STERLING INFRASTRUCTURE, INC. - Quarter Report: 2008 June (Form 10-Q)
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
one)
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[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended: June 30, 2008
Or
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[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the transition period from___ to ___
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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
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25-1655321
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State
or other jurisdiction of incorporation
or
organization
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(I.R.S.
Employer
Identification
No.)
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20810
Fernbush Lane
Houston,
Texas
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77073
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(Address
of principal executive office)
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(Zip
Code)
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Registrant’s
telephone number, including area code (281)
821-9091
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(Former
name, former address and former fiscal year, if changed from last
report)
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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 and 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 is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
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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 whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange
Act). [ ] Yes [√] No
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At
August 1, 2008, there were 13,117,748 shares outstanding of the issuer’s
common stock, par value $0.01 per share
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Quarterly
Report on Form 10-Q for the period ended June 30, 2008
TABLE OF
CONTENTS
2
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
(Amounts
in thousands, except share and per share data)
(Unaudited)
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June
30,
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December 31,
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2008
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2007
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$ | 85,197 | $ | 80,649 | ||||
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Short-term
investments
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-- | 54 | ||||||
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Contracts
receivable, including retainage
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63,617 | 54,394 | ||||||
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Costs
and estimated earnings in excess of billings on
uncompletedcontracts
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5,904 | 3,747 | ||||||
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Inventories
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1,147 | 1,239 | ||||||
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Deferred
tax asset, net
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1,088 | 1,088 | ||||||
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Deposits
and other current assets
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1,392 | 1,779 | ||||||
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Total
current assets
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158,345 | 142,950 | ||||||
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Property
and equipment, net
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76,245 | 72,389 | ||||||
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Goodwill
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57,232 | 57,232 | ||||||
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Other
assets, net
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1,795 | 1,944 | ||||||
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Total
assets
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$ | 293,617 | $ | 274,515 | ||||
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
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Accounts
payable
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$ | 30,739 | $ | 27,190 | ||||
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Billings
in excess of costs and estimated earnings on uncompleted
contracts
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33,349 | 25,349 | ||||||
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Current
maturities of long term obligations
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73 | 98 | ||||||
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Income
taxes payable
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1,246 | 1,102 | ||||||
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Other
accrued expenses
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7,720 | 7,148 | ||||||
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Total
current liabilities
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73,127 | 60,887 | ||||||
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Long-term
liabilities:
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Long-term
debt, net of current maturities
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60,519 | 65,556 | ||||||
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Deferred
tax liability, net
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5,593 | 3,098 | ||||||
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Minority
interest in subsidiary
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7,063 | 6,362 | ||||||
| 146,302 | 75,016 | |||||||
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Commitments
and contingencies
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Stockholders’
equity:
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Preferred
stock, par value $0.01 per share; authorized 1,000,000shares,
none issued
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-- | -- | ||||||
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Common
stock, par value $0.01 per share; authorized 19,000,000shares, 13,117,748
and 13,006,502 shares issued
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131 | 130 | ||||||
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Additional
paid-in capital
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148,231 | 147,786 | ||||||
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Accumulated
deficit
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(1,047 | ) | (9,304 | ) | ||||
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Total
stockholders’ equity
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147,315 | 138,612 | ||||||
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Total
liabilities and stockholders’ equity
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$ | 293,617 | $ | 274,515 | ||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
(Amounts
in thousands, except share and per share data)
(Unaudited)
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Three
months ended June 30,
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Six
months ended June 30,
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2008
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2007
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2008
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2007
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Revenues
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$ | 106,728 | $ | 71,275 | $ | 191,654 | $ | 140,163 | ||||||||
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Cost
of revenues
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94,988 | 63,229 | 171,813 | 126,485 | ||||||||||||
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Gross
profit
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11,740 | 8,046 | 19,841 | 13,678 | ||||||||||||
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General
and administrative expenses
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(3,442 | ) | (2,876 | ) | (6,889 | ) | (5,476 | ) | ||||||||
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Other
income (expense)
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(91 | ) | 108 | (102 | ) | 416 | ||||||||||
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Operating
income
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8,207 | 5,278 | 12,850 | 8,618 | ||||||||||||
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Interest
income
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223 | 475 | 510 | 941 | ||||||||||||
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Interest
expense
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(152 | ) | (42 | ) | (282 | ) | (42 | ) | ||||||||
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Income before income
taxes and minority interest
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8,278 | 5,711 | 13,078 | 9,517 | ||||||||||||
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Income
tax expense
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(2,781 | ) | (1,914 | ) | (4,372 | ) | (3,209 | ) | ||||||||
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Minority
interest in earnings ofsubsidiary
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(357 | ) | -- | (449 | ) | -- | ||||||||||
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Net
income
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$ | 5,140 | $ | 3,797 | $ | 8,257 | $ | 6,308 | ||||||||
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Net
income per share:
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Basic
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$ | 0.39 | $ | 0.35 | $ | 0.63 | $ | 0.58 | ||||||||
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Diluted
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$ | 0.37 | $ | 0.32 | $ | 0.60 | $ | 0.54 | ||||||||
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Weighted
average number of common shares outstanding used in computing
per share amounts:
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Basic
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13,110,500 | 10,969,513 | 13,089,682 | 10,944,654 | ||||||||||||
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Diluted
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13,783,307 | 11,783,284 | 13,695,000 | 11,768,881 | ||||||||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
(Amounts
in thousands)
(Unaudited)
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Additional
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Common
Stock
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Paid-in
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Accumulated
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Shares
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Amount
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Capital
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Deficit
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Total
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Balance
at January 1, 2008
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13,007 | $ | 130 | $ | 147,786 | $ | (9,304 | ) | $ | 138,612 | ||||||||||
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Net
income
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-- | -- | -- | 8,257 | 8,257 | |||||||||||||||
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Stock
issued upon option exercises
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90 | 1 | 122 | -- | 123 | |||||||||||||||
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Excess
tax benefits from exercise of stock options
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-- | -- | 233 | -- | 233 | |||||||||||||||
