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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
one)
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[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended: March 31, 2009
Or
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[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the transition period from___ to ___
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Commission
file number 1-31993
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STERLING
CONSTRUCTION COMPANY, INC.
(Exact
name of registrant as specified in its charter)
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DELAWARE
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25-1655321
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State
or other jurisdiction of incorporation
or
organization
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(I.R.S.
Employer
Identification
No.)
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20810
Fernbush Lane
Houston,
Texas
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77073
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(Address
of principal executive office)
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(Zip
Code)
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Registrant’s
telephone number, including area code (281)
821-9091
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(Former
name, former address and former fiscal year, if changed from last
report)
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Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90
days. [√] Yes [ ] No
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
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Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
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Large
accelerated
filer [ ] Accelerated
filer [√]
Non-accelerated
filer [ ] (Do not check if a smaller
reporting
company) Smaller
reporting company [ ]
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange
Act). [ ] Yes [√] No
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At
May 1, 2009, there were 13,205,524 shares outstanding of the issuer’s
common stock, par value $0.01 per share
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STERLING
CONSTRUCTION COMPANY, INC.
Quarterly
Report on Form 10-Q for the period ended March 31, 2009
Item
1 Condensed
Consolidated Unaudited Financial Statements
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
(Amounts
in thousands, except share and per share data)
(Unaudited)
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March
31,
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December 31,
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|||||||
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2009
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2008
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|||||||
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ASSETS
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||||||||
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Current
assets:
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||||||||
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Cash
and cash equivalents
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$ | 57,712 | $ | 55,305 | ||||
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Short-term
investments
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19,724 | 24,379 | ||||||
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Contracts
receivable, including retainage
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70,141 | 60,582 | ||||||
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Costs
and estimated earnings in excess of billings on uncompleted
contracts
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9,128 | 7,508 | ||||||
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Inventories
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1,279 | 1,041 | ||||||
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Deferred
tax asset, net
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177 | 1,203 | ||||||
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Deposits
and other current assets
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2,996 | 2,704 | ||||||
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Total
current assets
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161,157 | 152,722 | ||||||
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Property
and equipment, net
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76,015 | 77,993 | ||||||
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Goodwill
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57,232 | 57,232 | ||||||
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Other
assets, net
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1,550 | 1,668 | ||||||
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Total
assets
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$ | 295,954 | $ | 289,615 | ||||
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
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Accounts
payable
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$ | 26,047 | $ | 26,111 | ||||
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Billings
in excess of costs and estimated earnings on uncompleted
contracts
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28,174 | 23,127 | ||||||
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Current
maturities of long-term obligations
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73 | 73 | ||||||
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Income
taxes payable
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597 | 547 | ||||||
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Other
accrued expenses
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7,342 | 7,741 | ||||||
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Total
current liabilities
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62,233 | 57,599 | ||||||
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Long-term
liabilities:
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Long-term
debt, net of current maturities
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50,464 | 55,483 | ||||||
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Deferred
tax liability, net
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12,249 | 11,117 | ||||||
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Put
liability related to and noncontrolling owner's interest in
subsidiary
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6,244 | 6,300 | ||||||
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Total
long-term liabilities
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68,957 | 72,900 | ||||||
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Commitments
and contingencies
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Stockholders’
equity:
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Preferred
stock, par value $0.01 per share; authorized 1,000,000 shares,
none issued
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-- | -- | ||||||
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Common
stock, par value $0.01 per share; authorized 19,000,000 shares, 13,198,204
and 13,184,638 shares issued and outstanding
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131 | 131 | ||||||
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Additional
paid-in capital
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150,373 | 150,223 | ||||||
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Retained
earnings including accumulated other comprehensive loss of $67 in
2009
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14,260 | 8,762 | ||||||
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Total
Sterling common stockholders’ equity
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164,764 | 159,116 | ||||||
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Total
liabilities and stockholders’ equity
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$ | 295,954 | $ | 289,615 | ||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
(Amounts
in thousands, except share and per share data)
(Unaudited)
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Three
months ended March 31,
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||||||||
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2009
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2008
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Revenues
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$ | 94,866 | $ | 84,926 | ||||
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Cost
of revenues
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83,055 | 76,825 | ||||||
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Gross
profit
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11,811 | 8,101 | ||||||
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General
and administrative expenses
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(3,214 | ) | (3,447 | ) | ||||
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Other
income (expense)
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87 | (11 | ) | |||||
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Operating
income
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8,684 | 4,643 | ||||||
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Interest
income
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159 | 287 | ||||||
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Interest
expense
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(58 | ) | (130 | ) | ||||
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Income before income
taxes and earnings attributable to the noncontrolling
interest
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8,785 | 4,800 | ||||||
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Income
tax expense
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(2,919 | ) | (1,591 | ) | ||||
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Net income
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5,866 | 3,209 | ||||||
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Less:
Net income attributable to the noncontrolling interest in earnings of
subsidiary
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(301 | ) | (92 | ) | ||||
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Net
income attributable to Sterling common stockholders
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$ | 5,565 | $ | 3,117 | ||||
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Net
income per share attributable to Sterling common
stockholders:
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Basic
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$ | 0.42 | $ | 0.24 | ||||
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Diluted
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$ | 0.41 | $ | 0.23 | ||||
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Weighted
average number of common shares outstanding used in computing
per share amounts:
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Basic
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13,188,266 | 13,068,864 | ||||||
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Diluted
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13,715,629 | 13,684,249 | ||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
FOR THE
THREE MONTHS ENDED MARCH 31, 2009
(Amounts
in thousands)
(Unaudited)
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Common
Stock
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Accumulated
Other
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Shares
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Amount
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Additional Paid-in
Capital |
Comprehensive Income (Loss)
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Retained
Earnings
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Total
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Balance
at January 1, 2009
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13,185 | $ | 131 | $ | 150,223 | $ | -- | $ | 8,762 | $ | 159,116 | |||||||||||||
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Net
