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Dear Shareholders,
Last September, I was elected Chief Executive officer of Sterling
Construction Company, Inc. My history of over 25 years of civil
construction experience, which includes 14 years as President and CEO of
various operating units for Skanska, has prepared me to take the
leadership of this company and continue to grow its capabilities. Since
being elected, I have begun the process of integrating our operating units
into a cohesive group.
Peter E. MacKenna
President & CEO
Financial Results
In 2012, revenue climbed to $630.5 million, demonstrating a 25.8% growth compared with fiscal
2011. We have emerged from the past couple of recession years in a strong financial position.
At December 31, 2012 working capital totaled $87.5 million, including $52.4 million of cash,
cash equivalents and short term investments, and a tangible net worth of $157.8 million that is
more than adequate to support our bonding requirements. The total 2012 contract awards
(excluding acquired contracts) were $643 million, an increase of 8% over total 2011 awards.
Gross margin increased in the fourth quarter to 10.3% up from 3.4% over the same period in
2011 resulting in gross margin for all of 2012 of 7.5%.
People
I would like to thank Patrick Manning and Joseph Harper, Sr. for their 40 years of outstanding
service to our company. Through their leadership and vision, Sterling has grown into a
successful, well‐capitalized, geographically‐diverse heavy civil construction company. We are
fortunate that Joe and Pat have agreed to remain on the Board so that Sterling will continue to
benefit from their experience, insights and practical wisdom. I have promoted our Human
Resources Director to Senior Vice President and Chief Human Resources Officer and have added
the positions of Chief Information Officer and Director of IT Operations. The newly formed IT
positions will manage the IT infrastructure and systems, improving measurement, and focusing
on process improvement.
Growth
In 2011 we added the capabilities of J. Banicki Construction, Inc. (“JBC”) in Arizona and acquired
a 50% interest in Myers & Sons Construction, L.P. in California, and in 2012 we had the benefit
of a full year's earning contribution from these companies. Both companies added to our
earnings and backlog, with our subsidiary, Ralph L. Wadsworth Construction Company, LLC
(“RLW”), winning a $71 million job in a Joint Venture with JBC, and with Myers & Sons winning
an $88 million job from the California Department of Transportation. Our solid financial position
affords us the ability to target more acquisitions that will expand or deepen our geographic
penetration in attractive regions, and provide us with increased capabilities in markets outside
but adjacent to our traditional heavy highway focus.
Consolidation and Integration
On December 31, 2012 Sterling made an early exercise of its option under a December 2009
purchase agreement and purchased the remaining 20% membership interest in RLW that was
previously held by RLW’s executive management. Sterling further retained the continued
services of RLW’s CEO, its President, and its Vice President of Business Development under new
employment agreements. This will provide for the operational continuity of RLW and a stable
platform for organic growth and further integration of our operating units.
Our immediate focus on integration involves creating a financial shared service within Sterling
to ensure that our policies, processes, procedures and structure fully support our construction
operations. In 2013 we are introducing Project Evergreen; this project will focus on reviewing
our key financial operations and making appropriate consolidation, integration and efficiency
improvements.
Markets and Outlook
Since joining Sterling in September 2012, I’ve become increasingly optimistic about the
opportunities in front of us. While highway funding and political gridlock are outside of our
control, we have made enhancements to our operations that should yield improving
performance over time. We anticipate limited organic revenue growth in 2013 as government
funding remains constrained. Based on our current estimates, the average gross margin of
projects in our backlog is below the 7.5% gross margin achieved on 2012. As the year progresses
and these projects are completed, we anticipate improvement in margins. For 2013, SG&A as a
percent of revenues should be comparable to 2012. Our current budget anticipates capital
expenditures to return to 2011 levels. Looking out over the next several years, we believe we
can leverage our current fleet, along with leased assets to achieve significantly higher revenues.
Strategy and Objectives
As we continue in 2013, our operating units are focused on achieving the following objectives:
Extend our construction service capabilities
Expand into new markets and selectively pursue opportunities
Apply core competencies and best practices across our platform
Increase market leadership in core geographic markets
Position our business for future infrastructure spending
Optimize operations through implementation of systems, processes, policies and the
addition of key personnel
Continue to attract, retain and develop our employees
Our company continues its proud past with a focus on safety and quality and looks forward to a
successful future. On behalf of our over 1,600 employees, I would like to thank our shareholders
for their continued support.
Peter E. MacKenna
President & Chief Executive Officer
March 28, 2013
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2012
[ ] 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
State or other jurisdiction of
incorporation or organization
20810 Fernbush Lane
Houston, Texas
(Address of principal executive offices)
25-1655321
(I.R.S. Employer
Identification No.)
77073
(Zip Code)
Registrant’s telephone number, including area code (281) 821-9091
Securities registered pursuant to Section 12(b) of the
Act:
Title of each class
Common Stock, $0.01 par value per share
(Title of Class)
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[ ] Yes [√] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
[ ] Yes [√] No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
[√] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter prior that the registrant was required to submit and post such files).
[√] ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [√]
Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [ ]
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [√] No
Aggregate market value of the voting and non-voting common equity held by non-affiliates at June 30, 2012: $154,195,017.
At March 6, 2013, the registrant had 16,602,034 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to
stockholders in connection with the Annual Meeting of Stockholders to be held on May 9, 2013 are incorporated by reference
into Part III of this Form 10-K.
STERLING CONSTRUCTION COMPANY, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
PART II
PART III
PART IV
Cautionary Comment Regarding Forward-Looking Statements .........................................
Item 1. Business ..............................................................................................................................
Item 1A. Risk Factors ........................................................................................................................
Item 1B. Unresolved Staff Comments ...............................................................................................
Item 2. Properties ............................................................................................................................
Item 3. Legal Proceedings ...............................................................................................................
Item 4. Mine Safety Disclosures .....................................................................................................
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ...........................................................................................
Item 6. Selected Financial Data ......................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operation ............................................................................................................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............................................
Item 8. Financial Statements and Supplementary Data ...................................................................
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure ...........................................................................................................................
Item 9A. Controls and Procedures .....................................................................................................
Item 9B. Other Information ...............................................................................................................
Item 10. Directors , Executive Officers and Corporate Governance ................................................
Item 11. Executive Compensation ....................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ............................................................................................................
Item 13. Certain Relationships and Related Transactions, and Director Independence ....................
Item 14. Principal Accounting Fees and Services .............................................................................
Item 15. Exhibits and Financial Statement Schedules ......................................................................
Financial Statements ...........................................................................................................
Exhibits ...............................................................................................................................
Signatures ...........................................................................................................................
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PART I
Cautionary Comment Regarding Forward-Looking Statements
This Report includes statements that are, or may be considered to be, “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements are included
throughout this Report, including in the sections entitled “Business,” “Risk Factors,” and “Management’s Discussion
and Analysis of Financial Condition and Results of 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 recessions, 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’, subcontractors, and joint
venture partners’ 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;
design/build contracts which subject us to the risk of design errors and omissions;
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 limited number of 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 than ours, 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
Administration;
federal, state and local environmental laws and regulations non-compliance can result in penalties and/or
termination of contracts as well as civil and criminal liability;
the instability of certain financial institutions, which could cause losses on our cash and cash equivalents and
short-term investments;
adverse economic conditions in our markets; and
the other factors discussed in more detail in Item 1A. —Risk Factors.
issued by any governmental authority,
the Occupational Safety and Health
including
In reading this Report, you should consider these factors carefully in evaluating any forward-looking statements
and you are cautioned not to place undue reliance on any forward-looking statements. Although we believe that our
plans, intentions and expectations reflected in, or suggested by, the forward-looking statements that we make in this
Report are reasonable, we can provide no assurance that they will be achieved.
3
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.
Item 1. Business.
Overview of the Company’s Business.
Sterling Construction Company, Inc. was founded in 1991 as a Delaware corporation. Our principal executive
offices are located at 20810 Fernbush Lane, Houston, Texas 77073, and our telephone number at this address is (281)
821-9091. Our construction business was founded in 1955 by a predecessor company in Michigan and is now
conducted through our subsidiaries which primarily include: Texas Sterling Construction Co., a Delaware
corporation, or “TSC”; Road and Highway Builders, LLC, a Nevada limited liability company, or “RHB”; Road and
Highway Builders of California, Inc., a California corporation, or “RHBCa”; Ralph L. Wadsworth Construction
Company, LLC, a Utah limited liability company, or “RLW”; J. Banicki Construction, Inc., an Arizona corporation,
or “JBC”; and Myers & Sons Construction, L.P., a California limited partnership, or “Myers”. The terms
“Company,” “Sterling,” and “we” refer to Sterling Construction Company, Inc. and its subsidiaries except when it is
clear that those terms mean only the parent company or a particular subsidiary.
Sterling is a leading heavy civil construction company that specializes in the building and reconstruction of
transportation and water infrastructure projects in Texas, Utah, Nevada, Arizona, California and other states where
there are construction opportunities. Its transportation infrastructure projects include highways, roads, bridges and
light rail and its water infrastructure projects include water, wastewater and storm drainage systems. Sterling
performs the majority of the work required by its contracts with its own crews and equipment.
Although we describe our business in this report in terms of the services we provide, our base of customers and
the geographic areas in which we operate, we have concluded that our operations comprise one reportable segment
and one reporting unit component: heavy civil infrastructure construction. In making this determination, we
considered that each project has similar characteristics, includes similar services and similar types of customers and is
subject to similar regulatory and economic environments. We organize, evaluate and manage our financial
information around each project when making operating decisions and assessing our overall performance.
Sterling has grown its service profile and geographic reach both organically and through acquisitions.
Expansions into Utah, Arizona and California were achieved with the 2009 acquisition of RLW and the 2011
acquisitions of JBC and Myers, respectively. These acquisitions also extended Sterling’s service profiles.
Recent Developments.
Financial Results for 2012, Operational Issues and Outlook for 2013 Financial Results.
As was the case in 2011, the Company’s 2012 results were adversely affected by production issues on a number
of construction projects.
In 2012, the Company had operating income of $15.0 million and net loss attributable to Sterling common
stockholders of $297,000. Included in the net loss attributable to Sterling common stockholders for 2012 is additional
earnings allocated to noncontrolling interest owners of $6.7 million, or $4.3 million net of tax, resulting from an
amendment to the RLW operating agreement to change the treatment of goodwill impairments for purposes of
determining net income distributable to RLW’s members. This is discussed further in Note 2 to the Consolidated
Financial Statements. Our gross margins have decreased to 7.5% in 2012 from 8.0% in 2011 and 13.6% in 2010. In
2012, our gross margins continued to be adversely impacted by downward revisions to estimated profitability on
certain projects.
The majority of our revenues and backlog is derived from fixed unit price contracts. Some of our revenues are
derived from lump sum contracts. Fixed unit price contracts require us to provide materials and services at a fixed
unit price based on approved quantities irrespective of our actual per unit costs. Lump sum contracts require that the
total amount of work be performed for a single price irrespective of our actual costs. As discussed in “Item 1A. Risk
Factors,” we realize a profit on our contracts only if we accurately estimate our costs and then successfully control
actual costs and avoid cost overruns, and our revenues exceed actual costs. If our cost estimates for a contract are
inaccurate, or if we do not execute the contract within our cost estimates, then cost overruns may cause the contract
not to be as profitable as we expected or result in a loss, negatively affecting our cash flow, earnings and financial
position.
While the risks of cost overruns and changes in estimated contract revenues are an inherent part of the
construction business, during 2012 we implemented the following changes in order to improve the profitability of our
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projects, reduce the variability in profitability of our projects in the future and strengthen the internal control
environment:
changed roles and responsibilities to improve functional support and controls;
developed management tools designed to improve the estimating process and increase the oversight of that
process;
implemented processes designed to better identify, evaluate and quantify risks for individual projects;
improved the methodologies for allocating overhead, indirect costs and equipment costs to individual
projects; and
improved the timeliness and content of reporting available to operations management.
In addition to the factors discussed above which impact the profitability on individual projects, there are other
factors which have adversely affected our ability to secure construction projects at favorable margins. 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
SAFETEA-LU bill expired on September 30, 2009, and the federal government enacted a number of extensions on an
interim basis, most recently through June 30, 2012. In July 2012, the federal government enacted the Moving Ahead
for Progress in the 21st Century (“MAP-21”) legislation: a two-year, $105 billion reauthorization of the federal
surface transportation program. This legislation maintains annual federal highway spending close to the previous
level of $41 billion under the SAFETEA-LU bill. While we believe that a longer term bill is needed, the new bill
does alleviate some of the uncertainty which has adversely affected the levels of transportation and water
infrastructure capital expenditures in our markets, reduced opportunities to replace backlog at reasonable margins and
increased competition for new projects.
While we expect that implementation of the internal changes discussed above will improve profitability in the
future, we are not expecting a significant improvement in gross margins for 2013. In addition, we expect continued
pressure on our gross margins on new contract awards.
Senior Management Team.
Peter MacKenna joined the Company in September 2012 and serves as its President & Chief Executive Officer.
Patrick Manning, the Company’s previous Chief Executive Officer, continues to serve as the Chairman of the Board
of Directors. As planned, Joseph P. Harper, Sr., who has served as the Company’s President and Chief Operating
Officer and Treasurer, retired in December 2012 and continues to serve as a director.
Our Business Strategy.
Key features of our business strategy include:
Continue to add construction capabilities: by adding capabilities that augment our core contracting and
construction competencies, we are able to improve gross margin opportunities, and more effectively
compete for contracts that might not otherwise be available to us.
Expand into new markets and selectively pursue opportunities and strategic acquisitions: we will continue
to seek to identify attractive new markets and opportunities in select western, southwestern and southeastern
U.S. areas. We will also continue to assess opportunities to extend our service capabilities and expand our
markets through acquisitions.
Apply core competencies across our markets: we will seek to capitalize on opportunities to export our Texas
experience constructing water infrastructure projects and our Nevada earthmoving, aggregates and asphalt
paving experience into Utah markets. Similarly, we believe that RLW’s experience with design-build,
construction manager and general contractor (“CM/GC”) and other alternative project delivery methods in
Utah, and its development of accelerated bridge construction (“ABC”) techniques can enhance opportunities
for us in our Texas, California, Arizona and Nevada markets.
Increase our market leadership in our core markets: we have a strong presence in a number of markets in
Texas, Utah and Nevada and intend to expand our presence in these states as well as Arizona, California,
Hawaii and other states where we believe opportunities exist.
Position our business for future infrastructure spending: currently there are considerable uncertainties
surrounding federal, state and local funding in our markets; however, we believe there is awareness of the
need to build, reconstruct and repair our country’s infrastructure, including transportation infrastructure,
such as bridges, highways, and mass transit systems and water infrastructure, such as water, wastewater and
storm drainage systems. We will continue to build our expertise to capture this infrastructure spending. We
also see opportunities to make enhancements to our operations that should yield improving performance
5
over time. These include a tighter integration of the acquisitions we have made over the past several years
which should result in cost reductions and better collaboration between business units when pursuing new
contract opportunities.
Continue to attract, retain and develop our employees: we believe that our employees are key to the
successful implementation of our business strategy, and we will continue allocating significant resources in
order to attract and retain talented managers and supervisory and field personnel.
Our Markets, Competition and Customers.
Although we occasionally undertake contracts for private customers, the vast majority of our revenues are
attributable to work for public sector customers. The majority of the services provided to these customers are
pursuant to contracts awarded through competitive bidding processes. 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.
Our competitors include companies that we bid against for construction contracts and compete against for short
listings, mandates and joint ventures. We have many competitors of different sizes in all of the markets that we serve,
and they include large international, national and regional construction companies as well as many smaller
contractors. Historically, the construction business has not typically required large amounts of capital for smaller
contracts, which can result in relative ease of market entry for companies possessing acceptable qualifications.
