs and
lower profit margins on certain contracts started in the last half of
2008.
Gross
profit in the fourth quarter of 2008 decreased $2.5 million or 21% from the same
quarter in 2007. Gross profit was 13.7% of revenues in the 2007
fourth quarter versus 8.7% in the fourth quarter of 2008 as a result of some
unusually profitable municipal projects being performed primarily in the 2007
fourth quarter. Without those projects, the gross margins for the
2007 fourth quarter would have been more in line with normal margins, although
still somewhat better than that of the fourth quarter of 2008.
At
December 31, 2008, our backlog of construction projects was $448 million, as
compared to $450 million at December 31, 2007. We were awarded approximately
$413 million of new projects and change orders and recognized $415 million of
earned revenue in 2008. Approximately $69 million of the backlog at
December 31, 2008 is expected to be completed after 2009. The
decrease in backlog from 2007 was due to increased competition and economic
conditions in certain of our markets.
General
and administrative expenses, net, increased by $0.5 million in 2008 from 2007
primarily due to a full year of G&A at our Nevada operations offset by lower
stock compensation expense.
Despite
the increase in absolute G&A expenses, the percentage of G&A to revenue
decreased to 3.3% in 2008 from 4.3% in 2007 as the Nevada operations' G&A is
not as large a percentage of revenues as Sterling's G&A which includes
corporate overhead and expenses associated with being a public
company.
Other
income decreased $0.6 million and consists of gains and losses on disposal of
equipment which depends on, among other things, age and condition of equipment
disposed of, insurance recoveries and the market for used
equipment.
Operating
income increased $7.1 million due to the factors discussed above regarding gross
profit and general and administrative expenses and other income.
Net
interest income was $0.5 million less for 2008 than 2007 due to a decrease in
interest rates on cash and short-term investments combined with the imputed
interest expense of $0.2 million on the put option related to the minority
interest in RHB.
Our
effective income tax rate for the year ended December 31, 2008 was 34.6%
compared to 35.2% for 2007. The difference between the effective tax
rate and the statutory tax rate is due to the portion of earnings of a
subsidiary taxed to the minority interest owner partially offset by the revised
Texas franchise tax which became effective July 1, 2007.
The
increase of $0.8 million is due to the minority interest's share of the results
of RHB included in the consolidated results of operations for a full year in
2008 versus two months in 2007.
Historical Cash
Flows
.
The
following table sets forth information about our cash flows for the years ended
December 31, 2009, 2008 and 2007.
|
|
Year Ended December
31,
|
|||||||||||
|
|
2009
|
2008
|
2007
|
|||||||||
|
(Amounts
in thousands)
|
||||||||||||
|
Cash
and cash equivalents (at end of period)
|
$ | 54,406 | $ | 55,305 | $ | 80,649 | ||||||
|
Net
cash provided by (used in)
|
||||||||||||
|
Continuing
operations:
|
||||||||||||
|
Operating
activities
|
47,563 | 26,721 | 29,542 | |||||||||
|
Investing
activities
|
(80,249 | ) | (42,719 | ) | (47,515 | ) | ||||||
|
Financing
activities
|
31,787 | (9,346 | ) | 70,156 | ||||||||
|
Supplementary
information:
|
||||||||||||
|
Capital
expenditures
|
5,277 | 19,896 | 26,319 | |||||||||
|
Working
capital (at end of period)
|
113,878 | 95,123 | 82,063 | |||||||||
Operating
Activities.
Significant
non-cash items included in operating activities are:
|
·
|
depreciation
and amortization, which for 2009 totaled $13.7 million, an increase of
$0.6 million from 2008 and $4.2 million from 2007 as a result of $5.3
million of capital expenditures in 2009 and $19.9 million of capital
additions in 2008 and a full year's depreciation in 2008 on equipment
purchased in the RHB acquisition in October,
2007;
|
|
·
|
deferred
tax expense was $4.5 million, $8.9 million and $6.6 million in 2009, 2008
and 2007, respectively, mainly attributable to accelerated depreciation
methods used on equipment for tax purposes and amortization for tax return
purposes of goodwill arising in the acquisition of RHB and
RLW.
|
Besides
net income of $25.5 million and the non-cash items discussed above, other
significant components of cash flows from operations, net of those acquired in
the RLW business combination, are as follows:
|
·
|
contracts
receivable decreased by $15.1 million in the current year due to lower
receivables in Texas because of the decrease in revenues in 2009, as
compared to an increase of $6.2 million in 2008 which was due
to an increase in revenues and a higher level of customer retentions than
in 2007;
|
|
·
|
the
decrease in cost and estimated earnings in excess of billings on
uncompleted contracts of $3.8 million as of December 31, 2009, versus a
increase of $3.8 million as of December 31, 2008, which was due to the
decrease in project activity in 2009 and an increase in the volume of
materials purchased for certain projects at December 31, 2008, but not
billed to the customer until 2009 and timing of other
billings;
|
|
·
|
accounts
payable decreased by $11.2 million in 2009 due to lower project activity
during the fourth quarter of 2009;
|
|
·
|
billings
in excess of costs and estimated earnings on uncompleted contracts
decreased by $3.6 million also due to the lower project activity during
the fourth quarter of 2009.
|
Investing
Activities
.
Expenditures
for the replacement of certain equipment and to expand our construction fleet
and office and shop facilities totaled $5.3 million in 2009, compared with a
total of $19.9 million and $26.3 million in 2008 and 2007,
respectively. Capital equipment is acquired as needed to support work
crews required by increased backlog and to replace retiring
equipment. The decreases in capital expenditures in 2008 and 2009
were principally due to management's cautious view regarding certain of the
Company's markets in 2009 and 2010, respectively, as a result of current
economic uncertainties. Management expects capital expenditures in
2010 to be higher than 2009 primarily as a result of the recent acquisition of
our Utah operations and construction of shop facilities in Dallas and San
Antonio.
During
the twelve months ended December 31, 2009 and 2008, the Company had net
purchases of short-term securities of $14.6 million and $24.3 million,
respectively versus a net reduction of $26.1 million in 2007 primarily due to
the longer term (maturity greater than 90 days at the date of purchase) of the
securities purchased in 2007, 2008 and 2009.
In
October 2007, we purchased a 91.67% equity interest in RHB for a net cash
purchase price of $49.3 million and, in December 2009, we purchased an 80.0%
equity interest in RLW for a net cash purchase price of $60.5 million, net of
cash acquired, in order to expand our construction operations to Nevada and
Utah, respectively.
Financing
Activities
.
Financing
activities in 2009 primarily reflect a reduction of $15.0 million in borrowings
under our $75.0 million Credit Facility as compared to a reduction of $10.0
million of borrowings in 2008. The amount of borrowings under the
Credit Facility is based on the Company's expectations of working capital
requirements.
Additionally,
the Company sold common stock in 2009 and 2007 for net proceeds of $46.8 million
and $34.5 million, respectively.
Liquidity.
The level
of working capital for our construction business varies due to fluctuations
in:
|
·
|
customer
receivables and contract
retentions;
|
|
·
|
costs
and estimated earnings in excess of
billings;
|
|
·
|
billings
in excess of costs and estimated
earnings;
|
|
·
|
the
size and status of contract mobilization payments and progress
billings; and
|
|
·
|
the
amounts owed to suppliers and
subcontractors.
|
Some of
these fluctuations can be significant.
As of
December 31, 2009, we had working capital of $114 million, an increase of
$19 million over December 31, 2008. Increasing working capital is an
important element in expanding our bonding capacity, which enables us to bid on
larger and longer duration projects. The increase in working capital was the
result of the following (in millions):
|
Net
income
|
$ | 25.5 | ||
|
Depreciation
|
13.7 | |||
|
Deferred
tax expense
|
4.5 | |||
|
Proceeds
of stock offering
|
46.8 | |||
|
Capital
expenditures
|
(5.3 | ) | ||
|
Debt
repayment
|
(15.0 | ) | ||
|
Cash
paid for RLW, net of working capital acquired
|
(52.8 | ) | ||
|
Other
|
1.6 | |||
|
Total
increase in working capital
|
$ | 19.0 |
The
Company believes that it has sufficient liquid financial resources, including
the unused portion of its Credit Facility, to fund its requirements for the next
twelve months of operations, including its bonding requirements, and the Company
expects no material adverse change in its liquidity. Future developments or
events, such as an increase in our level of purchases of equipment to support
significantly higher backlog or an acquisition of another company could,
however, affect our level of working capital.
Sources of Capital
.
In
addition to our available cash and cash equivalents, short term investments
balances and cash provided by operations, we use borrowings under our Credit
Facility with Comerica Bank to finance our capital expenditures and working
capital needs.
We have a
$75.0 million Credit Facility with a bank syndicate for which Comerica Bank is a
participant and agent. The Credit Facility entered into on October
31, 2007 replaced a similar $35.0 million revolver that had been renewed in
April 2006. The Credit Facility has a maturity date of October 31,
2012, and is secured by all assets of the Company, other than proceeds and other
rights under our construction contracts which are pledged to our bond
surety. Borrowings under the Credit Facility are used to finance
working capital. At December 31, 2009, the aggregate borrowings outstanding
under the Credit Facility were $40.0 million, and the aggregate amount of
letters of credit outstanding under the Credit Facility was $1.8 million,
which reduces availability under the Credit Facility. Availability
under the Credit Facility was, therefore, $33.2 million without violating any of
the financial covenants discussed in the next paragraph.
The
Credit Facility is subject to our compliance with certain covenants, including
financial covenants at quarter-end relating to fixed charges, leverage, tangible
net worth, asset coverage and consolidated net losses. The Credit Facility
contains restrictions on our ability to:
|
·
|
Make
distributions and dividends;
|
|
·
|
Incur
liens and encumbrances;
|
|
·
|
Incur
further indebtedness;
|
|
·
|
Guarantee
obligations;
|
|
·
|
Dispose
of a material portion of assets or merge with a third
party;
|
|
·
|
Incur
negative income for two consecutive
quarters.
|
|
·
|
Making
investments in securities.
|
The
Company was in compliance with all covenants under the Credit Facility as of
December 31, 2009.
The
financial markets have experienced substantial volatility as a result of
disruptions in the credit markets and the recession. However, to date
we have not experienced any difficulty in borrowing under our Credit Facility or
any change in its terms.
Management
believes that the Credit Facility will provide adequate funding for the
Company’s working capital, debt service and capital expenditure requirements,
including seasonal fluctuations at least through December 31, 2010.
The
unpaid principal balance of each prime-based loan will bear interest at a
variable rate equal to Comerica’s prime rate plus an amount ranging from 0% to
0.50% depending on the pricing leverage ratio that we achieve. If we achieve a
pricing leverage ratio of (a) less than 1.00 to 1.00; (b) equal to or
greater than 1.00 to 1.00 but less than 1.75 to 1.00; or (c) greater than
or equal to 1.75 to 1.00, then the applicable prime margins will be 0.0%, 0.25%
or 0.50%, respectively. The interest rate on funds borrowed under
this revolver during the year ended December 31, 2009 was 3.25% at all times
that the Company had debt outstanding under this facility.
At our
election, the loans under the new Credit Facility bear interest at either a
LIBOR-based interest rate or a prime-based interest rate. The prime
based interest rate option plus the applicable prime based margin can be no less
than the Daily Adjusting Libor plus 1.00%, or Federal Funds Rate plus
1.00%. The unpaid principal balance of each LIBOR-based loan bears
interest at a variable rate equal to LIBOR plus an amount ranging from 1.25% to
2.25% depending on the pricing leverage ratio that we achieve. The “pricing
leverage ratio” is determined by the ratio of our average total debt, less cash
and cash equivalents, to earnings before interest, taxes, depreciation and
amortization ("EBITDA") that we achieve on a rolling four-quarter basis. The
pricing leverage ratio is measured quarterly. If we achieve a pricing leverage
ratio of (a) less than 1.00 to 1.00; (b) equal to or greater than 1.00
to 1.00 but less than 1.75 to 1.00; or (c) greater than or equal to 1.75 to
1.00, then the applicable LIBOR margins will be 1.25%, 1.75% or 2.25%,
respectively then the applicable prime based margins will be 0.00%, 0.25% and
0.50%, respectively. Interest on LIBOR-based loans is payable at the end of the
relevant LIBOR interest period, which must be one, two, three or six
months.
Mortgage.
In 2001
we completed the construction of a new headquarters building on land owned by us
adjacent to our equipment repair facility in Houston. The building
was financed principally through an additional mortgage of $1.1 million on the
land and facilities at a floating interest rate which at December 31, 2009 was
3.5% per annum, repayable over 15 years.
Contractual
Obligations
.
The
following table sets forth our fixed, non-cancelable obligations at December 31,
2009:
|
|
Payments due by Period
|
|||||||||||||||||||
|
Total
|
<
1 Year
|
1—3 Years
|
4—5
Years
|
>
5 Years
|
||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||
|
Credit
Facility
|
$ | 40,000 | $ | -- | $ | 40,000 | $ | -- | $ | -- | ||||||||||
|
Operating
leases
|
7,033 | 1,087 | 1,846 | 884 | 3,216 | |||||||||||||||
|
Mortgage
|
482 | 73 | 220 | 147 | 42 | |||||||||||||||
| $ | 47,515 | $ | 1,160 | $ | 42,066 | $ | 1,031 | $ | 3,258 | |||||||||||
Our
obligations for interest are not included in the table above as these amounts
vary according to the levels of debt outstanding at any
time. Interest on our Credit Facility is paid monthly and fluctuates
with the balances outstanding during the year, as well as with fluctuations in
interest rates. In 2009 interest on the Credit Facility was
approximately $46,000. The mortgages are expected to have future
annual interest expense payments of approximately $16,000 in less than one year,
$32,000 in one to three years, $8,000 in four to five years and $500 for all
years thereafter.
In
addition to the contractual obligations set forth above, the non-controlling
interest owners of two of our subsidiaries have the right to require the Company
to buy their interest in those subsidiaries in 2011 and 2013. At
December 31, 2009, the estimated put liability to those non-controlling interest
owners was approximately $23.9 million. See note 12 to the
accompanying consolidated financial statements.
To manage
risks of changes in the material prices and subcontracting costs used in
submitting bids for construction contracts, we generally obtain firm quotations
from our suppliers and subcontractors before submitting a bid. These
quotations do not include any quantity guarantees, and we have no obligation for
materials or subcontract services beyond those required to complete the
contracts that we are awarded for which quotations have been
provided.
As is
customary in the construction business, we are required to provide surety bonds
to secure our performance under construction contracts. Our ability
to obtain surety bonds primarily depends upon our capitalization, working
capital, past performance, management expertise and reputation and certain
external factors, including the overall capacity of the surety
market. Surety companies consider such factors in relationship to the
amount of our backlog and their underwriting standards, which may change from
time to time. We have pledged all proceeds and other rights under our
construction contracts to our bond surety company. Events that affect the
insurance and bonding markets generally may result in bonding becoming more
difficult to obtain in the future, or being available only at a significantly
greater cost. To date, we have not encountered difficulties or cost
increases in obtaining new surety bonds.
Capital
Expenditures
.