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Issuance
and amortization of restricted stock
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21 | 0 | 125 | -- | 125 | |||||||||||||||
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Stock-based
compensation expense
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-- | -- | 108 | -- | 108 | |||||||||||||||
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Expenditures
related to 2007 equity offering
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-- | -- | (143 | ) | -- | (143 | ) | |||||||||||||
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Balance
at June 30, 2008
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13,118 | $ | 131 | $ | 148,231 | $ | (1,047 | ) | $ | 147,315 | ||||||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
(Amounts
in thousands)
(Unaudited)
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Six
months ended June 30,
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2008
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2007
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Net
income
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$ | 8,257 | $ | 6,308 | ||||
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Adjustments
to reconcile income from operations to
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net cash provided by operating
activities:
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Depreciation
and amortization
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6,552 | 4,661 | ||||||
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Loss
(gain) on sale of property and equipment
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102 | (377 | ) | |||||
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Deferred
tax expense
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2,495 | 3,078 | ||||||
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Stock-based
compensation expense
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233 | 858 | ||||||
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Excess
tax benefits from exercise of stock options
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(233 | ) | -- | |||||
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Interest
expense accreted on minority interest
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252 | -- | ||||||
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Minority interest in net
earnings of subsidiary
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449 | -- | ||||||
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Other
changes in operating assets and liabilities:
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Increase
in contracts receivable
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(9,222 | ) | (8,011 | ) | ||||
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Increase
in costs and estimated earnings
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in excess of billings on
uncompleted contracts
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(2,157 | ) | (3,404 | ) | ||||
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(Increase)
decrease in other current assets
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380 | (418 | ) | |||||
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Increase
in accounts payable
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3,549 | 6,700 | ||||||
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Increase
in billings in excess of costs and
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estimated earnings on
uncompleted contracts
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8,001 | 3,260 | ||||||
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Increase
(decrease) in other accrued expenses
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949 | (1,486 | ) | |||||
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Net cash provided by operating
activities
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19,607 | 11,169 | ||||||
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Cash
flows from investing activities:
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Additions
to property and equipment
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(11,056 | ) | (16,634 | ) | ||||
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Proceeds
from sale of property and equipment
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671 | 865 | ||||||
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Purchases
of short-term securities, available for sale
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-- | (49,512 | ) | |||||
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Sales
of short-term securities, available for sale
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54 | 45,975 | ||||||
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Net cash used in investing
activities
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(10,331 | ) | (19,306 | ) | ||||
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Cash
flows from financing activities:
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Cumulative
daily drawdowns – Credit Facility
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120,000 | 25,000 | ||||||
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Cumulative
daily reductions – Credit Facility
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(125,062 | ) | (30,062 | ) | ||||
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Payments
received on note receivable
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121 | 154 | ||||||
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Excess
tax benefits from exercise of stock options
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233 | -- | ||||||
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Issuance
of common stock pursuant to the exercise of options
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123 | 175 | ||||||
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Expenditures
related to 2007 equity offering
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(143 | ) | -- | |||||
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Net cash used by
financing activities
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(4,728 | ) | (4,733 | ) | ||||
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Net
increase (decrease) in cash and cash equivalents
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4,548 | (12,870 | ) | |||||
| Cash and cash equivalents at beginning of period | 80,649 | 28,466 | ||||||
| Cash and cash equivalents at end of period | $ | 85,197 | $ | 15,596 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
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Cash
paid during the period for interest
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$ | 97 | $ | 44 | ||||
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Cash
paid during the period for taxes
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$ | 1,500 | $ | 90 | ||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements
THREE AND
SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)
1. Basis
of Presentation
Sterling Construction Company, Inc.
(“Sterling” or “the Company”) 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 and
Nevada. Our transportation infrastructure projects include highways,
roads, bridges and light 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, paving, pipe
installation, and asphalt and concrete placement. We purchase the
necessary materials for our contracts, perform approximately three-quarters of
the work required by our contracts with our own crews, and generally engage
subcontractors only for ancillary services.
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, heavy civil construction, pursuant to Statement
of Financial Accounting Standards No. 131 – "Disclosures about Segments of an
Enterprise and Related Information." In making this determination, we
considered that each project has similar characteristics, includes similar
services, has similar types of customers and is subject to the same regulatory
environment. We organize, evaluate and manage our financial
information around each project when making operating decisions and assessing
our overall performance.
The
condensed consolidated financial statements included herein have been prepared
by Sterling, without audit, in accordance with the rules and regulations of the
Securities and Exchange Commission (SEC) and should be read in conjunction with
the Company’s Annual Report on Form 10-K for the year ended December 31,
2007. The condensed consolidated financial statements reflect, in the
opinion of management, all normal recurring adjustments necessary to present
fairly the Company’s financial position at June 30, 2008 and the results of
operations and cash flows for the periods presented. Certain
information and note disclosures prepared in accordance with generally accepted
accounting principles have been either condensed or omitted pursuant to SEC
rules and regulations. Interim results may be subject to significant
seasonal variations and the results of operations for the six months ended June
30, 2008 are not necessarily indicative of the results to be expected for the
full year.
The accompanying condensed consolidated
financial statements include the accounts of subsidiaries in which the Company
has a greater than 50% ownership interest, and all intercompany balances and
transactions have been eliminated in consolidation. For all periods
presented, the Company had no subsidiaries with ownership interests less than
50%.
Certain insignificant reclassifications
of prior year amounts have been made to conform to current year
presentation.
2. Critical
Accounting Policies
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America 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. Management’s
estimates, judgments and assumptions are continually evaluated based on
available information and experience; however, actual amounts could differ from
those estimates.
On an ongoing
basis, the Company evaluates the critical accounting policies used to prepare
its condensed consolidated financial statements, including, but not limited to,
those related to:
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revenue
recognition
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contracts
and retainage receivables
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inventories
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impairment
of long-term assets
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income
taxes
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self-insurance;
and
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stock-based
compensation
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The Company’s significant accounting
policies are more fully described in Note 1 of the Notes to Consolidated
Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2007. There have been no material changes to
such significant accounting policies.
3. Recent
Accounting Pronouncements
In December 2007, the Financial
Accounting Standards Board (FASB) revised Statement of Accounting Standards No.
141, “Business Combinations” (SFAS 141(R)). This Statement
establishes principles and requirements for how the acquirer: (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, under SFAS 141(R), all
direct costs of the business combination must be charged to expense on the
financial statements of the acquirer at the time of acquisition. SFAS
141(R) 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. This statement is effective
for acquisitions occurring on or after January 1, 2009, with early adoption not
permitted. Unless the Company enters into another business combination, there
will be no effect on future financial statements of SFAS 141(R) when
adopted.