income attributable to Sterling common stockholders
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-- | -- | -- | -- | 5,565 | 5,565 | ||||||||||||||||||
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Stock
issued upon option and warrant exercises
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5 | -- | 11 | -- | -- | 11 | ||||||||||||||||||
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Unrealized
loss on available-for-sale securities, net of tax
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-- | -- | -- | (67 | ) | -- | (67 | ) | ||||||||||||||||
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Issuance
and amortization of restricted stock
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8 | -- | 93 | -- | -- | 93 | ||||||||||||||||||
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Stock-based
compensation expense
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-- | -- | 46 | -- | -- | 46 | ||||||||||||||||||
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Balance
at March 31, 2009
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13,198 | $ | 131 | $ | 150 | $ | (67 | ) | $ | 14,327 | $ | 164,764 | ||||||||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Amounts
in thousands)
(Unaudited)
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Three
months ended March 31,
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||||||||
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2009
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2008
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Net
Income attributable to Sterling common stockholders
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$ | 5,565 | $ | 3,117 | ||||
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Other
comprehensive income, net of tax:
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Unrealized
holding loss on available-for-sale securities, net of
tax
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(67 | ) | -- | |||||
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Comprehensive
income attributable to Sterling common stockholders
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$ | 5,498 | $ | 3,117 | ||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
(Amounts
in thousands)
(Unaudited)
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Three
months ended March 31,
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||||||||
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2009
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2008
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Net
income
attributable to Sterling common stockholders
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$ | 5,565 | $ | 3,117 | ||||
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Plus:
Net income attributable to noncontrolling interest
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301 | 92 | ||||||
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Net
income
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5,866 | 3,209 | ||||||
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Adjustments
to reconcile net income to net cash
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provided by operating
activities:
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Depreciation
and amortization
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3,603 | 3,285 | ||||||
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Loss
(gain) on sale of property and equipment
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(89 | ) | 11 | |||||
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Deferred
tax expense
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2,158 | 1,183 | ||||||
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Stock-based
compensation expense
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139 | 105 | ||||||
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Excess
tax benefits from exercise of stock options
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-- | (116 | ) | |||||
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Interest
expense accreted on noncontrolling interest
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51 | 126 | ||||||
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Other
changes in operating assets and liabilities:
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(Increase)
decrease in contracts receivable
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(9,559 | ) | 1,258 | |||||
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(Increase)
decrease in costs and estimated earnings
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in excess of billings on
uncompleted contracts
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(1,620 | ) | (1,918 | ) | ||||
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(Increase)
decrease in other current assets
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(125 | ) | (53 | ) | ||||
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Increase
(decrease) in accounts payable
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(64 | ) | (5,280 | ) | ||||
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Increase
(decrease) in billings in excess of costs and
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estimated earnings on
uncompleted contracts
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5,047 | (1,434 | ) | |||||
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Increase
(decrease) in other accrued expenses
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(350 | ) | 280 | |||||
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Net cash provided by (used in) by
operating activities
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5,057 | 656 | ||||||
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Cash
flows from investing activities:
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Additions
to property and equipment
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(1,598 | ) | (4,467 | ) | ||||
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Proceeds
from sale of property and equipment
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125 | 188 | ||||||
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Purchases
of short-term investments, available for sale
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(6,405 | ) | -- | |||||
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Proceeds
from sales of short-term investments, available for sale
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10,993 | 54 | ||||||
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Net cash provided by (used in)
investing activities
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3,115 | (4,225 | ) | |||||
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Cash
flows from financing activities:
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Cumulative
daily drawdowns – Credit Facility
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50,000 | 60,000 | ||||||
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Cumulative
daily reductions – Credit Facility
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(55,000 | ) | (65,000 | ) | ||||
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Repayments
under long-term obligations
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(18 | ) | (31 | ) | ||||
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Issuance
of note receivable
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(350 | ) | -- | |||||
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Payments
received on note receivable
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-- | 60 | ||||||
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Distribution
of earnings to noncontrolling interest
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(408 | ) | -- | |||||
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Excess
tax benefits from exercise of stock options
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-- | 116 | ||||||
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Issuance
of common stock pursuant to the exercise of options and
warrants
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11 | 120 | ||||||
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Expenditures
related to 2007 equity offering
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-- | (143 | ) | |||||
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Net cash provided by (used in)
financing activities
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(5,765 | ) | (4,878 | ) | ||||
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Net
increase (decrease) in cash and cash equivalents
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2,407 | (8,447 | ) | |||||
| Cash and cash equivalents at beginning of period | 55,305 | 80,649 | ||||||
| Cash and cash equivalents at end of period | $ | 57,712 | $ | 72,202 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for interest | $ | 13 | $ | 82 | ||||
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Cash
paid during the period for taxes
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-- | -- | ||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
THREE
MONTHS ENDED MARCH 31, 2009 (UNAUDITED)
1. Basis
of Presentation
Sterling Construction Company, Inc.
(“Sterling” or “the Company”) is a leading heavy civil construction company that
specializes in the building, reconstruction and repair of transportation and
water infrastructure in large and growing markets in Texas and
Nevada. Our transportation infrastructure projects include highways,
roads, bridges and light rail, and our water infrastructure projects include
water, wastewater and storm drainage systems. We provide general
contracting services primarily to public sector clients utilizing our own
employees and equipment for activities including excavating, paving, pipe
installation, and asphalt and concrete placement. We purchase the
necessary materials for our contracts, perform approximately three-quarters of
the work required by our contracts with our own crews, and generally engage
subcontractors only for ancillary services.
Although we describe our business in
this report in terms of the services we provide, base of customers and
geographic areas in which we operate, we have concluded that our operations
comprise one reportable segment, heavy civil construction, pursuant to Statement
of Financial Accounting Standards No. 131 – "Disclosures about Segments of an
Enterprise and Related Information." In making this determination, we
considered that each project has similar characteristics, includes similar
services, has similar types of customers and is subject to similar economic and
regulatory environments. We organize, evaluate and manage our
financial information around each project when making operating decisions and
assessing our overall performance.
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,
2008. 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, 2009 and the results of
operations and cash flows for the periods presented. Certain
information and note disclosures prepared in accordance with generally accepted
accounting principles have been either condensed or omitted pursuant to SEC
rules and regulations. Interim results may be subject to significant
seasonal variations and the results of operations for the three months ended
March 31, 2009 are not necessarily indicative of the results to be expected for
the full year.
The accompanying condensed consolidated
financial statements include the accounts of subsidiaries in which the Company
has a greater than 50% ownership interest, and all intercompany balances and
transactions have been eliminated in consolidation. For all periods
presented, the Company had no subsidiaries with ownership interests less than
50%. The Company's subsidiaries are: Texas Sterling Construction Co.
("TSC"), Road and Highway Builders, LLC ("RHB"), Road and Highway Builders, Inc.
("RHB Inc.") and Road and Highway Builders of California, Inc. ("RHB
Cal").
2. Critical
Accounting Policies
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Management’s
estimates, judgments and assumptions are continually evaluated based on
available information and experience; however, actual amounts could differ from
those estimates.