Factors influencing our competitiveness include price, our reputation for quality, our innovativeness, our
equipment fleet, our work crews, our financial strength, our bonding capacity and prequalification criteria, our
knowledge of local markets and conditions, our project management and estimating abilities, our customer
relationships, our marketing abilities, our ability to enter into strategic relationships with other contractors and our
ability to perform many aspects of each project. Although some of our competitors are larger than we are and may
possess greater resources or provide more vertically-integrated services, we believe that we are well-positioned to
compete in the markets in which we operate on the basis of the foregoing factors.
Based on publicly available information on awarded construction projects, we believe that we are one of the
larger participants in each of our Texas, Utah and Nevada markets. Because we own and maintain most of the
equipment required for our contracts and have the key experienced workforce to handle many types of heavy civil
construction, we are able to bid competitively on many categories of contracts, especially complex, multi-task
projects. In the state highway markets, most of our competitors are large international, national and regional
contractors, and individual contracts tend to be larger and require more specialized skills than those in the municipal
markets. Some of these competitors have the advantage of being more vertically-integrated, or they specialize in
certain types of projects such as construction over water.
Since 2008, our markets have been much more competitive than in the past because of reductions in federal, state
and local spending on transportation and water-related infrastructure; bidding by our traditional competitors at what
appears to have been break-even or loss margins; the entry of new competitors from other states and the expansion of
foreign competitors into our markets. 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 the bid prices in our markets. These factors have compressed the profitability on many new projects
where we submitted successful bids.
The nationwide decline in home sales, the increase in foreclosures and the prolonged recession 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. Expenditures by municipalities have also been impacted by federal,
state and local funding limitations in the current economic environment. The ongoing disagreements in Congress
over balancing the federal budget in the short-term and long-term as well as reducing the federal deficit add to the
uncertainties surrounding the renewal or enactment of federal highway funding legislation.
These and other factors have adversely affected the levels of transportation and water infrastructure capital
awards and expenditures in our markets, reducing opportunities to replace backlog at reasonable margins and
increasing competition for new projects. We do, however, expect that our markets will ultimately recover from the
conditions described above and that our backlog and revenues will grow and gross margins, net income and earnings
per share will return to levels more consistent with historical rates of return. However, we cannot predict the timing
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of such a return to historical normalcy in our markets. We believe that the Company is in 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.
The U.S. Department of Transportation (“U.S.DOT”) had actual appropriations of $41.8 billion for federal
highway financial assistance to the states for 2011, had authority to spend $41.5 billion in the fiscal year ended
September 2012 and has requested authority to spend $39.7 billion in fiscal 2013 and $40.3 billion in fiscal 2014 for
highways and bridges.
Our principal markets are in Texas, Utah, Nevada, Arizona and California, states that management believes
benefit from both positive long-term demographic trends as well as an historical commitment to funding
transportation and water infrastructure projects. Currently, the Company also has highway construction contracts in
Hawaii, Montana, Idaho and Louisiana. From 2005 to 2010, the populations of Texas, Utah, Nevada, Arizona and
California grew 10.2%, 15.8%, 14.8%, 9.1% and 3.5%, respectively, compared to approximately 4.5% for the
national average. According to the 2010 U.S. Census Bureau Information, Texas, Utah, Nevada, Arizona, and
California are expected to continue to experience population increases from 25.1 million, 2.8 million, 2.7 million, 6.4
million, and 37 million people in 2010, respectively, to populations of over 33 million, 3 million, 4 million, 10
million and 46 million, respectively, by 2030. While the near-term funding available for infrastructure spending in
these markets is currently limited, management anticipates that long-term population growth and increased spending
for infrastructure in these markets will positively affect business opportunities over the coming years.
In Texas, our customers include Texas Department of Transportation (“TxDOT”), Texas county and municipal
public works departments, regional transit and water authorities, port authorities, school districts, municipal utility
districts and the U.S. Corps of Engineers.
TxDOT contract awards (“lettings”) for transportation construction projects were estimated at $3.0 billion in
2013 and are estimated to be $2.3 billion in 2014.
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; however, such spending could be limited by federal, state and local funding limitations.
In Utah, our public sector customers include the Utah Department of Transportation (“UDOT”) and the Utah
Transit Authority. Spending for highway and bridge construction in Utah was $957.3 million in 2012, and $1.2
billion has been authorized for 2013. The details of the capital spending for 2014 have not been released; however the
Utah Governor’s recommendation for total capital spending in 2014 is approximately $649.2 million. In Utah, we
have been competitive, in part, because of successful marketing efforts, design-build and CM/GC capabilities and
development of innovative methods for completing projects. Competition for design-build projects is not totally
focused on cost factors but is also significantly dependent on successful marketing efforts, reputation, quality of
designs and aesthetics. We believe that we were one of the first construction companies to utilize ABC technology to
build bridges offsite, move them to their location, and complete their installation in a very short period of time in
order to minimize mobility disruptions.
In Nevada, we believe that we are a leading asphalt paving contractor on suburban and rural highway projects.
Our primary public sector customer is the Nevada Department of Transportation (“NDOT”). Nevada’s budget for
construction of roadways and facilities is $212 million in 2013 and $391 million in 2014 compared with expenditures
of $221 million in 2012. In addition, RHB is currently performing eight projects in Hawaii.
In Arizona, our principal customers are the Arizona Department of Transportation (“ADOT”) and municipal
airport authorities. Arizona’s expenditures for transportation construction were $1.3 billion in 2012, appropriations
are $1.6 billion in 2013 and a budget of $1.5 billion has been requested for 2014.
In California, our principal customer is the California Department of Transportation (“Caltrans”). California’s
transportation capital outlays and local assistance were $2.6 billion in 2012, while such expenditures are estimated to
be $4.8 billion in 2013 and $3.5 billion in 2014. A substantial portion of the change between 2013 and 2014 is due to
a reduction in expected Federal Trust highway funds.
The majority of our contracts pertain to state highway and related bridge work. In 2012, state highway and
related bridge work accounted for 61% of our consolidated revenues compared with 65% and 68% in 2011 and 2010,
respectively.
In 2012, contracts with UDOT and Caltrans represented 16.0% and 15.0% of our consolidated revenues,
respectively.
In the past, we have also completed the construction of certain infrastructure for new light rail systems in
Houston, Dallas and Galveston, Texas, and in Salt Lake City, Utah. We anticipate that expenditures in the cities of
Houston and San Antonio for road, rail and water infrastructure projects will continue to increase due to steady gains
7
in population in these metropolitan areas as a result of the immigration of new residents and the annexation of
surrounding communities and due to continuing programs in these metropolitan areas to expand storm water and
flood control systems and water delivery systems. We believe that similar municipal civil construction opportunities
are available in other municipalities in our major markets. We provide services to our municipal customers
principally pursuant to contracts awarded through competitive bidding processes.
Backlog.
Backlog is our estimate of the revenues that we expect to earn in future periods on our construction projects. In
prior periods we generally added the anticipated revenue value of each new project to our backlog when management
reasonably determined that we would be awarded the contract and there were no known impediments to being
awarded the contract. However, due to the operating environment of our California subsidiaries in which low bid
awards are at times contested, management has revised the definition of backlog to exclude low bid awards not
officially awarded. The new definition of backlog applies whenever backlog is mentioned throughout this document,
and we have updated prior period backlog information to conform to our current definition. As the construction on
our projects progresses, we increase or decrease backlog to take into account our estimates of the effects of changes
in estimated quantities, changed conditions, change orders and other variations from initially anticipated contract
revenues, including completion penalties and incentives. At December 31, 2012, our backlog was $656 million.
Substantially all of the contracts in our contract backlog may be canceled at the election of the customer;
however, we have not been materially adversely affected by contract cancellations or modifications in the past. See
the section below entitled “— Contracts — Contract Management Process.”
Construction Delivery Methods.
Alternative construction delivery methods describe different contractual and responsibility relationships among
the owner, the builder and the designer of a project. There are three primary construction delivery methods: design-
bid-build, design-build and construction management.
The traditional method by which the majority of our projects have historically been completed is design-bid-
build. Under this type of construction delivery, the owner hires a design engineer to design the project and then
solicits bids from construction firms and typically awards the contract to build the pre-designed project to the lowest
qualifying bidder. The contractor to whom the project is awarded becomes the general contractor and is responsible
for completing the project in accordance with the owner’s designs using the contractor’s own employees or resources,
or subcontractors. Projects under this method are typically fixed unit price contracts.
Design-build is increasingly being used by public entities as a method of project delivery. Unlike traditional
projects where the owner first hires a design firm or designs a project itself and then puts the project out to bid for
construction, design-build projects provide the owner with a single point of responsibility and a single contact for
both final design and construction. The owner selects a builder who hires the design team as required and
construction typically starts before the design is complete. This project delivery method is typically undertaken
through either fixed unit price contracts or lump sum contracts, and price is not the only determining factor used by
the owner when selecting a particular contractor.
Construction management is a newer method of delivering a project whereby a contractor agrees to manage a
project for the owner for an agreed-upon fee, which may be fixed or may vary based upon negotiated factors. The
owner of the project typically hires the contractor as a construction manager early in the design phase of the project.
The construction manager works with the design team to help ensure that the design is something that can in fact be
built within the owner’s desired cost and other parameters and that the ultimate construction contractor will be able to
understand the design drawings and specifications. There are two basic types of construction management:
construction manager as advisor and construction manager at risk. In the construction manager as advisor type of
arrangement, the construction manager acts as a technical consultant to the owner of the project and has no legal
responsibility for the performance of the actual construction work. In the construction manager at risk type of
arrangement, the construction manager becomes the prime contractor during the construction phase and makes a
determination as to which portions of the work will be self-performed and which will be performed through
subcontracts. In either type of construction management process, portions of a project are often submitted for bid
during the course of the construction manager relationship, with the construction manager bidding, and oftentimes
having the first right to bid, on portions of the project.
Contracts.
Types of Contracts.
We provide our services primarily by using traditional general contracting arrangements, including fixed-unit
price contracts, lump sum contracts and cost-plus contracts.
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Fixed unit price contracts are generally used in competitively-bid public civil construction contracts. Contractors
under fixed unit price contracts are generally committed to provide all of the resources required to complete the
contract for a fixed price per unit. These contracts are generally subject to negotiated change orders, frequently due to
differences in site conditions from those initially anticipated or asserted by the customer. Some fixed unit price
contracts provide for penalties, if the contract is not completed on time, or incentives, if it is completed ahead of
schedule.
Under a lump sum contract, the contractor typically agrees to deliver a completed project in accordance with the
contract’s requirements for a specific price, and the customer agrees to pay the price according to a negotiated
payment schedule. In developing a lump sum bid, the contractor estimates the costs of labor, subcontracts and
materials and adds an amount for overhead and profit. The amount of the profit included in the bid is based on the
contractor’s assessment of risk and other factors such as availability of resources. If the actual costs of labor,
subcontracts, materials and overhead are higher than the contractor’s estimate, the profit will be reduced or become a
loss; if the actual costs are lower, the contractor may earn more profit.
In a cost plus contract, the owner of a project generally agrees to pay the cost of all of the contractor’s labor,
subcontracts and materials plus an amount for contractor overhead and profit (usually as a percentage of the labor,
subcontracts and material cost). If actual costs are lower than the estimate, the owner benefits from the cost savings.
If actual costs are higher than the estimate, the owner bears the economic burden of the additional costs.
Contract Management Process.
We identify potential contracts from a variety of sources, including through subscriber services that notify us of
contracts out for bid; through advertisements by federal, state and local governmental entities; through our business
development efforts; through contacts at government agencies; and through meetings with other participants in the
construction industry. After determining which contracts are available, we decide which contracts to pursue based on
such factors as the relevant skills required, the contract size and duration, the availability of our personnel and
equipment, the size and makeup of our current backlog, our competitive advantages and disadvantages, prior
experience, the contracting agency or customer, the source of contract funding, geographic location, likely
competition, construction risks, gross margin opportunities, penalties or incentives and the type of contract.
As a condition to pursuing some contracts, we are required to complete a prequalification process with the
applicable agency or customer. Some customers, such as TxDOT, NDOT and UDOT, require yearly prequalification,
and some other customers have experience requirements specific to the contract. The prequalification process
generally limits bidders to those companies with the operational experience and financial capability to effectively
complete the particular contract in accordance with the plans, specifications and construction schedule.
There are several factors that can create variability in contract performance and financial results compared to our
bid assumptions on a contract. The most significant of these include the completeness and accuracy of our original
bid analysis, recognition of costs associated with added scope changes, extended overhead due to customer and
weather delays, subcontractor availability and performance issues, changes in productivity expectations, site
conditions that differ from those assumed in the original bid, and changes in the availability and proximity of
materials. In addition, our original bids for some contracts are based on the contract customer’s estimates of the
quantities needed to complete a contract. If the quantities ultimately needed are different, our backlog and financial
performance on the contract will change. All of these factors can lead to inefficiencies in contract performance, which
can increase costs and lower profits. Conversely, if any of these or other factors is more favorable than the
assumptions in our bid, contract profitability can improve. Design-build projects carry additional risks such as design
error risk and the risk associated with estimating quantities and prices before the project design is completed. Design
errors may result in higher than anticipated construction costs and additional liability to the contract owner. Although
we manage this additional risk by adding contingencies to our bid amounts, obtaining errors and omissions insurance
and obtaining indemnifications from our design consultants where possible, there is no guarantee that these risk
management strategies will always be successful. Generally, gross margins included in bids on design-build
contracts are higher than for other types of contracts due to the higher risks involved.
The estimating process for our traditional fixed unit price competitive bid contracts typically involves three
phases. Initially, we consider the level of anticipated competition and our available resources for the prospective
project. If we then decide to continue considering a project, we undertake the second phase of the contract process
and spend several weeks performing a detailed review of the plans and specifications, summarizing the various types
of work involved and related estimated quantities, determining the contract duration and schedule and highlighting
the unique and riskier aspects of the contract. Concurrent with this process, we estimate the cost and availability of
labor, material, equipment, subcontractors and the project team required to complete the contract on time and in
accordance with the plans and specifications. Substantially all of our estimates are made on a per-unit basis for each
line item, and it is not unusual for an estimate to contain over 300 line items. The final phase consists of a detailed
review of the estimate by management, including, among other things, assumptions regarding cost, approach, means
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and methods, productivity, risk and the estimated profit margin. This profit amount will vary according to
management’s perception of the degree of difficulty of the contract, the current competitive climate and the size,
availability of resources and makeup of our backlog. Our project managers are intimately involved throughout the
estimating and construction process so that contract issues, and risks, can be understood and addressed on a timely
basis.
Although the factors described above are relevant in determining the appropriate amount to bid, the contracting
process is managed differently if the project is to be performed on a design-build basis or a CM/GC basis. For design-
build projects, we assemble a team that may include project managers, engineers, quality managers and surveyors, to
learn about a project that we have identified as one on which we may desire to bid. For some projects, pre-
qualification for the project is required where each contractor and/or contracting team prepares a description of
financial strengths, past experience on similar types of projects, safety record and the persons who will be on the
project management and design team, after which, the customer will usually announce a short list of three to five
contractors to respond to a request for proposal, generally within three months. Utilizing the limited design
specifications provided by the customer, we generally meet weekly over a two to three month period with design
engineers to generate a bid containing quantities, prices, timing and a description of our approach for completing the
project. The customer then reviews the bids and selects the one that has the best value, and considers factors such as
contractor qualifications, the time estimated to complete the project and the price bid.
For our CM/GC projects, the customer typically sends out a request for proposal to general contractors for a
project. The customer scores each contractor that submits a bid based on the unit prices submitted for five to twenty
items that comprise approximately 10% to 20% of the project design, the profit margin proposed, the experience of
the contractor for similar types of projects, the contractor’s approach to completing the specific project and whether
the contractor understands the CM/GC process. A committee reviews each bid and determines the best value winner
to be the general contractor. If we are the winning general contractor, we work with the customer and the engineer to
design the project. As various phases of the project are designed, we usually submit bids to construct phases of the
project for which we are qualified. In some situations, we also solicit bids from other construction contractors. If we
are the lower bidder, we are awarded a contract for that phase. In other situations, if our bid is close to the cost
estimates determined by the customer and the engineer, then we will generally be awarded the contract for a
particular phase; otherwise, the customer negotiates with us on an appropriate contract price; and if those negotiations
are not successful, then the customer can terminate our contract.
