STERLING INFRASTRUCTURE, INC. - Quarter Report: 2010 March (Form 10-Q)

form10q.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2010 Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___ to ___
Commission file number 1-31993
STERLING CONSTRUCTION COMPANY, INC. (Exact name of registrant as specified in its charter)
DELAWARE	25-1655321
State or other jurisdiction of incorporation or organization	(I.R.S. Employer Identification No.)

20810 Fernbush Lane Houston, Texas	77073
(Address of principal executive office)	(Zip Code)

Registrant’s telephone number, including area code (281) 821-9091

(Former name, former address and former fiscal year, if changed from last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [ ] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [√] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [√] No
At May 3, 2010, there were 16,097,698 shares outstanding of the issuer’s common stock, par value $0.01 per share

STERLING CONSTRUCTION COMPANY, INC.

Quarterly Report on Form 10-Q for the three months ended March 31, 2010

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PART I. FINANCIAL INFORMATION		3

ITEM 1. CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS		3

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS		8

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		17

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK		27

ITEM 4. CONTROLS AND PROCEDURES		28

PART II – OTHER INFORMATION		29

ITEM 6. EXHIBITS		29

SIGNATURES		30

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PART I

Item 1 Condensed Consolidated Unaudited Financial Statements

STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

	March 31, 2010		December 31, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	46,867	$	54,406
Short-term investments		48,634		39,319
Contracts receivable, including retainage		72,954		80,283
Costs and estimated earnings in excess of billings on uncompleted ontracts		5,654		5,973
Inventories		1,233		1,229
Deferred tax asset, net		161		127
Equity in construction joint ventures		2,671		2,341
Deposits and other current assets		5,875		5,510
Total current assets		184,049		189,188
Property and equipment, net		78,034		80,282
Goodwill		114,745		114,745
Other assets, net		1,583		1,526
Total assets	$	378,411	$	385,741
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	32,596	$	32,619
Billings in excess of costs and estimated earnings on uncompleted contracts		33,380		31,132
Current maturities of long-term obligations		73		73
Income taxes payable		443		351
Other accrued expenses		10,161		11,135
Total current liabilities		76,653		75,310
Long-term liabilities:
Long-term debt, net of current maturities		30,391		40,409
Deferred tax liability, net		15,741		15,369
Total long-term liabilities		46,132		55,778

Commitments and contingencies

Non-controlling owners' interest in subsidiaries		23,084		23,887

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, 16,092,098 and 16,081,878 shares issued and outstanding		160		160
Additional paid-in capital		198,064		197,898
Retained earnings		34,318		32,708
Total Sterling common stockholders’ equity		232,542		230,766
Total liabilities and stockholders’ equity	$	378,411	$	385,741

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

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STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

(Unaudited)

	Three months ended March 31,
	2010			2009
Revenues	$	86,157		$	94,866
Cost of revenues		77,908			83,055
Gross profit		8,249			11,811
General and administrative expenses		(5,464	)		(3,214	)
Other income		31			85
Operating income		2,816			8,682
Gain on sale of securities		417			2
Interest income		202			159
Interest expense		(297	)		(58	)
Income before income taxes and earnings attributable to the non-controlling interests		3,138			8,785
Income tax expense		(858	)		(2,919	)
Net income		2,280			5,866
Less: Net income attributable to the non-controlling interests of subsidiaries		(728	)		(301	)
Net income attributable to Sterling common stockholders	$	1,552		$	5,565

Net income per share attributable to Sterling common stockholders:
Basic	$	0.10		$	0.42
Diluted	$	0.09		$	0.41

Weighted average number of common shares outstanding used in computing per share amounts:
Basic		16,087,808			13,188,266
Diluted		16,532,581			13,715,629

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

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STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED March 31, 2010

(Amounts in thousands)

(Unaudited)

	Common Stock
	Shares		Amount		Additional Paid-in Capital		Retained Earnings		Total
Balance at January 1, 2010		16,082	$	160	$	197,898	$	32,708	$	230,766

Net income attributable to Sterling common stockholders		--		--		--		1,552		1,552

Change in unrealized gain on available-for-sale securities, net of tax		--		--		--		58		58

Stock issued upon option and warrant exercises		10		--		24		--		24

Amortization of restricted stock		--		--		100		--		100

Stock-based compensation expense		--		--		42		--		42

Balance at March 31, 2010		16,092	$	160	$	198,064	$	34,318	$	232,542

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

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STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