Our
capital expenditures during 2009 were $5.3 million, and during 2008 were $19.9
million. The decrease in 2009 from the 2008 level was due to management's
cautious view regarding certain of the Company's markets and current economic
uncertainties. In addition, we acquired $11.2 of property, plant and equipment
with the purchase of our Utah operations. In 2010 we expect that our
capital expenditure spending will be higher than in 2009, primarily as a result
of additional equipment that may be acquired for our Utah operations and
construction of shop facilities in Dallas and San Antonio.
Inflation
Until
2008, inflation had not had a material impact on our financial results; however,
that year's increases in oil and fuel prices affected our cost of
operations. Since September 30, 2008, the prices we have paid for oil
and fuel and, generally, for other materials have
decreased. 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 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 oil and fuel used in our
business will be adequately covered by the estimated escalation we have included
in our bids or 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.
Off-Balance Sheet
Arrangements
.
We have
no off-balance sheet arrangements, other than the operating leases included in
the table in "Contractual Obligations" above.
New Accounting
Pronouncements
.
In
December 2007, the Financial Accounting Standards Board, or FASB, established
principles and requirements for how an acquirer of another business entity:
(a) recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree; (b) recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase and (c) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. Also, all
direct costs of the business combination must be charged to expense on the
financial statements of the acquirer as incurred. The new standard revises
previous guidance as to the recording of post-combination restructuring plan
costs by requiring the acquirer to record such costs separately from the
business combination. We adopted this statement on January 1, 2009, and, in
connection with the acquisition of RLW, we recorded $1.2 million of direct costs
as a charge to expense in the statement of operations for the year ended
December 31, 2009.
In
September 2006, the FASB established a framework for measuring fair value which
requires expanded disclosure about the information used to measure fair value.
The standard applies whenever other statements require or permit assets or
liabilities to be measured at fair value, and does not expand the use of fair
value accounting in any new circumstances. We adopted this standard on
January 1, 2009, which did not have a material impact on Sterling’s
financial statements.
In
December 2007, the FASB issued a standard clarifying previous guidance on how
consolidated entities should account for and report non-controlling interests in
consolidated subsidiaries. The pronouncement standardizes the presentation of
non-controlling interests (formally referred to as “minority interests”) for
both the consolidated balance sheet and income statement. As a result of
adopting this standard on January 1, 2009, Sterling’s financial statements
segregate net income as attributable to the Company’s common stockholders and
non-controlling owner’s interest and equity of non-controlling interests in
those subsidiaries.
In May
2009, the FASB set forth general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. This standard became effective in the
second quarter of 2009 and did not have a material impact on the Company's
financial statements.
In June
2009, the FASB issued a standard to address the elimination of the concept of a
qualifying special purpose entity. This standard will replace the
quantitative-based risks and rewards calculation for determining which
enterprise has a controlling financial interest in a variable interest entity
with an approach focused on identifying which enterprise has the power to direct
the activities of a variable interest entity and the obligation to absorb losses
of the entity or the right to receive benefits from the entity. Additionally,
this standard will provide more timely and useful information about an
enterprise’s involvement with a variable interest entity. This standard will
become effective in the first quarter of 2010. This standard may have the effect
of requiring us to consolidate joint ventures in which we have a controlling
interest. At December 31, 2009, we had no participation in a joint venture where
we had a material controlling interest investment.
In June
2009, the Accounting Standards Codification was established as the source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under federal securities
laws are also sources of authoritative GAAP for SEC registrants. All guidance
contained in the Codification carries an equal level of authority. This standard
was effective for financial statements issued for interim and annual periods
ending after September 15, 2009. The adoption of this standard did not have
a material effect on Sterling’s financial statements.
|
Item 7A
.
|
Quantitative and Qualitative
Disclosures about Market
Risk
.
|
Changes
in interest rates are one of our sources of market risks. At December
31, 2009, $40 million of our outstanding indebtedness was at floating interest
rates. Based on our average debt outstanding during 2009, we estimate
that an increase of 1.0% in the interest rate would have resulted in an increase
in our interest expense of approximately $13,000 in 2009.
To manage
risks of changes in material prices and subcontracting costs used in tendering
bids for construction contracts, we obtain firm price quotations from our
suppliers, except for fuel, and subcontractors before submitting a
bid. These quotations do not include any quantity guarantees, and we
have no obligation for materials or subcontract services beyond those required
to complete the respective contracts that we are awarded for which quotations
have been provided.
During
2009, we commenced a strategy of investing in certain securities, the assets of
which are a crude oil commodity pool. We believe that the gains and losses on
these securities will tend to offset increases and decreases in the price we pay
for diesel and gasoline fuel and reduce the volatility of such fuel costs in our
operations. For the year ended December 31, 2009, the Company had a realized
gain of $141,000 on these securities and an unrealized gain of $319,000. We will
continue to evaluate this strategy and may increase or decrease our investment
in these securities depending on our forecast of the diesel and gasoline fuel
markets and our operational considerations. There can be no assurance that this
strategy will be successful.
|
|
Item 8.
|
Financial Statements and
Supplementary Data
.
|
Financial statements start on page 46.
|
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
|
|
None
|
|
Item 9A.
|
Controls and
Procedures
.
|
Evaluation of
Disclosure Controls and Procedures
.
Disclosure
controls and procedures include, without limitation, 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 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 Securities Exchange Act of
1934). 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 December 31, 2009 to ensure that the
information required to be disclosed by the Company in this Annual Report on
Form 10-K 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.
Management’s
Report on Internal Control over Financial Reporting
.
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule 13a-15(f)) under
the Securities Exchange Act of 1934). Under the supervision and with
the participation of the Company’s management, including the principal executive
officer and principal financial officer, the Company conducted an evaluation of
the effectiveness of internal control over financial reporting at December 31,
2009. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework. The Company’s
management has concluded that, at December 31, 2009 internal control over
financial reporting is effective based on these criteria.
As
permitted by guidance provided by the staff of the Securities and Exchange
Commission, the scope of management's assessment of the effectiveness of the
Company's internal control over financial reporting as of December 31, 2009, did
not include the internal controls of RLW which are included in the 2009
consolidated financial statements of Sterling Construction Company, Inc. and
Subsidaries. We acquired RLW on December 3, 2009 and its business
represents approximately 13.1% and 20.6% of the Company's total assets and
liabilities, respectively, as of December 31, 2009, and approximately 2.6% and
2.9% of the Company's total revenues and net income attributable to Sterling
common stockholders, respectively, for the year then ended. The
Company will include the RLW business in the scope of management's assessment of
internal control over financial reporting beginning in 2010.
Our
internal control over financial reporting has been audited by Grant Thornton
LLP, an independent registered public accounting firm, as stated in their report
included herein.
Changes in
Internal Control over Financial Reporting
.
We
maintain a system of internal control over financial reporting that is designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States. Based on the
most recent evaluation, we have concluded that no significant changes in our
internal control over financial reporting occurred during the last fiscal
quarter 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.
|
Item 9B.
|
Other
Information
.
|
None
|
|
|
|
Item 10.
|
Directors, Executive Officers
and Corporate Governance of the
Registrant
.
|
The
information required in this item is contained in the Company's proxy statement
for its Annual Meeting of Stockholders to be held on May 6, 2010 and is
incorporated herein by reference. The information can be found under
the following headings in the proxy statement:
|
|
Location
in the Proxy Statement
|
|
Directors
|
Election
of Directors (Proposal 1)
|
|
Compliance
With Section 16(a) of the Exchange Act
|
Stock
Ownership Information
|
|
Code
of Ethics
|
The
Corporate Governance & Nominating Committee
|
|
Communication
with the Board; nominations; Board and committee meetings; committees of
the Board; Board leadership and risk oversight; and director
compensation.
|
Board
Operations
|
Information
relating to the Company's executive officers is set forth in Part I of this
report under the caption "Executive Officers of the Registrant" and is
incorporated herein by reference.
|
Item
11.
|
Executive
Compensation
|
The
information required in this item is contained in the Company's proxy statement
for its Annual Meeting of Stockholders to be held on May 6, 2010 and is
incorporated herein by reference.
The
information can be found under the heading
Executive Compensation
in the
proxy statement.
|
Item 12.
|
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
.
|
The
information required in this item is contained in the Company's proxy statement
for its Annual Meeting of Stockholders to be held on May 6, 2010 and is
incorporated herein by reference.
Equity
Compensation Plan Information can be found in the proxy statement under the
heading
Executive
Compensation
.
Information
regarding the ownership of the Company's common stock can be found in the proxy
statement under the heading
Stock Ownership
Information
.
|
Item 13.
|
Certain Relationships and
Related Transactions, and Director
Independence
.
|
The
information required in this item is contained in the Company's proxy statement
for its Annual Meeting of Stockholders to be held on May 6, 2010 and is
incorporated herein by reference.
Information
regarding any relationships between directors and officers and the Company can
be found in the proxy statement under the heading
Business Relationships with
Directors and Officers
.
Information
about director independence can be found in the proxy statement under the
heading
Election of Directors
(Proposal 1)
.
The
information required in this item is contained in the Company's proxy statement
for its Annual Meeting of Stockholders to be held on May 6, 2010 and is
incorporated herein by reference.
The
information can be found in the proxy statement under the heading
Information about Audit Fees and
Audit Services.
|
Item 15.
|
Exhibits, Financial Statements
and Schedules
.
|
|
|
The
following Financial Statements and Financial Statement Schedules are filed
with this Report:
|
Financial
Statements
.
Reports
of the Company's Independent Registered Public Accounting Firm
Consolidated
Balance Sheets at December 31, 2009 and 2008
Consolidated
Statements of Operations at December 31, 2009, 2008 and 2007
Consolidated
Statements of Stockholders' Equity for the fiscal years ended December 31, 2009,
2008 and 2007
Consolidated
Statements of Comprehensive Income for the fiscal years ended December 31, 2009,
2008 and 2007
Consolidated
Statements of Cash Flows for the fiscal years ended December 31, 2009, 2008 and
2007
Financial
Statement Schedules.
None
Exhibits
.
The
following exhibits are filed with this Report:
Explanatory
Note
Prior to
changing its name to Sterling Construction Company, Inc. in November 2001, the
Company had the following names during the following periods:
|
Hallwood
Holdings Incorporated
|
May
1991 to July 1993
|
|
Oakhurst
Capital, Inc.
|
July
1993 to April 1995
|
|
Oakhurst
Company, Inc.
|
April
1995 to November 2001
|
References
in the following exhibit list use the name of the Company in effect at the date
of the exhibit.
|
Number
|
Exhibit
Title
|
|
2.1
|
Purchase
Agreement by and among Richard H. Buenting, Fisher Sand & Gravel Co.,
Thomas Fisher and Sterling Construction Company, Inc. dated as of
October 31, 2007 (incorporated by reference to Exhibit number 2.1 to
Sterling Construction Company, Inc.'s Current Report on Form 8-K,
Amendment No. 1 filed on November 21, 2007 (SEC File No.
1-31993)).
|
|
2.2
|
Purchase
Agreement, dated as of December 3, 2009, by and among Kip Wadsworth, Ty
Wadsworth, Con Wadsworth, Tod Wadsworth and Sterling Construction Company,
Inc. (incorporated by reference to Exhibit 2.1 to Sterling Construction
Company, Inc.'s Current Report on Form 8 K, filed on December 3, 2009 (SEC
File No. 1-31993))
|
|
3.1
|
Certificate
of Incorporation of Sterling Construction Company, Inc. (incorporated by
reference to Exhibit 3.0 to Sterling Construction Company, Inc.'s
Quarterly Report on Form 10-Q, filed on August 10, 2009 (SEC File No.
1-31993)).
|
|
3.2
|
Bylaws
of Sterling Construction Company, Inc. as amended through March 13, 2008
(incorporated by reference to Exhibit 3.1 to Sterling Construction
Company, Inc.'s Current Report on Form 8-K, filed on March 19, 2008 (SEC
File No. 333-129780)).
|
|
4.1
|
Form
of Common Stock Certificate of Sterling Construction Company, Inc.
(incorporated by reference to Exhibit 4.5 to its Form 8-A, filed on
January 11, 2006 (SEC File No. 01-31993)).
|
|
10.1#
|
Oakhurst
Company, Inc. 2001 Stock Incentive Plan (incorporated by reference to
Exhibit 10.6 to Sterling Construction Company, Inc.'s Registration
Statement on Form S-1, filed on November 17, 2005 (SEC File No.
333-129780)).
|
|
10.2#
|
Forms
of Stock Option Agreement under the Oakhurst Company, Inc. 2001 Stock
Incentive Plan (incorporated by reference to Exhibit 10.51 to Sterling
Construction Company, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2004, filed on March 29, 2005 (SEC File No.
001-31993)).
|
|
10.3#
|
Summary
of the Compensation Plan for Non Employee Directors of Sterling
Construction Company, Inc. (incorporated by reference to Exhibit 10.1 to
Sterling Construction Company, Inc.'s Quarterly Report on Form 10-Q, filed
on August 11, 2008 (SEC File No. 333-129780)).
|
|
10.4
|
Credit
Agreement by and among Sterling Construction Company, Inc., Texas Sterling
Construction Co., Oakhurst Management Corporation and Comerica Bank and
the other lenders from time to time party thereto, and Comerica Bank as
administrative agent for the lenders, dated as of October 31, 2007
(incorporated by reference to Exhibit 10.1 to Sterling Construction
Company, Inc.'s Current Report on Form 8-K, Amendment No. 1 filed on
November 21, 2007 (SEC File No. 1-31993)).
|
|
10.5
|
Security
Agreement by and among Sterling Construction Company, Inc., Texas Sterling
Construction Co., Oakhurst Management Corporation and Comerica Bank as
administrative agent for the lenders, dated as of October 31, 2007
(incorporated by reference to Exhibit 10.4 to Sterling Construction
Company, Inc.'s Quarterly Report on Form 10-Q, filed on November 9, 2009
(SEC File No. 01-31993)).
|
|
10.6
|
Joinder
Agreement by Road and Highway Builders, LLC and Road and Highway Builders
Inc, dated as of October 31, 2007 (incorporated by reference to Exhibit
10.3 to Sterling Construction Company, Inc.'s Current Report on Form 8-K,
Amendment No. 1 filed on November 21, 2007 (SEC File No.
1-31993)).
|
|
10.7#
|
Employment
Agreement dated as of July 19, 2007 between Sterling Construction Company,
Inc. and Patrick T. Manning (incorporated by reference to Exhibit 10.1 to
Sterling Construction Company, Inc.'s Current Report on Form 8-K filed on
January 17, 2008 (SEC File No. 1-31993))
|
|
10.8#
|
Employment
Agreement dated as of July 19, 2007 between Sterling Construction Company,
Inc. and Joseph P. Harper, Sr. (incorporated by reference to Exhibit 10.2
to Sterling Construction Company, Inc.'s Current Report on Form 8-K filed
on January 17, 2008 (SEC File No. 1-31993))
|
|
10.09#
|
Employment
Agreement dated as of July 16, 2007 between Sterling Construction Company,
Inc. and James H. Allen, Jr. (incorporated by reference to Exhibit 10.3 to
Sterling Construction Company, Inc.'s Current Report on Form 8-K filed on
January 17, 2008 (SEC File No. 1-31993))
|
|
10.10#
|
Option
Agreement dated August 7, 2007 between Sterling Construction Company, Inc.
and James H. Allen, Jr. (incorporated by reference to Exhibit 10.4 to
Sterling Construction Company, Inc.'s Current Report on Form 8-K filed on
January 17, 2008 (SEC File No. 1-31993))
|
|
10.11#
|
Employment
Agreement dated as of March 17, 2006 between Sterling Construction
Company, Inc. and Roger M. Barzun.
|
|
10.12#*
|
Employment
Agreement dated as of December 3, 2009 between Ralph L. Wadsworth and Kip
L. Wadsworth.
|
|
21
|
Subsidiaries
of Sterling Construction Company, Inc.:
Name
State of Incorporation
Texas
Sterling Construction
Co. Delaware
Road
and Highway Builders,
LLC Nevada
Road
and Highway Builders
Inc.