To manage risks of changes in material prices and subcontracting costs used in tendering bids for construction
contracts, we generally obtain firm price quotations from our suppliers and subcontractors, except for fuel and
trucking, before submitting a bid. For fixed unit price contracts, these quotations do not include any quantity
guarantees, and we have no obligation for materials or subcontract services beyond those required to complete the
respective contracts that we are awarded for which quotations have been provided. For design-build and CM/GC
projects, lump sum subcontracts are often executed with subcontractors.
During the construction phase of a contract, we monitor our progress by comparing actual costs incurred and
quantities completed to date with budgeted amounts and the contract schedule, and periodically prepare an updated
estimate of total forecasted revenue, cost and expected profit for the contract.
During the normal course of most contracts, the customer, and sometimes the contractor, initiates modifications
or changes to the original contract to reflect, among other things, changes in quantities, specifications or design,
method or manner of performance, facilities, materials, site conditions and the period for completion of the work. In
many cases, final contract quantities may differ from those specified by the customer. Generally, the scope and price
of these modifications are documented in a “change order” to the original contract and reviewed, approved and paid
in accordance with the normal change order provisions of the contract. We are often required to perform extra or
change order work under our fixed unit price contracts as directed by the customer even if the customer has not
agreed in advance on the scope or price of the work to be performed. This process may result in disputes over
whether the work performed is beyond the scope of the work included in the original contract plans and specifications
or, even if the customer agrees that the work performed qualifies as extra work, the price that the customer is willing
to pay for the extra work. These disputes may not be settled to our satisfaction. Even when the customer agrees to pay
for the extra work, we may be required to fund the cost of the work for a lengthy period of time until the change order
is approved and funded by the customer. In addition, any delay caused by the extra work may adversely impact the
timely scheduling of other work on the contract (or on other contracts) and our ability to meet contract milestone
dates.
The process for resolving contract claims varies from one contract to another but, in general, we attempt to
resolve claims at the project supervisory level through the normal change order process or, if necessary, with higher
levels of management within our organization and the customer’s organization. Regardless of the process, when a
potential claim arises on a contract, we typically have the contractual obligation to perform the work and must incur
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the related costs. We do not recoup the costs unless and until the claim is resolved, which could take a significant
amount of time.
Most of our construction contracts provide for termination of the contract for the convenience of the customer,
with provisions to pay us only for work performed through the date of termination. Our backlog and results of
operations have not been materially adversely affected by these provisions in the past.
We act as the prime contractor on the majority of the construction contracts that we undertake. We generally
complete the majority of the work on our contracts with our own resources, and we typically subcontract only
specialized activities, such as traffic control, electrical systems, signage, trucking and, in Utah, earthmoving. As the
prime contractor, we are responsible for the performance of the entire contract, including subcontract work. Thus, we
are subject to increased costs associated with the failure of one or more subcontractors to perform as anticipated. We
manage this risk by reviewing the size of the subcontract, the financial stability of and prior experience with the
subcontractor and other factors. Although we generally do not require that our subcontractors furnish a bond or other
type of security to guarantee their performance, we require performance and payment bonds on some specialized or
large subcontract portions of our contracts. Disadvantaged business enterprise regulations require us to use our best
efforts to subcontract a specified portion of contract work performed for governmental entities to certain types of
subcontractors, including minority- and women-owned businesses. We have not experienced significant costs
associated with subcontractor performance issues in the past.
Joint Ventures.
We participate in joint ventures with other large construction companies and other partners, typically for large,
technically complex projects, including design-build projects, when it is desirable to share risk and resources in order
to seek a competitive advantage or when the project is too large for us to obtain sufficient bonding. Joint venture
partners typically provide independently prepared estimates, furnish employees and equipment, enhance bonding
capacity and often also bring local knowledge and expertise. We select our joint venture partners based on our
analysis of their construction and financial capabilities, expertise in the type of work to be performed and past
working relationships with us, among other criteria.
Under a joint venture agreement, one partner is typically designated as the sponsor or manager. The sponsoring
partner typically provides all administrative, accounting and most of the project management support for the project
and generally receives a fee from the joint venture for these services. We have been designated as the sponsoring
partner in certain of our current joint venture projects and are a non-sponsoring partner in others.
Joint venture contracts with project owners typically impose joint and several liability on the joint venture
partners. Although our agreements with our joint venture partners provide that each party will assume and pay its
share of any losses resulting from a project, if one of our partners is unable to pay its share, we would be fully liable
under our contract with the project owner. Circumstances that could lead to a loss under these guarantee
arrangements include a partner’s inability to contribute additional funds to the venture in the event that the project
incurs a loss or additional costs that we could incur should the partner fail to provide the services and resources
toward project completion that had been committed to in the joint venture agreement.
Insurance and Bonding.
All of our buildings and equipment are covered by insurance, at levels which our management believes to be
adequate. In addition, we maintain general liability and excess liability insurance, workers’ compensation insurance
and auto insurance all in amounts consistent with our risk of loss and industry practice.
As a normal part of the construction business, we are generally required to provide various types of surety and
payment bonds that provide an additional measure of security for our performance under the contract. Typically, a
bidder for a contract must post a bid bond, generally for 5% to 10% of the amount bid, and on winning the bid, must
post a performance and payment bond for 100% of the contract amount. Upon completion of a contract, before
receiving final payment on the contract, a contractor must post a maintenance bond for generally 1% of the contract
amount for one to two years. Our ability to obtain surety bonds depends upon our capitalization, working capital,
aggregate contract size, past performance, management expertise and external factors, including the capacity of the
overall surety market. Surety companies consider such factors in light of the amount of our backlog that we have
currently bonded and their current underwriting standards, which may change from time to time. As is customary, we
have agreed to indemnify our bonding company for all losses incurred by it in connection with bonds that are issued,
and we have granted our bonding company a security interest in certain assets as collateral for such obligation.
Government and Environmental Regulations.
Our operations are subject to compliance with numerous regulatory requirements of federal, state and local
agencies and authorities, including regulations concerning safety, wage and hour, and other labor issues, immigration
11
controls, vehicle and equipment operations and other aspects of our business. For example, our construction
operations are subject to the requirements of the Occupational Safety and Health Act, or OSHA, and comparable state
laws directed toward the protection of employees. In addition, most of our construction contracts are entered into with
public authorities, and these contracts frequently impose additional governmental requirements, including
requirements regarding labor relations and subcontracting with designated classes of disadvantaged businesses.
All of our operations are also subject to federal, state and local laws and regulations relating to the environment,
including those relating to discharges into air, water and land, climate change, the handling and disposal of solid and
hazardous waste, the handling of underground storage tanks and the cleanup of properties affected by hazardous
substances. For example, we must apply water or chemicals to reduce dust on road construction projects and to
contain contaminants in storm run-off water at construction sites. In certain circumstances, we may also be required
to hire subcontractors to dispose of hazardous wastes encountered on a project in accordance with a plan approved in
advance by the customer. Certain environmental laws impose substantial penalties for non-compliance and others,
such as the federal Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, impose
strict and retroactive joint and several liability upon persons responsible for releases of hazardous substances.
CERCLA and comparable state laws impose liability, without regard to fault or the legality of the original
conduct, on certain classes of persons that contributed to the release of a “hazardous substance” into the environment.
These persons include the owner or operator of the site where the release occurred and companies that disposed or
arranged for the disposal of the hazardous substances found at the site. Under CERCLA, these persons may be
subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into
the environment, for damages to natural resources and for the costs of certain health studies. CERCLA also
authorizes the federal Environmental Protection Agency, or EPA, and, in some instances, third parties, to act in
response to threats to the public health or the environment and to seek to recover from the responsible classes of
persons the costs they incur.
Solid wastes, which may include hazardous wastes, are subject to the requirements of the Federal Solid Waste
Disposal Act, the Federal Resource Conservation and Recovery Act, referred to as RCRA, and comparable state
statutes. Although we do not generate solid waste, we occasionally dispose of solid waste on behalf of customers.
From time to time, the EPA considers the adoption of stricter disposal standards for non-hazardous wastes. Moreover,
it is possible that additional wastes will in the future be designated as “hazardous wastes.” Hazardous wastes are
subject to more rigorous and costly disposal requirements than are non-hazardous wastes.
We continually evaluate whether we must take additional steps at our locations to ensure compliance with
environmental laws. While compliance with applicable regulatory requirements has not materially adversely affected
our operations in the past, there can be no assurance that these requirements will not change and that compliance will
not adversely affect our operations in the future. That tighter regulation for the protection of the environment and
other factors may make it more difficult to obtain new permits and renewal of existing permits may be subject to
more restrictive conditions than currently exist.
Employees.
As of December 31, 2012, the Company had approximately 1,685 employees, including 1,489 field personnel.
Of our field personnel, approximately 28 are project managers and 65 are superintendents. Of the 196 non-field
employees, approximately 34 are headquarters’ personnel located in Houston. At December 31, 2012, 278 of our
field employees were union members in Nevada, Arizona and California, and these union employees are represented
by 8 unions.
Our business is dependent upon a readily available supply of management, supervisory and field personnel.
Substantially all of our employees are hired on a permanent basis; however, as is typical in the construction industry,
we experienced a high degree of turnover as a result of construction projects being completed. In the past, we have
been able to attract sufficient numbers of personnel to support the growth of our operations.
We conduct extensive safety training programs, which have allowed us to maintain a high safety level at our
worksites. All newly-hired employees undergo an initial safety orientation, and for certain types of projects, we
conduct specific hazard training programs. Our project foremen and superintendents conduct weekly on-site safety
meetings, and our full-time safety inspectors make random site safety inspections and perform assessments and
training if infractions are discovered. In addition, all of our superintendents and project managers are required to
complete an OSHA-approved safety course.
Access to Company’s Filings.
The Company maintains a website at www.sterlingconstructionco.com on which our latest Annual Report on
Form 10-K, recent Quarterly Reports on Form 10-Q, recent Current Reports on Form 8-K, any amendments to those
filings, and other filings may be accessed free of charge through a link to the Securities and Exchange Commission’s
12
(“SEC”) website (www.sec.gov) where those reports are filed. Our website also has recent press releases, the
Company’s Code of Business Conduct & Ethics, the charters of the Audit Committee, Compensation Committee, and
Corporate Governance & Nominating Committee of the Board of Directors and information on the Company’s
“whistle-blower” procedures. Our website content is made available for information purposes only. It should not be
relied upon for investment purposes, and none of the information on the website is incorporated into this Report by
this reference to it.
Item 1A . Risk Factors.
The risks described below are those we believe to be the material risks we face. Any of the risk factors described
below could significantly and adversely affect our business, prospects, financial condition, results of operations and
cash flows.
Risks Relating to Our Business.
If we are unable to accurately estimate the overall risks, requirements or costs when we bid on or negotiate a
contract that is ultimately awarded to us, we may achieve a lower than anticipated profit or incur a loss on the
contract.
The majority of our revenues and backlog are derived from fixed unit price contracts. Some of our revenues are
derived from lump sum contracts. Fixed unit price contracts require us to provide materials and services at a fixed
unit price based on approved quantities irrespective of our actual per unit costs. Lump sum contracts require that the
total amount of work be performed for a single price irrespective of our actual per unit costs. We realize a profit on
our contracts only if we accurately estimate our costs and then successfully control actual costs and avoid cost
overruns, and our revenues exceed actual costs. If our cost estimates for a contract are inaccurate, or if we do not
execute the contract within our cost estimates, then cost overruns may cause us to incur losses or cause the contract
not to be as profitable as we expected. The final results under these types of contracts could negatively affect our cash
flow, earnings and financial position.
The costs incurred and gross profit realized on our contracts can vary, sometimes substantially, from our original
projections due to a variety of factors, including, but not limited to:
onsite conditions that differ from those assumed in the original bid or contract;
failure to include required materials or work in a bid, or the failure to estimate properly the quantities or
costs needed to complete a lump sum contract;
delays caused by weather conditions;
contract or project modifications creating unanticipated costs not covered by change orders;
changes in availability, proximity and costs of materials, including steel, concrete, aggregates and other
construction materials (such as stone, gravel, sand and oil for asphalt paving), as well as fuel and lubricants
for our equipment;
inability to predict the costs of accessing and producing aggregates and purchasing oil required for asphalt
paving projects;
availability and skill level of workers in the geographic location of a project;
failure by our suppliers, subcontractors, designers, engineers, joint venture partners or customers to perform
their obligations;
fraud, theft or other improper activities by our suppliers, subcontractors, designers, engineers, joint venture
partners or customers or our own personnel;
mechanical problems with our machinery or equipment;
issued by any governmental authority,
citations
Administration;
difficulties in obtaining required governmental permits or approvals;
changes in applicable laws and regulations;
delays in quickly identifying and taking measures to address issues which arise during production; and
claims or demands from third parties for alleged damages arising from the design, construction or use and
operation of a project of which our work is part.
the Occupational Safety and Health
including
Many of our contracts with public sector customers contain provisions that purport to shift some or all of the
above risks from the customer to us, even in cases where the customer is partly at fault. Our experience has often
been that public sector customers have been willing to negotiate equitable adjustments in the contract compensation
or completion time provisions if unexpected circumstances arise. However, public sector customers may seek to
impose contractual risk-shifting provisions more aggressively, which could increase risks and adversely affect our
cash flow, earnings and financial position.
We may be unable to sustain our historical revenue growth rate and maintain our profitability.
13
Our revenue has grown rapidly in recent years, in part through acquisitions that expanded our geographical
footprint. We may be unable to sustain these recent revenue growth rates for a variety of reasons, including decreased
government funding for infrastructure projects, limits on additional growth in our current markets, reduced spending
by our customers, an increased number of competitors, less success in competitive bidding for contracts, limitations
on access to necessary working capital and investment capital to sustain growth, limitations on access to bonding to
support increased contracts and operations, inability to hire and retain essential personnel and to acquire equipment to
support growth, and inability to identify acquisition candidates and successfully acquire and integrate them into our
business. A substantial decline in our revenue could have a material adverse effect on our financial condition and
results of operations if we are unable to also reduce our operating expenses. See “Recent Developments ― Financial
Results for 2012, Operational Issues and Outlook for 2013 Financial Results” above for further discuss of the impact
on our financial results.
Economic downturns or reductions in government funding of infrastructure projects could reduce our revenues and
profits and have a material adverse effect on our results of operations.
Our business is highly dependent on the amount and timing of infrastructure work funded by various
governmental entities, which, in turn, depends on the overall condition of the economy, the need for new or
replacement infrastructure, the priorities placed on various projects funded by governmental entities and federal, state
or local government spending levels. Spending on infrastructure could decline for numerous reasons, including
decreased revenues received by state and local governments for spending on such projects, including federal funding.
The nationwide decline in home sales, the increase in foreclosures and a prolonged recession have resulted in
decreases in property taxes and some other local taxes, which are among the sources of funding for municipal road,
bridge and water infrastructure construction. State spending on highway and other projects can be adversely affected
by decreases or delays in, or uncertainties regarding, federal highway funding, which could adversely affect us. We
are reliant upon contracts with state transportation departments for a significant portion of our revenues.
See “Business−Our Markets, Competition and Customers” above for a more detailed discussion of our markets
and their funding sources.
We operate in Texas, Utah, Nevada, Arizona, California and to a lesser extent in other states, and adverse changes to
the economy and business environment in those states have had an adverse effect on, and could continue to
adversely affect, our operations, which could lead to lower revenues and reduced profitability.
Because of this concentration in specific geographic locations, we are susceptible to fluctuations in our business
caused by adverse economic or other conditions in these regions, including natural or other disasters. The stagnant or
depressed economy, to varying degrees, in Texas, Utah, Nevada, Arizona and California have adversely affected, and
could continue to adversely effect, our business and results of operations.
The cancellation of significant contracts or our disqualification from bidding for new contracts could reduce our
revenues and profits and have a material adverse effect on our results of operations.