	Three months ended March 31,
	2010		2009
Net income attributable to Sterling common stockholders	$	1,552	$	5,565
Other comprehensive income:
Change in unrealized gain (loss) on available-for-sale securities, net of tax		58		(67	)
Comprehensive income attributable to Sterling common stockholders	$	1,610	$	5,498

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

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STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	Three months ended March 31,
	2010			2009
Cash flows provided by operating activities:
Net income attributable to Sterling common stockholders	$	1,552		$	5,565
Plus: Net income attributable to non-controlling interests		728			301
Net income		2,280			5,866
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		3,972			3,603
Gain on sale of property and equipment		(31	)		(89	)
Gain on sale of securities		(417	)		(2	)
Deferred tax expense		283			2,158
Stock-based compensation expense		142			139
Interest expense accreted on non-controlling interest		292			51
Other changes in operating assets and liabilities:
(Increase) decrease in contracts receivable		7,329			(9,559	)
(Increase) decrease in costs and estimated earnings
in excess of billings on uncompleted contracts		319			(1,620	)
(Increase) decrease in other current assets		(809	)		(125	)
Increase (decrease) in accounts payable		(23	)		(64	)
Increase (decrease) in billings in excess of costs and estimated earnings on uncompleted contracts		2,248			5,047
Increase (decrease) in other accrued expenses		(883	)		(350	)
Net cash provided by (used in) operating activities		14,702			5,055
Cash flows from investing activities:
Additions to property and equipment		(1,647	)		(1,598	)
Proceeds from sale of property and equipment		31			125
(Issuance) of note receivable		--			(350	)
Purchases of short-term investments		(18,100	)		(6,405	)
Proceeds from sales of short-term investments		9,293			10,995
Net cash provided by (used in) investing activities		(10,423	)		2,767
Cash flows from financing activities:
Cumulative daily drawdowns – Credit Facility		30,000			50,000
Cumulative daily reductions – Credit Facility		(40,000	)		(55,000	)
Repayments under long-term obligations		(18	)		(18	)
Distribution of earnings to non-controlling interest		(1,824	)		(408	)
Issuance of common stock pursuant to the exercise of options and warrants		24			11
Net cash provided by (used in) financing activities		(11,818	)		(5,415	)
Net increase (decrease) in cash and cash equivalents		(7,539	)		2,407
Cash and cash equivalents at beginning of period		54,406			55,305
Cash and cash equivalents at end of period	$	46,867		$	57,712

Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	25		$	13
Cash paid during the period for taxes		--			--

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

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STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31, 2010 (UNAUDITED)

1. 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 and perform the majority of the work required by our contracts with our own crews and equipment.

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, 2009 and the sections of this Report entitled “Backlog at March 31, 2010 and “Our Markets” under Item 2.

The accompanying consolidated financial statements include the accounts of subsidiaries and construction joint ventures 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% (see Note 7 for accounting for construction joint ventures where the Company does not have a controlling interest.)

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, 2009. Certain information and note disclosures prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been either condensed or omitted pursuant to SEC rules and regulations. 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 March 31, 2010 and the results of operations and cash flows for the periods presented. The December 31, 2009 condensed consolidated balance sheet data was derived from audited financial statements, but, as discussed above, does not include all disclosures required by accounting principles generally accepted in the United States of America. Interim results may be subject to significant seasonal variations and the results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results to be expected for the full year.

Certain amounts relating to non-controlling interests on the 2009 condensed consolidated financial statements have been reclassified to conform to the current period presentation.

2. Critical Accounting Policies

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.

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Segment Reporting

Sterling operates in one segment, heavy civil construction, through its subsidiaries that specialize in the building, reconstruction and repair of transportation and water infrastructure in large and growing population markets in Texas, Utah and Nevada and other states where we see contracting opportunities.

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 on 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, in the majority, 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 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.

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, 2009.

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Other Critical Accounting Policies

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:

· construction revenue recognition

· contracts and retainage receivables

· inventories

· goodwill and long-lived assets

· segment reporting

· construction joint ventures

· income taxes

· self-insurance; and

· stock-based compensation

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, 2009. There have been no material changes to such significant accounting policies since December 31, 2009.

3. Recent Accounting Pronouncements

In June 2009, the FASB issued a standard to address the elimination of the concept of a qualifying special purpose entity. This standard replaces 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 provides more timely and useful information about an enterprise’s involvement with a variable interest entity. This standard became effective in the first quarter of 2010 and could have the effect of requiring us to consolidate joint ventures in which we have a non-controlling variable interest. At March 31, 2010, we had no participation in a joint venture where we had a material non-controlling variable interest.