In September 2006, the FASB issued
Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”
(SFAS 157) which establishes a framework for measuring fair value and requires
expanded disclosure about the information used to measure fair
value. The statement which was effective for financial statements
issued after November 15, 2007, 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. In
February 2008, the FASB delayed the effective date by which companies must adopt
certain provisions of SFAS 157 related to non-financial assets and liabilities
to fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. The adoption of this standard did not have a
material impact on our financial position, results of operations, or cash
flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities – Including an amendment to FASB Statement
No. 115 (“SFAS No. 159”). This statement allows a company to
irrevocably elect fair value as a measurement attribute for certain financial
assets and financial liabilities with changes in fair value recognized in the
results of operations. SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. While the Company is required by other
generally accepted accounting principles to measure certain assets and
liabilities at fair value, it has elected not to apply the provisions of SFAS
No. 159.
In December 2007, the FASB issued
Statement of Accounting Standards No. 160, “Non-controlling Interests in
Consolidated Financial Statements” (SFAS 160). SFAS 160 clarifies
previous guidance on how consolidated entities should account for and report
non-controlling interests in consolidated subsidiaries. The statement
standardizes the presentation of non-controlling ("minority interests") for both
the consolidated balance sheet and income statement. This Statement
is effective for fiscal years beginning on or after January 1, 2009, and all
interim periods within that fiscal year, with early adoption not
permitted. While the Company is currently assessing the impact of
this SFAS on its financial statements, it believes that when this Statement is
adopted, the Minority Interest in RHB and any similar subsequent acquisitions
will be retrospectively reported as a separate component of stockholders equity
instead of a liability and net income will be segregated between net income
attributable to common stock-holders and non-controlling interests.
4. 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. Included in cash and cash equivalents at June 30, 2008 and December
31, 2007 are uninsured temporary cash investments of $84.9 million and $21.9
million, respectively, in money market funds stated at fair
value. Additionally, the Company maintains cash in bank deposit
accounts that at times, including June 30, 2008, may exceed federally insured
limits.
The
Company classifies any short-term investments as securities available for sale
in accordance with SFAS No. 115, “Accounting for Certain Investments
in Debt and Equity Securities”. At June 30, 2008, the Company had no short-term
securities available for sale.
5. Inventories
The Company’s inventories are stated at
the lower of cost or market as determined by the average cost
method. Inventories consist of raw materials, such as broken
concrete, millings, and quarried stone which are expected to be utilized in
construction projects in the future. The cost of inventory includes
labor, trucking and equipment costs.
6. Property
and Equipment (in thousands)
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June 30, 2008
|
December 31, 2007
|
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Construction
equipment
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$ | 91,595 | $ | 83,739 | ||||
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Transportation
equipment
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11,104 | 9,279 | ||||||
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Buildings
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1,562 | 1,573 | ||||||
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Office
equipment
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563 | 602 | ||||||
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Construction
in progress
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2,342 | 856 | ||||||
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Land
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2,718 | 2,718 | ||||||
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Water
rights
|
200 | 200 | ||||||
| 110,084 | 98,967 | |||||||
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Less
accumulated depreciation
|
(33,839 | ) | (26,578 | ) | ||||
| $ | 76,245 | $ | 72,389 | |||||
Construction
in progress at June 30, 2008 consists of third-party costs incurred in
construction of an office addition and shop buildings.
7. Income
per Share
Basic net income per common share is
computed by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted net income per common share is
computed giving effect to all potentially dilutive common stock options and
warrants using the treasury stock method. At June 30, 2008 and 2007,
there were 82,300 and 81,300, respectively, common stock options with a weighted
average exercise price per share of $24.90 and $25.02, respectively, that were
excluded from the calculation of diluted income per share as they were
anti-dilutive. The following table reconciles the numerators and
denominators of the basic and diluted net income per common share computations
for the three and six months ended June 30, 2008 and June 30, 2007,
respectively, (in thousands, except per share data):
|
Three months ended June 30,
|
||||||||
|
2008
|
2007
|
|||||||
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Numerator:
|
||||||||
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Net
income
|
$ | 5,140 | $ | 3,797 | ||||
|
Denominator:
|
||||||||
|
Weighted
average common shares outstanding – basic
|
13,111 | 10,970 | ||||||
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Shares
for dilutive stock options, restricted stock andwarrants
|
673 | 813 | ||||||
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Weighted
average common shares outstanding and assumedconversions –
diluted
|
13,783 | 11,783 | ||||||
| Basic earnings per common share: | $ | 0.39 | $ | 0.35 | ||||
| Diluted earnings per common share: | $ | 0.37 | $ | 0.32 | ||||
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Six months ended June 30,
|
||||||||
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2008
|
2007
|
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Numerator:
|
||||||||
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Net
income
|
$ | 8,257 | $ | 6,308 | ||||
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Denominator:
|
||||||||
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Weighted
average common shares outstanding – basic
|
13,090 | 10,945 | ||||||
|
Shares
for dilutive stock options, restricted stock andwarrants
|
605 | 824 | ||||||
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Weighted
average common shares outstanding and assumedconversions –
diluted
|
13,695 | 11,769 | ||||||
| Basic earnings per common share: | $ | 0.63 | $ | 0.58 | ||||
| Diluted earnings per common share: | $ | 0.60 | $ | 0.54 | ||||
8. Stock-Based
Compensation Plans and Warrants
The Company has five stock plans, only
two of which currently have stock options outstanding, which are administered by
the Compensation Committee of the Board of Directors. In general, the plans
provide for all options 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 options typically do not exceed 10
years. Stock options generally vest over a three to five year
period. Note 8 – Stock Options and Warrants of the Notes to the
Consolidated Financial Statements contained in the Annual Report on Form 10-K
for the year ended December 31, 2007 should be referred to for additional
information regarding the stock-based incentive plans.
We
recorded compensation expense of $233,000 and $858,000 for the six-month periods
ended June 30, 2008 and 2007, respectively, (including $125,000 and $93,000,
respectively, related to restricted stock grants to independent directors and
certain employees discussed below). For the quarters ended June 30,
2008 and 2007, we recorded $128,000 and $308,000, respectively, (including
$73,000 and $50,000, respectively, related to restricted stock grants to
non-employee directors and certain employees). Unrecognized
compensation expense related to stock options at June 30, 2008 and 2007 was
$435,000 and $556,000, respectively, to be recognized over a weighted average
period of approximately 2.4 and 2.2 years, respectively. Proceeds
received by the Company from the exercise of 3,000 and 90,190 options for the
three and six months ended June 30, 2008, respectively were approximately $3,000
and $123,000, respectively. No options were granted in the six months
ended June 30, 2008 or 2007.