Contracts that we enter into with governmental entities can usually be canceled at any time by them with
payment only for the work already completed. In addition, we could be prohibited from bidding on certain
governmental contracts if we fail to maintain qualifications required by those entities. A cancellation of an unfinished
contract or our debarment from the bidding process could cause our equipment and work crews to be idled for a
significant period of time until other comparable work becomes available, which could have a material adverse effect
on our business and results of operations.
Our growth strategy involves a number of risks.
While for a number of years we have pursued revenue and profit growth through the acquisition of companies
and assets that enabled us to expand our project skill-sets and capabilities, enlarge our geographic markets, add
experienced management and enhance our ability to bid on larger contracts, we may be unable or unwilling to
continue to implement this strategy if we cannot reach agreements for potential acquisitions on acceptable terms or
for other reasons. Risks related to growth, including growth through acquisitions, include:
difficulties in the integration of operations and systems;
difficulties applying our expertise in one market into another market;
regulatory requirements that impose restrictions on bidding for certain projects because of historical
operations by Sterling or the acquired company;
the key personnel, customers and project partners of the acquired company may terminate or diminish their
relationships with the acquired company;
we may experience additional financial and accounting challenges and complexities in areas such as tax
planning and financial reporting;
14
we may assume or be held liable for risks and liabilities (including for environmental-related costs and
liabilities) as a result of our acquisitions, some of which we may not discover during our due diligence;
we may not adequately anticipate competitive and other market factors applicable to the acquired company;
we may not be able to realize cost savings or other financial benefits we anticipated or we may not realize
our ongoing business may be disrupted or receive insufficient management attention; and
the anticipated benefits in the time frame that we expected.
Future growth, including growth through acquisitions, may require us to obtain additional equity or debt
financing, as well as additional surety bonding capacity, which may not be available on terms acceptable to us or at
all. Moreover, to the extent that any acquisition results in additional goodwill, it will reduce our tangible net worth,
which might have an adverse effect on our credit and bonding capacity.
Our industry is highly competitive, with a variety of companies competing against us, and our failure to compete
effectively could reduce the number of new contracts awarded to us or adversely affect our margins on contracts
awarded.
In the past, a majority of the contracts on which we bid were awarded through a competitive bid process, with
awards generally being made to the lowest bidder, but sometimes recognizing other factors, such as shorter contract
schedules or prior experience with the customer. For our design-build, CM/GC and other alternative methods of
delivering projects, reputation, marketing efforts, quality of design and minimizing public inconvenience are also
significant factors considered in awarding contracts, in addition to cost. Within our markets, we compete with many
international, national, regional and local construction firms. Some of these competitors have achieved greater market
penetration than we have in the markets in which we compete, and some may have greater financial and other
resources than we do. In addition, there are a number of international and national companies in our industry that are
larger than we are and that, if they so desire, could establish a presence in our markets and compete with us for
contracts.
In some markets where residential and commercial projects have significantly diminished, the bidding
environment in our markets has been much more competitive as construction companies that lack available work in
those markets have begun bidding on projects in our markets, sometimes at bid levels below our break-even pricing.
In addition, traditional competitors on larger transportation and water infrastructure projects also appear to have been
bidding at less than normal margins, and in some cases at below our break-even pricing, in order to replenish their
backlogs. As a result, we may need to accept lower contract margins in order to compete against competitors that
have the ability to accept awards at lower prices or have a pre-existing relationship with a customer.
In addition, if the use of design-build, CM/GC and other alternative project delivery methods continues to
increase and we are not able to further develop our capabilities and reputation in connection with these alternative
delivery methods, we will be at a competitive disadvantage, which may have a material adverse effect on our
financial position, results of operations, cash flows and prospects. If we are unable to compete successfully in our
markets, our relative market share and profits could also be reduced.
Our dependence on subcontractors and suppliers of materials (including petroleum-based products) could increase
our costs and impair our ability to complete contracts on a timely basis or at all, which would adversely affect
our profits and cash flow.
We rely on third-party subcontractors to perform some of the work on many of our contracts. We generally do
not bid on contracts unless we have the necessary subcontractors committed for the anticipated scope of the contract
and at prices that we have included in our bid, except in some instances for trucking arrangements. Therefore, to the
extent that we cannot engage subcontractors, our ability to bid for contracts may be impaired. In addition, if a
subcontractor is unable to deliver its services according to the negotiated terms for any reason, including the
deterioration of its financial condition, we may suffer delays and be required to purchase the services from another
source at a higher price or incur other unanticipated costs. This may reduce the profit to be realized, or result in a loss,
on a contract.
We also rely on third-party suppliers to provide most of the materials (including aggregates, cement, asphalt,
concrete, steel, pipe, oil and fuel) for our contracts, except in Nevada where we source and produce some of the
aggregates we use from quarries in which we have mining rights. We do not own or operate any quarries in Texas,
Utah, Arizona or California. We normally do not bid on contracts unless we have commitments from suppliers for the
materials and subcontractors for certain of the services required to complete the contract and at prices that we have
included in our bid, except for some construction projects in Nevada where we use aggregates from quarries in
which we have mining rights. Thus, to the extent that we cannot obtain commitments from our suppliers for materials
and subcontractors for certain of the services, our ability to bid for contracts may be impaired. In addition, if a
supplier or subcontractor is unable to deliver materials or services according to the negotiated terms of a
supply/services agreement for any reason, including the deterioration of its financial condition, we may suffer delays
15
and be required to purchase the materials/services from another source at a higher price or incur other unanticipated
costs. This may reduce the profit to be realized, or result in a loss, on a contract.
Diesel fuel and other petroleum-based products are utilized to operate the plants and equipment on which we rely
to perform our construction contracts. In addition, our asphalt plants and suppliers use oil in combination with
aggregates to produce asphalt used in our road and highway construction projects. Decreased supplies of such
products relative to demand, unavailability of petroleum supplies due to refinery turnarounds, higher prices charged
for petroleum based products and other factors can increase the cost of such products. Future increases in the costs of
fuel and other petroleum-based products used in our business, particularly if a bid has been submitted for a contract
and the costs of such products have been estimated at amounts less than the actual costs thereof, could result in a
lower profit, or a loss, on a contract.
We may not accurately assess the quality, and we may not accurately estimate the quality, quantity, availability and
cost, of aggregates we plan to produce, particularly for projects in rural areas of Nevada, which could have a
material adverse effect on our results of operations.
Particularly for projects in rural areas of Nevada, we typically estimate the quality, quantity, availability and cost
for anticipated aggregate sources that we have not previously used to produce aggregates, which increases the risk
that our estimates may be inaccurate. Inaccuracies in our estimates regarding aggregates could result in significantly
higher costs to supply aggregates needed for our projects, as well as potential delays and other inefficiencies. As a
result, our failure to accurately assess the quality, quantity, availability and cost of aggregates could cause us to incur
losses, which could materially adversely affect our results of operations.
If we are unable to attract and retain key personnel and skilled labor, or if we encounter labor difficulties, our ability
to bid for and successfully complete contracts may be negatively impacted.
Our ability to attract and retain reliable, qualified personnel is a significant factor that enables us to successfully
bid for and profitably complete our work. This includes members of our management, project managers, estimators,
supervisors, foremen, equipment operators and laborers. The loss of the services of any of our management could
have a material adverse effect on us. Our future success will also depend on our ability to hire and retain, or to attract
when needed, highly-skilled personnel. If competition for these employees is intense, we could experience difficulty
hiring and retaining the personnel necessary to support our business. If we do not succeed in retaining our current
employees and attracting, developing and retaining new highly-skilled employees, our reputation may be harmed and
our operations and future earnings may be negatively impacted.
We rely heavily on immigrant labor. We have taken steps that we believe are sufficient and appropriate to ensure
compliance with immigration laws. However, we cannot provide assurance that we have identified, or will identify in
the future, all illegal immigrants who work for us. Our failure to identify illegal immigrants who work for us may
result in fines or other penalties being imposed upon us, which could have a material adverse effect on our operations,
results of operations and financial condition.
In Nevada, California and Hawaii, a substantial number of our equipment operators and laborers are unionized.
Any work stoppage or other labor dispute involving our unionized workforce, or inability to renew contracts with the
unions, could have a material adverse effect on our operations and operating results.
Our contracts may require us to perform extra or change order work, which can result in disputes and adversely
affect our working capital, profits and cash flows.
Our contracts often require us to perform extra or change order work as directed by the customer even if the
customer has not agreed in advance on the scope or price of the extra work to be performed. This process may result
in disputes over whether the work performed is beyond the scope of the work included in the original project plans
and specifications or, if the customer agrees that the work performed qualifies as extra work, the price that the
customer is willing to pay for the extra work. These disputes may not be settled to our satisfaction. Even when the
customer agrees to pay for the extra work, we may be required to fund the cost of such work for a lengthy period of
time until the change order is approved by the customer and we are paid by the customer.
To the extent that actual recoveries with respect to change orders or amounts subject to contract disputes or
claims are less than the estimates used in our financial statements, the amount of any shortfall will reduce our future
revenues and profits, and this could have a material adverse effect on our reported working capital and results of
operations. In addition, any delay caused by the extra work may adversely impact the timely scheduling of other
project work and our ability to meet specified contract milestone dates.
Our failure to meet schedule or performance requirements of our contracts could adversely affect us.
In most cases, our contracts require completion by a scheduled acceptance date. Failure to meet any such
schedule could result in additional costs, penalties or liquidated damages being assessed against us, and these could
16
exceed projected profit margins on the contract. Performance problems on existing and future contracts could cause
actual results of operations to differ materially from those anticipated by us and could cause us to suffer damage to
our reputation within the industry and among our customers.
The design-build project delivery method subjects us to the risk of design errors and omissions.
In the event of a design error or omission causing damages with respect to one of our design-build projects, we
could be liable. Although we pass design responsibility on to the engineering firms that we engage to perform design
services on our behalf for these projects, in the event of a design error or omission causing damages, there is risk that
the engineering firm, its professional liability insurance, and the errors and omissions insurance that they and we
purchase will not fully protect us from costs or liabilities. Any liabilities resulting from an asserted design defect with
respect to our construction projects may have a material adverse effect on our financial position, results of operations
and cash flows.
Adverse weather conditions may cause delays, which could slow completion of our contracts and negatively affect
our revenues and cash flow.
Because all of our construction projects are built outdoors, work on our contracts is subject to unpredictable
weather conditions, which could become more frequent or severe if general climatic changes occur. For example,
evacuations in Texas due to hurricanes along the U.S. Gulf of Mexico coastal areas can result in our inability to
perform work on all Houston-area contracts for several days. Lengthy periods of wet or cold winter weather will
generally interrupt construction, and this can lead to under-utilization of crews and equipment, resulting in less
efficient rates of overhead recovery. Extreme heat can prevent us from performing certain types of operations.
During the late fall to early spring months of each year, our work on construction projects in Nevada and Utah may
also be curtailed because of snow and other work-limiting weather. While revenues can be recovered following a
period of bad weather, it is generally impossible to recover the cost of inefficiencies, and significant periods of bad
weather typically reduce profitability of affected contracts both in the current period and during the future life of
affected contracts. Such reductions in contract profitability negatively affect our results of operations in current and
future periods until the affected contracts are completed.
Timing of the award and performance of new contracts could have an adverse effect on our operating results and
cash flow.
It is generally very difficult to predict whether and when new contracts will be offered for tender, as these
contracts frequently involve a lengthy and complex design and bidding process, which is affected by a number of
factors, such as market conditions, funding arrangements and governmental approvals. Because of these factors, our
results of operations and cash flows may fluctuate from quarter to quarter and year to year, and the fluctuation may be
substantial.
The uncertainty of the timing of contract awards may also present difficulties in matching the size of our
equipment fleet and work crews with contract needs. In some cases, we may maintain and bear the cost of more
equipment and ready work crews than are currently required, in anticipation of future needs for existing contracts or
expected future contracts. If a contract is delayed or an expected contract award is not received, we would incur costs
that could have a material adverse effect on our anticipated profit.
In addition, the timing of the revenues, earnings and cash flows from our contracts can be delayed by a number
of factors, including adverse weather conditions, such as prolonged or intense periods of rain, snow, storms or
flooding; delays in receiving material and equipment from suppliers and services from subcontractors; and changes in
the scope of work to be performed. Such delays, if they occur, could have adverse effects on our operating results for
current and future periods until the affected contracts are completed.
Our participation in construction joint ventures exposes us to liability and/or harm to our reputation for failures of
our partners.
As part of our business, we are a party to joint venture arrangements, pursuant to which we typically jointly bid
on and execute particular projects with other companies in the construction industry. Success on these joint projects
depends upon managing the risks discussed in the various risks described in these “Risk Factors” and on whether our
joint venture partners satisfy their contractual obligations.
We and our joint venture partners are generally jointly and severally liable for all liabilities and obligations of
our joint ventures. If a joint venture partner fails to perform or is financially unable to bear its portion of required
capital contributions or other obligations, including liabilities stemming from lawsuits, we could be required to make
additional investments, provide additional services or pay more than our proportionate share of a liability to make up
for our partner’s shortfall. Furthermore, if we are unable to adequately address our partner’s performance issues, the
customer may terminate the project, which could result in legal liability to us, harm to our reputation and reduction to
our profit on a project.
17
In connection with acquisitions, certain counterparties to joint venture arrangements, which may include our
historical direct competitors, may not desire to continue such arrangements with us and may terminate the joint
venture arrangements or not enter into new arrangements. Any termination of a joint venture arrangement could cause
us to reduce our backlog and could materially and adversely affect our business, results of operations and financial
condition.
Our dependence on a limited number of customers could adversely affect our business and results of operations.
Due to the size and nature of our construction contracts, one or a few customers have in the past and may in the
future represent a substantial portion of our consolidated revenues and gross profits in any one year or over a period
of several consecutive years. For example, in 2012, approximately 16.0% of our revenue was generated from UDOT
and approximately 15.0% was generated by Caltrans. Similarly, our backlog frequently reflects multiple contracts for
certain customers; therefore, one customer may comprise a significant percentage of backlog at a certain point in
time. Examples of this are Caltrans, NTTA, Central Texas Regional Mobility Authority, TxDOT and ADOT which
comprised 31.0%, 16.2%, 7.4%, 6.8% and 5.7% of our backlog at December 31, 2012, respectively. The loss of
business from any one of such customers could have a material adverse effect on our business or results of
operations. Also, a default or delay in payment on a significant scale by a customer could materially adversely affect
our business, results of operations, cash flows and financial condition.
We may incur higher costs to lease, acquire and maintain equipment necessary for our operations, and the market
value of our owned equipment may decline.
A significant portion of our contracts is built with our own construction equipment rather than leased or rented
equipment. To the extent that we are unable to buy construction equipment necessary for our needs, either due to a
lack of available funding or equipment shortages in the marketplace, we may be forced to rent equipment on a short-
term basis, which could increase the costs of performing our contracts.
The equipment that we own or lease requires continuous maintenance, for which we maintain our own repair
facilities. If we are unable to continue to maintain the equipment in our fleet, we may be forced to obtain third-party
repair services, which could increase our costs. In addition, the market value of our equipment may unexpectedly
decline at a faster rate than anticipated.
An inability to obtain bonding could limit the aggregate dollar amount of contracts that we are able to pursue.
As is customary in the construction business, we are required to provide surety bonds to our customers to secure
our performance under construction contracts. Our ability to obtain surety bonds primarily depends upon our
capitalization, working capital, past performance, management expertise and reputation and certain external factors,
including the overall capacity of the surety market. Surety companies consider such factors in relationship to the
amount of our backlog and their underwriting standards, which may change from time to time. Events that adversely
affect the insurance and bonding markets generally may result in bonding becoming more difficult to obtain in the
future, or being available only at a significantly greater cost. Our inability to obtain adequate bonding would limit the
amount that we can bid on new contracts and could have a material adverse effect on our future revenues and
business prospects.
Our operations are subject to hazards that may cause personal injury or property damage, thereby subjecting us to
liabilities and possible losses, which may not be covered by insurance.