Nevada
Road
and Highway Builders of California,
Inc. California
Ralph
L. Wadsworth Construction Company,
LLC Utah
|
|
23.1*
|
Consent
of Grant Thornton LLP
|
|
31.1*
|
Certification
of Patrick T. Manning, Chief Executive Officer of Sterling Construction
Company, Inc.
|
|
31.2*
|
Certification
of James H. Allen, Jr., Chief Financial Officer of Sterling Construction
Company, Inc.
|
|
32.0*
|
Certification
pursuant to Section 1350 of Chapter 63 of Title 18 of the United States
Code (18 U.S.C. 1350) of Patrick T. Manning, Chief Executive Officer, and
James H. Allen, Jr., Chief Financial
Officer.
|
|
|
# Management
contract or compensatory plan or
arrangement.
|
* Filed
herewith.
|
|
Signatures
|
Pursuant
to the requirements of Section 13 or 15(d) 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
.
Dated:
March 15,
2010 By:
/s/
Patrick T.
Manning
Patrick
T. Manning, Chief Executive Officer
(duly authorized officer)
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
/s/ Patrick T.
Manning
Patrick
T. Manning
|
Chairman
of the Board of Directors; Chief Executive Officer (principal executive
officer)
|
March
15, 2010
|
|
/s/ Joseph P. Harper,
Sr.
Joseph
P. Harper, Sr.
|
President,
Treasurer & Chief Operating Officer; Director
|
March
15, 2010
|
|
/s/James H. Allen,
Jr.
James
H. Allen, Jr.
|
Senior
Vice President & Chief Financial Officer (principal financial officer
and principal accounting officer)
|
March
15, 2010
|
|
/s/ John D.
Abernathy
John
D. Abernathy
|
Director
|
March
15, 2010
|
|
/s/ Robert W.
Frickel
Robert
W. Frickel
|
Director
|
March
15, 2010
|
|
/s/ Donald P. Fusilli,
Jr.
Donald
P. Fusilli, Jr.
|
Director
|
March
15, 2010
|
|
/s/Maarten D.
Hemsley
Maarten
D. Hemsley
|
Director
|
March
15, 2010
|
|
/s/ Christopher H. B.
Mills
Christopher
H. B. Mills
|
Director
|
March
15, 2010
|
|
/s/ Milton L.
Scott
Milton
L. Scott
|
Director
|
March
15, 2010
|
|
/s/ David R. A.
Steadman
David
R. A. Steadman
|
Director
|
March
15, 2010
|
|
/s/ Kip L.
Wadsworth
Kip
L. Wadsworth
|
Director
|
March
15, 2010
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Sterling
Construction Company, Inc.:
We have
audited the accompanying consolidated balance sheets of Sterling Construction
Company, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2009
and 2008, and the related consolidated statements of operations, stockholders’
equity, comprehensive income and cash flows for each of the three years in the
period ended December 31, 2009.
These financial
statements are the responsibility of the Company’s management.
Our responsibility is
to express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).
Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements.
An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.
We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Sterling Construction
Company, Inc. and subsidiaries as of December 31, 2009 and 2008, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2009 in conformity with accounting
principles generally accepted in the United States of America.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Sterling Construction Company, Inc. and
subsidiaries’ internal control over financial reporting as of December 31, 2009,
based on criteria established in
Internal Control—Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO
)
and our report dated March 15, 2010 expressed an unqualified opinion that
Sterling Construction Company, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting.
/s/ GRANT
THORNTON LLP
Houston,
Texas
March 15,
2010
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Sterling
Construction Company, Inc.:
We have
audited Sterling Construction Company, Inc. (a Delaware corporation) and
subsidiaries’ internal control over financial reporting as of December 31, 2009,
based on criteria established in
Internal Control—Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Sterling Construction Company, Inc. and
subsidiaries’ management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on Sterling Construction Company, Inc.
and subsidiaries’ internal control over financial reporting based on our audit.
Our audit of, and opinion on, Sterling Construction Company, Inc.’s internal
control over financial reporting does not include internal control over
financial reporting of Ralph L. Wadsworth Construction Company LLC, an 80
percent owned subsidiary, whose financial statements reflect total assets and
revenues constituting 13 percent and less than three percent, respectively, of
the related consolidated financial statement amounts as of and for the year
ended December 31, 2009. As indicated in Management’s Report, Ralph L. Wadsworth
Construction Company LLC was acquired during December 2009 and therefore,
management’s assertion on the effectiveness of Sterling Construction Company,
Inc.’s internal control over financial reporting excluded internal control over
financial reporting of Ralph L. Wadsworth Construction Company LLC.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness 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.
In our
opinion, Sterling Construction Company, Inc. and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control—Integrated
Framework
issued by COSO.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Sterling
Construction Company Inc. and subsidiaries as of December 31, 2009 and 2008 and
the related consolidated statements of operations, stockholders’ equity,
comprehensive income and cash flows for each of the three years in the period
ended December 31, 2009
and our report dated
March 15, 2010 expressed an unqualified opinion on those consolidated financial
statements.
/s/ GRANT
THORNTON LLP
Houston,
Texas
March 15,
2010
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
As
of December 31, 2009 and 2008
(Amounts
in thousands, except share and per share data)
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 54,406 | $ | 55,305 | ||||
|
Short-term
investments
|
39,319 | 24,379 | ||||||
|
Contracts
receivable, including retainage
|
80,283 | 60,582 | ||||||
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
5,973 | 7,508 | ||||||
|
Inventories
|
1,229 | 1,041 | ||||||
|
Deferred
tax asset, net
|
127 | 1,203 | ||||||
|
Equity
in construction joint ventures
|
2,341 | -- | ||||||
|
Deposits
and other current assets
|
5,510 | 2,704 | ||||||
|
Total
current assets
|
189,188 | 152,722 | ||||||
|
Property
and equipment, net
|
80,282 | 77,993 | ||||||
|
Goodwill
|
114,745 | 57,232 | ||||||
|
Other
assets, net
|
1,526 | 1,668 | ||||||
|
Total
assets
|
$ | 385,741 | $ | 289,615 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 32,619 | $ | 26,111 | ||||
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
31,132 | 23,127 | ||||||
|
Current
maturities of long-term debt
|
73 | 73 | ||||||
|
Income
taxes payable
|
351 | 547 | ||||||
|
Other
accrued expenses
|
11,135 | 7,741 | ||||||
|
Total
current liabilities
|
75,310 | 57,599 | ||||||
|
Long-term
liabilities:
|
||||||||
|
Long-term
debt, net of current maturities
|
40,409 | 55,483 | ||||||
|
Deferred
tax liability, net
|
15,369 | 11,117 | ||||||
|
Total
long-term liabilities
|
55,778 | 66,600 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Non-controlling
owners' interests in subsidiaries
|
23,887 | 6,300 | ||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred
stock, par value $0.01 per share; authorized
|
||||||||
|
1,000,000 shares, none
issued
|
-- | -- | ||||||
|
Common
stock, par value $0.01 per share; authorized
|
||||||||
|
19,000,000 shares, 16,081,878
and 13,184,638 shares issued and outstanding
|
160 | 131 | ||||||
|
Additional
paid in capital
|
197,898 | 150,223 | ||||||
|
Retained
earnings
|
32,708 | 8,762 | ||||||
|
Total
Sterling common stockholders’ equity
|
230,766 | 159,116 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 385,741 | $ | 289,615 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the years ended December 31, 2009, 2008 and 2007
(Amounts
in thousands, except per share data)
|
2009
|
2008
|
2007
|
||||||||||
|
Revenues
|
$ | 390,847 | $ | 415,074 | $ | 306,220 | ||||||
|
Cost
of revenues
|
336,478 | 373,102 | 272,534 | |||||||||
|
Gross
profit
|
54,369 | 41,972 | 33,686 | |||||||||
|
General
and administrative expenses
|
(14,971 | ) | (13,763 | ) | (13,231 | ) | ||||||
|
Direct
costs of acquisition
|
(1,211 | ) | -- | -- | ||||||||
|
Provision
for loss on lawsuit
|
(1,000 | ) | -- | -- | ||||||||
|
Other
income (expense)
|
270 | (81 | ) | 549 | ||||||||
|
Operating
income
|
37,457 | 28,128 | 21,004 | |||||||||
|
Interest
income
|
572 | 1,070 | 1,669 | |||||||||
|
Interest
expense
|
(234 | ) | (199 | ) | (277 | ) | ||||||
|
Income
before income taxes and earnings attributable to non-controlling
interests
|
37,795 | 28,999 | 22,396 | |||||||||
|
Income
tax expense:
|
||||||||||||
|
Current
|
(7,785 | ) | (1,087 | ) | (1,290 | ) | ||||||
|
Deferred
|
(4,482 | ) | (8,938 | ) | (6,600 | ) | ||||||
|
Total Income tax
expense
|
(12,267 | ) | (10,025 | ) | (7,890 | ) | ||||||
|
Net
income
|
25,528 | 18,974 | 14,506 | |||||||||
|
Non-controlling
interests in earnings of subsidiaries
|
(1,824 | ) | (908 | ) | (62 | ) | ||||||
|
Net
income attributable to Sterling common stockholders
|
$ | 23,704 | $ | 18,066 | $ | 14,444 | ||||||
| Net income per share attributable to Sterling common stockholders: | ||||||||||||
| Basic | $ | 1.77 | $ | 1.38 | $ | 1.31 | ||||||
| Diluted | $ | 1.71 | $ | 1.32 | $ | 1.22 | ||||||
| Weighted average number of common shares outstanding used in computing per share amounts: | ||||||||||||
| Basic | 13,358,903 | 13,119,987 | 11,043,948 | |||||||||
| Diluted | 13,855,709 | 13,702,488 | 11,836,176 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
For
the years ended December 31, 2009, 2008 and 2007
(Amounts
in thousands)
|
Common
Stock
|
Additional
|
Retained
|
||||||||||||||||||
|
Shares
|
Amount
|
paid
in capital
|
earnings
(deficit)
|
Total
|
||||||||||||||||
|
Balance
at December 31, 2006
|
10,875 | $ | 109 | $ | 114,630 | $ | (23,748 | ) | $ | 90,991 | ||||||||||
|
Net income attributable to
Sterling common stockholders
|
14,444 | 14,444 | ||||||||||||||||||
|
Stock issued upon option and
warrant exercises
|
241 | 2 | 511 | 513 | ||||||||||||||||
|
Stock based compensation
expense
|
912 | 912 | ||||||||||||||||||
|
Stock issued in equity offering,
net
of
expenses
|
1,840 | 18 | 34,471 | 34,489 | ||||||||||||||||
|
Issuance and amortization of
restricted stock
|
10 | -- | 198 | 198 | ||||||||||||||||
|
Excess tax benefits from
exercise of stock options
|
1,480 | 1,480 | ||||||||||||||||||
|
Issuance of stock to
non-controlling interest
|
41 | 1 | 999 | 1,000 | ||||||||||||||||
|
Excess fair value over book
value of non-controlling interest in subsidiary
|
(5,415 | ) | (5,415 | ) | ||||||||||||||||
|
Balance
at December 31, 2007
|
13,007 | 130 | 147,786 | (9,304 | ) | 138,612 | ||||||||||||||
|
Net
income attributable to Sterling common
stockholders
|
18,066 | 18,066 | ||||||||||||||||||
|
Stock issued upon option and
warrant exercises
|
154 | 1 | 237 | 238 | ||||||||||||||||
|
Stock based compensation
expense
|
210 | 210 | ||||||||||||||||||
|
Issuance and amortization of
restricted stock
|
24 | -- | 307 | 307 | ||||||||||||||||
|
Excess tax benefits from
exercise of stock options
|
1,218 | 1,218 | ||||||||||||||||||
|
Revaluation of non-controlling
interest put/call liability
|
607 | 607 | ||||||||||||||||||
|
Expenditures related to 2007
equity offering
|
(142 | ) | (142 | ) | ||||||||||||||||
|
Balance
at December 31, 2008
|
13,185 | 131 | 150,223 | 8,762 | 159,116 | |||||||||||||||
|
Net income attributable to
Sterling common stockholders
|
23,704 | 23,704 | ||||||||||||||||||
|
Unrealized holding gain on
available-for-sale securities, net of tax
|
242 | 242 | ||||||||||||||||||
|
Stock issued upon option and
warrant exercises
|
109 | 1 | 307 | 308 | ||||||||||||||||
|
Stock based compensation
expense
|
181 | 181 | ||||||||||||||||||
|
Issuance and amortization of
restricted stock
|
28 | -- | 405 | 405 | ||||||||||||||||
|
Stock issued in equity offering,
net of expenses
|
2,760 | 28 | 46,782 | 46,810 | ||||||||||||||||
|
Balance
at December 31, 2009
|
16,082 | $ | 160 | $ | 197,898 | $ | 32,708 | $ | 230,766 | |||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
For the years
ended December 31, 2009, 2008 and 2007
(Amounts
in thousands)
|
For
the year ended
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
income attributable to Sterling common stockholders
|
$ | 23,704 | $ | 18,066 | $ | 14,444 | ||||||
|
Other
comprehensive income, net of tax:
|
||||||||||||
|
Unrealized holding gain on
available-for-sale securities
|
242 | - | -- | |||||||||
|
Comprehensive
income attributable to Sterling common stockholders
|
$ | 23,946 | $ | 18,066 | $ | 14,444 | ||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the years ended December 31, 2009, 2008 and 2007
(Amounts
in thousands)
|
2009
|
2008
|
2007
|
||||||||||
|
Net
income attributable to Sterling common stockholders
|
$ | 23,704 | $ | 18,066 | $ | 14,444 | ||||||
|
Plus:
Non-controlling interests in earnings of subsidiaries
|
1,824 | 908 | 62 | |||||||||
|
Net
income
|
25,528 | 18,974 | 14,506 | |||||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
13,730 | 13,168 | 9,544 | |||||||||
|
(Gain)
loss on sale of property and equipment
|
264 | 81 | (501 | ) | ||||||||
|
Deferred
tax expense
|
4,482 | 8,938 | 6,600 | |||||||||
|
Stock
based compensation expense
|
586 | 517 | 1,110 | |||||||||
|
Excess
tax benefits from exercise of stock options
|
-- | (1,218 | ) | (1,480 | ) | |||||||
|
Interest
expense accreted on non-controlling interest
|
206 | 199 | - | |||||||||
|
Other
changes in operating assets and liabilities:
|
||||||||||||
|
(Increase)
decrease in contracts receivable
|
15,138 | (6,188 | ) | (6,588 | ) | |||||||
|
(Increase)
decrease in costs and estimated earnings in excess of billings on
uncompleted contracts
|
3,778 | (3,761 | ) | 648 | ||||||||
|
(Increase)
decrease in prepaid expenses and other assets
|
(1,610 | ) | (1,945 | ) | (629 | ) | ||||||
|
Increase
(decrease) in trade payables
|
(11,185 | ) | (1,079 | ) | 6,064 | |||||||
|
Increase
(decrease) in billings in excess of costs and estimated earnings on
uncompleted contracts
|
(3,571 | ) | (2,222 | ) | 646 | |||||||
|
Increase
(decrease) in accrued compensation and other liabilities
|
519 | 1,257 | (378 | ) | ||||||||
|
Net
cash provided by operating activities
|
47,865 | 26,721 | 29,542 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Cash
paid for business combinations, net of cash acquired
|
(60,490 | ) | -- | (49,334 | ) | |||||||
|
Additions
to property and equipment
|
(5,277 | ) | (19,896 | ) | (26,319 | ) | ||||||
|
Proceeds
from sale of property and equipment
|
435 | 1,298 | 1,603 | |||||||||
|
(Issuance)
payments on note receivables
|
(350 | ) | 204 | 420 | ||||||||
|
Purchases
of short-term securities, available for sale
|
(71,386 | ) | (24,325 | ) | (123,797 | ) | ||||||
|
Sales
of short-term securities, available for sale
|
56,819 | -- | 149,912 | |||||||||
|
Net
cash used in investing activities
|
(80,249 | ) | (42,719 | ) | (47,515 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Cumulative
daily drawdowns – Credit Facility
|
188,000 | 235,000 | 190,199 | |||||||||
|
Cumulative
daily reductions – Credit Facility
|
(203,000 | ) | (245,000 | ) | (155,199 | ) | ||||||
|
Repayments
under long-term obligations
|
(74 | ) | (98 | ) | (129 | ) | ||||||
|
Increase in
deferred loan costs
|
(151 | ) | -- | (1,197 | ) | |||||||
|
Issuance
of common stock pursuant to warrants and options exercised
|
308 | 238 | 513 | |||||||||
|
Utilization
of excess tax benefits from exercise of stock options
|
-- | 1,218 | 1,480 | |||||||||
|
Distributions
to non-controlling interest owners
|
(408 | ) | (562 | ) | -- | |||||||
|
Net
proceeds from sale of common stock
|
46,810 | (142 | ) | 34,489 | ||||||||
|
Net
cash provided by (used in) financing activities
|
31,485 | (9,346 | ) | 70,156 | ||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(899 | ) | (25,344 | ) | 52,183 | |||||||
|
Cash
and cash equivalents at beginning of period
|
55,305 | 80,649 | 28,466 | |||||||||
|
Cash
and cash equivalents at end of period
|
$ | 54,406 | $ | 55,305 | $ | 80,649 | ||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||||
|
Cash
paid during the period for interest, net of $13, $107 and $53 of
capitalized interest expense in 2009, 2008 and 2007,
respectively
|
$ | 31 | $ | 167 | $ | 216 | ||||||
|
Cash
paid during the period for income taxes
|
$ | 7,000 | $ | 3,000 | $ | 1,300 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary
of Business and Significant Accounting Policies
Basis
of Presentation:
Sterling
Construction Company, Inc. (“Sterling” or “the Company”) a Delaware Corporation,
is a leading heavy civil construction company that specializes in the building,
reconstruction and repair of transportation and water infrastructure in large
and growing markets in Texas, Utah, Nevada and other states where we see
contracting opportunities. Our transportation infrastructure projects include
highways, roads, bridges and light and commuter rail, and our water
infrastructure projects include water, wastewater and storm drainage systems. We
provide general contracting services primarily to public sector clients
utilizing our own employees and equipment for activities including excavating,
concrete and asphalt paving, construction of bridges and similar large
structures, pipe and rail installation, concrete and asphalt batch plant
operations, concrete crushing and aggregates operations. We purchase the
necessary materials for our contracts, perform the majority of the work required
by our contracts with our own crews.