On
an ongoing basis, the Company evaluates the critical accounting policies used to
prepare its condensed consolidated financial statements, including, but not
limited to, those related to:
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●
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revenue
recognition
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●
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contracts
and retainage receivables
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●
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inventories
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●
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impairment
of long-term assets
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●
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income
taxes
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●
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self-insurance;
and
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●
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stock-based
compensation
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The Company’s significant accounting
policies are more fully described in Note 1 of the Notes to Consolidated
Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2008. There have been no material changes to
such significant accounting policies.
3. Recent
Accounting Pronouncements
In December 2007, the Financial
Accounting Standards Board (FASB) revised Statement of Financial Accounting
Standards No. 141, “Business Combinations” (SFAS 141(R)). This
Statement establishes principles and requirements for how the acquirer: (a)
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree; (b) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase and (c) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. Also,
under SFAS 141(R), all direct costs of the business combination must be charged
to expense on the financial statements of the acquirer as
incurred. SFAS 141(R) revises previous guidance as to the recording
of post-combination restructuring plan costs by requiring the acquirer to record
such costs separately from the business combination. The adoption of
this statement on January 1, 2009, did not have an effect on the accompanying
financial statements.
In September 2006, the FASB issued
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
(SFAS 157) which establishes a framework for measuring fair value and requires
expanded disclosure about the information used to measure fair
value. The statement applies whenever other statements require or
permit assets or liabilities to be measured at fair value, and does not expand
the use of fair value accounting in any new circumstances. We adopted
this statement on January 1, 2009, which did not have a material impact on the
accompanying financial statements.
In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests
in Consolidated Financial Statements” (SFAS 160). SFAS 160 clarifies
previous guidance on how consolidated entities should account for and report
noncontrolling interests in consolidated subsidiaries. The statement
standardizes the presentation of noncontrolling ("minority interests") for both
the consolidated balance sheet and income statement. As a result of
adopting this Statement on January 1, 2009, the accompanying financial
statements segregate net income as attributable to the Company's common
stockholders and noncontrolling owner's interest.
4. Cash
and Cash Equivalents and Short-term Investments
The
Company considers all highly liquid investments with original or remaining
maturities of three months or less at the time of purchase to be cash
equivalents. Substantially all of the cash and cash equivalents at March 31,
2009 and December 31, 2008 are uninsured temporary checking accounts,
investments in certificates of deposit and money market funds.
The
Company classifies short-term investments as securities available for sale in
accordance with SFAS No. 115, “Accounting for Certain Investments in
Debt and Equity Securities”. At March 31, 2009 and December 31, 2008, the
Company had $19.7 million and $24.4 million, respectively, of short-term
securities available for sale. The short-term investments at March
31, 2009 consist of certificates of deposit and treasury bills with maturities
of 180 to 270 days for which the market value approximates the specific cost and
investments in marketable equity securities, which are all level one and are
stated at their quoted market prices. The loss realized on these
securities during the three months ended March 31, 2009 was
immaterial. The unrealized loss of $67,000, net of $36,000 in
estimated taxes, on these securities for the three months ended March 31, 2009
is included in other comprehensive loss in stockholders' equity as the loss is
expected to be temporary. Upon sale of equity securities, the average
cost basis is used to determine the gain or loss.
5. Inventories
The Company’s inventories are stated at
the lower of cost or market as determined by the average cost
method. Inventories consist of raw materials, such as broken
concrete, millings, and quarried stone which are expected to be utilized in
construction projects in the future. The cost of inventory includes
labor, trucking and equipment costs.
6. Property
and Equipment (in thousands)
|
March
31, 2009
|
December
31, 2008
|
|||||||
|
Construction
equipment
|
$ | 94,911 | $ | 96,002 | ||||
|
Transportation
equipment
|
12,217 | 12,358 | ||||||
|
Buildings
|
4,445 | 3,926 | ||||||
|
Office
equipment
|
569 | 547 | ||||||
|
Construction
in progress
|
474 | 792 | ||||||
|
Land
|
2,916 | 2,916 | ||||||
|
Water
rights
|
200 | 200 | ||||||
| 115,732 | 116,741 | |||||||
|
Less
accumulated depreciation
|
(39,717 | ) | (38,748 | ) | ||||
| $ | 76,015 | $ | 77,993 | |||||
Construction
in progress at March 31, 2009 consists of expenditures for new maintenance shop
facilities at various locations in Texas.
7. Income
per Share
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 for the period. Diluted net income per share attributable
to Sterling common shareholders is computed giving effect to all potentially
dilutive common stock options and warrants using the treasury stock
method. At March 31, 2009 and 2008, there were 96,000 and 82,500,
respectively, common stock options with a weighted average exercise price per
share of $24.43 and $24.90, respectively, which were excluded from the
calculation of diluted income per share as they were anti-dilutive. The
following table reconciles the numerators and denominators of the basic and
diluted net income per common share computations for the three months ended
March 31, 2009 and 2008, respectively (in thousands, except per share
data):
|
Three months ended March
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Numerator:
|
||||||||
|
Net
income attributable to common stockholders
|
$ | 5,565 | $ | 3,117 | ||||
|
Denominator:
|
||||||||
|
Weighted
average common shares outstanding – basic
|
13,188 | 13,069 | ||||||
|
Shares
for dilutive stock options, restricted stock and warrants
|
528 | 615 | ||||||
|
Weighted
average common shares outstanding and assumed conversions –
diluted
|
13,716 | 13,684 | ||||||
| Basic net income per share attributable to Sterling common stockholders | $ | 0.42 | $ | 0.24 | ||||
| Diluted net income per share attributable to Sterling common stockholders | $ | 0.41 | $ | 0.23 | ||||
8. Stock-Based
Compensation Plans and Warrants
The Company's stock plans, which
currently have stock options outstanding, are administered by the Compensation
Committee of the Board of Directors. In general, the plans provide for all
options to be issued with a per-share exercise price equal to the fair market
value of a share of common stock on the date of grant. The original
terms of the options typically do not exceed 10 years. Stock options
generally vest over a three to five year period. Note 8 – Stock
Options and Warrants of the Notes to the Consolidated Financial Statements
contained in the Annual Report on Form 10-K for the year ended December 31, 2008
should be referred to for additional information regarding the stock-based
incentive plans.