Our workers are subject to the usual hazards associated with providing construction and related services on
construction sites, plants and quarries. Operating hazards can cause personal injury and loss of life, damage to or
destruction of property, plant and equipment and environmental damage. We maintain general liability and excess
liability insurance, workers’ compensation insurance, auto insurance and other types of insurance all in amounts
consistent with our risk of loss and industry practice, but this insurance may not be adequate to cover all losses or
liabilities that we may incur in our operations.
Insurance liabilities are difficult to assess and quantify due to unknown factors, including the severity of an
injury, the determination of our liability in proportion to other parties, the number of incidents not reported and the
effectiveness of our safety program. If we were to experience insurance claims or costs above our estimates, we
might be required to use working capital to satisfy these claims rather than to maintain or expand our operations. To
the extent that we experience a material increase in the frequency or severity of accidents or workers’ compensation
and health claims, or unfavorable developments on existing claims, our operating results and financial condition
could be materially and adversely affected.
Environmental and other regulatory matters could adversely affect our ability to conduct our business and could
require expenditures that could have a material adverse effect on our results of operations and financial
condition.
18
Our operations are subject to various environmental laws and regulations relating to the management, disposal
and remediation of hazardous substances, climate change and the emission and discharge of pollutants into the air and
water. We could be held liable for such contamination created not only from our own activities but also from the
historical activities of others on our project sites or on properties that we acquire or lease. Our operations are also
subject to laws and regulations relating to workplace safety and worker health, which, among other things, regulate
employee exposure to hazardous substances. Immigration laws require us to take certain steps intended to confirm the
legal status of our immigrant labor force, but we may nonetheless unknowingly employ illegal immigrants. Violations
of such laws and regulations could subject us to substantial fines and penalties, cleanup costs, third-party property
damage or personal injury claims. In addition, these laws and regulations have become, and enforcement practices
and compliance standards are becoming, increasingly stringent. Moreover, we cannot predict the nature, scope or
effect of legislation or regulatory requirements that could be imposed, or how existing or future laws or regulations
will be administered or interpreted, with respect to products or activities to which they have not been previously
applied. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the
regulatory agencies, could require us to make substantial expenditures for, among other things, pollution control
systems and other equipment that we do not currently possess, or the acquisition or modification of permits
applicable to our activities.
Our aggregate quarry lease in Nevada could subject us to costs and liabilities. As lessee and operator of the
quarry, we could be held responsible for any contamination or regulatory violations resulting from activities or
operations at the quarry. Any such costs and liabilities could be significant and could materially and adversely affect
our business, operating results and financial condition.
Terrorist attacks have impacted, and could continue to negatively impact, the U.S. economy and the markets in which
we operate.
Terrorist attacks, like those that occurred on September 11, 2001, have contributed to economic instability in the
United States, and further acts of terrorism, violence or war could affect the markets in which we operate, our
business and our expectations. Armed hostilities may increase, or terrorist attacks, or responses from the United
States, may lead to further acts of terrorism and civil disturbances in the United States or elsewhere, which may
further contribute to economic instability in the United States. These attacks or armed conflicts may affect our
operations or those of our customers or suppliers and could impact our revenues, our production capability and our
ability to complete contracts in a timely manner.
Risks Related to Our Financial Results and Financing Plans.
Actual results could differ from the estimates and assumptions that we use to prepare our financial statements.
To prepare financial statements in conformity with accounting principles generally accepted in the United States
(“GAAP”), management is required to make estimates and assumptions, as of the date of the financial statements,
which affect the reported values of assets and liabilities, revenues and expenses, and disclosures of contingent assets
and liabilities. Areas requiring significant estimates by our management include: contract costs and profits;
application of percentage-of-completion accounting and revenue recognition of contract change order claims;
provisions for uncollectible receivables and customer claims and recoveries of costs from subcontractors, suppliers
and others; impairment of long-term assets; valuation of assets acquired and liabilities assumed in connection with
business combinations; accruals for estimated liabilities, including litigation and insurance reserves; and stock-based
compensation. Our actual results could differ from, and could require adjustments to, those estimates.
In particular, as is more fully discussed in “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Critical Accounting Policies,” we recognize contract revenue using the
percentage-of-completion method. Under this method, estimated contract revenue is recognized by applying the
percentage of completion of the contract for the period (based on the ratio of costs incurred to total estimated costs of
a contract) to the total estimated revenue for the contract. Estimated contract losses are recognized in full when
determined. Contract revenue and total cost estimates are reviewed and revised on a continuous basis as the work
progresses and as change orders are initiated or approved, and adjustments based upon the percentage of completion
are reflected in contract revenue in the accounting period when these estimates are revised. To the extent that these
adjustments result in an increase, a reduction or an elimination of previously reported contract profit, we recognize a
credit or a charge against current earnings, which could be material.
We may need to raise additional capital in the future for working capital, capital expenditures and/or acquisitions,
and we may not be able to do so on favorable terms or at all, which would impair our ability to operate our
business or achieve our growth objectives.
Our ability to obtain additional financing in the future will depend in part upon prevailing credit and equity
market conditions, as well as conditions in our business and our operating results; such factors may adversely affect
our efforts to arrange additional financing on terms satisfactory to us. We have pledged the proceeds and other rights
19
under our construction contracts to our bond surety, and we have pledged substantially all of our other assets as
collateral in connection with our credit facility and mortgage debt. As a result, we may have difficulty in obtaining
additional financing in the future if such financing requires us to pledge assets as collateral. In addition, under our
credit facility, we must obtain the consent of our lenders to incur any amount of additional debt from other sources
(subject to certain exceptions). If future financing is obtained by the issuance of additional shares of common stock,
our stockholders may suffer dilution. If adequate funds are not available, or are not available on acceptable terms, we
may not be able to make future investments, take advantage of acquisitions or other opportunities, or respond to
competitive challenges.
We are subject to financial and other covenants under our credit facility that could limit our flexibility in
managing our business.
We have a credit facility that restricts us from engaging in certain activities, including our ability (subject to
certain exceptions) to:
make distributions, pay dividends and buy back shares;
make acquisitions.
incur liens or encumbrances;
incur other indebtedness;
guarantee obligations;
dispose of a material portion of assets;
engage in a merger with a third party; and
Our credit facility contains financial covenants that require us to maintain specified fixed charge coverage ratios,
asset ratios and leverage ratios, and to maintain specified levels of tangible net worth. Our ability to borrow funds for
any purpose will depend on our satisfying these tests. If we are unable to meet the terms of the financial covenants or
fail to comply with any of the other restrictions contained in our credit facility, an event of default could occur. An
event of default, if not waived by our lenders, could result in the acceleration of any outstanding indebtedness,
causing such debt to become immediately due and payable. If such acceleration occurs, we may not be able to repay
such indebtedness on a timely basis. Acceleration of our credit facility could result in foreclosure on and loss of our
operating assets. In the event of such foreclosure, we would be unable to conduct our business and forced to
discontinue operations.
If we were required to write down all or part of our goodwill, our net earnings and net worth could be materially and
adversely affected.
We had approximately $54.8 million of goodwill recorded on our consolidated balance sheet at December 31,
2012. Goodwill represents the excess of cost over the fair value of net assets acquired in business combinations
reduced by any impairments recorded subsequent to the date of acquisition. A shortfall in our revenues or net income
or changes in various other factors from that expected by securities analysts and investors could significantly reduce
the market price of our common stock. If our market capitalization drops significantly below the amount of net
equity recorded on our balance sheet, it might indicate a decline in our fair value and would require us to further
evaluate whether our goodwill has been impaired. We perform an annual review of our goodwill and intangible assets
to determine if they have become impaired, which would require us to write down the impaired portion of these
assets. On an interim basis, we also review the factors that have or may affect our operations or market capitalization
for events that may trigger impairment testing. Writedowns of goodwill may be substantial. For example, in 2011,
our annual review indicated that goodwill was impaired, and as a result we recorded a charge of $67.0 million
representing approximately 55% of the $121 million of recorded goodwill prior to the write down. As a result, the
Company incurred a significant loss for 2011 and equity declined by $41.8 million. If we were required to write
down all or a significant part of our goodwill in future periods, our net earnings and equity could be materially and
adversely affected.
Item 1B . Unresolved Staff Comments
None
Item 2. Properties
We own our headquarters office building in Houston, Texas, which is located on a seven-acre parcel of land on
which our Texas equipment repair center is also located. We also own land and newly constructed offices in San
Antonio and Dallas.
Our Utah operations leases office space in Draper, Utah, near Salt Lake City, and repair facilities in West Jordan
City, Utah from entities owned primarily by certain officers of RLW – see Note 17 (references to “Note” or “Notes”
20
are to the Notes to Consolidated Financial Statements for the year ended December 31, 2012, included in this
document).
For our Nevada operations, we lease office space in Sparks, Nevada, and own our office and repair facilities
located on a forty-five acre parcel of land in Lovelock, Nevada. We also lease the right to mine stone and sand at four
quarry sites in Nevada. Unlike in Texas and Utah where we acquire aggregates from third-party suppliers, in Nevada
we generally source and produce our own aggregates, either from our own quarries or from other sources near job
sites where we enter into short-term leases to acquire the aggregates necessary for the job.
For our Arizona operations, we lease office space in Tempe, and for our California operations, we lease office
space in Sacramento.
In order to complete most contracts, we also lease small parcels of real estate near the site of a contract job site to
store materials, locate equipment, and provide offices for the contracting customer, its representatives and our
employees.
Item 3. 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 4. Mine Safety Disclosures.
The information concerning mine safety violations and other regulatory matters required by section 1503(a) of
the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in
Exhibit 95.1 of this Annual Report on Form 10-K, which is incorporated by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
(At March 1, 2013)
The following is a list of the Company's executive officers, their ages, positions, offices and the year they
became executive officers together with a brief description of their business experience.
Name
Age
Position/Offices
Peter MacKenna (1)
Elizabeth D. Brumley
Joseph P. Harper, Jr.
Brian R. Manning
50
54
41
46
President & Chief Executive Officer
Executive Vice President & Chief Financial
Officer, Treasurer, Controller
Executive Vice President
Executive Vice President & Chief Business
Development Officer
Roger M. Barzun
71
Senior Vice President & General Counsel,
(1) Member of the Board of Directors.
Secretary
Executive
Officer Since
2012
2011
2010
2010
2006
Each executive officer is elected by the Board of Directors and, subject to the terms of his employment
agreement with the Company, holds office for such term as the Board of Directors may prescribe or until his death,
disqualification, resignation or removal.
Mr. MacKenna was elected Chief Executive Officer effective September 1, 2012, and on January 28, 2013 he
was given the additional title of President on the retirement of Joseph P. Harper, Sr., the Company’s former President
and Chief Operating Officer. Prior to joining the Company, Mr. MacKenna was employed by Skanska AB for more
than fourteen years as president and chief executive officer of several of its operating companies. Skanska AB is a
Fortune 500 public company and one of the ten largest construction companies in the world.
Ms. Brumley was elected Chief Accounting Officer & Controller effective March 17, 2011 and Executive Vice
President & Chief Financial Officer effective November 28, 2011. Prior to joining the Company, from November,
2005 through June, 2010, she was with Bristow Group Inc. serving in various roles, the most recent of which was as
the Company’s Vice President-Finance and Chief Financial Officer. Bristow Group Inc. is listed on the New York
21
Stock Exchange and is a leading global provider of helicopter services to the worldwide offshore energy industry.
Prior to that she held controller and accounting positions with several Houston-based corporations. Ms. Brumley is a
certified public accountant.
Messrs. Harper and Manning have been officers of the Company for more than the last five years. Messrs.
Harper and Manning were elected to their current positions on September 1, 2010.
Mr. Barzun has been an officer of the Company for more than the last five years and also serves as general
counsel to other corporations from time to time on a part-time basis. He is a member of the bar of New York and
Massachusetts.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
The Company’s common stock is traded on the NASDAQ Global Select Market (“NGS”). The table below
shows the market high and low closing sales prices of the common stock for 2011 and 2012 by quarter.
Year Ended December 31, 2011
First Quarter ............................................................ $
Second Quarter .......................................................
Third Quarter ..........................................................
Fourth Quarter ........................................................
Year Ended December 31, 2012
First Quarter ........................................................... $
Second Quarter .......................................................
Third Quarter ..........................................................
Fourth Quarter ........................................................
High
Low
16.89 $
16.85
14.27
13.11
12.30 $
10.22
10.80
10.00
12.42
12.25
10.70
10.05
8.98
8.75
9.64
7.81
On February 28, 2013, there were 1,092 holders of record of our common stock.
Dividend Policy.
We have never paid any cash dividends on our common stock. For the foreseeable future, we intend to retain
any earnings in our business, and we do not anticipate paying any cash dividends. Whether or not we declare any
dividends will be at the discretion of the Board of Directors considering then-existing conditions, including the
Company’s financial condition and results of operations, capital requirements, bonding prospects, contractual
restrictions (including those under the Company’s Credit Facility), business prospects and other factors that our
Board of Directors considers relevant.
Equity Compensation Plan Information.
Certain information about the Company’s equity compensation plans is incorporated into Item 11. — Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters from the Company’s
proxy statement for its 2013 Annual Meeting of Stockholders.
Performance Graph.
The following graph compares the percentage change in the Company’s cumulative total stockholder return on
its common stock for the last five years with the Dow Jones US Index, a broad market index, and the Dow Jones US
Heavy Construction Index, a group of companies whose focus is limited primarily to heavy civil construction. Both
indices are published in The Wall Street Journal.
The returns are calculated assuming that an investment with a value of $100 was made in the Company’s
common stock and in each index at the end of 2007 and that all dividends were reinvested in additional shares of
common stock. The graph lines merely connect the measuring dates and do not reflect fluctuations between those
dates. The stock performance shown on the graph is not intended to be indicative of future stock performance.
22
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Sterling Construction Company, Inc, the Dow Jones US Index,
and the Dow Jones US Heavy Construction Index
$120
$100
$80
$60
$40
$20
$0
12/07
12/08
12/09
12/10
12/11
12/12
Sterling Construction Company, Inc
Dow Jones US
Dow Jones US Heavy Construction
*$100 invested on 12/31/07 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2013 Dow Jones & Co. All rights reserved.
December
2007 ($)
December
2008 ($)
December
2009 ($)
December
2010 ($)
December
2011 ($)
December
2012 ($)
Sterling Construction Company, Inc.
Dow Jones US
Dow Jones US Heavy Construction
100.00
100.00
100.00
84.92
62.84
44.88
87.72
80.93
51.30
59.76
94.40
65.87
49.36
95.67
54.30
45.55
111.29
65.94
Issuer Purchases of Equity Securities.
In October 2008, the Company announced a share-repurchase program to purchase up to $5 million in shares of
common stock. In August 2010, the Company announced an increase to the share-repurchase program to purchase an
additional $5 million in shares of common stock, for a total up to $10 million. The specific timing and amount of
repurchase will vary based on market conditions, securities law limitations and other factors. There were no
repurchases of shares during the twelve months ended December 31, 2012.
23
Item 6. Selected Financial Data
The following table sets forth selected financial and other data of the Company and its subsidiaries and should be
read in conjunction with both “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” which follows, and “Item 8. Financial Statements and Supplementary Data.”
Years ended December 31,
2012
2011
2010
2009
2008
Revenues ........................................................$
630,507 $
501,156 $
459,893 $
390,847 $
415,074
Income (loss) before income taxes and
earnings attributable to noncontrolling
interests........................................................$
Income tax benefit (expense) .........................
Net income (loss) .....................................
Noncontrolling owners’ interests in earnings
of subsidiaries ..............................................
Net income (loss) attributable to Sterling
17,133 $
579
17,712
(51,716) $
17,012
(34,704)
36,494 $
(10,270)
26,224
37,795 $
(12,267)
25,528
28,999
(10,025)
18,974
(18,009)
(1,196)
(7,137)
(1,824)
(908)
common stockholders ..................................$
(297) $
(35,900) $
19,087 $
23,704 $
18,066
Net income (loss) per share attributable to
Sterling common stockholders:
Basic ........................................................$
Diluted .....................................................$
(0.26) $
(0.26) $
(2.24) $
(2.24) $
1.15 $
1.13 $
1.77 $
1.71 $
1.38
1.32
Weighted average number of common shares
outstanding used in computing per share
amounts:
Basic .......................................................