Unrecognized
compensation expense related to restricted stock awards at June 30, 2008 and
2007 was $348,000 and $175,000, respectively, to be recognized over a weighted
average period of 1.6 and 0.8 years. In May 2008 and 2007, the six
non-employee directors of the Company were each granted 2,564 and 1,598 shares
of restricted stock, respectively, at the market price on the date of grant, or
$19.50 and $21.90, respectively, which will be recognized ratably over the one
year restriction period. In March 2008, five employees were granted
an aggregated total of 5,672 shares of restricted stock at $18.16 per share
resulting in an expense of $103,000 to be recognized ratably over the five year
restriction period.
At June
30, 2008, there were 453,106 shares covered by outstanding stock options and
356,266 shares covered by outstanding stock warrants.
9. Income
Taxes
The Company and its subsidiaries file
consolidated income tax returns in the United States federal jurisdiction and in
certain states. With few exceptions, the Company is no longer subject
to federal tax examinations for years prior to 2004. 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 June 30, 2008 and 2007.
In its 2005 tax return, the Company
used net operating tax loss carryforwards (“NOL”) that would have expired during
that year instead of deducting compensation expense that originated in 2005 as
the result of stock option exercises. Whether the Company can choose
not to take deductions for compensation expense in the tax return and to instead
use otherwise expiring NOLs is considered by management to be an uncertain tax
position. In the event that the IRS examines the 2005 tax return and
determines that the compensation expense is a required deduction in the tax
return, then the Company would deduct the compensation expense instead of the
NOL used in the period; however there would be no cash impact on tax paid due to
the increased compensation deduction. In addition, there would be no
interest or penalties due as a result of the change. Based on the
Company’s detailed analysis, management has determined that it is more likely
than not this position will be sustained upon examination, and this uncertain
tax position was determined to have a measurement of $0.
The effective income tax rates were
33.6% and 33.4% of income before income taxes and minority interest for the
three and six months ended June 30, 2008 and 33.5% and 33.7% for the comparable
periods in 2007. The difference between the effective tax rates and
the statutory rate of 35% is the result of various miscellaneous permanent
differences, including the portion of earnings of subsidiary taxed to the
minority interest owner, offset by the revised Texas franchise tax effective
since July 1, 2007.
10. Acquisition
of Road and Highway Builders, LLC
On October 31, 2007, the Company
purchased a 91.67% interest in Road and Highway Builders, LLC (“RHB”) and all of
the outstanding capital stock of Road and Highway Builders Inc. ("RHB Inc.")
then an inactive Nevada Corporation. The results of RHB and RHB Inc.
are included in the Company's consolidated results for the three and six months
ended June 30, 2008, but not in the comparable periods for 2007 as the
acquisition was made after June 30, 2007.
RHB is a
heavy civil construction business located in Reno, Nevada that builds roads,
highways and bridges for state and local governmental agencies. Its
assets consist of construction contracts, road and bridge construction and
aggregate mining machinery and equipment, and 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 on which RHB can
mine aggregates for use in its own construction business and for sale to third
parties. During the first quarter of 2008, RHB Inc. began crushing
stone for the operations of RHB.
The
Company paid an aggregate purchase price for the RHB entities of $53.0 million
to the sellers. Additionally, the Company incurred $1.1 million of
direct costs related to the acquisition. Ten percent of the purchase price has
been placed in escrow for eighteen months as security for any breach of
representations and warranties made by the sellers.
The
minority interest owner of RHB has the right to put, or require the Company to
buy, his remaining 8.33% interest in RHB and, concurrently, the Company has the
right to require that owner to 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 RHB's income before interest, taxes,
depreciation and amortization for the calendar years 2008, 2009 and
2010. The minority interest was recorded at its estimated fair value
at the date of acquisition and the difference between the minority owner's
interest in the historical basis of RHB and the estimated fair value of that
interest was recorded as a liability to minority interest and a reduction in
additional paid-in-capital.
Any
changes to the estimated fair value of the minority interest will be recorded as
a corresponding change in additional paid-in-capital. Additionally,
interest expense ($252,000 and $126,000 for the six and three months ended
June 30, 2008) has been accreted to the minority interest liability based on the
discount rate used to calculate the fair value of the put at the date of the
acquisition.
The
following table summarizes the allocation of the purchase price, including
related direct acquisition costs for the RHB entities (in
thousands):
|
Tangible
assets acquired at estimated fair value, includingapproximately $10,000 of
property, plant and equipment
|
$ | 19,334 | ||
|
Current
liabilities assumed
|
(9,686 | ) | ||
|
Goodwill
|
44,496 | |||
|
Total
|
$ | 54,144 |
The
goodwill is deductible for tax purposes over 15 years. The purchase
price allocation has been finalized and there were no separately identifiable
intangible assets, other than goodwill. No material adjustments have
been made to the initial allocation of the purchase price. For more
detail regarding this acquisition, see Notes 13 and 15 to the Consolidated
Financial Statements in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2007.
On July 16, 2008, the Company filed a
"shelf" registration statement on Form S-3 with the Securities and Exchange
Commission ("SEC"). Under this shelf registration statement, the
Company may offer from time to time any combination of securities described in
the prospectus in one or more offerings up to a total amount of $80.0
million. The securities described in the prospectus include common
and preferred stock, debt securities, warrants, units, and guarantees of debt
securities. Net proceeds from the sales of the offered securities may
be used for working capital needs, capital expenditures and other expenditures
related to general corporate purposes, including future
acquisitions.
On July
23, 2008, an oil supplier, SemMaterials, L.P., filed a Chapter 11 bankruptcy
petition. SemMaterials had contracted to supply a particular grade of
oil directly to the Company to produce asphalt for one of our projects in Nevada
and to an asphalt subcontractor on another of our projects in Nevada; however,
SemMaterials has indicated that it will be unable to do so. The
supply of this particular grade of oil in Nevada is currently limited and the
price of the oil is higher than the contracted price. The Nevada
Department of Transportation ("NDOT") recognizes the magnitude of problems
caused by SemMaterials' defaults and has expressed a willingness to work with
contractors on the redesign of affected projects. Until the redesign
of these projects is resolved with NDOT, it is too early to predict the effect,
if any, of this issue on estimated profitability on these
projects. In addition, the redesign of the affected projects will
have an effect on our ability to complete portions of these projects in 2008
which we had planned on installing this year and, therefore, we estimate 2008
revenue could be as much as $25.0 million less than we had
planned.