We
recorded stock-based compensation expense of $139,000 and $105,000 for the
three-month periods ended March 31, 2009 and 2008, respectively, (including
$93,000 and $53,000, respectively, related to restricted stock grants to
independent directors and certain employees discussed
below). Unrecognized compensation expense related to stock options at
March 31, 2009 and 2008 was $290,000 and $490,000, respectively, to be
recognized over a weighted average period of approximately 1.5 and 2.3 years,
respectively. Proceeds received by the Company from the exercise of
warrants and options for the three months ended March 31, 2009 and 2008 were
approximately $11,000 and $120,000. No options were granted in the
three months ended March 31, 2009 or March 31, 2008.
Unrecognized
compensation expense related to restricted stock awards at March 31, 2009 and
2008 was $270,000 and $120,000, respectively, to be recognized over a weighted
average period of 2.5 and 4.3 years, respectively. In May 2008 and
2007, the six non-employee directors of the Company were each granted 2,564 and
1,598 shares of restricted stock, respectively, at the market price on the date
of grant, or $19.50 and $21.90, respectively, which will be recognized ratably
over the one year restriction period. In March 2009 and 2008, several
key employees were granted an aggregated total of 8,366 and 5,672 shares of
restricted stock at $17.45 and $18.16 per share, respectively, resulting in an
expense of $146,000 and $103,000 to be recognized ratably over the five year
restriction period. In June 2008, another non-employee director was
re-elected to the board and was awarded 2,564 shares of restricted stock at
$19.50 per share.
At March
31, 2009, there were 405,800 shares covered by outstanding stock options and
334,046 shares covered by outstanding stock warrants.
9. Income
Taxes
The Company and its subsidiaries file
consolidated income tax returns in the United States federal jurisdiction and in
certain states. With few exceptions, the Company is no longer subject
to federal tax examinations for years prior to 2002 and state income tax
examinations prior to 2005. 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, 2009 and 2008.
In its 2005 tax return, the Company
used net operating tax loss carryforwards (“NOL”) that would have expired during
that year instead of deducting compensation expense that originated in 2005 as
the result of stock option exercises. Whether the Company can choose
not to take deductions for compensation expense in the tax return and to instead
use otherwise expiring NOLs is considered by management to be an uncertain tax
position. In the event that the IRS examines the 2005 tax return and
determines that the compensation expense is a required deduction in the tax
return, then the Company would deduct the compensation expense instead of the
NOL used in the period; however there would be no cash impact on tax paid due to
the increased compensation deduction. In addition, there would be no
interest or penalties due as a result of the change. Based on the
Company’s detailed analysis, management has determined that it is more likely
than not this position will be sustained upon examination, and this uncertain
tax position was determined to have a measurement of $0.
The effective income tax rates were
33.2% and 33.1% of income before income taxes and noncontrolling interest for
the three months ended March 31, 2009 and 2008, respectively. The
difference between the effective tax rates and the statutory rate of 35% is the
result of miscellaneous permanent differences, including the portion of earnings
of a subsidiary taxed to the noncontrolling interest owner, offset by the
revised Texas franchise tax.
10. Noncontrolling
Interest in Subsidiary
On October 31, 2007, the Company
purchased a 91.67% interest in Road and Highway Builders, LLC (“RHB”) and all of
the outstanding capital stock of Road and Highway Builders Inc. ("RHB Inc.")
then an inactive Nevada Corporation. RHB is a heavy civil
construction business located in Reno, Nevada that builds roads, highways and
bridges for state and local governmental agencies.
The
noncontrolling interest owner of RHB has the right to put, or require the
Company to buy, his remaining 8.33% interest in RHB and, concurrently, the
Company has the right to require that owner to sell his 8.33% interest to the
Company, beginning in 2011. The purchase price in each case is 8.33%
of the product of six times the simple average of RHB's income before interest,
taxes, depreciation and amortization for the calendar years 2008, 2009 and
2010. At the date of acquisition, the difference between the
noncontrolling owner's interest in the historical basis of RHB and the estimated
fair value of that interest was recorded as a liability to noncontrolling
interest and a reduction in additional paid-in-capital. Any changes
to the estimated fair value of the noncontrolling interest will be recorded as a
corresponding change in additional paid-in-capital. Additionally,
interest expense ($51,000 and $126,000 for the three months ended March 31, 2009
and 2008, respectively) has been accreted to the noncontrolling interest
liability based on the discount rate used to calculate the fair
value.
The
following table summarizes the changes in the noncontrolling interest for the
three months ended March 31, 2009 and 2008 (in thousands):
|
2009
|
2008
|
|||||||
|
Balance,
beginning of period
|
$ | 6,300 | $ | 6,362 | ||||
|
Noncontrolling
interest in earnings of subsidiary
|
301 | 92 | ||||||
|
Accretion
of interest on noncontrolling interest liability
|
51 | 126 | ||||||
|
Distributions
to noncontrolling interest
|
(408 | ) | -- | |||||
|
Balance,
end of period
|
$ | 6,244 | $ | 6,580 | ||||
For more
detail regarding this acquisition, see Note 13 to the Consolidated Financial
Statements in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2008.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward
Looking Statements
This
Quarterly Report on Form 10-Q includes certain statements that are, or may be
deemed to be, “forward-looking statements” within the meaning of Section 27A of
the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E
of the Securities Exchange Act of 1934, as amended, (the “Exchange
Act”). These forward-looking statements may be found throughout this
report, including in this “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and in “Risk Factors”, below and relate to
matters such as our industry, business strategy, goals and expectations
concerning our market position, contract backlog, future operations, margins,
profitability, capital expenditures, liquidity and capital resources and other
financial and operating information. We use the words “anticipate,”
“assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,”
“forecast,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “will,”
“future” and similar terms and phrases to identify forward-looking statements in
this report.
Forward-looking
statements reflect our current expectations regarding future events, results or
outcomes. These expectations may or may not be
realized. Some of these expectations may be based upon assumptions or
judgments that prove to be incorrect. In addition, our business and
operations involve numerous risks and uncertainties, many of which are beyond
our control, which could result in our expectations not being realized or
otherwise could materially affect our financial condition, results of operations
and cash flows.