Sterling
owns five subsidiaries; Texas Sterling Construction Co. (“TSC”), a
Delaware corporation, Road and Highway Builders, LLC (“RHB”), a Nevada limited
liability company, Road and Highway Builders, Inc. ("RHB Inc"), a Nevada
corporation, Road and Highway Builders of California, Inc., ("RHB Cal"), a
California corporation and Ralph L. Wadsworth Construction Company, LLC ("RLW"),
a Utah limited liability company. TSC, RHB, RHB Cal and RLW perform
construction contracts and RHB Inc produces aggregates from a leased quarry,
primarily for use by RHB.
The
accompanying consolidated financial statements include the accounts of
subsidiaries in which the Company has a greater than 50% ownership interest and
all significant intercompany accounts and transactions have been eliminated in
consolidation. For all years presented, the Company had no subsidiaries with
ownership interests of less than 50%.
Our
Markets
Demand
for transportation and water infrastructure depends on a variety of factors,
including overall population growth, economic expansion and the vitality of the
market areas in which we operate, as well as unique local topographical,
structural and environmental issues. In addition to these factors,
demand for the replacement of infrastructure is driven by the general aging of
infrastructure and the need for technical improvements to achieve more efficient
or safer use of infrastructure and resources. Funding for this
infrastructure depends on federal, state and local governmental resources,
budgets and authorizations.
During
the last quarter of 2008, throughout fiscal year 2009 and continuing into the
first quarter of 2010, the bidding environment in our markets has been much more
competitive because of the following:
|
·
|
While
our business includes only minimal residential and commercial
infrastructure work, the severe fall-off in new projects in those markets
has resulted in some residential and commercial infrastructure contractors
bidding on smaller public sector transportation and water infrastructure
projects, sometimes at bid levels below our break-even pricing, thus
increasing competition and creating downward pressure on bid prices in our
markets.
|
|
·
|
Traditional
competitors on larger transportation and water infrastructure projects
also appear to have been bidding at less than normal margins, sometimes at
bid levels below our break-even pricing, in order to replenish their
reduced backlogs.
|
These
factors have limited our ability to maintain or increase our backlog through
successful bids for new projects and have compressed the profitability on the
new projects where we submitted successful bids. While we have recently been
more aggressive in reducing the anticipated margins we use to bid on some
projects, we have not bid at anticipated loss margins in order to obtain new
backlog.
Assuming
that these factors continue to affect infrastructure capital expenditures in our
markets in the near term, and taking into account the amount of backlog we had
at December 31, 2009 and the lower anticipated margin bid on some projects that
we have recently been awarded and expect to start work on in 2010, we currently
anticipate that our net income and diluted earnings per common share of stock
attributable to Sterling common stockholders for 2010 will be substantially
below the results we achieved for 2009.
We do,
however, expect that our markets will ultimately recover from the conditions
described above and that our backlog, revenues and net income will return to
levels more consistent with historical levels. However, we cannot
predict the timing of such a return to historical normalcy in our
markets.
Critical
Accounting Policies:
Use
of Estimates:
The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America
("GAAP"), which require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amount of revenues and expenses during the reporting period.
Certain
of the Company's accounting policies require higher degrees of judgment than
others in their application. These include the recognition of revenue and
earnings from construction contracts under the percentage of completion method,
the valuation of long-term assets, and income taxes.
Management
continually evaluates all of its estimates and judgments based on available
information and experience; however, actual amounts could differ from those
estimates.
Construction
Revenue Recognition:
The
Company is a general contractor in the States of Texas, Utah and Nevada where it
engages in various types of heavy civil construction projects principally for
public (government) owners. Credit risk is minimal with public owners since the
Company ascertains that funds have been appropriated by the governmental project
owner prior to commencing work on such projects. While most public contracts are
subject to termination at the election of the government entity, in the event of
termination the Company is entitled to receive the contract price for completed
work and reimbursement of termination-related costs. Credit risk with private
owners is minimized because of statutory mechanics liens, which give the Company
high priority in the event of lien foreclosures following financial difficulties
of private owners.
Revenues
are recognized on the percentage-of-completion method, measured by the ratio of
costs incurred up to a given date to estimated total costs for each
contract. Our contracts generally take 12 to 36 months to
complete.
Contract
costs include all direct material, labor, subcontract and other costs and those
indirect costs related to contract performance, such as indirect salaries and
wages, equipment repairs and depreciation, insurance and payroll taxes.
Administrative and general expenses are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance, job conditions
and estimated profitability, including those changes arising from contract
penalty provisions and final contract settlements may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined. An amount attributable to contract claims is included in revenues
when realization is probable and the amount can be reasonably
estimated. Cost and estimated earnings in excess of billings included
$0.7 million and $0.2 million at December 31, 2009 and 2008, respectively, for
contract claims not approved by the customer (which includes out-of-scope work,
potential or actual disputes, and claims). The Company generally provides a one
to two-year warranty for workmanship under its contracts. Warranty
claims historically have been insignificant.
The
asset, “Costs and estimated earnings in excess of billings on uncompleted
contracts” represents revenues recognized in excess of amounts billed on these
contracts. The liability “Billings in excess of costs and estimated earnings on
uncompleted contracts” represents billings in excess of revenues recognized on
these contracts.
Cash
and Cash Equivalents and Short-term Investments:
The
Company considers all highly liquid investments with original or remaining
maturities of three months or less at the time of purchase to be cash
equivalents. At December 31, 2009 approximately $1.0 million of cash
and cash equivalents were fully insured by the FDIC under its standard maximum
deposit insurance amount (SMDIA) guidelines. The Company classifies
short-term investments, other than certificates of deposits with remaining
maturity of 90 days or less, at purchase as securities available for
sale. At December 31, 2009 the Company had short-term investments as
follows (in thousands):
|
December
31, 2009
|
||||||||||||||||
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||
|
Fixed
income mutual funds
|
$ | 35,055 | $ | 35,055 | $ | -- | $ | -- | ||||||||
|
Exchange
traded funds
|
2,494 | 2,494 | -- | -- | ||||||||||||
|
Total
securities available-for-sale
|
$ | 37,549 | $ | 37,549 | $ | -- | $ | -- | ||||||||
|
Certificates
of deposit with original
maturities between 90 and 365
days
|
1,770 | |||||||||||||||
|
Total
short-term investments
|
$ | 39,319 | ||||||||||||||
|
December
31, 2008
|
||||||||||||||||
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||
|
U.S.
Treasury Bills
|
$ | 5,000 | $ | 5,000 | $ | -- | $ | -- | ||||||||
|
Total
securities available-for-sale
|
$ | 5,000 | $ | 5,000 | $ | -- | $ | -- | ||||||||
|
Certificates
of deposit with original
maturities between 90 and 365
days
|
19,379 | |||||||||||||||
|
Total
short-term investments
|
$ | 24,379 | ||||||||||||||
Level 1
Inputs - Valuation based upon quoted prices for identical assets in active
markets that the Company has the ability to access at the measurement
date.
Level 2
Inputs – Based upon quoted prices (other than Level 1) in active markets for
similar assets, quoted prices for identical or similar assets in markets that
are not active, inputs other than quoted prices that are observable for the
asset such as interest rates, yield curves, volatilities and default rates and
inputs that are derived principally from or corroborated by observable market
data.
Level 3
Inputs – Based on unobservable inputs reflecting the Company’s own assumptions
about the assumptions that market participants would use in pricing the asset
based on the best information available.
The
pre-tax gains realized on short-term investment securities during the year ended
December 31, 2009 were $524,000 included in other income in the accompanying
statements of operations. There was also $373,000 in pre-tax
unrealized gains on short-term investments as of December 31, 2009 included in
accumulated other comprehensive income in stockholders' equity as the gains may
be temporary. Upon sale of equity securities, the average cost basis
is used to determine the gain or loss.
For the
years ended December 31, 2009, 2008 and 2007, the Company recorded interest
income of $572,000, $1.1 million and $1.7 million, respectively.
Contracts
Receivable:
Contracts
receivable are generally based on amounts billed to the customer. At December
31, 2009 and 2008 contracts receivable included $31.7 million and $25.9 million
of retainage, respectively, discussed below which is being withheld by customers
until completion of the contracts and $3.7 million and $2.1 million of unbilled
receivables, respectively, on contracts completed or substantially complete at
that date (the latter amount is expected to be billed in 2010). All other
contracts receivable include only balances approved for payment by the customer.
Based upon a review of outstanding contracts receivable, historical collection
information and existing economic conditions, management has determined that all
contracts receivable at December 31, 2009 and 2008 are fully collectible, and,
accordingly, no allowance for doubtful accounts against contracts receivable is
necessary. Contracts receivable are written off based on individual credit
evaluation and specific circumstances of the customer, when such treatment is
warranted.
Retainage:
Many of
the contracts under which the Company performs work contain retainage
provisions. Retainage refers to that portion of billings made by the Company but
held for payment by the customer pending satisfactory completion of the project.
Unless reserved, the Company assumes that all amounts retained by customers
under such provisions are fully collectible. Retainage on active contracts is
classified as a current asset regardless of the term of the contract and is
generally collected within one year of the completion of a contract. Retainage
was approximately $31.7 million and $25.9 million at December 31, 2009 and 2008,
respectively, all of which is expected to be collected by December 31,
2010.
Inventories:
The
Company's inventories are stated at the lower of cost or market as determined by
the average cost method. Inventories at December 31, 2009 and 2008,
consist primarily of concrete and millings which are expected to be utilized on
construction projects in the future. The cost of inventory includes
labor, trucking and other equipment costs.
Property
and Equipment:
Property
and equipment are stated at cost. Depreciation and amortization are computed
using the straight-line method. The estimated useful lives used for computing
depreciation and amortization are as follows:
|
Buildings
|
39
years
|
|
Construction
equipment
|
5-15
years
|
|
Land
improvements
|
5-15
years
|
|
Office
furniture and fixtures
|
3-10
years
|
|
Transportation
equipment
|
5
years
|
Depreciation
expense was approximately $13.5 million, $12.9 million, and $9.5 million in
2009, 2008 and 2007, respectively.
Equipment
under Capital Leases:
The
Company’s policy is to account for capital leases, which transfer substantially
all the benefits and risks incident to the ownership of the leased property to
the Company, as the acquisition of an asset and the incurrence of an obligation.
Under this method of accounting, the recorded value of the leased asset is
amortized principally using the straight-line method over its estimated useful
life and the obligation, including interest thereon, is reduced through payments
over the life of the lease. Depreciation expense on leased equipment
and the related accumulated depreciation is included with that of owned
equipment.
Deferred
Loan Costs:
Deferred
loan costs represent loan origination fees paid to the lender and related
professional fees such as legal fees related to drafting of loan agreements.
These fees are amortized over the term of the loan. In 2007, the Company entered
into a new syndicated term Credit Facility (see Note 3) and incurred $1.2
million of loan costs, which are being amortized over the five-year term of the
loan. Loan cost amortization expense for fiscal years 2009, 2008 and 2007 was
$258,000, $254,000 and $76,000 respectively.
Goodwill
and Intangibles:
Goodwill
represents the excess of the cost of companies acquired over the fair value of
their net assets at the dates of acquisition.
U.S.
generally accepted accounting principles ("GAAP") requires that: (1) goodwill
and indefinite lived intangible assets not be amortized, (2) goodwill is to be
tested for impairment at least annually at the reporting unit level, (3) the
amortization period of intangible assets with finite lives is to be no longer
limited to forty years, and (4) intangible assets deemed to have an indefinite
life are to be tested for impairment at least annually by comparing the fair
value of these assets with their recorded amounts.