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. We had one mortgage outstanding at March 31, 2010 and December 31, 2009. This mortgage was accruing interest at 3.50% at both of those dates 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 March 31, 2010 and December 31, 2009 the carrying value of the mortgage was $464,000 and $482,000, respectively, and the fair value of the mortgage was approximately $416,000 and $431,000, respectively.

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5. 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 March 31, 2010 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 deposit with remaining maturity of 90 days or less at purchase, as securities available for sale. At March 31, 2010 and December 31, 2009, the Company had short-term investments as follows (in thousands):

	March 31, 2010
	Total		Level 1		Level 2		Level 3
Fixed income mutual funds	$	46,505	$	46,505	$	--	$	--

Total securities available-for-sale	$	46,505	$	46,505	$	--	$	--

Certificates of deposit with original maturities between 90 and 365 days		2,129

Total short-term investments	$	48,634

	December 31, 2009
	Total		Level 1		Level 2		Level 3
Fixed income mutual funds	$	35,055	$	35,055
Exchange traded funds		2,339		2,339	$	--	$	--

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

Description of the inputs used to value the above securities are shown below:

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 three months ended March 31, 2010 and 2009 were $417,000 and $2,000, respectively, included in gain on sale of securities in the accompanying statements of income. There was also a $462,000 and $373,000 of pre-tax unrealized gain on short-term investments as of March 31, 2010 and December 31, 2009, respectively, included in accumulated other comprehensive income in stockholders' equity as the gains and losses may be temporary. Upon sale of equity securities, the average cost basis is used to determine the gain or loss. For the three months ended March 31, 2010 and 2009, the Company earned interest income of $202,000 and $159,000, respectively, on its cash, cash equivalents and short-term investments.

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6. 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.

7. Construction Joint Ventures

We participate in various construction joint venture partnerships. Our agreements with our joint venture partners provide that each venture partner will receive its share of net income and assume and pay its share of any losses resulting from a project. If one of our venture partners is unable to pay its share of losses, we would be fully liable for those losses 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 committed to 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.

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. The total combined assets, liabilities, revenues and net income of joint ventures in which the Company has a non-controlling interest and the Company's share of such accounts included in the Company's consolidated financial statements as of and for the three months ended March 31, 2010 are shown below (in thousands):

Total Combined -	2010
Current assets	$	41,077
Less Liabilities		(32,321	)
Net assets	$	8,756

Revenues	$	32,131
Net income		2,640

Sterling's interest -
Share of revenues	$	4,017
Share of net income		331

Sterling's equity in net assets of joint ventures	$	2,671

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8. Property and Equipment, stated at cost (in thousands):

	March 31, 2010			December 31, 2009
Construction equipment	$	107,132		$	105,085
Transportation equipment		13,644			13,472
Buildings		4,699			4,699
Office equipment		919			892
Construction in progress		759			471
Land		2,916			2,916
Water rights		200			200
		130,269			127,735
Less accumulated depreciation		(52,235	)		(47,453	)
	$	78,034		$	80,282

Construction in progress at March 31, 2010 and December 31, 2009 consists primarily of expenditures for new maintenance shop facilities.

9. 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.

The cash portion of the purchase price was funded from the Company’s available cash and short-term investments. 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 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 expense is accreted on the Put based on the Company’s borrowing rate under its Credit Facility plus two percent. Such accretion, included in "Non-controlling owners' interest in subsidiaries" and "Interest expense" in the accompanying condensed consolidated financial statements, amounted to $202,000 for the three months ended March 31, 2010.

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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 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 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. 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 operations of RLW are included in the accompanying consolidated statements of income and cash flows for the three months ended March 31, 2010. Supplemental information on an unaudited pro forma combined basis, as if the RLW acquisition had been consummated at the beginning of 2009, is as follows (in thousands, except per share amounts):

	For the Three Months Ended March 31,
	2010 (unaudited)		2009 (unaudited)
Revenues	$	86,157	$	119,003
Net income attributable to Sterling common stockholders		1,552		8,512
Diluted net income per share attributable to Sterling common stockholders	$	0.09	$	0.62

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.

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.