Actual
events, results and outcomes may differ materially from our expectations due to
a variety of factors. Although it is not possible to identify all of
these factors, they include, among others, the following:
|
|
·
|
changes
in general economic conditions, in federal, state and local government
funding for infrastructure services and in those governments' 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 obtaining required governmental permits and
approvals;
|
|
|
·
|
actions
of suppliers, subcontractors, 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 fixed-unit-price contracts, including
changes in availability, proximity and cost of materials such as steel,
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 and the impact of
competitive services and pricing;
|
|
|
·
|
our
ability to successfully identify, finance, complete and integrate
acquisitions;
|
|
|
·
|
citations
issued by any governmental authority, including the Occupational Safety
and Health Administration; and
|
|
·
|
the
current instability of financial institutions could cause losses on our
cash and cash equivalents and short-term
investments.
|
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, 2008 in evaluating any
forward-looking statements and are cautioned not to place undue reliance on
these forward-looking statements. Although we believe that our plans,
intentions and expectations reflected in or suggested by the forward-looking
statements that we make in this report are reasonable, we can provide no
assurance that such plans, intentions or expectations will be
achieved.
Any
forward-looking statements included in this report are made only as of the date
of this report, and we undertake no obligation to update any information
contained in this report or to publicly release the results of any revisions to
any forward-looking statements that may be made to reflect events or
circumstances that occur, or that we become aware of, after the date of this
report, except as may be required by applicable securities laws.
Overview
Sterling Construction Company, Inc.
(“Sterling” or “the Company”) operates in one segment, heavy civil construction,
through Texas Sterling Construction Co., ("TSC"), Road and Highway Builders, LLC
("RHB"), Road and Highway Builders Inc. ("RHB Inc") and Road and Highway
Builders of California, Inc ("RHB Cal") that specialize in the building,
reconstruction and repair of transportation and water infrastructure in large
and growing population markets in Texas and Nevada. Our
transportation infrastructure projects include highways, roads, bridges and
light rail, and our water infrastructure projects include water, wastewater and
storm drainage systems. We provide general contracting services
primarily to public sector clients utilizing our own employees and equipment for
activities including excavating, paving, pipe installation and asphalt and
concrete placement. We purchase the necessary materials for our
contracts, perform approximately three-quarters of the work required by our
contracts with our own crews, and generally engage subcontractors only for
ancillary services.
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, 2008.
Material
Changes in Financial Condition
At March 31, 2009, there had been no
material changes in the Company’s financial condition since December 31, 2008,
as discussed in Item 7 of the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008.
Results
of Operations
Three months ended March 31,
2009 compared with three months ended March 31, 2008
|
(dollar
amounts in thousands) (unaudited):
|
2009
|
2008
|
% change
|
|||||||||
|
Revenues
|
$ | 94,866 | $ | 84,926 | 11.7 | % | ||||||
|
Gross
profit
|
11,811 | 8,101 | 45.8 | % | ||||||||
|
Gross margin
|
12.5 | % | 9.5 | % | 31.6 | % | ||||||
|
General,
administrative and other expenses
|
(3,127 | ) | (3,458 | ) | (9.6 | %) | ||||||
|
Operating
income
|
8,684 | 4,643 | 87.0 | % | ||||||||
|
Operating margin
|
9.2 | % | 5.5 | % | 67.3 | % | ||||||
|
Interest
income, net
|
101 | 157 | (35.7 | %) | ||||||||
|
Income
before taxes and earnings attributable to the noncontrolling
interest
|
8,785 | 4,800 | 83.0 | % | ||||||||
|
Income
taxes
|
(2,919 | ) | (1,591 | ) | 83.5 | % | ||||||
|
Net
income attributable to the noncontrolling interest in earnings of
subsidiary
|
(301 | ) | (92 | ) | 227.2 | % | ||||||
|
Net
income attributable to Sterling common stockholders
|
$ | 5,565 | $ | 3,117 | 78.5 | % | ||||||
Revenues
Revenues for the first quarter of 2009
increased $9.9 million or 11.7% over the comparable quarter in
2008. A majority of the increase was due to the amount of revenues
earned by our Nevada operations in the first quarter of 2009 vs. the comparable
quarter in 2008. The increase in revenues in Nevada is primarily due
to projects being performed in 2009 in Southern Nevada where the weather is less
seasonal than in Northern Nevada where our Nevada projects were principally
located in 2008.
Backlog
At the end of the first quarter of the
current year, our backlog of construction projects was $385 million, as compared
to $448 million as of December 31, 2008 and $485 million at the end of the first
quarter of 2008. In the first quarter of 2009, we were awarded or were the
apparent low bidder on $32 million of new contracts. At March 31,
2009, we had $12 million in backlog which had not been officially awarded to
us. Historically, subsequent non-award of such low bids has not had
an adverse effect on the Company’s backlog or financial condition.
While our business does not include
residential and commercial infrastructure work, the severe fall-off in new
projects in those markets in Nevada and to a lesser extent in Texas, has
resulted in some residential and commercial infrastructure contractors bidding
on public sector transportation and water infrastructure projects, thus
increasing competition and creating downward pressure on bid prices in our
markets. These and other factors could adversely affect our ability
to maintain or increase our backlog through successful bids for new projects and
could adversely affect the profitability of new projects that we do obtain
through successful bids.
Recent reductions in miles driven in
the U.S. and more fuel efficient vehicles are reducing federal and state
gasoline taxes and tolls collected. Additionally, the current credit
crisis may limit the amount of state and local bonds that can be sold at
reasonable terms. Further, the nationwide decline in home sales, the
increase in foreclosures and a prolonged recession may result in decreases in
user fees and property and sales taxes. These and other factors could
adversely affect transportation and water infrastructure capital expenditures in
our markets.
In February 2009, the American Recovery
and Reinvestment Act ("ARRA") was signed into law which provides stimulus funds
of $2.25 billion in Texas and $200 million in Nevada for the construction of
highway and bridges over the years 2009 and 2010. These stimulus
funds have funded or partially funded certain projects in April 2009 lettings by
the Texas Department of Transportation ("TXDOT") and may increase the number or
projects, and margins thereon, that we bid the rest of this year and in
2010.
Gross
profit
During
2008 and 2009, we have had approximately 60 contracts-in-progress at any one
time of various sizes, expected different 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 and delay penalties), costs and gross profit. Thus gross
profit as a percent of revenues can increase or decrease from comparable and
sequential quarters–to–quarters due to which contracts are just commencing or
are at a more advanced stage of completion.
The
increase in gross profit of $3.7 million or 45.8% in the first quarter of 2009
over the comparable quarter in 2008 was due in part to the increase in revenues
of our Nevada operations in 2009 and in part to the mix in the stage of
completion and profitability of certain contracts at March 31, 2009 as discussed
above. The gross margin of 12.5% in the first quarter of 2009 may not
be indicative of the gross margins that the Company will achieve in subsequent
quarters of 2009.