Goodwill
impairment is tested during the last quarter of each calendar year. The first
step compares the book value of the Company’s stock to the quoted market value
of those shares as reported by Nasdaq adjusted for a controlling interest
premium. If the adjusted quoted market value of the stock is greater than the
calculated book value of the stock, goodwill is deemed not to be impaired and no
further testing is required. If the adjusted quoted market value is less than
the calculated book value, additional steps of determining fair value of
additional assets must be taken to determine impairment. Testing step one in
2009 indicated the adjusted quoted market value of the Company’s stock was
significantly in excess of its book value and no further testing was required;
based on the results of such test for impairment, the Company concluded that no
impairment of goodwill existed as of December 31, 2009.
Intangible
assets that have finite lives continue to be subject to amortization. In
addition, the Company must evaluate the remaining useful life in each reporting
period to determine whether events and circumstances warrant a revision of the
remaining period of amortization. If the estimate of an intangible asset’s
remaining life is changed, the remaining carrying amount of such asset is
amortized prospectively over that revised remaining useful life.
Evaluating
Impairment of Long-Lived Assets:
When events or changes in
circumstances indicate that long-lived assets other than goodwill may be
impaired, an evaluation is performed. The estimated undiscounted cash
flow associated with the asset is compared to the asset's carrying amount to
determine if a write-down to fair value is required.
Segment
reporting:
We
operate in one segment and have only one reportable segment and one reporting
unit component, heavy civil construction. In making this determination, we
considered that each project has similar characteristics, includes similar
services, has similar types of customers and is subject to similar economic and
regulatory environments. We organize, evaluate and manage our financial
information around each project when making operating decisions and assessing
our overall performance.
Even if
our local offices were to be considered separate components of our heavy civil
construction operating segment, those components could be aggregated into a
single reporting unit for purposes of testing goodwill for impairment under
Accounting Standards Codification 280 and EITF D-101 because our local offices
all have similar economic characteristics and are similar in all of the
following areas:
|
·
|
The
nature of the products and services — each of our local offices
perform similar construction projects — they build, reconstruct and
repair roads, highways, bridges, light and commuter rail and water, waste
water and storm drainage systems.
|
|
·
|
The
nature of the production processes — our heavy civil construction
services rendered in the construction production process for each of our
construction projects performed by each local office is the same —
they excavate dirt, remove existing pavement and pipe, lay aggregate or
concrete pavement, pipe and rail and build bridges and similar large
structures in order to complete our
projects.
|
|
·
|
The
type or class of customer for products and services — substantially
all of our customers are federal and state departments of transportation,
cities, counties, and regional water, rail and toll-road authorities. A
substantial portion of the funding for the state departments of
transportation to finance the projects we construct is furnished by the
federal government.
|
|
·
|
The
methods used to distribute products or provide services — the heavy
civil construction services rendered on our projects are performed
primarily with our own field work crews (laborers, equipment operators and
supervisors) and equipment (backhoes, loaders, dozers, graders, cranes,
pug mills, crushers, and concrete and asphalt
plants).
|
|
·
|
The
nature of the regulatory environment — we perform substantially all
of our projects for federal, state and municipal governmental agencies,
and all of the projects that we perform are subject to substantially
similar regulation under U.S. and state department of transportation
rules, including prevailing wage and hour laws; codes established by the
federal government and municipalities regarding water and waste water
systems installation; and laws and regulations relating to workplace
safety and worker health of the U.S. Occupational Safety and Health
Administration and to the employment of immigrants of the
U.S. Department of Homeland
Security.
|
The
economic characteristics of our local offices are similar. While profit margin
objectives included in contract bids have some variability from contract to
contract, our profit margin objectives are not differentiated by our chief
operating decision maker or our office management based on local office
location. Instead, the projects undertaken by each local office are primarily
competitively-bid, fixed-unit or negotiated lump-sum price contracts, all of
which are bid based on achieving gross margin objectives that reflect the
relevant skills required, the contract size and duration, the availability of
our personnel and equipment, the makeup and level of our existing backlog, our
competitive advantages and disadvantages, prior experience, the contracting
agency or customer, the source of contract funding, anticipated start and
completion dates, construction risks, penalties or incentives and general
economic conditions.
Federal
and State Income Taxes:
We
determine deferred income tax assets and liabilities using the balance sheet
method. Under this method, the net deferred tax asset or liability is determined
based on the tax effects of the temporary differences between the book and tax
bases of the various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. We recognize the financial statement benefit of a tax position
only after determining that the relevant tax authority would more likely than
not sustain the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax
authority.
Construction
Joint Ventures:
We
participate in various construction joint venture partnerships. Our
agreements with our joint venture partners provide that each venture partner
will assume and pay its share of any losses resulting from a
project. If one of our venture partners is unable to pay its share,
we would be fully liable under our contract with the project
owner. Circumstances that could lead to a loss under our joint
venture arrangements beyond our ownership interest include a venture partner's
inability to contribute additional funds required by the venture or additional
costs that we could incur should a venture partner fail to provide the services
and resources toward project completion that it had been committed in the joint
venture agreement and the contract with the customer.
Generally,
each construction joint venture is formed to accomplish a specific project and
is jointly controlled by the joint venture partners. The joint
venture agreements typically provide that our interests in any profits and
assets, and our respective share in any losses and liabilities that may result
from the performance of the contract is limited to our stated percentage
interest in the venture. We have no significant commitments beyond
completion of the contract.
If we
have determined that we control the joint venture, we consolidate the joint
venture in our consolidated financial statements. There was no
controlled joint venture at December 31, 2009, that had incurred any material
costs. We account for our share of the operations of construction
joint ventures, where we are a non-controlling venture partner, on a pro rata
basis in the consolidated statements of operations and as a single line item in
the consolidated balance sheets. Our consolidated financial
statements include the following amounts related to joint ventures for the year
ended December 31, 2009: Revenues of $12,000, gross profit of $2,000 and equity
in construction joint ventures of $2.3 million, which primarily represents cash
of the joint venture and an account receivable from the joint venture's
customer.
Stock-Based
Compensation:
The
Company has five stock-based incentive plans which are administered by the
Compensation Committee of the Board of Directors. The Company’s
policy is to use the closing price of the common stock on the date of the
meeting at which a stock option award is approved for the option’s per-share
exercise price. The term of the grants under the plans do not exceed
10 years. Stock options generally vest over a three to five year period and
the fair value of the stock option is recognized on a straight-line basis over
the vesting period of the option. Refer to Note 7 for further information
regarding the stock-based incentive plans.
Net
Income Per Share Attributable to Sterling Common Stockholders:
Basic net
income per share attributable to Sterling common stockholders is computed by
dividing net income attributable to Sterling common stockholders by the weighted
average number of common shares outstanding during the
period. Diluted net income per common share attributable to Sterling
common stockholders is the same as basic net income per share attributable to
Sterling common stockholders but assumes the exercise of any convertible
subordinated debt securities and includes dilutive stock options 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 attributable to Sterling common stockholders for
2009, 2008 and 2007 (in thoursands, except per share data):
|
2009
|
2008
|
2007
|
||||||||||
|
Numerator:
|
||||||||||||
|
Net
income attributable to Sterling common stockholders
|
$ | 23,704 | $ | 18,066 | $ | 14,444 | ||||||
|
Denominator:
|
||||||||||||
|
Weighted
average common shares
outstanding
— basic
|
13,359 | 13,120 | 11,044 | |||||||||
|
Shares
for dilutive stock options and warrants
|
497 | 582 | 792 | |||||||||
|
Weighted
average common shares outstanding and
assumed
conversions — diluted
|
$ | 13,856 | $ | 13,702 | $ | 11,836 | ||||||
|
Basic
net income per share attributable to Sterling common
stockholders
|
$ | 1.77 | $ | 1.38 | $ | 1.31 | ||||||
|
Diluted
net income per share attributable to Sterling common
stockholders
|
$ | 1.71 | $ | 1.32 | $ | 1.22 | ||||||
For the
years ended December 31, 2009, 2008 and 2007 were 96,007, 96,007 and 79,700
options, respectively, considered antidilutive as the option exercise price
exceeded the average share market price.
Interest
Costs:
Approximately
$13,000, $107,000 and $53,000 of interest related to the construction of
maintenance facilities and an office building were capitalized as part of
construction costs during 2009, 2008 and 2007.
Recent
Accounting Pronouncements:
In December 2007, the Financial Accounting Standards Board, or FASB, established
principles and requirements for how an acquirer of another business entity:
(a) recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree; (b) recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase and (c) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. Also, all
direct costs of the business combination must be charged to expense on the
financial statements of the acquirer as incurred. The new standard revises
previous guidance as to the recording of post-combination restructuring plan
costs by requiring the acquirer to record such costs separately from the
business combination. We adopted this statement on January 1, 2009, and, in
connection with the acquisition of RLW, we recorded $1.2 million as a charge to
expense in the statement of operations for the year ended December 31,
2009.
In
September 2006, the FASB established a framework for measuring fair value which
requires expanded disclosure about the information used to measure fair value.
The standard applies whenever other statements require or permit assets or
liabilities to be measured at fair value, and does not expand the use of fair
value accounting in any new circumstances. We adopted this standard on
January 1, 2009 which did not have a material impact on the Company's
financial statements.
In
December 2007, the FASB issued a standard clarifying previous guidance on how
consolidated entities should account for and report non-controlling interests in
consolidated subsidiaries. The pronouncement standardizes the presentation of
non-controlling interests (formally referred to as “minority interests”) for
both the consolidated balance sheet and income statement. As a result of
adopting this standard on January 1, 2009, Sterling’s financial statements
segregate net income of subsidiaries attributable to the Company’s common
stockholders and non-controlling owner’s interest and equity of non-controlling
interests in those subsidiaries.
In May
2009, the FASB set forth general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. This standard became effective in the
second quarter of 2009 and did not have a material impact on the Company's
financial statements.
In June
2009, the FASB issued a standard to address the elimination of the concept of a
qualifying special purpose entity. This standard will replace the
quantitative-based risks and rewards calculation for determining which
enterprise has a controlling financial interest in a variable interest entity
with an approach focused on identifying which enterprise has the power to direct
the activities of a variable interest entity and the obligation to absorb losses
of the entity or the right to receive benefits from the entity. Additionally,
this standard will provide more timely and useful information about an
enterprise’s involvement with a variable interest entity. This standard will
become effective in the first quarter of 2010. This standard may have the effect
of requiring us to consolidate joint ventures in which we have a controlling
interest. At December 31, 2009, we had no participation in a joint venture where
we had a material controlling interest.
In June
2009, the Accounting Standards Codification ("ASC") was established as the
source of authoritative GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the SEC under
federal securities laws are also sources of authoritative GAAP for SEC
registrants. All guidance contained in the Codification carries an equal level
of authority. This standard was effective for financial statements issued for
interim and annual periods ending after September 15, 2009. The adoption of
this standard did not have a material effect on the Company's financial
statements.
Reclassifications:
Certain immaterial balances included
in the prior year balance sheet have been reclassified to conform to current
year presentation. The accompanying financial statements also contain
certain reclassifications for a change in GAAP, which was effective January 1,
2009, relating to non-controlling interests as discussed in the fourth paragraph
above.
2. Property
and Equipment
Property
and equipment are summarized as follows (in thousands):
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
Construction
equipment
|
$ | 105,085 | $ | 96,002 | ||||
|
Transportation
equipment
|
13,472 | 12,358 | ||||||
|
Buildings
|
4,699 | 3,926 | ||||||
|
Office
equipment
|
892 | 547 | ||||||
|
Construction
in progress
|
471 | 792 | ||||||
|
Land
|
2,916 | 2,916 | ||||||
|
Water
rights
|
200 | 200 | ||||||
| 127,735 | 116,741 | |||||||
|
Less
accumulated depreciation
|
(47,453 | ) | (38,748 | ) | ||||
| $ | 80,282 | $ | 77,993 | |||||
At
December 31, 2009, construction in progress consisted of expenditures for new
maintenance shop facilities at various locations in Texas.
3. Line
of Credit and Long-Term Debt
Long-term
debt consists of the following (in thousands):
|
December
31,
2009
|
December
31,
2008
|
|||||||
|
Credit
Facility, due October 2012
|
$ | 40,000 | $ | 55,000 | ||||
|
Mortgage
due monthly through June 2016
|
482 | 556 | ||||||
| 40,482 | 55,556 | |||||||
|
Less
current maturities of long-term debt
|
(73 | ) | (73 | ) | ||||
|
Total
long-term debt
|
$ | 40,409 | $ | 55,483 | ||||
Line
of Credit Facility:
On
October 31, 2007, the Company and its subsidiaries entered into a new
credit facility (“Credit Facility”) with Comerica Bank, which replaced a prior
Revolver and will mature on October 31, 2012. The Credit Facility allows
for borrowing of up to $75.0 million and is secured by all assets of the
Company, other than proceeds and other rights under our construction contracts,
which are pledged to our bond surety. The Credit Facility requires the payment
of a quarterly commitment fee of 0.25% per annum of the unused portion of the
Credit Facility. Borrowings under the Credit Facility were used to finance the
RHB acquisition, repay indebtedness outstanding under the Revolver, and finance
working capital. At December 31, 2009, the aggregate borrowings outstanding
under the Credit Facility were $40.0 million, and the aggregate amount of
letters of credit outstanding under the Credit Facility was $1.8 million,
which reduces availability under the Credit Facility. Availability
under the Credit Facility was, therefore, $33.2 million at December 31, 2009
without violating any of the covenants discussed in the next
paragraph.
The
Credit Facility is subject to our compliance with certain covenants, including
financial covenants relating to fixed charges, leverage, tangible net worth,
asset coverage and consolidated net losses. The Credit Facility contains
restrictions on the Company’s ability to:
|
·
|
Make
distributions and dividends;
|
|
·
|
Incur
liens and encumbrances;
|
|
·
|
Incur
further indebtedness;
|
|
·
|
Guarantee
obligations;
|
|
·
|
Dispose
of a material portion of assets or merge with a third
party;
|
|
·
|
Make
acquisitions;
|
|
·
|
Incur
losses for two consecutive
quarters;
|
|
·
|
Make
investments in securities
|
The
Company was in compliance with all covenants under the Credit Facility as of
December 31, 2009.
The
unpaid principal balance of each prime-based loan will bear interest at a
variable rate equal to Comerica’s prime rate plus an amount ranging from 0% to
0.50% depending on the pricing leverage ratio that we achieve. If we achieve a
pricing leverage ratio of (a) less than 1.00 to 1.00; (b) equal to or
greater than 1.00 to 1.00 but less than 1.75 to 1.00; or (c) greater than
or equal to 1.75 to 1.00, then the applicable prime margins will be 0.0%, 0.25%
or 0.50%, respectively. The interest rate on funds borrowed under
this revolver during the year ended December 31, 2009 was 3.25% at all times
that the Company had debt outstanding under this facility.