Forward
Looking Statements
This
Quarterly Report on Form 10-Q includes certain statements that are, or may be
deemed to be, “forward-looking statements” within the meaning of Section 27A of
the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E
of the Securities Exchange Act of 1934, as amended, (the “Exchange
Act”). These forward-looking statements may be found throughout this
report, including in this “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and in “Risk Factors”, below and relate to
matters such as our industry, business strategy, goals and expectations
concerning our market position, contract backlog, future operations, margins,
profitability, capital expenditures, liquidity and capital resources and other
financial and operating information. We use the words “anticipate,”
“assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,”
“forecast,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “will,”
“future” and similar terms and phrases to identify forward-looking statements in
this report.
Forward-looking
statements reflect our current expectations 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, which could result in our expectations not being realized or
otherwise could materially affect our financial condition, results of operations
and cash flows.
Actual
events, results and outcomes may differ materially from our expectations due to
a variety of factors. Although it is not possible to identify all of
these factors, they include, among others, the following:
|
|
·
|
changes
in general economic conditions, reductions in federal, state and local
government funding for infrastructure services and changes in those
governments laws and regulations;
|
|
|
·
|
adverse
economic conditions in our markets in Texas and Nevada and the
availability, cost and skill level of workers in those geographic
locations;
|
|
|
·
|
delays
or difficulties related to the completion of our projects, including
additional costs, reductions in revenues or the payment of liquidated
damages or obtaining required governmental permits and
approvals;
|
|
|
·
|
actions
of suppliers, subcontractors, customers, competitors and others which are
beyond our control including suppliers' and subcontractors' failure to
perform;
|
|
|
·
|
cost
escalations associated with our fixed-unit-price contracts, including
changes in availability, proximity and cost of materials such as steel,
concrete, aggregates, fuel and other construction
materials;
|
|
|
·
|
our
dependence on a few significant
customers;
|
|
|
·
|
adverse
weather conditions; although we prepare our budgets and bid for contracts
based on historical rain and snowfall patterns, the incidence of rain and
snowfall may differ materially from these
expectations;
|
|
|
·
|
the
presence of competitors with greater financial resources and the impact of
competitive services and pricing;
|
|
|
·
|
our
ability to successfully identify, finance, complete and integrate
acquisitions;
|
|
|
·
|
the
effects of estimates inherent in our percentage-of-completion accounting
policies including onsite conditions that differ from those assumed in the
original bid, contract modifications, mechanical problems with our
machinery or equipment and the effects of other risks discussed above;
and
|
|
|
·
|
citations
issued by any governmental authority, including the Occupational Safety
and Health Administration.
|
Stockholders
and potential investors are urged to carefully consider these factors and the
other factors described under “Risk Factors” in Item 1A of the Company’s Annual
Report on Form 10-K for the year ended December 31, 2007 in evaluating any
forward-looking statements and are cautioned not to place undue reliance on
these 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 such plans, intentions or expectations will be
achieved.
Any
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 that may be made to reflect events or
circumstances that occur, or that we become aware of, after the date of this
report, except as may be required by applicable securities laws.
Overview
Sterling Construction Company, Inc.
(“Sterling” or “the Company”) operates in one segment, heavy civil construction,
through Texas Sterling Construction Co., ("TSC"), Road and Highway Builders, LLC
("RHB") and Road and Highway Builders Inc. that specialize in the building,
reconstruction and repair of transportation and water infrastructure in large
and growing population markets in Texas and Nevada. Road and Highway
Builders of California, Inc., an 80% owned subsidiary, was recently formed to
bid and perform work in California. Our transportation infrastructure
projects include highways, roads, bridges and light 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, paving, pipe installation and asphalt and concrete
placement. We purchase the necessary materials for our contracts,
perform approximately three-quarters of the work required by our contracts with
our own crews, and generally engage subcontractors only for ancillary
services.
For a
more detailed discussion of the Company's business, readers of this report are
urged to review Item 1, Business, of the Company's Annual Report on Form 10-K
for the year ended December 31, 2007.
Material
Changes in Financial Condition
At June 30, 2008, there had been no
material changes in the Company’s financial condition since December 31, 2007,
as discussed in Item 7 of the Company’s Annual Report on Form 10-K for the year
ended December 31, 2007.
Results
of Operations
Three months ended June 30,
2008 compared with three months ended June 30, 2007
|
(dollar
amounts in thousands) (unaudited):
|
2008
|
2007
|
% change
|
|||||||||
|
Revenues
|
$ | 106,728 | $ | 71,275 | 49.7 | % | ||||||
|
Gross
profit
|
11,740 | 8,046 | 45.9 | % | ||||||||
|
Gross margin
|
11.0 | % | 11.3 | % | (2.7 | %) | ||||||
|
General,
administrative and other expenses
|
3,442 | 2,768 | 24.3 | % | ||||||||
|
Operating
income
|
8,207 | 5,278 | 55.5 | % | ||||||||
|
Operating margin
|
7.7 | % | 7.4 | % | 4.1 | % | ||||||
|
Interest
income, net
|
71 | 433 | (83.6 | %) | ||||||||
|
Income
before taxes and minority interest
|
8,278 | 5,711 | 44.9 | % | ||||||||
|
Income
taxes
|
2,781 | 1,914 | 45.3 | % | ||||||||
|
Minority
interest in earnings of subsidiary
|
357 | -- |
Nm
|
|||||||||
|
Net
income
|
$ | 5,140 | $ | 3,797 | 35.4 | % | ||||||
Revenues
Revenues increased $35.5 million.
The majority of the increase was due to the revenues earned by our
Nevada operations which were included in the consolidated results of operations
for the six months of 2008 after being acquired in late 2007. Also
contributing to the increased volume of work performed was the improved weather
conditions in our Texas markets, and an increase in crews and equipment since
the prior year. Rainfall decreased an average of 69% quarter over
quarter in our Texas markets and we had a year-over-year increase in the average
number of employees of 20% and a total increase of $25.9 million of property and
equipment including that acquired with RHB.
Backlog
At the end of the second
quarter of the current year, our backlog
of construction projects was $514 million, as compared to $485 million at the
end of the first quarter of 2008. In the second quarter of 2008, we were awarded
$136 million of new contracts. The backlog at June 30, 2008 includes
approximately $379 million and $135 million of backlog applicable to Texas
and Nevada, respectively, and approximately $252 million expected to be
completed in the last six months of 2008. At June 30, 2008, we
included in backlog approximately $31 million of contracts on which we were
the apparent low bidder and expect to be awarded the contracts, but as of the
quarter end these contracts had not been officially
awarded. Historically, subsequent non-award of such low bids has not
had an adverse effect on the Company’s backlog or financial
condition.