Diluted .....................................................
16,421
16,421
16,396
16,396
16,195
16,563
13,359
13,856
Cash dividends declared .................................$
-- $
-- $
-- $
-- $
13,120
13,702
--
Balance sheet:
Total assets .....................................................$
Long-term debt ...............................................$
Equity attributable to Sterling common
331,510 $
24,201 $
303,831 $
263 $
367,131 $
336 $
385,741 $
40,409 $
289,615
55,483
stockholders .................................................$
210,148 $
213,311 $
250,429 $
230,766 $
159,116
Book value per share of outstanding
common stock attributable to Sterling
common stockholders ..................................$
Shares outstanding ..........................................
12.74 $
16,495
13.07 $
16,321
15.21 $
16,468
14.35 $
16,082
12.07
13,185
24
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview.
We are a company that operates in one segment, heavy civil construction, through our subsidiaries, and which
specializes in the building, reconstruction and repair of transportation and water infrastructure in Texas, Utah,
Nevada, Arizona and California and other states where we see opportunities. We have strategically expanded our
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 August 1, 2011,
we expanded our operations into Arizona and California with the acquisitions of JBC and Myers.
Critical Accounting Policies.
On an ongoing basis, the Company evaluates the critical accounting policies used to prepare its consolidated
financial statements, including, but not limited to, those related to:
Revenue recognition
Contracts receivable, including retainage
Valuation of property and equipment, goodwill and other long-lived assets
Construction joint ventures
Income taxes
Segment reporting
Our significant accounting policies are described in Note 1, and conform to the FASB’s Accounting Standards
Codification (or GAAP or ASC).
Use of Estimates.
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the 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. Certain of the Company’s accounting policies require higher degrees of judgment than others in their
application. These include the recognition of revenue and earnings from construction contracts under the percentage-
of-completion method, the valuation of long-lived assets, and income taxes. Management continually evaluates all of
its estimates and judgments based on available information and experience; however, actual amounts could differ
from those estimates.
Contract Revenue Recognition
The majority of our contracts with our customers are “fixed unit price.” Under such contracts, we are committed
to providing materials or services required by a contract at fixed unit prices (for example, dollars per cubic yard of
concrete poured or per cubic yard of earth excavated). Most of our state and municipal contracts provide for
termination of the contract for the convenience of the owner, with provisions to pay us only for work performed
through the date of termination.
Credit risk is minimal with public owners since the Company ascertains that funds have been appropriated by the
governmental project owner prior to commencing work on such projects. While most public contracts are subject to
termination at the election of the government entity, in the event of termination the Company is entitled to receive the
contract price for completed work and reimbursement of termination-related costs. Credit risk with private owners is
minimized because of statutory mechanics liens, which give the Company high priority in the event of lien
foreclosures following financial difficulties of private owners.
We use the percentage-of-completion accounting method for construction contracts. Revenue is recognized as
costs are incurred in an amount equal to cost plus the related expected profit based on the percentage of completion
method of accounting in the ratio of costs incurred to estimated final costs. Our contracts generally take 12 to 36
months to complete. Contract costs consist of direct costs on contracts, including labor, materials, amounts payable
to subcontractors and those indirect costs related to contract performance, such as indirect salaries and wages,
equipment maintenance, repairs, fuel and depreciation, insurance and payroll taxes. Contract cost is recorded as
incurred, and revisions in contract revenue and cost estimates are reflected in the accounting period when known.
Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Changes in job performance, job conditions and estimated profitability, including those changes arising from contract
penalty provisions and final contract settlements may result in revisions to costs and income and are recognized in the
period in which the revisions are determined. An amount attributable to contract claims is included in revenues when
25
realization is probable and the amount can be reasonably estimated. The Company generally provides a one to two-
year warranty for workmanship under its contracts. Warranty claims historically have been insignificant.
The accuracy of our revenue and profit recognition in a given period is dependent on the accuracy of our
estimates of the revenues and costs to finish uncompleted contracts. Our estimates for all of our significant contracts
use a highly detailed “bottom up” approach, and we believe our experience allows us to produce reliable estimates.
However, our projects can be highly complex, and in almost every case, the profit margin estimates for a contract will
either increase or decrease to some extent from the amount that was originally estimated at the time of bid. Because
we have a large number of projects of varying levels of size and complexity in process at any given time, these
changes in estimates can sometimes offset each other without materially impacting our overall profitability. However,
large changes in revenue or cost estimates can have a significant effect on profitability. There are a number of factors
that can contribute to changes in estimates of contract cost and profitability. The most significant of these include the
completeness and accuracy of the original bid, recognition of costs associated with scope changes, extended overhead
due to customer-related and weather-related delays, subcontractor and supplier performance issues, site conditions
that differ from those assumed in the original bid (to the extent contract remedies are unavailable), the availability
and skill level of workers in the geographic location of the project and changes in the availability and proximity of
materials. The foregoing factors, as well as the stage of completion of contracts in process and the mix of contracts at
different margins, may cause fluctuations in gross profit between periods, and these fluctuations may be significant.
Results for 2012 and 2011 were adversely affected by revisions to estimated profitability on a number of construction
projects. See “Recent Developments ― Financial Results for 2012, Operational Issues and Outlook for 2013
Financial Results” above and “Results of Operations ― Fiscal Year Ended December 31, 2012 Compared with Fiscal
Year Ended December 31, 2011” for further discussion of the impact on our financial results.
Contracts Receivable, Including Retainage
Contracts receivable are generally based on amounts billed to the customer. At December 31, 2012 and 2011,
contracts receivable included $18.1 million and $22.6 million of retainage, respectively, which is being withheld by
customers until completion of the contracts. All other contracts receivable include only balances approved for
payment by the customer.
Many of the contracts under which the Company performs work contain retainage provisions. Retainage refers to
that portion of billings made by the Company but held for payment by the customer pending satisfactory completion
of the project. Retainage on active contracts is classified as a current asset regardless of the term of the contract and is
generally collected within one year of the completion of a contract.
Based upon a review of outstanding contracts receivable, historical collection information and existing economic
conditions, management has determined that all contracts receivable at December 31, 2012, including retainage, are
fully collectible, and, accordingly, no allowance for doubtful accounts against contracts receivable was necessary.
Contracts receivable are written off based on individual credit evaluation and specific circumstances of the customer,
when such treatment is warranted.
Valuation of Long-Lived Assets.
Long-lived assets, which include property, equipment and acquired intangible assets, including goodwill, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Impairment evaluations involve fair values and management estimates of useful asset lives
and future cash flows. Actual useful lives and cash flows could be different from those estimated by management,
and this could have a material effect on operating results and financial position. Goodwill must be reviewed for
impairment at least annually, and we completed our most recent annual impairment review for historical goodwill
during the fourth quarter of 2012. It indicated that there was no impairment in goodwill. Note 8 to the Consolidated
Financial Statements discusses the three valuation approaches used by the Company to determine the fair value of the
Company’s equity for purposes of evaluating whether there is an indication of goodwill impairment. These valuation
approaches are impacted by a number of factors but the key ones are the Company’s stock price, the Company’s
financial performance relative to its peer group, the financial performance of the peer group, the estimated control
premium and the estimated forecasted cash flows. The valuation approaches contain uncertainty regarding the
estimates used. One of the largest uncertainties relates to government and state spending which management expects
to increase in the next few years. There are a number of other uncertainties with respect to our future financial
performance that could impact estimated future cash flows. These are discussed in a number of places including
“Item IA. Risk Factors.” We determined that the fair value of the Company’s equity was approximately 3% above
the carrying value of the Company’s equity, and therefore a modest change in estimated forecasted cash flows could
result in an impairment of goodwill. In 2011, we determined that there was an impairment in goodwill of $67.0
million, which has been recognized as a charge in 2011. At December 31, 2012, we had goodwill with a remaining
carrying amount of approximately $54.8 million.
26
Income Taxes.
Deferred tax assets and liabilities are recognized based on the differences between the financial statement
carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for
recoverability and, where necessary, establish a valuation allowance. We are subject to the alternative minimum tax,
or AMT, and payments of AMT result in a reduction of our deferred tax liability.
Segment Reporting.
We operate in one segment and have only one reportable segment and one reporting unit component, heavy civil
construction. In making this determination, we considered that each project has similar characteristics, includes
similar services 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 rail and water, waste water and storm
drainage systems.
The nature of the production processes — our heavy civil construction services rendered in the construction
process for each of our construction projects performed by each local office is the same — they excavate
dirt, remove existing pavement and pipe, lay aggregate or concrete pavement, pipe and rail and build bridges
and similar large structures in order to complete our projects.
The type or class of customer for products and services — substantially all of our customers are state
departments of transportation, cities, counties, and regional water, rail and toll-road authorities. A substantial
portion of the funding for the state departments of transportation to finance the projects we construct is
furnished by the federal government.
The methods used to distribute products or provide services — the heavy civil construction services
rendered on our projects are performed primarily with our own field work crews (laborers, equipment
operators and supervisors) and equipment (backhoes, loaders, dozers, graders, cranes, pug mills, crushers,
and concrete and asphalt plants).
The nature of the regulatory environment — we perform substantially all of our projects for federal, state
and municipal governmental agencies, and all of the projects that we perform are subject to substantially
similar regulation under U.S. and state department of transportation rules, including prevailing wage and
hour laws; codes established by the federal government and municipalities regarding water and waste water
systems installation; and laws and regulations relating to workplace safety and worker health of the
U.S. Occupational Safety and Health Administration and to the employment of immigrants of the
U.S. Department of Homeland Security.
The economic characteristics of our local offices are similar. While profit margin objectives included in contract
bids have some variability from contract to contract, our profit margin objectives are not differentiated by our chief
operating decision maker or our office management based on local office location. Instead, the projects undertaken by
each local office are primarily competitively-bid, fixed-unit or negotiated lump-sum price contracts, all of which are
bid based on achieving gross margin objectives that reflect the relevant skills required, the contract size and duration,
the availability of our personnel and equipment, the makeup and level of our existing backlog, our competitive
advantages and disadvantages, prior experience, the contracting agency or customer, the source of contract funding,
anticipated start and completion dates, construction risks, penalties or incentives and general economic conditions.
Results of Operations.
Backlog at December 31, 2012
At December 31, 2012, our backlog of construction projects was $656 million, as compared to $616 million at
December 31, 2011. Our Company was awarded $643 million of new contracts in 2012, excluding acquired
contracts, compared to $595 million of new contracts in 2011. Our contracts are typically completed in 12 to
36 months. At December 31, 2012, there was approximately $63 million excluded from our consolidated backlog
where we were the apparent low bidder, but had not yet been formally awarded the contract or the contract price had
not been finalized. Backlog includes $77 million attributable to our share of estimated revenues related to joint
ventures where we are a noncontrolling joint venture partner. As discussed further in “Item 1. Business―Recent
Developments―Financial Results for 2012, Operational Issues and Outlook for 2013 Financial Results,” based on
our current estimates, the gross margin in our backlog is lower than the gross margin of 7.5% realized in 2012 as a
result of operational issues and lower infrastructure capital expenditures by federal and state governments.
27
We do, however, expect that our markets will ultimately recover from the conditions discussed in “Item 1.
Business” and that our backlog and revenues will grow and gross margins, net income and earnings per share will
return to levels more consistent with historical rates of return. However, we cannot predict the timing of such a
return to historical normalcy in our markets. We believe that the Company is in sound financial condition and has the
resources and management experience to weather current market conditions and to continue to compete successfully
for projects as they become available at acceptable profit margin levels. See “Item 1. Business — Our Markets,
Competition and Customers” for a more detailed discussion of our markets and their funding sources.
Fiscal Year Ended December 31, 2012 Compared with Fiscal Year Ended December 31, 2011
Revenues ........................................................................$
Gross profit ....................................................................$
General and administrative expenses .............................
Goodwill impairment .....................................................
Unusual items .................................................................
Other income (expense) .................................................
Operating income (loss) .................................................
Gains (losses) on the sale of short-term investments .....
Interest income ...............................................................
Interest expense ..............................................................
Income (loss) before income taxes and earnings
attributable to noncontrolling interests ....................
Income tax benefit (expense) .........................................
Net income (loss) ...........................................................
Noncontrolling owners’ interests in earnings of
subsidiaries and joint ventures ..................................
Net income (loss) attributable to Sterling common
$
$
2011
2012
(Dollar amounts in thousands)
630,507
47,472
(35,187)
--
(511)
3,205
14,979
1,797
1,301
(944)
501,156
39,837
(24,785)
(67,000)
(676)
390
(52,234)
94
1,655
(1,231)
17,133
579
17,712
(51,716)
17,012
(34,704)
(18,009)
(1,196)
stockholders ..............................................................$
(297)
$
(35,900)
Gross margin ..................................................................
Operating margin (deficit) ..............................................
Contract backlog, end of year ........................................$
7.5 %
2.4 %
656,000
8.0 %
(10.4) %
$
616,000
NM – Not meaningful.
Revenues.
% Change
25.8%
19.2
42.6
NM
NM
NM
NM
NM
(21.4)
(23.3)
NM
(96.3)
NM
NM
(99.2)
(6.3)
NM
6.5
Revenues for 2012 increased 25.8% compared with the prior year. Most of this increase is attributable to
revenues from contracts performed in Arizona and California which totaled $168.9 million in 2012 as compared to
$19.5 million in 2011. Prior to the August 1, 2011 acquisitions of JBC and Myers, we did not perform any work in
these states. Since our acquisition of these entities they have performed well in their respective markets. We also had
higher revenues in Utah, Nevada, and Texas reflecting higher activity levels and improvements in estimated
profitability in certain projects. During 2012, results included $43.7 million of revenues and $11.8 million of gross
profit attributable to our share of the results from a construction project joint venture in which we were a minority
participant. The joint venture’s construction project is substantially complete, and we do not anticipate a significant
amount of additional earnings from this joint venture in future periods.
Gross Profit.
Gross profit increased $7.6 million for 2012 compared with the prior year. Gross margins declined to 7.5% in
2012 from 8.0% in 2011 due to net downward revisions of estimated revenues and gross margins on a number of
construction projects, primarily in Texas. Upward revisions on projects in Utah substantially offset the downward
revisions for Texas projects in 2012. Downward revisions for Texas projects had a significant impact on 2011 gross
profits as well. These upward revisions were primarily related to the joint venture project which is substantially
complete discussed under “Revenues” above. The net revisions to contract estimates were the result of different
factors affecting various contracts, some positively and some negatively. While there are a number of factors which
28
cause the costs incurred and gross profit realized on our contracts to vary, sometimes substantially, from our original
projections, the primary factors which resulted in downward revisions in estimates in 2012 were:
conditions or contract requirements that differed from those assumed in the original bid or contract;
delays in quickly identifying and taking measures to address issues which arose during production.
lower than expected activity levels; and
At December 31, 2012, we had approximately 91 contracts-in-progress which were less than 90% complete 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 the stage of
completion of contracts.
General and administrative expenses
General and administrative expenses for 2012 included a full year of general and administrative expenses for
JBC and Myers which we acquired on August 1, 2011 as well as an increase in compensation related expenses and
professional fees. As a percent of revenues, general and administrative expenses in 2012 were higher at 5.7%
compared with 5.1% for the prior year and included a signing bonus of $250,000 paid to our newly appointed CEO
and $670,000 in compensation for our retiring CEO.
Goodwill Impairment.
During the fourth quarter of 2011, the Company completed an evaluation of the carrying value of goodwill
resulting in an impairment charge of $67.0 million. This charge had an impact of $41.8 million on the net loss
attributable to Sterling common stockholders (net of the related tax benefits and reduced for the amount attributable
to noncontrolling interest owners) or $2.55 per diluted share. No goodwill impairment charge was recorded in 2012.
See Note 8 to the Consolidated Financial Statements.
Income taxes.