At our
election, the loans under the new Credit Facility bear interest at either a
LIBOR-based interest rate or a prime-based interest rate. The prime
based interest rate option plus the applicable prime based margin can be no less
than the Daily Adjusting Libor plus 1.00%, or Federal Funds Rate plus
1.00%. The unpaid principal balance of each LIBOR-based loan bears
interest at a variable rate equal to LIBOR plus an amount ranging from 1.25% to
2.25% depending on the pricing leverage ratio that we achieve. The “pricing
leverage ratio” is determined by the ratio of our average total debt, less cash
and cash equivalents, to earnings before interest, taxes, depreciation and
amortization ("EBITDA") that we achieve on a rolling four-quarter basis. The
pricing leverage ratio is measured quarterly. If we achieve a pricing leverage
ratio of (a) less than 1.00 to 1.00; (b) equal to or greater than 1.00
to 1.00 but less than 1.75 to 1.00; or (c) greater than or equal to 1.75 to
1.00, then the applicable LIBOR margins will be 1.25%, 1.75% or 2.25%,
respectively then the applicable prime based margins will be 0.00%, 0.25% and
0.50%, respectively. Interest on LIBOR-based loans is payable at the end of the
relevant LIBOR interest period, which must be one, two, three or six
months.
In
December 2007, Comerica syndicated the Credit Facility with three other
financial institutions under the same terms discussed above.
Management
believes that the Credit Facility will provide adequate funding for the
Company’s working capital, debt service and capital expenditure requirements,
including seasonal fluctuations at least through December 31, 2010.
Mortgage:
In 2001
TSC completed the construction of a headquarters building and financed it
principally through a mortgage of $1.1 million on the land and facilities, at a
floating interest rate, which at December 31, 2009 was 3.5% per annum, repayable
over 15 years. The outstanding balance on this mortgage was $482,000 at December
31, 2009.
Maturity
of Debt:
The
Company's long-term obligations mature in future years as follows (in
thousands):
|
Fiscal
Year
|
||||
|
2010
|
$ | 73 | ||
|
2011
|
73 | |||
|
2012
|
40,073 | |||
|
2013
|
73 | |||
|
2014
|
73 | |||
|
Thereafter
|
117 | |||
| $ | 40,482 | |||
4. Financial
Instruments
The fair
value of financial instruments is the amount at which the instrument could be
exchanged in a current transaction between willing parties.
The
Company’s financial instruments are cash and cash equivalents, short-term
investments, contracts receivable, accounts payable, mortgages payable and
long-term debt. The recorded values of cash and cash equivalents,
short-term investments, contracts receivable and accounts payable approximate
their fair values based on their short-term nature. The recorded
value of long-term debt approximates its fair value, as interest approximates
market rates.
TSC had
one mortgage outstanding at December 31, 2009 and 2008. This mortgage
was accruing interest at 3.50% and 3.50% at those dates, respectively and
contained pre-payment penalties. To determine the fair value of the mortgage,
the amount of future cash flows was discounted using the Company’s borrowing
rate on its Credit Facility. At December 31, 2009 and 2008 the
carrying value of the mortgages was $482,000 and $556,000, respectively, and the
fair value of the mortgage was approximately $431,000 and $488,000,
respectively.
The
Company does not have any off-balance sheet financial instruments.
5. Income
Taxes and Deferred Tax Asset/Liability
The
Company and its subsidiaries file income tax returns in the United States
federal jurisdiction and in various states. With few exceptions, the Company is
no longer subject to federal and state tax examinations for years prior to 2006.
The Company’s policy is to recognize interest related to any underpayment of
taxes as interest expense, and penalties as administrative expenses. No interest
or penalties have been accrued at December 31, 2009.
Current
income tax expense represents federal tax, Texas state franchise tax and the
Utah state income tax for 2009.
Deferred
tax assets and liabilities consist of the following (in thousands):
|
|
December 31, 2009
|
December 31, 2008
|
||||||||||||||
|
|
Current
|
Long
Term
|
Current
|
Long
Term
|
||||||||||||
|
Assets
related to:
|
||||||||||||||||
|
Accrued
compensation
|
$ | -- | $ | -- | $ | 1,169 | $ | -- | ||||||||
|
AMT carry
forward
|
-- | -- | -- | 1,770 | ||||||||||||
|
Other
|
127 | -- | 34 | 128 | ||||||||||||
|
Liabilities
related to:
|
||||||||||||||||
|
Amortization of
goodwill
|
-- | (2,361 | ) | -- | (1,209 | ) | ||||||||||
|
Depreciation of property and
equipment
|
-- | (13,163 | ) | -- | (11,806 | ) | ||||||||||
|
Other
|
-- | 155 | -- | -- | ||||||||||||
|
Net
asset/liability
|
$ | 127 | $ | (15,369 | ) | $ | 1,203 | $ | (11,117 | ) | ||||||
The
income tax provision differs from the amount using the statutory federal income
tax rate of 35% for the following reasons (in thousands):
|
Fiscal
Year Ended
|
||||||||||||||||||||||||
|
December
31, 2009
|
%
|
December
31, 2008
|
%
|
December
31, 2007
|
%
|
|||||||||||||||||||
|
Tax
expense at the U.S. federal statutory rate
|
$ | 13,228 | 35.0 | % | $ | 10,149 | 35.0 | % | $ | 7,838 | 35.0 | % | ||||||||||||
|
State
franchise and income tax expense, net of refunds and Federal
benefits
|
233 | 0.6 | 195 | 0.7 | 106 | 0.5 | ||||||||||||||||||
|
Taxes
on subsidiary's earnings allocated to non-controlling
interests
|
(638 | ) | (1.7 | ) | (319 | ) | (1.1 | ) | -- | -- | ||||||||||||||
|
Tax
benefits of Domestic Production Activities Deduction
|
(563 | ) | (1.5 | ) | -- | -- | -- | -- | ||||||||||||||||
|
Non-taxable
interest income
|
(23 | ) | -- | (35 | ) | -- | (295 | ) | (1.3 | ) | ||||||||||||||
|
Other
permanent differences
|
30 | 0.1 | 35 | -- | 241 | 1.0 | ||||||||||||||||||
|
Income
tax expense
|
$ | 12,267 | 32.5 | % | $ | 10,025 | 34.6 | % | $ | 7,890 | 35.2 | % | ||||||||||||
Our
deferred tax assets related to prior year NOL's for financial statement purposes
were fully utilized during 2007. In addition to the utilization of
these NOL's, we had available carry-forwards resulting from the exercise of
non-qualified stock options. The Company could not recognize the tax
benefit of these carry-forwards as deferred tax assets until its existing NOL's
were fully utilized, and therefore, the deferred tax asset related to NOL
carry-forwards differed from the amount available on its federal tax
returns. The Company utilized approximately $3.5 million and $4.2
million of these excess compensation carry-forwards from the exercise of stock
options to offset taxable income in 2008 and 2007, respectively. The
utilization of these excess compensation benefits for tax purposes reduced taxes
payable and increased additional paid-in capital for financial statement
purposes by $1.2 million and $1.5 million in 2008 and 2007,
respectively.
As a
result of the Company’s detailed analysis, management has determined that the
Company does not have any material uncertain tax positions.
6. Costs
and Estimated Earnings and Billings on Uncompleted Contracts
Billing
practices for our contracts are governed by the contract terms of each project
based on progress towards completion approved by the owner, achievement of
milestones or pre-agreed schedules. Billings do not necessarily correlate with
revenue recognized under the percentage-of-completion method of accounting. The
current liability, “Billings in excess of costs and estimated earnings on
uncompleted contracts" represents billings in excess of revenues recognized. The
current asset, “Costs and estimated earnings in excess of billings on
uncompleted contracts, represents revenues recognized in excess of amounts
billed to the customer, which are usually billed during normal billing processes
following achievement of contractual requirements.
The two
tables below set forth the costs incurred and earnings accrued on uncompleted
contracts (revenues) versus the billings on those contracts through December 31,
2009 and 2008 and reconciles the net excess billings to the amounts included in
the consolidated balance sheets at those dates.
|
Fiscal
Year Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Costs
incurred and estimated earnings on uncompleted contracts
|
$ | 705,566 | $ | 584,997 | ||||
|
Billings
on uncompleted contracts
|
(730,725 | ) | (600,616 | ) | ||||
|
Excess
of billings over costs incurred and
estimated
earnings on uncompleted contracts
|
$ | (25,159 | ) | $ | (15,619 | ) | ||
Included
in accompanying balance sheets under the following captions:
|
Fiscal
Year Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
$ | 5,973 | $ | 7,508 | ||||
|
Billings
in excess of costs and estimated earnings
on
uncompleted contracts
|
(31,132 | ) | (23,127 | ) | ||||
| $ | (25,159 | ) | $ | (15,619 | ) | |||
Revenues recognized and billings on
uncompleted contracts include cumulative amounts recognized as revenues and
billings in prior years and, for 2009, amounts recognized and billed by RLW
prior to its acquisition by Sterling.
7. Stock
Options and Warrants
Stock
Options and Grants:
In July
2001, the Board of Directors adopted and in October 2001 shareholders approved
the 2001 Stock Incentive Plan (the “2001 Plan”). The 2001 Plan provides for the
issuance of stock awards for up to 1,000,000 shares of the Company's common
stock. The plan is administered by the Compensation Committee of the
Board of Directors. In general, the plan provides for all grants to be issued
with a per-share exercise price equal to the fair market value of a share of
common stock on the date of grant. The original terms of the grants typically do
not exceed 10 years. Stock options generally vest over a three to five year
period.
The
Company's and its subsidiaries' directors, officers, employees, consultants and
advisors are eligible to be granted awards under the 2001 plan.
At
December 31, 2009 there were 371,344 shares of common stock available under the
2001 Plan for issuance pursuant to future stock option and share
grants. No options are outstanding and no shares are or will be
available for grant under the Company’s other option plans, all of which have
been terminated
The 2001
plan provides for restricted stock grants and in May 2009 and 2008 pursuant to
non employee director compensation arrangements, non-employee directors of the
Company were awarded restricted stock with one-year vesting as
follows:
|
2009 Awards
|
2008 Awards
|
|||||||
|
Shares
awarded to each non-employee director
|
2,800 | 2,564 | ||||||
|
Total
shares awarded
|
19,600 | 17,948 | ||||||
|
Grant-date
market price per share
|
$ | 17.86 | $ | 19.50 | ||||
|
Total
compensation cost
|
$ | 350,000 | $ | 350,000 | ||||
|
Compensation
cost recognized in 2009 and 2008
|
$ | 233,000 | $ | 129,000 | ||||
In March
2009 and 2008, several key employees were granted an aggregated total of 8,366
and 5,672 shares of restricted stock with a market value $17.45 and $18.16 per
share, respectively, resulting in compensation expense of $146,000 and $103,000
to be recognized ratably over the five-year restriction period.
The
following tables summarize the stock option activity under the 2001 Plan and
previously active plans:
|
|
2001 Plan
|
1994 Non-Employee
Director Plan
|
1991 Plan
|
|||||||||||||||||||||
|
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
||||||||||||||||||
|
Outstanding
at December 31, 2006:
|
470,203 | $ | 8.35 | 13,166 | $ | 0.94 | 28,424 | $ | 2.75 | |||||||||||||||
|
Granted
|
16,507 | $ | 19.43 | -- | -- | $ | -- | |||||||||||||||||
|
Exercised
|
(24,110 | ) | $ | 3.39 | (3,000 | ) | $ | 1.00 | (28,424 | ) | $ | 2.75 | ||||||||||||
|
Expired/forfeited
|
(5,460 | ) | $ | 13.48 | -- | -- | $ | -- | ||||||||||||||||
|
Outstanding
at December 31, 2007:
|
457,140 | $ | 9.06 | 10,166 | $ | 0.93 | -- | $ | -- | |||||||||||||||
|
Exercised
|
(45,940 | ) | $ | 2.81 | (10,166 | ) | $ | 0.93 | ||||||||||||||||
|
Expired/forfeited
|
(200 | ) | $ | 25.21 | -- | |||||||||||||||||||
|
Outstanding
at December 31, 2008:
|
411,000 | $ | 9.75 | -- | -- | |||||||||||||||||||
|
Exercised
|
(89,640 | ) | $ | 3.10 | ||||||||||||||||||||
|
Expired/forfeited
|
(1,620 | ) | $ | 2.65 | ||||||||||||||||||||
|
Outstanding
at December 31, 2009:
|
319,740 | $ | 11.65 | |||||||||||||||||||||
|
|
1994 Omnibus Plan
|
1998 Plan
|
||||||||||||||
|
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
||||||||||||
|
Outstanding
at December 31, 2006:
|
258,180 | $ | 1.60 | 3,250 | $ | 1.00 | ||||||||||
|
Exercised
|
(181,990 | ) | $ | 1.91 | (3,250 | ) | $ | 1.00 | ||||||||
|
Outstanding
at December 31, 2007:
|
76,190 | $ | 0.88 | -- | -- | |||||||||||
|
Exercised
|
(76,190 | ) | $ | 0.88 | ||||||||||||
|
Outstanding
at December 31, 2008:
|
-- | -- | ||||||||||||||
The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2009:
|
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||||
|
Weighted
Average
|
Weighted
Average
|
Weighted
Average
|
||||||||||||||||||||
|
Range
of Exercise Price Per Share
|
Number
of Shares
|
Remaining
Contractual Life (years)
|
Exercise
Price Per Share
|
Number
of Shares
|
Exercise
Price Per Share
|
|||||||||||||||||
| $ | 0.94 - $1.50 | 28,100 | 1.56 | $ | 1.50 | 28,100 | $ | 1.50 | ||||||||||||||
| $ | 1.73 - $2.00 | 21,100 | 2.56 | $ | 1.73 | 21,100 | $ | 1.73 | ||||||||||||||
| $ | 2.75 - $3.38 | 76,353 | 4.22 | $ | 3.08 | 76,353 | $ | 3.09 | ||||||||||||||
| $ | 6.87 | 10,000 | 5.38 | $ | 6.87 | 10,000 | $ | 6.87 | ||||||||||||||
| $ | 9.69 | 62,800 | 0.54 | $ | 9.69 | 62,800 | $ | 9.69 | ||||||||||||||
| $ | 16.78 | 25,380 | 0.70 | $ | 16.78 | 20,180 | $ | 16.78 | ||||||||||||||
| $ | 18.99 | 13,707 | 7.60 | $ | 18.99 | 9,138 | $ | 18.99 | ||||||||||||||
| $ | 21.60 | 2,800 | 2.55 | $ | 21.60 | 2,800 | $ | 21.60 | ||||||||||||||
| $ | 24.96 | 62,800 | 1.54 | $ | 24.96 | 62,800 | $ | 24.96 | ||||||||||||||
| $ | 25.21 | 16,700 | 1.68 | $ | 25.21 | 10,180 | $ | 25.21 | ||||||||||||||
| 319,740 | 2.38 | $ | 11.65 | 303,451 | $ | 9.15 | ||||||||||||||||
|
Number of Shares
|
Aggregate intrinsic value
|
|||||||
|
Total
outstanding in-the-money options at 12/31/09
|
237,440 | $ | 2,867,498 | |||||
|
Total
vested in-the-money options at 12/31/09
|
227,671 | $ | 2,854,541 | |||||
|
Total
options exercised during 2009
|
89,640 | $ | 1,236,216 | |||||
For
unexercised options, aggregate intrinsic value represents the total pretax
intrinsic value (the difference between the Company’s closing stock price on
December 31, 2009 and the exercise price, multiplied by the number of
in-the-money option shares) that would have been received by the option holders
had all option holders exercised their options and sold them on December 31,
2009. For options exercised during 2009, aggregate intrinsic value
represents the total pretax intrinsic value based on the Company’s closing stock
price on the day of exercise.