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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 ($90,000 and $51,000 for the three months ended March 31, 2010 and 2009, respectively) has been accreted on the Put and included in the "Non-controlling owners' interest in subsidiaries" and "Interest expense" in the accompanying condensed consolidated financial statements 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. Management determined that no revision to such fair value was required for the three months ended March 31, 2010 and 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 March 31, 2010 and 2009 (in thousands):

	2010			2009
Balance, beginning of period	$	23,887		$	6,300
Non-controlling owners' interest in earnings of subsidiaries		729			301
Accretion of interest on Puts		292			51
Distributions to non-controlling interest owners		(1,824	)		(408	)
Balance, end of period	$	23,084		$	6,244

10. 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, which are not currently determinable. While the Company recorded the verdict amount as an expense in its results of operations in the fourth quarter of 2009, the Company has filed an appeal of this judgment as it believes, as a matter of law, that the jury erred in its decision.

11. 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 the first quarter of 2010 and 2009 (in thousands, except per share data):

	2010		2009
Numerator:
Net income attributable to Sterling common stockholders	$	1,552	$	5,565

Denominator:
Weighted average common shares outstanding — basic		16,088		13,188
Shares for dilutive stock options and warrants		445		528
Weighted average common shares outstanding and assumed conversions — diluted	$	16,533	$	13,716

Basic net income per share attributable to Sterling commonstockholders	$	0.10	$	0.42

Diluted net income per share attributable to Sterling commonstockholders	$	0.09	$	0.41

For the three months ended March 31, 2010 and 2009 there were 82,000 and 121,507 options, respectively, considered antidilutive as the option exercise price exceeded the average share market price.

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12. Stock-Based Compensation Plans and Warrants

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.

The discussion of Stock Options and Warrants in the Notes to the Consolidated Financial Statements contained in the Annual Report on Form 10-K for the year ended December 31, 2009 should be referred to for additional information regarding the stock-based incentive plans.

For the quarters ended March 31, 2010 and 2009, we recorded stock-based compensation expense of $142,000, respectively (including $100,000 and $93,000, respectively, related to restricted stock grants to non-employee directors and certain employees). Unrecognized compensation expense related to stock options at March 31, 2010 and 2009 was $114,000 and $290,000, respectively, to be recognized over a weighted average period of approximately 1.3 and 1.5 years, respectively. Proceeds received by the Company from the exercise of options and warrants for the three months ended March 31, 2010 and 2009 were approximately $24,000 and $11,000, respectively. No options were granted in the three months ended March 31, 2010 or 2009.

Unrecognized compensation expense related to restricted stock awards at March 31, 2010 and 2009 was $207,000 and $270,000, respectively, to be recognized over a weighted average period of 2.1 and 2.5 years, respectively. In May 2009, the seven non-employee directors of the Company were each granted 2,800 shares of restricted stock, at the market price on the date of grant of $17.86, which will be recognized ratably over the one year restriction period. In March 2009, several key employees were granted an aggregated total of 8,366 shares of restricted stock at $17.45 per share, resulting in an expense of $146,000 to be recognized ratably over the five year restriction period. At March 31, 2010, there were 343,158 shares covered by outstanding restricted stock and stock options and 314,412 shares covered by outstanding stock warrants. Of these, 49,927 shares of restricted stock and stock options were unvested and zero warrants were unvested.

13. Income Taxes

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 March 31, 2010 or 2009.

Current income tax expense represents federal and state taxes based on income or a component thereof.

The income tax provision for the three months ended March 31, 2010 and 2009 differs from the amount using the statutory federal income tax rate of 35% for the following reasons (in thousands):

	2010			%			2009			%
Tax expense at the federal statutory rate	$	1,098			35.0	%	$	3,075			35.0	%
State income tax expense, net of federal benefit		43			1.4			29			0.3
Taxes on subsidiaries' earnings attributable to non-controlling interests		(253	)		(8.1	)		(105	)		(1.2	)
Tax benefits of Domestic Production Activities Deduction		(44	)		(1.4	)		(80	)		(0.9	)
Other permanent differences		14			0.4			--			--
Income tax expense	$	858			27.3	%	$	2,919			33.2	%

As a result of the Company’s detailed analysis, management has determined that the Company does not have any material uncertain tax positions.

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

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 this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. We have used the words "anticipate," "assume," "believe," "budget," "continue," "could," "estimate," "expect," "forecast," "future, " "intend," "may," "plan," "potential," "predict," "project," "should, " "will," "would" and similar terms and phrases to identify forward-looking statements in this Report.