Gross
profit
Gross
profit increased $3.7 million and $6.1 million in the second
quarter and first six months of 2008, respectively, over the comparable
periods in 2007. This was due to the contribution of our Nevada
operations in 2008 and better weather in Texas than last year, which allowed our
crews and equipment to be more productive, offset by disappointing results on
certain Texas highway projects as discussed below.
During
the second quarter of 2008, a long-standing vendor in our Houston market advised
us that it would be unable to fulfill its commitment to furnish us steel on a
project at contracted terms, which had a negative impact of $1.0 million on
estimated total gross profit on this project. Approximately $600,000 of the
impact was recorded in the second quarter of 2008 for this matter based on the
percentage of completion of the project.
In
addition, due to the unanticipated significant increases this year in the prices
of gasoline and diesel fuel across all of our markets, we have incurred
additional costs of approximately $1.0 million, primarily in the second quarter
of 2008. We have revised our estimated total cost on projects for currently
anticipated additional costs of gasoline and diesel fuel.
We
achieved less than satisfactory execution on three projects in our Dallas
market, which we attribute primarily to that market’s recent
significant growth in operations. As a result, we recorded a
reduction in gross profit of approximately $1.0 million on those three projects
in the second quarter of 2008 and will realize reduced gross profit on those
projects through completion. We have taken steps to improve communication and
oversight on all projects in that market and believe these steps will enable us
to maintain or improve margins on these projects.
Subsequent
to June 30, 2008, an oil supplier, SemMaterials, L.P., filed a
Chapter 11 bankruptcy petition. SemMaterials had contracted to supply a
particular grade of oil directly to the Company to produce asphalt for one of
our projects in Nevada and to an asphalt subcontractor on another one of our
projects in Nevada; however, SemMaterials has indicated that it will be unable
to do so. The supply of this particular grade of oil in Nevada is currently
limited and the price of the oil is higher than the contracted price. The Nevada
Department of Transportation ("NDOT") recognizes the magnitude of the problems
caused by SemMaterials' defaults and has expressed a willingness to work with
contractors on the redesign of affected projects. Until the redesign of these
projects is resolved with NDOT, it is too early to predict the effect, if any,
of this issue on estimated profitability on these projects. In addition, the
redesign of the affected projects will have an effect on our ability to complete
portions of these projects in 2008 which we had planned on installing this year
and, therefore, we estimate 2008 revenue could be as much as $25.0 million less
than we had planned.
General
and administrative expenses, net of other income
General
and administrative expenses, net, increased by $0.7 million in the second
quarter of 2008 versus 2007, primarily due to higher compensation expense and
the addition of our Nevada operations. As a percent of revenues,
G&A was 3.2% for the second quarter of 2008 versus 3.9% of revenues for the
comparable prior year quarter. These expenses do not vary directly
with the volume of work performed on contracts.
Operating income
Operating
income increased $2.9 million in the second quarter of 2008 over 2007, due to
the factors discussed above regarding gross profit and general and
administrative expenses.
Interest income and
expense
Net
interest income was $362,000 less in the second quarter of 2008 than 2007,
due to a decrease in interest rates on cash and short-term investments plus the
imputed interest expense of $126,000 on the put related to the minority interest
in RHB.
Income
taxes
Our
effective income tax rate for the first quarter of 2008 was 33.6% compared to
33.5% for the second quarter of 2007.
Six months ended June 30,
2008 compared with six months ended June 30, 2007
|
(dollar
amounts in thousands) (unaudited):
|
2008
|
2007
|
% change
|
|||||||||
|
Revenues
|
$ | 191,654 | $ | 140,163 | 36.7 | % | ||||||
|
Gross
profit
|
19,841 | 13,678 | 45.1 | % | ||||||||
|
Gross margin
|
10.4 | % | 9.8 | % | 6.1 | % | ||||||
|
General,
administrative and other expenses
|
6,991 | 5,060 | 38.2 | % | ||||||||
|
Operating
income
|
12,850 | 8,618 | 49.1 | % | ||||||||
|
Operating margin
|
6.7 | % | 6.1 | % | 9.8 | % | ||||||
|
Interest
income, net
|
228 | 899 | (74.7 | %) | ||||||||
|
Income
before taxes and minority interest
|
13,078 | 9,517 | 37.4 | % | ||||||||
|
Income
taxes
|
4,372 | 3,209 | 36.2 | % | ||||||||
|
Minority
interest in earnings of subsidiary
|
449 | -- |
Nm
|
|||||||||
|
Net
income
|
$ | 8,257 | $ | 6,308 | 30.9 | % | ||||||
Revenues
Revenues increased $51.5 million. The majority of the increase was
due to the revenues earned by our Nevada operations. Also contributing to the
increased volume of work performed was the improved weather conditions in our
Texas markets, and an increase in crews and equipment since the prior
year. Rainfall decreased an average of 54% year over year in our
Texas markets and we had a year-over-year increase in the average number of
employees of 20% and a total increase of $25.9 million of property and equipment
including that acquired with RHB.
Backlog
At the end of the second quarter of the
current year, our backlog of construction projects was $514 million, as compared
to $450 million at December 31, 2007. We were awarded approximately $256
million of new contracts in the first six months of 2008.
Gross
profit
Gross
profit increased $6.1 million for the six-month period-over-period
comparison. This was due to the contribution of our Nevada operations
in 2008 and better weather in Texas than last year, which allowed our crews and
equipment to be more productive, offset by the factors discussed above under
"Gross Profit" for the second quarter of 2008.
General
and administrative expenses, net of other income
General
and administrative expenses, net, increased by $1.9 million for the first xis
months of 2008 from 2007 primarily due to higher compensation expense and the
addition of our Nevada operations.
Operating income
Operating
income increased $4.2 million due to the factors discussed above regarding gross
profit and general and administrative expenses.
Interest income and
expense
Net
interest income was $671,000 less for the six-month period-over-period
comparison due to a decrease in interest rates on cash and short-term
investments plus the imputed interest expense of $252,000 on the put related to
the minority interest in RHB.
Income
taxes
Our
effective income tax rate for the first six months of 2008 was 33.4% compared to
33.7% for the first six months of 2007. The difference between the
effective tax rate and the statutory tax rate is the result of various
miscellaneous permanent differences, including the portion of earnings of
subsidiary taxed to the minority interest owner, offset by the revised Texas
franchise tax which became effective July 1, 2007.