Compensation
expense for options granted during 2007 was calculated using the Black-Scholes
option pricing model using the following assumptions in each year (no options
were granted during 2008 or 2009):
|
|
Fiscal 2007
|
|||
|
Average
Risk free interest rate
|
4.7 | % | ||
|
Average
Expected volatility
|
70.7 | % | ||
|
Average
Expected life of option
|
3.0 years
|
|||
|
Expected
dividends
|
None
|
|||
The
risk-free interest rate is based upon interest rates that match the contractual
terms of the stock option grants. The expected volatility is based on
historical observation and recent price fluctuations. The expected
life is based on evaluations of historical and expected future employee exercise
behavior, which is not less than the vesting period of the
options. The Company does not currently pay dividends. The
weighted average fair value of stock options granted in 2007 was
$12.20.
Pre-tax
deferred compensation expense for stock options and restricted stock grants was
$405,000 ($263,000 after tax benefit of 35.0%), $517,000 ($336,000 after tax
benefit of 35.0%), and $1,110,000 ($722,000 after tax benefit of 35.0%), in
2009, 2008 and 2007, respectively. Proceeds received by the Company
from the exercise of options in 2009, 2008 and 2007 were $277,000, $205,000 and
$513,000, respectively. At December 31, 2009, total unrecognized
stock-based compensation expense related to unvested stock options was
approximately $155,000, which is expected to be recognized over a weighted
average period of approximately 1.2 years.
Warrants:
Warrants
attached to zero coupon notes were issued to certain members of TSC management
and to certain stockholders in 2001. These ten-year warrants to purchase shares
of the Company's common stock at $1.50 per share became exercisable 54 months
from the July 2001 issue date, except that one warrant covering 322,661 shares
by amendment became exercisable forty-two months from the issue
date. The following table shows the warrant shares outstanding and
the proceeds that have been received by the Company from exercises during the
three years ended December 31, 2009.
|
Shares
|
Company’s
Proceeds of Exercise
|
Year-End
Warrant Share Balance
|
||||||||||
|
Warrants
outstanding on January 1, 2007
|
-- | -- | 356,266 | |||||||||
|
Warrants
exercised in 2007
|
-- | -- | 356,266 | |||||||||
|
Warrants
exercised in 2008
|
22,220 | $ | 33,330 | 334,046 | ||||||||
|
Warrants
exercised in 2009
|
19,634 | $ | 29,451 | 314,412 | ||||||||
8. Employee
Benefit Plan
The
Company and its subsidiaries maintain a defined contribution profit-sharing plan
(401(k))covering substantially all non-union persons employed by the Company and
its subsidiaries, whereby employees may contribute a percentage of compensation,
limited to maximum allowed amounts under the Internal Revenue Code. The Plan
provides for discretionary employer contributions, the level of which, if any,
may vary by subsidiary and is determined annually by each company's board of
directors. The Company made aggregate matching contributions of $341,000,
$322,000 and $353,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
9. Operating
Leases
The
Company leases office space in Texas, Utah and Nevada.
In 2006
and 2007, the Company entered into several long-term operating leases for
equipment with lease terms of approximately three to five
years. Certain of these leases allow the Company to purchase the
equipment on or before the end of the lease term. If the Company does
not purchase the equipment, it is returned to the lessor. Two leases
obligate the Company to pay a guaranteed residual not to exceed 35% of the
original equipment cost. The Company is accruing the liability for
both leases, which is not expected to exceed $190,000 in the
aggregate.
Minimum
annual rentals for all operating leases having initial non-cancelable lease
terms in excess of one year are as follows (in thousands):
|
Fiscal Year
|
|
|||
|
2010
|
$ | 1,087 | ||
|
2011
|
958 | |||
|
2012
|
463 | |||
|
2013
|
424 | |||
|
2014
|
436 | |||
|
Thereafter
|
3,665 | |||
|
Total
future minimum rental payments
|
$ | 7,033 | ||
Total
rent expense for all operating leases amounted to approximately $765,000,
$767,000 and $1,068,000 in fiscal years 2009, 2008 and 2007,
respectively.
10. Customers
The
following table shows contract revenues generated from the Company’s customers
that accounted for more than 10% of revenues (dollars in
thousands):
|
December 31,
2009
|
December 31,
2008
|
December 31,
2007
|
||||||||||||||||||||||
|
|
Contract
Revenues
|
%
of
Revenues
|
Contract
Revenues
|
% of
Revenues
|
Contract
Revenues
|
% of
Revenues
|
||||||||||||||||||
|
Texas
Department of
Transportation
("TXDOT")
|
$ | 81,599 | 20.9 | % | $ | 162,041 | 39.2 | % | $ | 201,073 | 65.7 | % | ||||||||||||
|
Nevada
Department of Transportation ("NDOT")
|
92,137 | 23.6 | % | 88,159 | 21.3 | % | * | * | ||||||||||||||||
|
North
Texas Tollroad Authority ("NTTA")
|
52,183 | 13.4 | % | * | * | * | * | |||||||||||||||||
*
represents less than 10% of revenues
At
December 31, 2009, TXDOT ($15.7 million) and UDOT ($15.3 million) each owed
balances greater than 10% of contracts receivable.
11. Equity
Offerings
In
December 2007, the Company completed a public offering of 1.84 million shares of
its common stock at $20.00 per share. The Company received proceeds, net of
underwriting discounts, commissions and offering expenses of approximately $34.5
million. From the proceeds of the offering, the Company repaid the
portion of its Credit Facility that was used in its acquisition of its interest
in RHB. The remainder of the offering proceeds was used for working capital
purposes.
In
December 2009, the Company completed a public offering of 2.76 million shares of
its common stock at $18.00 per share. The Company received proceeds
of $46.8 million, net of underwriting discounts, commissions and direct offering
expenses. The Company used the proceeds to replenish, for the most
part, its cash and short-term investments used to acquire its interest in
RLW.
12. Acquisition
and non-controlling interests
Ralph
L. Wadsworth Construction Company, LLC (“RLW”)
On
December 3, 2009, we completed the acquisition of privately-owned RLW, a
Utah limited liability company which is headquartered in Draper, Utah, near Salt
Lake City. RLW is a heavy civil construction business focused on the
construction of bridges and other structures, roads and highways, and light and
commuter rail projects, primarily in Utah, with licenses to do business in
surrounding states. We paid approximately $63.9 million to acquire 80% of
the equity interests in RLW.
RLW’s
largest customer is UDOT, which is responsible for planning, constructing,
operating and maintaining the 6,000 miles of highway and over 1,700 bridges
that make up the Utah state highway system. RLW strives to provide efficient,
timely and profitable execution of construction projects, with a particular
emphasis on structures and innovative construction methods. RLW has significant
experience in obtaining and profitably executing “design-build” and “CM/GC”
(construction manager/general contractor) projects. We believe that
design-build, CM/GC and other alternative project delivery methods are
increasingly being used by public sector customers as alternatives to the
traditional fixed unit price low bid process. Since its founding in 1975, RLW
has experienced profitable growth, capitalizing on high-quality execution of
projects and strong customer relationships.
A portion
($4.5 million) of the cash purchase price was placed in escrow for eighteen
months as security for any breach of representations and warranties made by the
sellers. The cash portion of the purchase price was funded from the Company’s
available cash and short-term investments.
The
non-controlling interest owners of RLW, who are related and also its executive
management, have the right to require the Company to buy their remaining 20.0%
interest in RLW ("the Put") and, concurrently, the Company has the right to
require those owners to sell their 20.0% interest to the Company ("the Call"),
in 2013. The purchase price in each case is 20% of the product of the simple
average of RLW’s EBITDA (income before interest, taxes, depreciation and
amortization) for the calendar years 2010, 2011 and 2012 times a multiple of a
minimum of 4 and a maximum of 4.5. The non-controlling interests,
including the Put, were recorded at their estimated fair value at the date of
acquisition as "Non-controlling interests in subsidiary” in the accompanying
consolidated balance sheet.
Annual interest will be accredited
for the Put of the non-controlling interests based on the Company’s borrowing
rate under its Credit Facility plus two percent. Any other changes to the
estimated fair value of the Put will be reported as income or expense in the
consolidated statement of income.
The
purchase agreement restricts the sellers from competing against the business of
the Company and its subsidiaries and from soliciting their employees for a
period of four years after the closing of the purchase.
The
following table summarizes the initial allocation of the purchase price for RLW
(in thousands):
|
Assets
acquired and liabilities assumed -
|
||||
|
Current assets, including cash
of $3,370
|
$ | 43,053 | ||
|
Current
liabilities
|
(31,953 | ) | ||
|
Working capital
acquired
|
11,100 | |||
|
Property and
equipment
|
11,212 | |||
|
Total
tangible net assets acquired at fair value
|
22,312 | |||
|
Goodwill
|
57,513 | |||
|
Total
consideration
|
79,825 | |||
|
Fair
value of non-controlling owners' interest in RLW, including
Put
|
(15,965 | ) | ||
|
Cash
paid
|
$ | 63,860 | ||
The
consideration effectively transferred and goodwill have been reduced by $0.8
million from that initially reported for certain items under the terms of the
purchase agreement. The purchase price allocation has not been
finalized due to the short time period between the acquisition date and the date
of the financial statements. A preliminary analysis of the assets acquired
indicates that there are no separately identifiable intangible assets. The
nature and amount of any other material adjustments ultimately made to the
initial allocation of the purchase price will be disclosed when determined. The
goodwill is deductible for tax purposes over 15 years.
The
operations of RLW are included in the accompanying consolidated statements of
operations and cash flows for the month of December 2009. Supplemental
information on an unaudited pro forma combined basis, as if the RLW acquisition
had been consummated at the beginning of 2008, is as follow (in thousands,
except per share amounts):
|
2009
(unaudited)
|
2008
(unaudited)
|
|||||||
|
Revenues
|
$ | 546,747 | $ | 541,196 | ||||
|
Net
income attributable to Sterling common stockholders
|
$ | 43,475 | $ | 28,054 | ||||
|
Diluted
net income per share attributable to Sterling common
stockholders
|
$ | 3.14 | $ | 2.05 | ||||
For the
eleven months ended November 30, 2009, RLW had unaudited revenues of
approximately $155.9 million and unaudited income before taxes of
approximately $37.9 million. The profitability of RLW for the eleven month
period was higher than what is expected to continue due to some unusually high
margin contracts and may not be indicative of future results of operations. We
purchased RLW based on an assumed sustainable trailing twelve month EBITDA
(earnings before interest, tax, depreciation and amortization) of approximately
$15 million to $20 million with the expectation of further future
growth. At December 31, 2009, RLW had a backlog of approximately $303
million.
Road
and Highway Builders, LLC (“RHB”)
On
October 31, 2007, the Company purchased a 91.67% interest in RHB and all of
the outstanding capital stock of RHB Inc, then an inactive Nevada
corporation. These entities were affiliated through common ownership
and have been included in the Company's consolidated results since the date of
acquisition.
RHB is a
heavy civil construction business located in Reno and Las Vegas, Nevada that
builds roads, highways and bridges for local and state agencies in
Nevada. RHB also has a highway contract it is performing in Hawaii.
Its assets consisted of construction contracts, road and bridge construction and
aggregate mining machinery and equipment, and a parcel of land with
improvements. RHB Inc’s sole asset is its right as a co-lessee with RHB under a
long-term, royalty-based lease of a Nevada quarry and during 2008 it began
mining aggregates for use in RHB’s construction business and for sale to third
parties.
The
Company paid an aggregate purchase price for its interest in RHB of
$53.0 million, consisting of $48.9 million in cash, 40,702 unregistered
shares of the Company’s common stock, which were valued at $1.0 million based on
the quoted market value of the Company’s stock on the purchase date, and $3.1
million in assumption of accounts payable to RHB by one of the
sellers. Additionally, the Company incurred $1.1 million of direct
costs related to the acquisition.
The
following table summarizes the allocation of the purchase price, including
related direct acquisition costs for RHB (in thousands):
|
Tangible
assets acquired at estimated fair value, including approximately $10,000
of property, plant and equipment
|
$ | 19,334 | ||
|
Current
liabilities assumed
|
(9,686 | ) | ||
|
Goodwill
|
44,496 | |||
|
Total
|
$ | 54,144 |
Ten
percent of the cash purchase price was placed in escrow for eighteen months as
security for any breach of representations and warranties made by the sellers.
The escrow was released in full during 2009.
The
non-controlling interest owner of RHB has the right to put, or require the
Company to buy, his remaining 8.33% interest in the subsidiary and,
concurrently, the Company has the right to require that the owner sell his 8.33%
interest to the Company, beginning in 2011. The purchase price in
each case is 8.33% of the product of six times the simple average of the
subsidiary's EBITDA (income before interest, taxes, depreciation and
amortization) for the calendar years 2008, 2009 and 2010.
At the
date of acquisition, the difference between the non-controlling owner's interest
in the historical basis of the subsidiary and the estimated fair value of that
interest, including the Put, was recorded as Non-controlling owner's interest in
subsidiary and a reduction in additional paid-in-capital as required by GAAP
then in effect. Annual interest expense ($206,000 and $199,000 for the years
ended December 31, 2009 and 2008, respectively) has been accreted on
the Put and included in the non-controlling interest in the balance sheet based
on the discount rate used to calculate the fair value. Any other changes to the
estimated fair value of the Put related to this non-controlling interest will be
recorded as a corresponding change in additional paid-in-capital as this
acquisition was made prior to a change in accounting for non-controlling
interests, which became effective January 1, 2009.
Based on
RHB's operating results for 2008 and management's estimates of such results for
2009 and 2010, the Company revised its estimate of the fair value of the
non-controlling interest at December 31, 2008 and recorded a reduction in the
related liability and increased paid-in-capital by $607,000 at that
date. Management determined that no revision to such fair value was
required at December 31, 2009
The
purchase agreement restricts the sellers from competing against the business of
RHB and from soliciting its employees for a period of four years after the
closing of the purchase.
Changes
in non-controlling interests
The
following table summarizes the changes in the non-controlling owners' interests
in subsidiaries for the years ended December 31, 2009 and 2008 (in
thousands):
|
2009
|
2008
|
|||||||
|
Balance,
beginning of period
|
$ | 6,300 | $ | 6,362 | ||||
|
Fair
value of non-controlling interest, including Put, related to purchase of
RLW
|
15,965 | -- | ||||||
|
Non-controlling
owners' interest in earnings of subsidiaries
|
1,824 | 908 | ||||||
|
Accretion
of interest on Put
|
206 | 199 | ||||||
|
Change
in fair value of Put
|
-- | (607 | ) | |||||
|
Distributions
to non-controlling interest owner
|
(408 | ) | (562 | ) | ||||
|
Balance,
end of period
|
$ | 23,887 | $ | 6,300 | ||||
13. Commitments
and Contingencies
Employment
Agreements:
Certain
officers of the Company, the Chief Executive, Operating and Financial Officers,
and officers of its subsidiaries have employment agreements which run through
December 31, 2010, and provide for payments of annual salary, deferred salary,
incentive bonuses and certain benefits if their employment is terminated without
cause.