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

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

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

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

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

· 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;

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

· our dependence on a few significant customers;

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

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

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

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

· the current instability of financial institutions, which could cause losses on our cash and cash equivalents and short-term investments;

· adverse economic conditions in our markets in Texas, Utah and Nevada; and

· changes to various environmental laws and regulations relating to management, disposal and remediation of hazardous substances, climate change and the emission and discharge of pollutants into the air and water.

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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, 2009 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.

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

Overview

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 and 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.

Material Changes in Financial Condition

At March 31, 2010, there had been no material changes in the Company’s financial condition since December 31, 2009.

Backlog at March 31, 2010

Backlog is our estimate of the revenues that we expect to earn in future periods on our construction projects which are typically completed in 12 to 36 months. 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. Backlog includes $59 million applicable to consolidated joint ventures where we have a controlling interest and $133 million where we have a non-controlling interest.

At March 31, 2010, our backlog was $618 million as compared to $648 million as of December 31, 2009 and $385 million at March 31, 2009. Our backlog at March 31, 2010 included approximately $64 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. Consolidated and Utah backlog include RLW's $192 million share of the estimated revenues related to joint ventures in which RLW is a participant.

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.

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At March 31, 2010, our backlog of construction projects included $300 million of our newly acquired operations in Utah. Excluding our Utah operations, our backlog at March 31, 2010, was $318 million as compared to $344 million at December 31, 2009 and $385 million at March 31, 2009.

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.

· We are also seeing some new out-of-state competitors bidding on large transportation projects; thus, adding to the competitive environment.

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, tolls collected and other highway related taxes. In addition, the federal government has not renewed the five-year SAFETEA-LU bill, which provided states with substantial funding for transportation infrastructure projects. The SAFETEA-LU bill expired on September 30, 2009 and the federal government rescinded $8.5 billion of the funding previously committed to be provided to the states in 2009, with interim financial assistance being extended on a month-to-month basis, at approximately 70% of the prior year SAFETEA-LU levels. We believe the lack of visibility in federal funding has negatively impacted the states’ highway and bridge construction awards and expenditures through March 2010.

On March 17, 2010, the Hiring Incentives to Restore Employment (“HIRE”) Act extended funding through December 31, 2010 at SAFETEA-LU levels, transferred $19.5 billion into the highway trust fund and restored the amount previously rescinded. The HIRE Act extension of the SAFETEA-LU bill should give the states more visibility on federal funding in the short-term; however, in the long term, a multi-year bill with adequate funding still needs to be adopted to enable the states to know that funding will be available to award large, two to four-year highway and bridge contracts.

In the fall 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 ultimately enact multi-year legislation similar to the SAFETEA-LU bill.

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 March 31, 2010 and the lower anticipated margin bid on some projects the Company has recently been awarded and has started or expects to start work on them 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 “Our Markets” below for a more detailed discussion of our markets and their funding sources.

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Results of Operations

The results of operations for the three months ended March 31, 2010 compared with three months ended March 31, 2009 are as follows (dollar amounts in thousands) (unaudited):

	Three months ended March 31,
	2010			2009			% change

Revenues	$	86,157		$	94,866			(9.2	%)
Gross profit		8,249			11,811			(30.2	%)
Gross margin		9.6	%		12.5	%		(23.2	%)
General and administrative expenses, net		(5,464	)		(3,214	)		70.0	%
Other income (loss)		31			85			(63.5	%)
Operating income		2,816			8,682			(67.6	%)
Operating margin		3.3	%		9.2	%		(64.1	%)
Gain on sale of securities		417			2		NM
Interest income		202			159			27.0	%
Interest expense		(297	)		(58	)		412.1	%
Income before taxes		3,138			8,785			(64.3	%)
Income taxes		(858	)		(2,919	)		(70.6	%)
Net income		2,280			5,866			(61.1	%)
Net income attributable to the non-controlling interests in earnings of subsidiaries		(728	)		(301	)		141.9	%
Net income attributable to Sterling common stockholders	$	1,552		$	5,565			(72.1	%)
Contract backlog, end of period	$	618,000		$	385,000			60.5	%
NM – Not meaningful

Revenues

Revenues decreased $8.7 million for the three months ended March 31, 2010 as compared to the comparable 2009 period. The decrease in revenues was primarily due to the reduced number of crews working in the first quarter of 2010 as a result of the lower backlog discussed above and wetter weather than in the first quarter of 2009 offset by 2010 revenues from our operations in Utah which were acquired in December 2009. The wetter weather caused our crews and equipment to make less progress towards completion on our contracts than in 2009 and, thus, earn less revenues during the 2010 period.