Our effective income tax rates for 2012 and 2011 were (3.4)% and 32.9%, respectively, and varied from the
statutory rate primarily as a result of net income attributable to noncontrolling interest owners which are taxed to
those owners rather than Sterling. In addition, the effective tax rate for 2012 was impacted by non-taxable interest
income, and the effective tax rate for 2011 was impacted by the portion of the goodwill impairment attributable to
goodwill that is not deductible for tax purposes.
Net income attributable to noncontrolling interests.
Net income attributable to noncontrolling interest owners increased in 2012 compared with 2011 and is primarily
related to net income attributable to the 20% noncontrolling interest owners in RLW. This subsidiary was 80%
owned until December 31, 2012 when we acquired the remaining 20% interest. As discussed further in Note 2 to the
consolidated financial statements, the members of RLW, including the Company, agreed to amend RLW’s operating
agreement effective January 1, 2012 to provide that any goodwill impairment, including the 2011 fourth quarter
goodwill impairment, is not to be allocated to RLW for the purpose of calculating the distributions to be made to the
RLW noncontrolling interest holders. This amendment resulted in an increase in the net income attributable to
RLW’s noncontrolling interests of $6.7 million during 2012. This increase is included in “Noncontrolling owners’
interests in earnings of subsidiaries and joint ventures” in the accompanying consolidated statements of operations
with an increase in the “Current obligation for noncontrolling owners’ interest in subsidiaries and joint ventures” in
the consolidated balance sheet. This increase has a related tax impact of $2.4 million which increased the tax benefit
for 2012.
29
Fiscal Year Ended December 31, 2011 Compared with Fiscal Year Ended December 31, 2010.
2011
2010
% Change
Revenues ...............................................................................$
Gross profit ...........................................................................
General and administrative expenses ....................................
Goodwill impairment……………………………………….
Unusual items .......................................................................
Other income (expense) ........................................................
Operating income (loss) ........................................................
Gains (losses) on the sale of short-term investments ............
Interest income ......................................................................
Interest expense ....................................................................
Income (loss) before income taxes and earnings attributable
to noncontrolling interests ....................................................
Income tax benefit (expense) ................................................
Net income (loss) ..................................................................
Noncontrolling owners’ interests in earnings of subsidiaries
and joint ventures .............................................................
Net income (loss) attributable to Sterling common
stockholders ..........................................................................$
Gross margin .........................................................................
Operating margin (deficit) ....................................................
Contract backlog, end of year ............................................... $
NM – not meaningful
Revenues.
$
(Dollar amount in thousands)
459,893
62,705
(24,895 )
--
--
(1,900 )
35,910
(38 )
1,809
(1,187 )
501,156
39,837
(24,785)
(67,000)
(676)
390
(52,234)
94
1,655
(1,231)
(51,716)
17,012
(34,704)
36,494
(10,270 )
26,224
9.0%
(36.5)
(0.4)
NM
NM
NM
NM
NM
(8.5)
3.7
NM
NM
NM
(1,196)
(7,137 )
(83.2)
(35,900)
%
8.0
(10.4) %
%
$
19,087
13.6 %
7.8 %
616,000
$
522,000
NM
(41.0)
NM
18.0
Revenues increased 9.0% or $41.3 million in fiscal year 2011 over fiscal year 2010. The increase was primarily
due to increased production levels in 2011 as a result of execution on contracts awarded in Texas markets in 2010,
increased revenues resulting from a higher level of activity on joint ventures in which we participate, primarily in
Utah, and $19.5 million in revenues in Arizona and California attributable to JBC and Myers which were acquired on
August 1, 2011. Revenues for our Nevada operations declined from the prior year due to fewer construction
contracts, and in Texas the increase in revenues between the periods was less than expected due to severe adverse
weather conditions during the first quarter of 2011 and delays by a customer in starting two sizable contracts.
Gross Profit.
Gross profit decreased $22.8 million for 2011 compared with the prior year and gross margins decreased to 8.0%
from 13.6% in 2010 due to net downward revisions of estimated revenues and gross margins on a number of
construction projects, primarily in Texas. The primary factors which caused the net charge in 2011 were:
onsite conditions that differed from those assumed in the original bid or contract;
delays caused by weather conditions;
contract or project modifications creating unanticipated costs not covered by change orders;
failure by our suppliers, subcontractors or customers to perform their obligations;
shortages in the availability of skilled workers in the geographic location of certain projects, especially due
to the rapid expansion of our business in certain markets;
delays in obtaining required governmental permits or approvals causing cost overruns on certain projects,
including two large construction projects in Dallas where the construction start date was delayed
significantly by the owner; and
delays in quickly identifying and taking measures to address issues which arose during production.
30
At December 31, 2011, we had approximately 83 contracts-in-progress which were less than 90% complete of
various sizes, of different expected profitability and various stage of completion.
General and administrative expenses.
General and administrative expenses for 2011 included $676,000 related to litigation and acquisition related
costs which are shown separately in the table above. In addition, 2011 included the general and administrative
expenses of the two companies we acquired on August 1, 2011 as well as an increase in salaries, wages and related
benefits primarily resulting from added positions. Offsetting these increases was a decrease in bonus compensation
resulting from lower earnings for the period. As a percent of revenues, general and administrative expenses were
5.1% in 2011 compared with 5.4% in 2010.
Income taxes.
The Company’s effective income tax rates for 2011 and 2010 were 32.9% and 28.1%, respectively, and varied
from the statutory rate primarily as a result of net income attributable to noncontrolling interest owners which are
taxed to those owners rather than Sterling. In addition, the effective tax rate for 2011 was impacted by the portion of
the goodwill impairment attributable to goodwill that is not deductible for tax purposes.
Net income attributable to noncontrolling interests.
The net income attributable to noncontrolling interest owners decreased in 2011 compared with 2010 as a result
of the $6.7 million impact for the impairment of goodwill attributable to noncontrolling interest owners. Offsetting
this impact was an increase in earnings from a 60% owned consolidated joint venture controlled by RLW as well as
income attributable to the noncontrolling interest owners of Myers which was acquired in August 2011.
Historical Cash Flows.
The following table sets forth information about our cash flows and liquidity (in thousands):
Years Ended December 31,
2011
2012
2010
Net cash provided by (used in):
Operating activities ......................................................$
Capital expenditures ....................................................
Proceeds from sale of property and equipment ............
Acquisition of noncontrolling interest .........................
Net assets of acquired companies ................................
Net sales (purchases) of short-term securities ..............
Distributions to noncontrolling interest owners ...........
Purchases of treasury stock ..........................................
Net drawdowns (repayment) on the Credit Facility .....
Other ............................................................................
Total ........................................................................$
24,789 $
(37,359)
12,464
(23,144)
--
(3,493)
(10,185)
--
24,012
(313)
(13,229) $
20,988 $
(23,989)
1,296
(8,205)
(3,911)
(7,897)
(7,809)
(3,592)
--
49
(33,070) $
47,073
(13,409)
1,607
--
--
2,946
(4,160)
--
(40,000)
978
(4,965)
Cash and cash equivalents ....................................................$
Working capital ....................................................................$
3,142 $
87,484 $
16,371
94,738
As of December 31,
2011
2012
Operating Activities.
Significant non-cash items included in operating activities are:
the impairment of goodwill of $67.0 million in 2011;
depreciation and amortization which increased to $19.0 million in 2012 as compared to $17.3 million in
2011 and $15.8 million in 2010 as a result of an increase in capital expenditures as well as depreciation
associated with JBC and Myers which were acquired in 2011;
deferred tax (benefit) expense was $(1.2) million, $(18.7) million and $3.9 million in 2012, 2011 and 2010,
respectively; the deferred tax benefit for 2011 is primarily the result of recording the impairment of goodwill
31
for financial reporting purposes whereas goodwill is amortized for tax return purposes; the deferred tax
expense in 2010 is the result of recognizing accelerated depreciation methods used on equipment for tax
purposes as compared to straight-line depreciation used for financial reporting purposes and amortizing
goodwill for tax return purposes but not for financial reporting purposes.
Besides the net income (loss) in 2012, 2011 and 2010 and the non-cash items discussed above, other significant
components of cash flows from operations (which excludes the impact of changes attributable to the net assets of
acquired companies) was a decrease in cash and cash equivalents related to non-cash working capital of $(4.7)
million, $(10.8) million, and $(2.4) million in 2012, 2011 and 2010, respectively.
Investing Activities.
Capital equipment is acquired as needed to support increased levels of production activities and to replace
retiring equipment. Expenditures for the replacement of certain equipment and to expand our construction fleet
totaled $37.4 million in 2012. Proceeds from the sale of property and equipment totaled $12.5 million for 2012 with
an associated net gain of $3.2 million. For the years ended December 31, 2011 and 2010, capital expenditures totaled
$24.0 million and $13.4 million, respectively, while proceeds from the sale of property and equipment totaled $1.3
million and $1.6 million, respectively, with an associated net gain/(loss) of $0.4 million and ($1.9) million,
respectively. Capital expenditures for 2012 are higher than 2011 to support our higher level of operations and to
replace equipment. In addition, proceeds from sales of property and equipment in 2012 have been higher than in
previous periods as management undertook a program to dispose of underutilized and aging equipment. The lower
expenditures in 2010 reflect the smaller size of our operations as well as efforts to minimize expenditures in response
to the poor economic conditions.
During 2012, 2011 and 2010, the Company had net purchases (sales) of short-term securities of $3.5 million,
$7.9 million and $(2.9) million, respectively. The net purchases in 2012 and 2011 were primarily due to the
investment of cash generated by operations, after repayment of indebtedness.
On August 1, 2011, the Company used $8 million of existing cash and short-term investments to fund the
acquisition of JBC, a heavy civil construction business operating in Arizona. Additional purchase consideration of up
to $5 million may be paid in connection with this acquisition subject to the achievement of certain earnings
requirements during the period from 2011 through July 31, 2016. Also on August 1, 2011, the Company acquired a
50% interest in Myers, a construction limited partnership located in California. The Company paid a purchase price
of $1.2 million which was funded by available cash of the Company. In December 2011, the Company acquired the
remaining 8.33% interest in RHB from the noncontrolling interest owner for $8.2 million as a result of the owner’s
exercise of his right to put the interest. On December 31, 2012, the Company acquired the remaining unowned 20%
interest in RLW for $23.1 million. The purchase price was subject to further adjustment once earnings for 2012 were
finalized and as result an additional $568,000 shall be paid in 2013.
Financing Activities.
Financing activities in 2012 consisted of drawdowns and repayments on the Credit Facility (with a net drawdown
of $24.0 million, primarily to fund the purchase of the 20% interest in RLW on December 31, 2012 discussed above)
and distributions to noncontrolling interest owners of $10.2 million. Financing activities in 2011 primarily reflect
distributions to noncontrolling interest owners of $7.8 million and purchases of treasury stock of $3.6 million.
Financing activities in 2010 primarily reflect a reduction of $40.0 million in borrowings under our Credit Facility and
distributions to noncontrolling interest owners of $4.2 million. The amount of borrowings under the Credit Facility is
based on the Company’s expectations of working capital requirements.
Liquidity and Sources of Capital
.
The need for working capital for our business varies due to fluctuations in:
customer receivables and contract retentions;
costs and estimated earnings in excess of billings;
billings in excess of costs and estimated earnings;
the size and status of contract mobilization payments and progress billings; and
the amounts owed to suppliers and subcontractors.
Some of these fluctuations can be significant.
As of December 31, 2012, we had working capital of $87.5 million, a decrease of $7.3 million over
December 31, 2011. The decrease in working capital was the result of the following (in thousands):
32
Net income ........................................................................................................ $
Current portion of obligation to noncontrolling interest owners of RLW……..
Depreciation and amortization ..........................................................................
Capital expenditures .........................................................................................
Acquisition of noncontrolling interests .............................................................
Proceeds from sales of property and equipment, net of gain (loss)……………
Distributions to noncontrolling interest owners ................................................
Net drawdowns on the Credit Facility………………………………………...
Other .................................................................................................................
Total decrease in working capital ..................................................................... $
17,712
(2,887)
18,997
(37,359)
(23,144)
9,280
(10,185)
24,012
(3,680)
(7,254)
In addition to our available cash and cash equivalents, short-term investments and cash provided by operations,
from time to time, we use borrowings under our $50.0 million Credit Facility with Comerica Bank to finance our
capital expenditures and working capital needs. The Credit Facility has a maturity date of September 30, 2016.
Subject to the conditions under the terms of the Credit Facility, including the financial covenants discussed below, up
to $50 million in borrowings and letters of credit is available under the amended Credit Facility with, under certain
circumstances, an optional increase of $50 million. Borrowings under the Credit Facility are 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 December 31, 2012, there were borrowings of $24.0 million outstanding under the Credit Facility and a
letter of credit of $1.8 million outstanding which reduced availability under the Credit Facility to $24.2 million. In
January 2013, the Company sold approximately $27.7 million of its short-term investments in order to repay the
$24.0 million of borrowings outstanding under the Credit Facility at December 31, 2012.
Average borrowings under the Credit Facility for the 2012 fiscal year were $1.1 million and the largest amount
of borrowings under the Credit Facility was $24.0 million on December 31, 2012. Average borrowings under the
Credit Facility for the 2011 fiscal year were $104,000, and the largest amount of borrowings under the Credit Facility
was $8.0 million on September 30, 2011.
The Credit Facility is subject to our compliance with certain covenants, including financial covenants at year-end
relating to leverage, tangible net worth, and asset coverage. The Credit Facility contains restrictions on our ability to:
Make distributions or pay dividends;
Incur liens and encumbrances;
Incur further indebtedness;
Guarantee obligations;
Dispose of a material portion of assets or merge with a third party; and
Make investments in securities.
To date the Company has not experienced any difficulty in borrowing under the Credit Facility, and the
Company was in compliance with all covenants under the Credit Facility as of December 31, 2012.
Management believes that the Company has sufficient liquid financial resources, including the unused portion of
its Credit Facility, to fund its requirements for the next twelve months of operations, including its bonding
requirements, and the Company expects no material adverse change in its liquidity. Future developments or events,
such as an increase in our level of purchases of equipment to support significantly higher backlog or an acquisition of
another company could, however, affect our level of working capital and tangible net worth.
33
Contractual Obligations.
The following table sets forth our fixed, non-cancelable obligations at December 31, 2012:
Payments due by period
Total
< 1
Year
1 - 3
Years
(Amounts in thousands)
4 – 5
Years
> 5
Years
Credit Facility .....................................................$ 24,012 $
Operating leases ..................................................
Mortgage .............................................................
Earn-out liability to former owner of JBC ..........
RLW put/call liabilities ......................................
6,006
262
2,420
568
$ 33,268 $
--
941
73
2,047
568
3,629
$
$
--
1,903
189
--
--
2,092
$
$
24,012
1,129
--
373
--
25,514
$
$
--
2,033
-- --
--
--
2,033
Our obligations for interest are not included in the table above as these amounts vary according to the levels of
debt outstanding at any time. Interest on our Credit Facility is paid monthly and fluctuates with the balances
outstanding during the year, as well as with fluctuations in interest rates. In 2012, interest on the Credit Facility was
approximately $37,000.
To manage risks of changes in the material prices and subcontracting costs used in submitting bids for
construction contracts, we generally obtain firm quotations from our suppliers and subcontractors before submitting a
bid. These quotations do not include any quantity guarantees, and we have no obligation for materials or subcontract
services beyond those required to complete the contracts that we are awarded for which quotations have been
provided.
As is customary in the construction business, we are required to provide surety bonds to secure our performance
under construction contracts. Our ability to obtain surety bonds primarily depends upon our capitalization, working
capital, past performance, management expertise and reputation and certain external factors, including the overall
capacity of the surety market. Surety companies consider such factors in relationship to the amount of our backlog
and their underwriting standards, which may change from time to time. We have pledged all proceeds and other
rights under our construction contracts to our bond surety company. Events that affect the insurance and bonding
markets 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.
Capital Expenditures.