Liquidity
and Capital Resources
Cash
Flows
The following table sets forth our cash
flows for the six months ended June 30, 2008 and June 30, 2007 (in thousands)
(unaudited):
|
Six
months ended
|
||||||||
|
June
30
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
and cash equivalents at end of period
|
$ | 85,197 | $ | 15,596 | ||||
|
Net
cash provided by (used in):
|
||||||||
|
Operating
activities
|
19,607 | 11,169 | ||||||
|
Investing
activities
|
(10,331 | ) | (19,306 | ) | ||||
|
Financing
activities
|
(4,728 | ) | (4,733 | ) | ||||
|
Increase
(decrease) in cash and cash equivalents
|
$ | 4,548 | $ | (12,870 | ) | |||
|
Capital
expenditures
|
$ | 11,056 | $ | 16,634 | ||||
|
Working
capital at end of period
|
$ | 85,218 | $ | 53,906 | ||||
Operating
Activities
Significant
non-cash items included in operating activities are:
|
|
●
|
depreciation
and amortization, which for the first six months of the current year
totaled $6.6 million, an increase of $1.9 million from last year, as a
result of the continued increase in the size of our construction fleet in
recent years and the RHB
acquisition;
|
|
|
●
|
deferred
tax expense in 2008 and 2007 of $2.5 and $3.1 million, respectively,
mainly attributable to accelerated depreciation methods used on equipment
for tax purposes
|
Besides
net income of $8.3 million and the non-cash items discussed above, significant
components of the changes in working capital are as follows:
|
|
●
|
contracts
receivable increased by $11.0 million as of June 30, 2008 due to the
increase in year to date revenues of $51.5 million, including
those of the Nevada operations, as compared to an increase of $8.0
million in 2007 in contract receivables which was due to an increase in
revenue and a higher level of customer
retentions;
|
|
|
●
|
cost
and estimated earnings in excess of billings on uncompleted contracts
increased by $2.2 million as of June 30, 2008, which was due to the timing
of billings to customers, compared to an increase of $3.4 million as of
June 30, 2007, which was principally due to the start up of several new
jobs;
|
|
|
●
|
billings
in excess of costs and estimated earnings on uncompleted contracts
increased by $8.0 million as of June 30, 2008, compared with an increase
of $3.3 million as of June 30, 2007. These changes principally
reflect increased billings as a result of increased volume of
work-in-progress;
|
|
|
●
|
accounts
payable increased by $5.3 million in the first six months of this year due
to the increased volume of work-in-progress. Accounts payable
increased $6.7 million in the first six months of 2007 as a result of
changes in the volume of materials and sub-contractor
services purchased in that
period.
|
Investing
activities
Expenditures
for the replacement of certain equipment and to expand our construction fleet
and office and shop facilities totaled $11.1 million in the first six months of
2008, compared with a total of $16.6 million of property and equipment purchases
in the same period last year. Capital equipment is acquired as needed
to support our work crews and backlog and to replace retiring
equipment. We plan to continue the expansion of our equipment fleet
over the remainder of the year, in line with the increase during the first six
months of 2008.
Financing
activities
Financing
activities in the first six months of 2008 primarily reflect a reduction of $5.0
million in borrowings under our $75.0 million Credit Facility as compared to a
$5.0 million reduction in borrowings under the predecessor $35.0 million credit
facility in the first six months of 2007. The amount of borrowings
under the Credit Facility is based on the Company's expectations of working
capital requirements.
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;
|
|
|
·
|
the
amounts owed to suppliers and
subcontractors.
|
Some of
these fluctuations can be significant.
As of
June 30, 2008, we had working capital of $85.2 million, an increase of $3.2
million over December 31, 2007. Working capital is an important
element in expanding our bonding capacity, which enables us to bid on larger and
longer-lived projects. The increase in working capital was mainly the
result of cash provided by operations of $19.6 million offset by purchases of
property and equipment of $11.0 million and net repayment of debt of $5.0
million.
The
increase of $31.3 million in our working capital at June 30, 2008 versus June
30, 2007 was due to earnings for the trailing 12 months, the net proceeds of
$34.5 million from our public offering in December 2007 and the increase in
borrowings of $35.0 million under our Credit Facility partially offset by our
purchase of the RHB entities in October 2007 and capital expenditures during
that twelve-month period.
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 expects no
other material changes in its liquidity.
Sources
of Capital
In
addition to our available cash and cash equivalents 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.
In October 2007, we entered into a new
Credit Facility with Comerica Bank which matures October 31,
2012. The Credit Facility allows for borrowings 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. At June 30, 2008, the aggregate borrowings
outstanding under the Credit Facility were $60.0 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 $13.2 million at
June 30, 2008.
The Credit Facility requires the
payment of a quarterly commitment fee of 0.25% per annum of the unused portion
of the Credit 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 average interest rate on funds
borrowed under the Credit Facility during the three and six months ended June
30, 2008 was approximately 5.38% and 6.25%, respectively. 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. We were
in compliance with all of these covenants at June 30, 2008.
In addition, as discussed in Note 11 to
the accompanying financial statements, the Company has filed a "shelf"
registration statement on Form S-3 with the Securities and Exchange Commission
("SEC") and, in one or more offerings, may sell equity and/or debt securities up
to a total amount of $80.0 million, the proceeds of which may be used for
working capital, capital expenditures and general corporate purposes, including
future acquisitions.
Inflation
Until
recently, inflation has not had a material impact on our financial results;
however, this year increases in oil, fuel and steel product prices have affected
the costs of operating our construction fleet, producing and installing concrete
and asphalt, transporting materials and the purchase price of certain other
materials. Anticipated cost increases, such as those discussed above, 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 and quantities
of most materials and services, other than oil and fuel products, thereby
mitigating future price increases and supply disruptions. This year
there have, however, been two vendors that had contracted to furnish materials
on two of our 60 jobs who have indicated that they would not be able to fulfill
their supply commitments or that they would need a price increase.
There can
be no assurance that oil, fuel, steel or other materials 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 where we
believe it is probable that we will have cost increases which will not be
recovered from customers, vendors or re-engineering.
Construction
Markets
We
operate in the heavy civil construction segment for infrastructure projects in
Texas and Nevada, specializing in transportation and water infrastructure.
Demand for this 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 authorizations.
According
to the 2006 census, Texas is the second largest state in population in the U.S.
with 23.5 million people and a population growth of 12.7% since 2000, almost
double the 6.4% growth rate for the U.S. as a whole over the same period. Three
of the largest 10 cities in the U.S. are located in Texas and we have operating
divisions in each of those cities: Houston, Dallas/Ft. Worth and San Antonio.
Nevada has undergone even more rapid growth, with the state’s population
expanding 24.9% since 2000 to 2.5 million people in 2006.