During the third quarter of 2009, we began to reduce the number of our crews as a result of completing certain projects without a comparable increase in backlog. At March 31, 2010, our employees, excluding those of our Utah operations, totaled 896 versus 1,224 at March 31, 2009. The lower crew level in the first quarter of 2010 resulted in lower revenues in that quarter.

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Gross profit

At March 31, 2010, we had approximately 75 contracts-in-progress 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 quarters due to variations among contracts and depending upon which contracts are just commencing or are at a more advanced stage of completion. At March 31, 2010, our contracts in progress were on average at a more advanced stage of completion than were those in progress at the comparable 2009 period end.

As discussed above, revenues for the first quarter in our Texas and Nevada market have declined from the prior year as we completed projects without totally replacing them with new awards. This has resulted in idling of a portion of our equipment fleet and resulted in under absorption of the depreciation, repairs and maintenance, insurance and property taxes related to such equipment. The under absorption is included in cost of revenues and amounted to a reduction of gross profit of approximately $1.0 million for the three months ended March 31, 2010. Management has reviewed the individual pieces of such equipment and determined that it is the same or similar type and age of other equipment not idled and will be used when the market returns to a more normalized level of activity and, consequently, there is no impairment in value of such idle equipment.

Gross profit decreased by $3.6 million during the first three months of 2010 versus gross profit for the three months ended March 31, 2009. Such decrease was due to less productivity on contracts-in-progress as a result of fewer crews and wetter weather; differences in the mix in the stage of completion and profitability of contracts during the period and unabsorbed equipment overhead offset by the gross profit earned by our Utah operations. The gross margin of 9.6% during the 2010 period decreased from 12.5% in the 2009 period for the same reasons as the absolute gross profit amount decreased.

General and administrative expenses

General and administrative expenses increased by $2.3 million in the first quarter of 2010 over the comparable period in 2009. The primary reasons for the higher G&A during the three months ended March 31, 2010 versus the comparable period in 2009 were G&A expenses of our Utah operations acquired in December 2009 and increases in compensation expense. The increase in compensation expense in the first quarter of 2010 was due primarily to the hiring of talented project managers, who became available because of market conditions and are necessary to assure our future growth, and the reversal in the first quarter of 2009 of certain bonuses accrued at 2008 year-end that were not subsequently paid. The reversal of such bonuses in the first quarter of 2009 reduced G&A expenses for that fiscal period as compared to 2010.

As a percent of revenues, G&A, was 6.3% and 3.4% for the three months ended March 31, 2010 and 2009. Our Utah operations’ G&A in the 2010 period amounted to 1.7% of consolidated revenues. We have started to review the Company's and our Utah operations' G&A to reduce duplicative costs, but it is too soon after the acquisition to realize substantial savings from our review. General and administrative expenses do not vary directly with the volume of work performed on contracts.

Gain on sale of securities

For the three months ended March 31, 2010, the Company realized $417,000 of gain on sale of securities, primarily as a result of selling certain securities, the assets of which are a crude oil commodity pool, discussed in Item 3. At December 31, 2009, the unrealized gain on these securities was $242,000.

Income taxes

Our effective income tax rates for the first quarter of 2010 and 2009 were 27.3% and 33.2%, respectively, and varied from the statutory rate as a result of various permanent differences, primarily the portion of earnings of subsidiaries taxed to the non-controlling interest owners.

Net income attributable to non-controlling interests

Net income attributable to non-controlling interests increased by $0.4 million in the three months ended March 31, 2010 over 2009 because of the inclusion in 2010 of earnings of our Utah operations acquired in late 2009 offset by a decrease in earnings of our Nevada operations in the three months ended March 31, 2010 versus the comparable period in 2009. The latter decrease was the result of the market conditions discussed above under “Backlog at March 31, 2010."

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Liquidity and Capital Resources

Cash Flows

The following table sets forth information about our cash flows for the three months ended March 31, 2010 and 2009 (amounts in thousands).

	2010			2009
Cash and cash equivalents (at end of period)	$	46,867		$	57,712

Net cash provided by (used in)
Operating activities		14,702			5,055
Investing activities		(10,423	)		2,767
Financing activities		(11,818	)		(5,415	)
Supplementary information:
Capital expenditures		1,647			1,598
Working capital (at end of period)	$	107,396		$	98,924

Operating Activities.