General
and administrative expenses, net of other income
General
and administrative expenses, net of other income, decreased by $331,000 in the
first quarter of 2009 versus 2008, primarily due to lower bonus accruals and
depreciation charged to G&A, offset by an increase in accruals for external
and internal audit services in the first quarter of 2009 versus the comparable
period in 2008. As a percent of revenues, G&A, net of other
income, was 3.3% for the first quarter of 2009 versus 4.1% of revenues for the
comparable prior year quarter. General and administrative expenses
and other income do not vary directly with the volume of work performed on
contracts.
Operating
income
Operating
income increased $4.0 million in the first quarter of 2009 over 2008, due to the
factors discussed above regarding gross profit and general and administrative
expenses.
Income
taxes
Our
effective income tax rate for the first quarter of 2009 was 33.2% compared to
33.1% for the first quarter of 2008 and varied from the statutory rate as a
result of various miscellaneous permanent differences, including the portion of
earnings of a subsidiary taxed to the noncontrolling interest owner offset by
the revised Texas franchise tax.
Liquidity
and Capital Resources
Cash
Flows
The following table sets forth our cash
flows for the three months ended March 31, 2009 and 2008 (in thousands)
(unaudited):
|
Three
months ended
|
||||||||
|
March
31
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
and cash equivalents at end of period
|
$ | 57,712 | $ | 55,305 | ||||
|
Net
cash provided by (used in):
|
||||||||
|
Operating
activities
|
5,057 | 656 | ||||||
|
Investing
activities
|
3,115 | (4,225 | ) | |||||
|
Financing
activities
|
(5,765 | ) | (4,878 | ) | ||||
|
Increase
(decrease) in cash and cash equivalents
|
$ | 2,407 | $ | (8,447 | ) | |||
|
Capital
expenditures
|
$ | 1,598 | $ | 4,467 | ||||
|
Working
capital at end of period
|
$ | 98,924 | $ | 80,797 | ||||
Operating
Activities
Significant
non-cash items included in operating activities are:
|
|
●
|
depreciation
and amortization, which for the first three months of the current year
totaled $3.6 million, an increase of $0.3 million from last year, as a
result of the continued increase in the size of our construction fleet in
recent years; and
|
|
|
●
|
deferred
tax expense of $2.2 million in 2009 versus $1.2 million in 2008,
respectively, mainly attributable to accelerated depreciation methods used
on equipment for tax purposes and amortization for tax return purposes of
goodwill.
|
Besides
net income of $5.6 million attributable to Sterling's common stockholders and
the non-cash items discussed above, significant components of cash flow are as
follows:
|
|
●
|
contracts
receivable and costs and estimated earnings in excess of billings
increased by $11.2 million in the first three months of 2009 due in part
to the increase in revenues of $9.9 million, and in part due to the timing
of billings to customers, as compared to an increase of $0.7 million in
those accounts in 2008; and
|
|
|
●
|
the
increase in billings in excess of costs and estimated earnings on
uncompleted contracts of $5.0 million as of March 31, 2009, versus a
decrease of $1.4 million as of March 31, 2008, which reflects the increase
in volume of work being performed and timing of billings to
customers.
|
Investing
activities
Expenditures
for the replacement of certain equipment and to expand our construction fleet
and office and shop facilities totaled $1.6 million in the first three months of
2009, compared with a total of $4.5 million of property and equipment purchases
in the same period last year. Capital equipment is acquired as needed
to support work crews required by increased backlog and to replace retiring
equipment. We plan to continue the replacement of equipment over the
remainder of the year as required. The decrease in capital
expenditures in 2009 was principally due to management's cautious view regarding
certain of the Company's markets and current economic
uncertainties. Unless such facts change, management expects capital
expenditures in 2009 to be less than in 2008.
Also
during the three months ended March 31, 2009 and 2008, the Company had net sales
of short-term securities of $4.6 million and $54,000,
respectively.
Financing
activities
Financing
activities in the first three months of 2009 and 2008 primarily reflect a
reduction of $5.0 in borrowings in each of those periods under our $75.0 million
Credit Facility. The amount of borrowings under the Credit Facility
is based on the Company's expectations of working capital
requirements.
Liquidity
The level
of working capital for our construction business varies due to fluctuations
in:
|
|
·
|
customer
receivables and contract
retentions;
|
|
|
·
|
costs
and estimated earnings in excess of
billings;
|
|
|
·
|
billings
in excess of costs and estimated
earnings;
|
|
|
·
|
the
size and status of contract mobilization payments and progress
billings;
|
|
|
·
|
the
amounts owed to suppliers and
subcontractors.
|
Some of
these fluctuations can be significant.
As of
March 31, 2009, we had working capital of $98.9 million, an increase of $3.8
million over December 31, 2008. Working capital is an important
element in expanding our bonding capacity, which enables us to bid on larger and
longer duration projects. The increase in working capital was mainly
the result of net income plus depreciation and deferred tax expense totaling
$11.3 million reduced by purchases of property and equipment of $1.6 million and
net repayment of debt of $5.0 million.
The
Company believes that it has sufficient liquid financial resources, including
the unused portion of its Credit Facility, to fund its requirements for the next
twelve months of operations, including its bonding requirements, and expects no
other material changes in its liquidity.
Sources
of Capital
In
addition to our available cash and cash equivalents balances and cash provided
by operations, we use borrowings under our Credit Facility with Comerica Bank to
finance our capital expenditures and working capital needs.
In October 2007, we entered into a new
Credit Facility with Comerica Bank which matures October 31,
2012. The Credit Facility allows for borrowings of up to
$75.0 million and is secured by all assets of the Company, other than
proceeds and other rights under our construction contracts which are pledged to
our bond surety. At March 31, 2009, the aggregate borrowings
outstanding under the Credit Facility were $50.0 million, and the aggregate
amount of letters of credit outstanding under the Credit Facility was
$1.8 million, which reduces availability under the Credit
Facility. Availability under the Credit Facility was therefore $23.2
million at March 31, 2009.
The Credit Facility requires the
payment of a quarterly commitment fee of 0.25% per annum of the unused portion
of the Credit Facility. At our election, the loans under the Credit
Facility bear interest at either a LIBOR-based interest rate or a prime-based
interest rate. The average interest rate on funds borrowed under the
Credit Facility during the three months ended March 31, 2009 was approximately
3.25%. The Credit Facility is subject to our compliance with certain
covenants, including financial covenants at quarter-end relating to fixed
charges, leverage, tangible net worth, asset coverage and consolidated net
losses. We were in compliance with all of these covenants at
March 31, 2009.