Our
highway and bridge work is generally funded through federal and state
authorizations. The federal government enacted the SAFETEA-LU bill, which
authorized $286 billion for transportation spending through 2009. Of this total,
the Texas Department of Transportation (“TXDOT”) and the Nevada Department of
Transportation (“NDOT”) were originally allocated approximately $14.5 billion
and $1.3 billion, respectively, over the five years of the authorization. Actual
SAFETEA-LU appropriations have been somewhat reduced from the original
allocations. While recent public statements by TXDOT officials indicate
potential TXDOT funding shortfalls and reductions in spending, transportation
leaders have identified $188 billion in needed construction projects to create
an acceptable transportation system in Texas by 2030. NDOT
expenditures totaled $740 million in 2006 and have had an annual increase of
9.9% since 2001. Recent reductions in driving in the U.S. and the
resultant effect on federal and state gasoline taxes collected may further limit
spending by both federal and state authorities.
Our water
and wastewater, underground utility, light-rail transit and non-highway paving
work is generally funded by municipalities and other local authorities. While
the size and growth rates of these markets is 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
which we operate are providing funding of in excess of $1 billion
annually.
While our
business does not include residential infrastructure work, the slow-down in
housing demand in Nevada, and to a lesser extent in Texas, has caused a softer
bidding climate in our infrastructure markets and has caused some
residential infrastructure contractors to bid on transportation and water
infrastructure projects, thus increasing competition and creating downward
pressure on bid prices. In addition, the nationwide declines in home
sales and increase in foreclosures and the resultant decrease in property and
sales taxes could adversely affect expenditures by state and local
governments.
As
discussed above, our backlog of construction projects was $514 million at June
30, 2008, including $252 million that we estimate will be completed by
December 31, 2008, versus backlog of $450 million at December 31, 2007—this
increase in backlog is after recognizing revenues earned of $192 million in the
first half of 2008.
To date
this year, the Company has had only one project scope reduction as a result of
reduced funding authorization and the amount of such scope reduction was not
material to our backlog. The Company had no project cancellations for
any reason. The bidding climate varies somewhat by locality; however,
we continue to bid projects that fit our expertise and criteria for potential
revenues and gross margins and, while our markets are softer and more
competitive in the current economic climate, management believes the Company has
the resources and experience to continue to compete successfully for available
projects.
Changes in interest rates are our
primary sources of market risk. At June 30, 2008, $60 million of our
outstanding indebtedness was at floating rates. An increase of 1% in
the market rate of interest would have increased our interest expense for the
six months ended June 30, 2008 by approximately $8,000.
Because we derive no revenues from
foreign countries and have no obligations in foreign currency, we experience no
direct foreign currency exchange rate risk. However, prices of
certain raw materials, construction equipment and consumables, such as oil,
steel and cement, may be affected by currency fluctuations.
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 and 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 June 30, 2008 to ensure that the
information required to be disclosed by the Company in this Quarterly Report on
Form 10-Q 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 financial officers, as
appropriate to allow timely decisions regarding required
disclosures.
There were no changes during the three
months ended June 30, 2008 that have materially affected, or are reasonably
likely to materially affect the Company’s internal controls over financial
reporting.
Internal controls over financial
reporting may not prevent or detect all errors and all fraud. Also,
projections of any evaluation of effectiveness of internal controls 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
1. Legal
Proceedings
The Company is not a party to any
material legal proceedings.
Item
1A. Risk
Factors
There
have not been any material changes from the risk factors previously disclosed in
Item 1A of the Company’s Annual Report on Form 10-K for the year ended December
31, 2007.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
None
Item
3. Defaults
upon Senior Securities
None
Item
4. Submission
of Matters to a Vote of Security Holders
|
Date
of
Meeting: May
8, 2008
|
||||||||||||||||
|
Type
of Meeting: Annual Meeting of Stockholders
|
||||||||||||||||
|
Election
of Directors.
|
For
|
Against
|
Abstain
|
Broker
Non-Votes
|
||||||||||||
|
Patrick
T. Manning
|
7,260,875 | 3,697,071 | 14,491 | -0- | ||||||||||||
|
Joseph
P. Harper, Sr.
|
7,619,176 | 3,698,564 | 14,696 | -0- | ||||||||||||
|
Adoption
of an Amended and Restated Certificate of Incorporation.
|
7,493,031 | 3,809,141 | 30,263 | -0- | ||||||||||||
|
Adoption
of an amendment to Article FOURTH of the Certificate of Incorporation to
increase the number of shares of common stock that the Company is
authorized to issue from 14 million shares to 19 million
shares.
|
10,759,947 | 555,524 | 16,963 | -0- | ||||||||||||
|
Ratification
of the selection of Grant Thornton LLP as the Company's independent
registered public accounting firm for 2008.
|
11,304,309 | 18,296 | 9,829 | -0- | ||||||||||||
Item
5. Other
Information
None
Exhibit
No. Description
|
|
3.1
|
Certificate
of Incorporation of Sterling Construction Company, Inc. incorporating
all amendments made through May 8,
2008.
|
|
|
10.1#*
|
Summary
of Compensation for Non Employee Directors of Sterling Construction
Company, Inc.
|
|
|
31.1
|
Certification
of Patrick T. Manning, Chief Executive Officer pursuant to Exchange Act
Rule 13a-14(a)
|
|
|
31.2
|
Certification
of James H. Allen, Jr., Chief Financial Officer, pursuant to Exchange Act
Rule 13a-14(a)
|
|
|
32.0
|
Certification
of Patrick T. Manning, Chief Executive Officer and James H. Allen, Jr.,
Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 (Section 906
of the Sarbanes-Oxley Act of 2002)
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
STERLING CONSTRUCTION COMPANY,
INC.
| Date: August 11, 2008 | By: | /s/ Patrick T. Manning. |
| Patrick T. Manning. | ||
| Chairman and Chief Executive Officer | ||
| Date: August 11, 2008 | By: | /s/ James H. Allen, Jr. |
| James H. Allen, Jr. | ||
| Chief Financial Officer |
STERLING CONSTRUCTION COMPANY,
INC...
Quarterly Report on Form 10-Q for
Period Ended June 30, 2008
|
Exhibit
No.
|
Description
|
|
| 3.1 | Certificate of Incorporation of Sterling Construction Company, Inc. incorporating all amendments made through May 8, 2008. | |
| 10.1#* | Summary of Compensation for Non Employee Directors of Sterling Construction Company, Inc. | |
|
Certification
by the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
||
|
Certification
by the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
||
|
Certification
of Periodic Financial Report by the Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
*Filed
herewith
25