Significant non-cash items for the three month periods included in operating activities are:

· depreciation and amortization, which for 2010 totaled $4.0 million, an increase of $0.4 million from 2009 as a result of depreciation of $0.6 million in 2010 on equipment purchased in the RLW acquisition in December, 2009 offset by lower depreciation in 2010 on remaining equipment;

· deferred tax expense was $0.3 million in 2010, 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 $2.3 million and the non-cash items discussed above, other significant components of cash flows from operations are as follows:

· contracts receivable and cost and earnings in excess of billings decreased by $7.6 million in the current year due to lower receivables and amounts not yet billable in Texas and Nevada because of the decrease in revenues in 2010 partially offset by contract receivables and cost and earnings in excess of billings of our newly acquired Utah operations, as compared to an increase of $11.2 million in 2009, which was primarily due to an increase in revenues and a higher level of customer retentions than in 2008;

· deposits and other current assets increased by $0.4 million in the first quarter of 2010 primarily as a result of additional deposits made to a supplier to purchase materials for specific contracts for delivery in 2010. The supplier is owned by a member of management of a subsidiary and such deposits amounted to $3.0 million at March 31, 2010. A member of Sterling’s management reviews all transaction with such supplier before they are transacted.

· billings in excess of costs and estimated earnings on uncompleted contracts increased by $2.2 million in the first quarter of 2010 due to an increase in advance billings allowed on certain projects.

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Investing Activities.

Expenditures for the replacement of certain equipment and to expand office and shop facilities totaled $1.6 million in the first three months of 2010, approximately the same amount as in the first quarter of 2009.

During the three months ended March 31, 2010 and 2009, the Company had net purchases of short-term securities of $8.8 million and net sales of $4.6 million, respectively. This increase in 2010 is primarily due to cash generated by operations.

Financing Activities.

Financing activities in the first three months of 2010 primarily reflect a reduction of $10.0 million in borrowings under our $75.0 million Credit Facility as compared to a reduction of $5.0 million of borrowings in the comparable period in 2009. The amount of borrowings under the Credit Facility is based on the Company's expectations of working capital requirements.

During the first quarter of 2010, we distributed $1.8 million of income earned in 2009 attributable to non-controlling interest owners of subsidiaries.

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;

· equity in construction joint ventures

· 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 March 31, 2010, we had working capital of $107 million, a decrease of $6.5 million over December 31, 2009 and an increase of $8.5 million over March 31, 2009. Increasing working capital is an important element in expanding our bonding capacity, which enables us to bid on larger and longer duration projects. The decrease in working capital in the three months ended March 31, 2010 was the result of the following (in millions):

Net income	$	2.3
Depreciation		4.0
Deferred tax expense		0.3
Capital expenditures		(1.6	)
Debt repayment		(10.0	)
Distributions to non-controlling interest owners of subsidiaries		(1.8	)
Other		0.3
Total decrease in working capital	$	(6.5	)

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.

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Sources of Capital

In addition to our available cash and cash equivalents, short term investments 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 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. At March 31, 2010, the aggregate borrowings outstanding under the Credit Facility were $30.0 million. Also outstanding was a letter of Credit of $1.7 million, which reduces availability under the Credit Facility. Availability under the Credit Facility was, therefore, $43.3 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.

To date we have not experienced any difficulty in borrowing under our Credit Facility or any change in its terms and the Company was in compliance with all covenants under the Credit Facility as of March 31, 2010.

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 March 31, 2011.

The unpaid principal balance of each prime-based loan bears 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 three months ended March 31, 2010 and 2009 was 3.25% for both periods.

At our election, the loans under the Credit Facility bear interest at either a LIBOR-based interest rate or a prime-based interest rate. Since the Credit Facility has been outstanding, we have not elected the LIBOR-based interest rate.

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 generally 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.

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Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements, other than for operating leases as discussed in Note 9 to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

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.

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 people in 2000 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, 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 over the preceding years.

State Highway Markets

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 taxes, which tax rate has not increased since 1994, 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. Because the SAFETEA-LU bill expired on September 30, 2009, the federal government rescinded $8.5 billion of the funding previously committed to be provided to the states in 2009, with interim financial assistance for 2010 being extended on a month-to-month basis, at approximately 70% of the prior year SAFETEA-LU levels. We believe the lack of visibility in federal funding has negatively impacted the states’ highway and bridge construction awards and expenditures for 2010.