The financial markets have recently
experienced substantial volatility as a result of disruptions in the credit
markets. However, to date we have experienced no difficulty in
borrowing under our Credit Facility and no change in its terms.
Inflation
Until the
first nine months of 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. Subsequent to September 30, 2008,
the prices we have paid for oil and fuel have decreased. Anticipated
cost increases and reductions are considered in our bids to customers on
proposed new construction projects.
Where we
are the successful bidder on a project, we execute purchase orders with material
suppliers and contracts with subcontractors covering the prices of most
materials and services, other than oil and fuel products, thereby mitigating
future price increases and supply disruptions. These purchase orders
and contracts do not contain quantity guarantees and we have no obligation for
materials and services beyond those required to complete the contracts with our
customers. There can be no assurance that oil and fuel used in our
business will be adequately covered by the estimated escalation we have included
in our bids or that all of our vendors will fulfill their pricing and supply
commitments under their purchase orders and contracts with the
Company. We adjust our total estimated costs on our projects where we
believe it is probable that we will have cost increases which will not be
recovered from customers, vendors or re-engineering.
Our
Markets
We
operate in the heavy civil construction segment for infrastructure projects in
Texas and Nevada, specializing in transportation and water infrastructure. RHB
Cal has bid on construction projects in California, but has not been awarded any
such projects.
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 authorizations.
According
to the 2006 census, Texas is the second largest state in population in the U.S.
with 23.5 million people and a population growth of 12.7% since 2000, almost
double the 6.4% growth rate for the U.S. as a whole over the same period. Three
of the 10 largest cities in the U.S. are located in Texas and we have operating
divisions in each of those cities: Houston, Dallas/Ft. Worth and San Antonio.
Nevada has undergone even more rapid growth, with the state’s population
expanding 24.9% since 2000 to 2.5 million people in 2006.
Our
highway and bridge work is generally funded through federal and state
authorizations. The federal government enacted the SAFETEA-LU bill in 2005,
which authorized $286 billion for transportation spending through
2009. Of this total, the Texas Department of Transportation (“TXDOT”)
and the Nevada Department of Transportation (“NDOT”) were originally allocated
approximately $14.5 billion and $1.3 billion, respectively, over the five years
of the authorization. Actual SAFETEA-LU appropriations have been somewhat
reduced from the original allocations. The USDOT proposed budget under
SAFETEA-LU for the Federal-Aid Highways Program requests $39.4 billion of
federal financial assistance to the States for 2009 versus actual appropriations
of $41.2 billion for 2008 and $38.0 billion for 2007. A successor
federal funding program has not yet been passed by Congress; however, the
President's proposed budget for 2010 includes $72.5 billion for the U.S.
Department of Transportation which would include funding to the States for
highway and bridge construction.
On
February 17, 2009 the American Recovery and Reinvestment Act ("economic-stimulus
legislation") was enacted by the federal government that authorizes $26.7
billion for highway and bridge construction. A significant portion of
these funds will be used for ready-to-go, quick spending highway projects for
which contracts can be awarded quickly. States are required, subject
to certain exceptions, to obligate 50 percent of the apportionment within 120
days of the date of apportionment or lose the funds not obligated in that period
of time. States would be further required to obligate the second 50
percent of their apportionment within one year of the initial
apportionment. The highway funds apportioned to Texas and Nevada
approximated $2.3 billion and $0.2 billion, respectively.
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 indicated that the population of Texas is
projected to grow at close to twice the U.S. rate with the population of Texas
growing from 23.5 million in 2006 to between 30.5 million and 40.5 million in
2030. The report stated that "With this 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 22 year period from 2009 through 2030 to prevent
worsening congestion and maintain economic competitiveness on its urban highways
and roads, improve congestion/safety and partial connectivity on its rural
highways and bridge replacement.
While
TXDOT officials have indicated potential short-term funding shortfalls and
reductions in spending on transportation, the TXDOT budget for 2009 for
transportation construction projects is $3.5 billion, including stimulus funds,
versus estimated expenditures of $2.1 billion in 2008 and actual expenditures of
$2.7 billion in 2007.
The Texas
Senate has passed legislation that would fund $8.1 billion for highway and
bridge construction in the 2010-11 biennium and the Texas House Committee
substitute bill for the Senate legislation includes $6.1 billion ($4.0 billion
in 2010 and $2.1 billion in 2011) for such construction in the 2010-11
biennium. TXDOT had requested approximately $7.2 billion ($4.5
billion in 2010 and $2.7 billion in 2011), including stimulus funds, for such
construction in the biennium. The Senate and House bills must be
negotiated, submitted to both chambers for final approval and signed into law by
the Governor before such legislation becomes effective.
Additionally,
the House legislation permits TXDOT to expend during the 2010-11 biennium the
proceeds of the $5.0 billion Proposition 12 General Obligation Bonds approved by
the voters of the State of Texas in November 2007 if TXDOT meets certain
conditions set out in the legislation, including the written approval of the
Legislative Budget Board and the Governor.
NDOT
transportation construction expenditures totaled $449.2 million in 2006 and
$455.5 million in 2007. NDOT’s budget for 2008 and 2009 includes $355.0 million
and $420.9 million for transportation capital expenditures,
respectively. Projections by NDOT for 2010 and 2011 transportation
capital expenditures are $400 million each year. NDOT has stated that Nevada’s
highway system needs are expected to be $11 billion by 2015; however, it has
also stated that Nevada is currently facing a $3.8 billion shortfall (in 2006
dollars) for the 10 largest projects planned for completion in
2015.
In summary, aggregate contract
lettings, including stimulus funds, would be $3.5 billion in 2009 and $4.0
billion in 2010 in Texas based on the lower proposed appropriations of the Texas
House and $521 million in 2009 and $500 million in 2010 in Nevada, based on the
currently proposed NDOT budgets and strategic plans. The amounts for
Texas are before any funds that may be spent from the Texas General Obligation
Bond approved by the voters in 2007.
In Texas,
substantial funds for transportation infrastructure spending are also being
provided by toll road and regional mobility authorities for the construction of
toll roads.
Our water
and wastewater, underground utility, light-rail transit and non-highway paving
work is generally funded by municipalities and other local authorities. While
the size and growth rates of these markets is difficult to compute as a whole,
given the number of municipalities, the differences in funding sources and
variations in local budgets, management estimates that the municipal markets in
which we operate are providing funding in excess of $1 billion
annually. Two of the many municipalities that we perform work for are
discussed below:
The City
of Houston estimated expenditures for 2008 on storm drainage, street and
traffic, waste water and water capital improvements were $721
million.