Self-Insurance:
The
Company is self-insured for employee health claims. Its policy is to accrue the
estimated liability for known claims and for estimated claims that have been
incurred but not reported as of each reporting date. The Company has obtained
reinsurance coverage for the policy period as follows:
|
|
•
Specific excess reinsurance coverage for medical and prescription drug
claims per insured person in excess of $60,000 within a plan year with a
maximum lifetime reimbursement of
$2,000,000.
|
|
|
•
Aggregate reinsurance coverage for medical and prescription drug claims
within a plan year with a maximum of $1.0 million in excess of an
aggregate deductible of $2.0
million.
|
For the
twelve months ended December 31, 2009, 2008 and 2007, the Company incurred $2.1
million, $1.5 million and $1.6 million, respectively, in expenses related to
this plan.
The
Company and its subsidiaries, other than RLW, are also self-insured for workers’
compensation claims up to $250,000 per occurrence, with a maximum aggregate
liability of $2.7 million per year. The Company's policy is to accrue
the estimated liability for known claims and for estimated claims that have been
incurred but not reported as of each reporting date. At December 31,
2009 and 2008, the Company had recorded an estimated liability of $1,174,000 and
1,092,000, respectively, which it believes is adequate for such claims based on
its claims history and an actuarial study. The Company has a safety
and training program in place to help prevent accidents and injuries and works
closely with its employees and the insurance company to monitor all claims. RLW
has purchased insurance to cover its workers' compensation losses.
The
Company obtains bonding on construction contracts through Travelers Casualty and
Surety Company of America. As is customary in the construction
industry, the Company indemnifies Travelers for any losses incurred by it in
connection with bonds that are issued. The Company has granted
Travelers a security interest in accounts receivable and contract rights for
that obligation.
Guarantees:
The
Company typically indemnifies contract owners for claims arising during the
construction process and carries insurance coverage for such claims, which in
the past have not been material.
The
Company’s Certificate of Incorporation provides for indemnification of its
officers and directors. The Company has a Director and Officer
insurance policy that limits its exposure. At December 31, 2009, the
likelihood of incurring a payment obligation in connection with this guarantee
is believed to be remote.
Litigation:
In
January 2010, a jury trial was held to resolve a dispute between a subsidiary of
the Company and a subcontractor. The jury rendered a verdict of $1.0
million against the subsidiary, exclusive of interest, court costs and
attorney's fees. While the Company has recorded this verdict as an expense in
the accompanying consolidated financial statements, the Company intends to
appeal this judgment as it believes, as a matter of law, that the jury erred in
its decision.
The
Company is the subject of certain other claims and lawsuits occurring in the
normal course of business. Management, after consultation with legal counsel,
does not believe that the outcome of these other actions will have a material
impact on the financial statements of the Company.
Purchase
Commitments:
To manage
the risk of changes in material prices and subcontracting costs used in
tendering bids for construction contracts, most of the time, we obtain firm
quotations from suppliers and subcontractors before submitting a
bid. These quotations do not include any quantity
guarantees. As soon as we are advised that our bid is the lowest, we
enter into firm contracts with most of our materials suppliers and
sub-contractors, thereby mitigating the risk of future price variations
affecting the contract costs.
14. Related
Party Transactions
RLW has
historically performed construction contracts for its non-controlling interest
owners (who are also executive managers of RLW, including Mr. Kip Wadsworth who
is also a member of the board of directors of the Company). Such
non-controlling interest owners are 18% owners of a privately-held renewable
energy development company with which RLW has the first right to perform
construction-management services for an estimated contract of between $5 million
and $10 million. The project, which will take approximately six to
twelve months to complete, consists of the erection of 58 solar towers in
California.
The
non-controlling interest owners are also 100% owners of a Company with which RLW
has a service agreement to provide monthly professional and other (accounting,
payroll, reimbursement, computer and postage) services for approximately $40,000
per month. The Company leases its main office for its Utah operations
from a second company which is 100% owned by these owners for $215,040 annually
plus common area maintenance charges of approximately $80,000 per
year. The office lease expires in 2022. Also, the Company
leases its equipment maintenance shop for its Utah operations from a third
company, which is also 100% owned by those owners for $169,740
annually. The shop lease expires in 2022. Management has
reviewed each of these transactions and believes the prices being charged to or
by RLW are competitive with what third parties would charge or pay.
During
2009, one of the Company's subsidiaries started purchasing materials for
specific contracts of that subsidiary from a company owned by a member of
management of that subsidiary. The purchases amount to approximately
$9.3 million in 2009. In addition, a deposit of $1.6 million had been
made at December 31, 2009, for delivery of such material in 2010. A
member of senior management of the Company reviews all such purchases before
they are transacted.
In July
2001, Robert Frickel was elected to the Board of Directors. He is President of
R.W. Frickel Company, P.C., an accounting firm that performs certain tax
services for the Company. Fees paid or accrued to R.W. Frickel Company for 2009,
2008 and 2007 were $42,000, $39,700 and $63,600, respectively.
In July
2005, Patrick T. Manning, the Company's Chief Executive Officer, married the
sole beneficial owner of two companies, both of which were women-owned business
enterprises and provided materials and services to the Company and to other
contractors. In 2008 and 2007, the Company paid approximately $0.4
million and $1.7 million, respectively, to these companies for materials and
services. In late 2008, the Company stopped making purchases from
these companies.
15. Capital
Structure
Holders
of common stock are entitled to one vote for each share on all matters voted
upon by the stockholders, including the election of directors, and do not have
cumulative voting rights. Subject to the rights of holders of any
then outstanding shares of preferred stock, common stockholders are entitled to
receive ratably any dividends that may be declared by the Board of Directors out
of funds legally available for that purpose. Holders of common stock
are entitled to share ratably in net assets upon any dissolution or liquidation
after payment of provision for all liabilities and any preferential liquidation
rights of our preferred stock then outstanding. Common stock shares
are not subject to any redemption provisions and are not convertible into any
other shares of capital stock. The rights, preferences and privileges
of holders of common stock are subject to those of the holders of any shares of
preferred stock that may be issued in the future.
The Board
of Directors may authorize the issuance of one or more classes or series of
preferred stock without stockholder approval and may establish the voting
powers, designations, preferences and rights and restrictions of such
shares. No preferred shares have been issued.
16. Quarterly
Financial Information (Unaudited)
|
Fiscal 2009 Quarter Ended
(unaudited)
|
||||||||||||||||||||
|
|
March 31
|
June 30
|
September 30
|
December 31
|
Total
|
|||||||||||||||
|
(Dollar
amounts in thousands, except per share data)
|
||||||||||||||||||||
|
Revenues
|
$ | 94,866 | $ | 120,375 | $ | 103,929 | $ | 71,677 | $ | 390,847 | ||||||||||
|
Gross
profit
|
11,811 | 18,579 | 16,542 | 7,437 | 54,369 | |||||||||||||||
|
Income
before income taxes and non-controlling interest
|
8,785 | 14,791 | 13,041 | 1,178 | 37,795 | |||||||||||||||
|
Net
income attributable to Sterling common stockholders
|
$ | 5,565 | $ | 9,285 | $ | 8,092 | $ | 762 | $ | 23,704 | ||||||||||
|
Net
income attributable to Sterling common stockholders per share,
basic:
|
$ | 0.42 | $ | 0.70 | $ | 0.61 | $ | 0.04 | $ | 1.77 | ||||||||||
|
Net
income attributable to Sterling common stockholders per share,
diluted:
|
$ | 0.41 | $ | 0.68 | $ | 0.59 | $ | 0.03 | $ | 1.71 | ||||||||||
|
Fiscal 2008 Quarter Ended
(unaudited)
|
||||||||||||||||||||
|
March 31
|
June 30
|
September 30
|
December 31
|
Total
|
||||||||||||||||
|
(Dollar
amounts in thousands, except per share data)
|
||||||||||||||||||||
|
Revenues
|
$ | 84,926 | $ | 106,728 | $ | 114,148 | $ | 109,272 | $ | 415,074 | ||||||||||
|
Gross
profit
|
8,101 | 11,740 | 12,572 | 9,559 | 41,972 | |||||||||||||||
|
Income
before income taxes and non-controlling interest
|
4,800 | 8,278 | 9,591 | 6,330 | 28,999 | |||||||||||||||
|
Net
income attributable to Sterling common stockholders
|
$ | 3,117 | $ | 5,140 | $ | 5,978 | $ | 3,831 | $ | 18,066 | ||||||||||
|
Net
income attributable to Sterling common stockholders per share,
basic:
|
$ | 0.24 | $ | 0.39 | $ | 0.46 | $ | 0.29 | $ | 1.38 | ||||||||||
|
Net
income attributable to Sterling common stockholders per share,
diluted:
|
$ | 0.23 | $ | 0.37 | $ | 0.44 | $ | 0.28 | $ | 1.32 | ||||||||||
Exhibit
Index
|
Number
|
Exhibit
Title
|
|
2.1
|
Purchase
Agreement by and among Richard H. Buenting, Fisher Sand & Gravel Co.,
Thomas Fisher and Sterling Construction Company, Inc. dated as of
October 31, 2007 (incorporated by reference to Exhibit number 2.1 to
Sterling Construction Company, Inc.'s Current Report on Form 8-K,
Amendment No. 1 filed on November 21, 2007 (SEC File No.
1-31993)).
|
|
2.2
|
Purchase
Agreement, dated as of December 3, 2009, by and among Kip Wadsworth, Ty
Wadsworth, Con Wadsworth, Tod Wadsworth and Sterling Construction Company,
Inc. (incorporated by reference to Exhibit 2.1 to Sterling Construction
Company, Inc.'s Current Report on Form 8 K, filed on December 3, 2009 (SEC
File No. 1-31993))
|
|
3.1
|
Certificate
of Incorporation of Sterling Construction Company, Inc. (incorporated by
reference to Exhibit 3.0 to Sterling Construction Company, Inc.'s
Quarterly Report on Form 10-Q, filed on August 10, 2009 (SEC File No.
1-31993)).
|
|
3.2
|
Bylaws
of Sterling Construction Company, Inc. as amended through March 13, 2008
(incorporated by reference to Exhibit 3.1 to Sterling Construction
Company, Inc.'s Current Report on Form 8-K, filed on March 19, 2008 (SEC
File No. 333-129780)).
|
|
4.1
|
Form
of Common Stock Certificate of Sterling Construction Company, Inc.
(incorporated by reference to Exhibit 4.5 to its Form 8-A, filed on
January 11, 2006 (SEC File No. 01-31993)).
|
|
10.1#
|
Oakhurst
Company, Inc. 2001 Stock Incentive Plan (incorporated by reference to
Exhibit 10.6 to Sterling Construction Company, Inc.'s Registration
Statement on Form S-1, filed on November 17, 2005 (SEC File No.
333-129780)).
|
|
10.2#
|
Forms
of Stock Option Agreement under the Oakhurst Company, Inc. 2001 Stock
Incentive Plan (incorporated by reference to Exhibit 10.51 to Sterling
Construction Company, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2004, filed on March 29, 2005 (SEC File No.
001-31993)).
|
|
10.3#
|
Summary
of the Compensation Plan for Non Employee Directors of Sterling
Construction Company, Inc. (incorporated by reference to Exhibit 10.1 to
Sterling Construction Company, Inc.'s Quarterly Report on Form 10-Q, filed
on August 11, 2008 (SEC File No. 333-129780)).
|
|
10.4
|
Credit
Agreement by and among Sterling Construction Company, Inc., Texas Sterling
Construction Co., Oakhurst Management Corporation and Comerica Bank and
the other lenders from time to time party thereto, and Comerica Bank as
administrative agent for the lenders, dated as of October 31, 2007
(incorporated by reference to Exhibit 10.1 to Sterling Construction
Company, Inc.'s Current Report on Form 8-K, Amendment No. 1 filed on
November 21, 2007 (SEC File No. 1-31993)).
|
|
10.5
|
Security
Agreement by and among Sterling Construction Company, Inc., Texas Sterling
Construction Co., Oakhurst Management Corporation and Comerica Bank as
administrative agent for the lenders, dated as of October 31, 2007
(incorporated by reference to Exhibit 10.4 to Sterling Construction
Company, Inc.'s Quarterly Report on Form 10-Q, filed on November 9, 2009
(SEC File No. 01-31993)).
|
|
10.6
|
Joinder
Agreement by Road and Highway Builders, LLC and Road and Highway Builders
Inc, dated as of October 31, 2007 (incorporated by reference to Exhibit
10.3 to Sterling Construction Company, Inc.'s Current Report on Form 8-K,
Amendment No. 1 filed on November 21, 2007 (SEC File No.
1-31993)).
|
|
10.7#
|
Employment
Agreement dated as of July 19, 2007 between Sterling Construction Company,
Inc. and Patrick T. Manning (incorporated by reference to Exhibit 10.1 to
Sterling Construction Company, Inc.'s Current Report on Form 8-K filed on
January 17, 2008 (SEC File No. 1-31993))
|
|
10.8#
|
Employment
Agreement dated as of July 19, 2007 between Sterling Construction Company,
Inc. and Joseph P. Harper, Sr. (incorporated by reference to Exhibit 10.2
to Sterling Construction Company, Inc.'s Current Report on Form 8-K filed
on January 17, 2008 (SEC File No. 1-31993))
|
|
10.09#
|
Employment
Agreement dated as of July 16, 2007 between Sterling Construction Company,
Inc. and James H. Allen, Jr. (incorporated by reference to Exhibit 10.3 to
Sterling Construction Company, Inc.'s Current Report on Form 8-K filed on
January 17, 2008 (SEC File No. 1-31993))
|
|
10.10#
|
Option
Agreement dated August 7, 2007 between Sterling Construction Company, Inc.
and James H. Allen, Jr. (incorporated by reference to Exhibit 10.4 to
Sterling Construction Company, Inc.'s Current Report on Form 8-K filed on
January 17, 2008 (SEC File No. 1-31993))
|
|
10.11#*
|
Employment
Agreement dated as of March 17, 2006 between Sterling Construction
Company, Inc. and Roger M. Barzun.
|
|
10.12#*
|
Employment
Agreement dated as of December 3, 2009 between Ralph L. Wadsworth and Kip
L. Wadsworth.
|
|
21
|
Subsidiaries
of Sterling Construction Company, Inc.:
Name
State of Incorporation
Texas
Sterling Construction
Co. Delaware
Road
and Highway Builders,
LLC Nevada
Road
and Highway Builders
Inc. Nevada
Road
and Highway Builders of California,
Inc. California
Ralph
L. Wadsworth Construction Company,
LLC Utah
|
|
23.1*
|
Consent
of Grant Thornton LLP
|
|
31.1*
|
Certification
of Patrick T. Manning, Chief Executive Officer of Sterling Construction
Company, Inc.
|
|
31.2*
|
Certification
of James H. Allen, Jr., Chief Financial Officer of Sterling Construction
Company, Inc.
|
|
32.0*
|
Certification
pursuant to Section 1350 of Chapter 63 of Title 18 of the United States
Code (18 U.S.C. 1350) of Patrick T. Manning, Chief Executive Officer, and
James H. Allen, Jr., Chief Financial
Officer.
|
|
|
# Management
contract or compensatory plan or
arrangement.
|
* Filed
herewith.
72
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsPart IIItem 4. Reserved By The Securities and Exchange ComissionItem 5. Market For The Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities.Item 11. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 6. Selected Financial DataItem 6. Management S Discussion and Analysis Of Financial Condition and Results Of OperationItem 7. Financial Statements and Supplementary DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate Governance Of The RegistrantItem 10 Information Location in The Proxy StatementItem 10 InformationItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statements and Schedules