On March 17, 2010, the HIRE Act was enacted by the federal government and extended funding for highway and bridges through December 31, 2010 at SAFETEA-LU levels, transferred $19.5 billion into the highway trust fund and restored the amount previously rescinded. The Hire Act extension of the SAFETEA-LU bill should give the states more visibility on federal funding in the short-term; however, in the long-term, a multi-year bill with adequate funding still needs to be adopted to enable the states to know that funding will be available to award large, two to four-year highway and bridge contracts.

In the fall of 2009, we had anticipated these matters would be resolved in late 2009 or early in the first quarter of 2010; however, we are unable to predict when or on what terms the federal government might ultimately enact long-term legislation similar to the SAFETEA-LU bill.

In February 2009, the American Recovery and Reinvestment Act, or federal economic-stimulus legislation, was enacted by the federal government that authorized $26.7 billion for highway and bridge construction. A significant portion of these funds were to be used for ready-to-go, quick spending highway projects for which contracts could 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.

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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 approximately $4.0 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. 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.

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.

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Competitive Environment

During the last quarter of 2008, the year 2009 and continuing into 2010, the bidding environment in our markets has been much more competitive because of the following:

· While our business does not include 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.

· We are also seeing some new competitors from out-of-state bidding on large transportation projects; thus, adding to the competitive environment.

Recent reductions in miles driven in the U.S. and more fuel efficient vehicles are reducing federal and state gasoline taxes and tolls collected which are the primary funding sources for construction of highways and bridges. Also, as discussed above, the federal government has not renewed the SAFETEA-LU bill, which expired September 30, 2009 and provided states with substantial funding for transportation infrastructure projects, and has been providing reduced federal financial assistance to the States on a month-to-month basis. 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.

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 March 31, 2010 and the lower anticipated margin bid on some projects that we have recently been awarded and have started or 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 the full year 2010 will be substantially below the results we achieved for 2009.

While the bidding climate varies by locality, we continue to bid projects that fit our expertise and current criteria for potential revenues and gross margins after giving consideration to resource utilization, degree of difficulty in the projects, amount of subcontracts and materials and project competition. We do expect that our markets will ultimately recover from the conditions described above and that our backlog, revenues and 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 management experience to weather current market conditions and to continue to compete successfully for projects as they become available at acceptable profit margin levels.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Changes in interest rates are one of our sources of market risks. At March 31, 2010, $30.0 million of outstanding indebtedness was at floating interest rates. Based on our average long-term debt outstanding during the first three months of 2010, we estimate that an increase of 1.0% in the interest rate would have resulted in an increase in our interest expense of approximately $1,000 for that period.

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, except for petroleum based products, 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.

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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 material cost increases in obtaining new surety bonds.

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. At March 31, 2010 and 2009, we had zero and $2.3 million invested in such securities. For the three months ended March 31, 2010 and 2009, the Company had a realized gain of $376,000 and a realized loss of $2,000, respectively, on these securities and unrealized losses of zero and $67,000, respectively. 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 4. 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 March 31, 2010 to ensure that the information required to be disclosed by the Company in this Report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Company's management including the principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

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 first fiscal quarter of 2010 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

As permitted by guidance provided by the Securities and Exchange Commission, the scope of management's assessment of the effectiveness of the Company's internal controls over financial reporting as of March 31, 2010, did not include the internal controls of RLW which are included in the 2010 condensed consolidated financial statements. The Company will include the RLW business in the scope of management's assessment of internal control over financial reporting by December 31, 2010.

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.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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.

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, 2009.

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

None

Item 3. Defaults upon Senior Securities

None

Item 4. Reserved by Securities and Exchange Commission

Item 5. Other Information

None

Item 6. Exhibits

Exhibit No. Description

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)

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SIGNATURES

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

STERLING CONSTRUCTION COMPANY, INC.

Date: May 10, 2010 By: /s/ Patrick T. Manning.

Patrick T. Manning.

Chairman and Chief Executive Officer

Date: May 10, 2010 By: /s/ James H. Allen, Jr.

James H. Allen, Jr.

Senior Vice-President and Chief Financial Officer

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STERLING CONSTRUCTION COMPANY, INC.

Quarterly Report on Form 10-Q for Period Ended March 31, 2010

Exhibit Index

Exhibit No.		Description
*31.1		Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2		Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.0		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