The most
recently adopted five-year plan includes $612 million in 2009, $557
million in 2010 and $504 million in 2011 for such improvements and projects;
however, prior to the recent enactment of the federal government's
economic-stimulus legislation, the Mayor of the City of Houston indicated he
would defer $200 million of the 2009 improvements to future years.
The City
of San Antonio has adopted a six-year capital improvement plan for 2009 through
2014, which includes $415 million for streets ($124 million in 2009) and $228
million for drainage ($103 million in 2009). 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. Included in those bonds was $307 million for
streets, bridges and sidewalks improvements and $152 million for drainage
improvements to be built over the period 2007 through 2012.
We also
do work for other cities, counties, business area redevelopment authorities and
regional 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 capital improvement plan proposes expenditures for public
works of $807 million for the years 2009 through 2013, including $311 million in
2009. The City Council of Las Vegas recently directed the city staff to delay
capital improvement projects that will require additional staffing for one to
two years which may cause significant deferrals of construction
projects. However, management believes there will be opportunities
for the Company to bid on and obtain municipal work in Las Vegas as well as Reno
and Carson City.
While our
business does not include residential and commercial infrastructure work, the
severe fall-off in new projects in those markets in Nevada and to a lesser
extent in Texas, has caused a softer bidding climate in our infrastructure
markets and has caused some residential and commercial infrastructure
contractors to bid on public sector transportation and water infrastructure
projects, thus increasing competition and creating downward pressure on bid
prices in our markets. These and other factors could adversely affect
our ability to maintain or increase our backlog through successful bids for new
projects and could adversely affect the profitability of new projects that we do
obtain through successful bids.
Recent
reductions in miles driven in the U.S. and more fuel efficient vehicles are
reducing the amount of federal and state gasoline taxes and tolls collected.
Additionally, the current credit crisis may limit the amount of state and local
bonds that can be sold at reasonable terms. Further, the nationwide decline in
home sales, the increase in foreclosures and a prolonged recession may result in
decreases in user fees and property and sales taxes. These and other
factors could adversely affect transportation and water infrastructure capital
expenditures in our markets.
Due to
increased competition the Company has submitted some of its more recent bids at
margins that are lower than bids submitted in the latter half of 2008. The
resulting lower margin jobs may affect gross margins recognized in the financial
statements for several quarters subsequent to March 31,
2009. Assuming TXDOT moves forward in 2009 with its planned level of
spending, we expect to have bidding opportunities that could allow our gross
profit margins to return to historic levels.
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. Our
markets are softer and more competitive in the current economic
climate. Management believes that the Company has the resources and
experience to continue to compete successfully for projects as they become
available.
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
Changes
in interest rates are one of our sources of market risks. At March
31, 2009, $50 million of our outstanding indebtedness was at floating interest
rates. Based on our average debt outstanding during 2009, we estimate
that an increase of 1.0% in the interest rate would have resulted in an increase
in our interest expense of approximately $1,000 in the first quarter of
2009.
To manage
risks of changes in material prices and subcontracting costs used in tendering
bids for construction contracts, we obtain firm price quotations from our
suppliers, except for fuel, and subcontractors before submitting a
bid. These quotations do not include any quantity guarantees, and we
have no obligation for materials or subcontract services beyond those required
to complete the respective contracts that we are awarded for which quotations
have been provided.
During
2009, we commenced a strategy of investing in certain securities, the assets of
which are a crude oil commodity pool. We believe that the gains and
losses on these securities will tend to offset increases and decreases in the
price we pay for diesel and gasoline fuel and reduce the volatility of such fuel
costs in our operations. At March 31, 2009, he Company has invested
$2.4 million in such securities which had a quoted market value of $2.3 million.
While the Company had an unrealized loss of $0.1 million on these securities for
the first quarter of 2009, the price of diesel fuel and gasoline also declined
during that period. The Company will continue to evaluate this
strategy, however, 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 and Exchange Act of 1934 is accumulated and
communicated to the issuer’s management, including the principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.
The
Company’s principal executive officer and principal financial officer reviewed
and evaluated the Company’s disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934). Based on that evaluation, the Company’s principal executive
officer and principal financial officer concluded that the Company’s disclosure
controls and procedures were effective at March 31, 2009 to ensure that the
information required to be disclosed by the Company in this Quarterly Report on
Form 10-Q is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms
and is accumulated and communicated to the Company's management including the
principal executive and principal financial officer as appropriate to allow
timely decisions regarding required disclosure.
Changes in
Internal Control over Financial Reporting
There were no changes during the three
months ended March 31, 2009 that have materially affected, or are reasonably
likely to materially affect the Company’s internal controls over financial
reporting.
Inherent
Limitations on Effectiveness of Controls
Internal controls over financial
reporting may not prevent or detect all errors and all fraud. Also,
projections of any evaluation of effectiveness of internal controls to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Item
1. Legal
Proceedings
The Company is not a party to any
material legal proceedings.
Item
1A. Risk
Factors
There
have not been any material changes from the risk factors previously disclosed in
Item 1A of the Company’s Annual Report on Form 10-K for the year ended December
31, 2008.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
None
Item
3. Defaults
upon Senior Securities
None
Item
4. Submission
of Matters to a Vote of Security Holders
None
Item
5. Other
Information
None
Item
6. Exhibits
Exhibit
No. Description
|
|
Certification
of Patrick T. Manning, Chief Executive Officer pursuant to Exchange Act
Rule 13a-14(a)
|
|
|
Certification
of James H. Allen, Jr., Chief Financial Officer, pursuant to Exchange Act
Rule 13a-14(a)
|
|
|
Certification
of Patrick T. Manning, Chief Executive Officer and James H. Allen, Jr.,
Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 (Section 906
of the Sarbanes-Oxley Act of
2002)
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
STERLING CONSTRUCTION COMPANY,
INC.
Date: May
11,
2009 By:
/s/ Patrick T.
Manning.
Patrick T. Manning.
Chairman and Chief Executive
Officer
Date: May
11,
2009 By:
/s/ James H. Allen,
Jr.
James H. Allen, Jr.
Senior Vice-President and Chief
Financial Officer
STERLING
CONSTRUCTION COMPANY, INC.
Quarterly
Report on Form 10-Q for Period Ended March 31, 2009
|
Exhibit
No.
|
Description
|
|
|
Certification
by the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
||
|
Certification
by the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
||
|
Certification
of Periodic Financial Report by the Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
*Filed
herewith
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