Capital equipment is acquired as needed by increased levels of production and to replace retiring
equipment. Management expects capital expenditures in 2013 to be lower than the $37.4 million incurred in 2012;
however, the award of a project requiring significant purchases of equipment or other factors could result in increased
expenditures.
Inflation.
Inflation generally has not had a material impact on our financial results; however, from time to time increases in
oil, fuel, and steel prices have affected our cost of operations. Anticipated cost increases and reductions are
considered in our bids to customers on proposed new construction projects.
In order to mitigate our exposure to increases in fuel prices, we have a program to hedge our exposure to
increases in diesel fuel prices by entering into swap contracts for diesel fuel. We believe that the gains and losses on
these contracts will tend to offset increases and decreases in the price we pay for diesel fuel and reduce the volatility
of such fuel costs in our operations. As of December 31, 2012, we had diesel futures contracts for 1,190,000 gallons
which fixed prices at an average of $2.92 per gallon. This compares to the December 31, 2012 price for off-road
ultra-low sulfur diesel published by Platts of $2.99. We will continue to evaluate this strategy and may increase or
decrease our commitments depending on our forecast of the diesel fuel market and other operational considerations.
There can be no assurance that this strategy will be successful.
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 increases in prices of oil and fuel used in our business
will be adequately covered by the estimated escalation we have included in our bids or derivative contracts entered
34
into to hedge against such increases, and there can be no assurance that all of our vendors will fulfill their pricing and
supply commitments under their purchase orders and contracts with the Company. We adjust our total estimated
costs on our projects when we believe it is probable that we will have cost increases which will not be recovered from
customers, vendors or re-engineering.
Off-Balance Sheet Arrangements and Joint Ventures.
We participate in various construction joint venture partnerships in order to share expertise, risk and resources
for certain highly complex projects. The venture’s contract with the project owner typically requires joint and several
liability among the joint venture partners. Although our agreements with our joint venture partners provide that each
party will assume and fund its share of any losses resulting from a project, if one of our partners was unable to pay its
share, we would be fully liable for such share under our contract with the project owner. Circumstances that could
lead to a loss under these guarantee arrangements include a partner’s inability to contribute additional funds to the
venture in the event that the project incurred a loss or additional costs that we could incur should the partner fail to
provide the services and resources toward project completion that had been committed to in the joint venture
agreement.
At December 31, 2012, there was approximately $214 million of construction work to be completed on
unconsolidated construction joint venture contracts, of which $77 million represented our proportionate share. Due to
the joint and several liability under our joint venture arrangements, if one of our joint venture partners fails to
perform, we and the remaining joint venture partners would be responsible for completion of the outstanding work.
As of December 31, 2012, we are not aware of any situation that would require us to fulfill responsibilities of our
joint venture partners pursuant to the joint and several liability under our contracts.
Off-balance sheet arrangements related to the operating leases are included in the table in “Contractual
Obligations” above.
New Accounting Pronouncements.
See “Recent Accounting Pronouncements” in Note 1 for a discussion of new accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Changes in interest rates are one of our sources of market risks. Outstanding indebtedness under our Credit
Facility bears interest at floating rates. The average borrowings under this facility during 2012 were $1.1 million.
Based on our expected levels of borrowings for 2013, we do not expect that a change in our interest rate would have
a material impact on our results from operations.
We are exposed to market risk from changes in commodity prices. In the normal course of business, we enter
into derivative transactions, specifically cash flow hedges, to mitigate our exposure to diesel fuel commodity price
movements. We do not participate in these transactions for trading or speculative purposes. While the use of these
arrangements may limit the benefit to us of decreases in the prices of diesel fuel, it also limits the risk of adverse
price movements. The following represents the outstanding contracts at December 31, 2012:
Period
Beginning
Ending
Range
2013
2014
January 1, 2013 December 31, 2013 $ 2.80 – 3.29 $
January 1, 2014 December 31, 2014 $ 2.79 – 2.93 $
Weighted
Average
2.96
2.84
Price Per Gallon
Fair Value of
Derivatives at
December 31,
2012
(in thousands)
7
1
8
Remaining
Volume
(gallons)
830,000 $
360,000
$
See “Inflation” above regarding risks associated with materials and fuel purchases required to complete our
construction contracts.
Item 8.
Financial Statements and Supplementary Data.
Financial statements start on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
35
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
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) as of December 31, 2012. Based on that evaluation, the Company’s principal executive officer and principal
financial officer have concluded that the Company’s disclosure controls and procedures were effective at December
31, 2012 to ensure that the information required to be disclosed by the Company in this Annual Report on Form 10-K
is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms and is accumulated and communicated to the Company’s management including the
principal executive and principal financial officers, as appropriate to allow timely decisions regarding required
disclosure.
Management’s Report on Internal Control over Financial Reporting.
The Company’s management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f)) under the Securities Exchange Act of 1934). Under the supervision
and with the participation of the Company’s management, including the principal executive officer and principal
financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial
reporting at December 31, 2012. In making this assessment, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. The
Company’s management has concluded that, at December 31, 2012, the Company’s internal control over financial
reporting is effective based on these criteria.
Remediation of Material Weakness in Internal Control over Financial Reporting.
In the fourth quarter of 2011, management identified a material weakness related to the established process for
estimating revenues and costs on its construction projects. The accuracy of our revenue and profit recognition in a
given period is dependent on the accuracy of our estimates of the revenues and costs to finish uncompleted contracts.
Under our established estimation process, project managers make estimates for all of our significant contracts on a
monthly basis using a highly detailed “bottom up” approach, and operations managers review those estimates for
reasonableness. Our projects can be highly complex, and in almost every case, the profit margin estimates for a
contract will either increase or decrease to some extent from the amount that was originally estimated at the time of
bid. In order to ensure that revenues and gross profit are recognized in the proper period under the percentage-of-
completion method of accounting, the monthly revisions to estimated revenues and costs must reflect changes in job
performance, job conditions, change orders and estimated profitability, including those changes arising from contract
penalty provisions and final contract settlements, which are known at that time. During the fourth quarter of 2011,
significant revisions to estimated revenues and costs were made for a number of construction projects. In response,
management undertook a thorough review and determined that certain of these revisions should have been made in
prior quarters, but the impact of revising these estimates would not have had a material impact on revenues or gross
profit reported in prior periods had the changes been made in the appropriate prior period. Management also
determined that in some instances the procedures performed to make periodic revisions in estimates were not being
made timely and that the review procedures being performed by operations management were not adequate to ensure
that a material impact on the financial statements resulting from such revisions in estimates would be recognized in
the proper period. Based on this evaluation and the material weakness noted above, management concluded that we
did not maintain effective internal control over financial reporting at December 31, 2011. While the risks of cost
overruns and changes in estimated contract revenues are an inherent part of the construction business, beginning in
the first quarter of 2012 and through the fourth quarter of 2012, we implemented the following changes in order to
improve the profitability of our projects, reduce the variability in profitability of our projects in the future and
strengthen the internal control environment:
changed roles and responsibilities to improve functional support and controls;
developed management tools designed to improve the estimating process and increase the oversight of that
process;
implemented processes designed to better identify, evaluate and quantify risks for individual projects;
improved the methodologies for allocating overhead, indirect costs and equipment costs to individual
projects; and
improved the timeliness and content of reporting available to operations management.
36
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, except for certain changes made related to the controls over the estimation of revenues and gross profits
on construction projects discussed above, we have concluded that no significant changes in our internal control over
financial reporting occurred during the three months ended December 31, 2012 that have materially affected or are
reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls.
Internal control over financial reporting may not prevent or detect all errors and all fraud. Also, projections of
any evaluation of effectiveness of internal control to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance of the Registrant.
The information required in this item is contained in the Company’s proxy statement for its Annual Meeting of
Stockholders to be held on May 9, 2013 and is incorporated herein by reference. The information can be found under
the following headings in the proxy statement:
Item 10 Information
Location/Heading
in the Proxy Statement
Directors ..........................................................
Election of Directors (Proposal 1)
Compliance With Section 16(a) of the
Exchange Act ...........................................
Stock Ownership Information
Code of Ethics .................................................
The Corporate Governance &
Nominating Committee
Communication with the Board;
nominations; Board and committee
meetings; committees of the Board; Board
leadership and risk oversight; and director
compensation. ..................................................
Board Operations
Information relating to the Company’s executive officers is set forth at the end of Part I of this report under the
caption “Executive Officers of the Registrant” and is incorporated herein by reference.
Item 11. Executive Compensation
The information required in this item is contained in the Company’s proxy statement for its Annual Meeting of
Stockholders to be held on May 9, 2013 and is incorporated herein by reference. The information can be found under
the heading Executive Compensation in the proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder
Matters.
The information required in this item is contained in the Company’s proxy statement for its Annual Meeting of
Stockholders to be held on May 9, 2013 and is incorporated herein by reference.
Equity Compensation Plan Information can be found in the proxy statement under the heading Executive
Compensation.
Information regarding the ownership of the Company’s common stock can be found in the proxy statement
under the heading Stock Ownership Information.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required in this item is contained in the Company’s proxy statement for its Annual Meeting of
Stockholders to be held on May 9, 2013 and is incorporated herein by reference.
37
Information regarding any relationships between directors and officers and the Company can be found in the
proxy statement under the heading Business Relationships with Directors and Officers.
Information about director independence can be found in the proxy statement under the heading Election of
Directors (Proposal 1).
Item 14.
Principal Accountant Fees and Services.
The information required in this item is contained in the Company’s proxy statement for its Annual Meeting of
Stockholders to be held on May 9, 2013 and is incorporated herein by reference. The information can be found in the
proxy statement under the heading Information about Audit Fees and Audit Services.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
The following Financial Statements and Financial Statement Schedules are filed with this Report:
Financial Statements:
Reports of the Company’s Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2012, 2011 and
2010
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2012, 2011 and 2010
Financial Statement Schedules.
None.
Exhibits.
The following exhibits are filed with this Report.
Explanatory Note: Prior to changing its name to Sterling Construction Company, Inc. in November 2001, the
Company had the following names during the following periods:
Hallwood Holdings Incorporated
Oakhurst Capital, Inc.
Oakhurst Company, Inc.
May 1991 to July 1993
July 1993 to April 1995
April 1995 to November 2001
References in the following exhibit list use the name of the Company in effect at the date of the exhibit.
Number
2.1.1
Exhibit Title
Purchase Agreement, dated as of December 3, 2009, by and among Kip Wadsworth, Ty
Wadsworth, Con Wadsworth, Tod Wadsworth and Sterling Construction Company, Inc.
(incorporated by reference to Exhibit 2.1 to Sterling Construction Company, Inc.’s Current
Report on Form 8 K, filed on December 3, 2009 (SEC File No. 1-31993)).
Agreement dated December 28, 2012 by and among Kip Wadsworth, Ty Wadsworth, Con
Wadsworth, Tod Wadsworth and Sterling Construction Company, Inc. relating to the
exercise of the right to purchase the remaining 20% of Ralph L. Wadsworth Construction
Company, LLC.
Certificate of Incorporation of Sterling Construction Company, Inc. (incorporated by reference to
Exhibit 3.0 to Sterling Construction Company, Inc.’s Quarterly Report on Form 10-Q, filed
on August 10, 2009 (SEC File No. 1-31993)).
Bylaws of Sterling Construction Company, Inc. as amended through March 13, 2008
(incorporated by reference to Exhibit 3.1 to Sterling Construction Company, Inc.’s Current
Report on Form 8-K, filed on March 19, 2008 (SEC File No. 1-31993)).
Form of Common Stock Certificate of Sterling Construction Company, Inc. (incorporated by
reference to Exhibit 4.5 to its Form 8-A, filed on January 11, 2006 (SEC File No. 1-31993)).
2.1.2*
3.1
3.2
4.1
10.1.1#
The Sterling Construction Company, Inc. Stock Incentive Plan as amended and restated
(incorporated by reference to Exhibit 10.13 to Sterling Construction Company, Inc.’s.
Current Report on Form 8-K, filed on May 12, 2011 (SEC File No. 1-31993)).
38
10.1.2#
10.2#
10.3#
Amendment dated May 6, 2012 to The Sterling Construction Company, Inc. Stock Incentive Plan
(incorporated by reference to Exhibit 10.1 to Sterling Construction Company, Inc.’s. Current
Report on Form 8 K, filed on May 11, 2012 (SEC File No. 1-31993)).
Forms of Stock Option Agreement under the Oakhurst Company, Inc. 2001 Stock Incentive Plan
(incorporated by reference to Exhibit 10.51 to Sterling Construction Company, Inc.’s Annual
Report on Form 10-K for the year ended December 31, 2004, filed on March 29, 2005 (SEC
File No. 1-31993)).
Summary of standard compensation arrangements for non-employee directors of Sterling
Construction Company, Inc. adopted by the Board of Directors on August 3, 2011
(incorporated by reference to Exhibit 10.1 to Sterling Construction Company, Inc.’s
Quarterly Report on Form 10-Q, filed on November 8, 2011 (SEC File No. 1-31993)).
10.4.1
Credit Agreement by and among Sterling Construction Company, Inc., Texas Sterling
Construction Co., Oakhurst Management Corporation and Comerica Bank and the other
lenders from time to time party thereto, and Comerica Bank as administrative agent for the
lenders, dated as of October 31, 2007 (incorporated by reference to Exhibit 10.1 to Sterling
Construction Company, Inc.’s Current Report on Form 8-K, Amendment No. 1 filed on
November 21, 2007 (SEC File No. 1-31993)).
10.4.2
Joinder Agreement by Road and Highway Builders, LLC and Road and Highway Builders Inc.
dated as of October 31, 2007 (incorporated by reference to Exhibit 10.3 to Sterling
Construction Company, Inc.’s Current Report on Form 8-K, Amendment No. 1 filed on
November 21, 2007 (SEC File No. 1-31993)).
10.4.3
Consent and Second Amendment to Credit Agreement by and among Sterling Construction
Company, Inc., its subsidiaries, and Comerica Bank as Agent, Lender, Swing Line Lender
and Issuing Lender dated as of November 8, 2011 (incorporated by reference to Exhibit 10.2
to Sterling Construction Company, Inc.’s Quarterly Report on Form 10-Q filed on November
8, 2011 (SEC File No. 1-31993)).
10.5
Security Agreement by and among Sterling Construction Company, Inc., Texas Sterling
Construction Co., Oakhurst Management Corporation and Comerica Bank as administrative
agent for the lenders, dated as of October 31, 2007 (incorporated by reference to Exhibit 10.4
to Sterling Construction Company, Inc.’s Quarterly Report on Form 10-Q, filed on November
9, 2009 (SEC File No. 1-31993)).
10.6#*
Employment Agreement dated as of January 1, 2012 between Texas Sterling Construction Co.
and Joseph P. Harper, Jr.
10.7#
Change of Control Agreement dated as of January 1, 2011 between Sterling Construction
Company, Inc. and Joseph P. Harper, Jr. (incorporated by reference to Exhibit 10.8 to
Sterling Construction Company, Inc.’s Current Report on Form 8-K filed on May 12, 2011
(SEC File No. 1-31993)).
10.8#
Employment Agreement dated as of January 1, 2011 between Sterling Construction Company,
Inc. and Brian R. Manning (incorporated by reference to Exhibit 10.9 to Sterling
Construction Company, Inc.’s Current Report on Form 8-K filed on May 12, 2011 (SEC File
No. 1-31993)).
10.9#
Change of Control Agreement dated as of January 1, 2011 between Sterling Construction
10.10#
Company, Inc. and Brian R. Manning (incorporated by reference to Exhibit 10.10 to Sterling
Construction Company, Inc.’s Current Report on Form 8-K filed on May 12, 2011 (SEC File
No. 1-31993)).
Employment Agreement dated as of February 1, 2011 between Sterling Construction Company,
Inc. and Elizabeth D. Brumley (incorporated by reference to Exhibit 10.11 to Sterling
Construction Company, Inc.’s Current Report on Form 8-K filed on May 12, 2011 (SEC File
No. 1-31993)).
10.11#
Change of Control Agreement dated as of January 1, 2011 between Sterling Construction
Company, Inc. and Elizabeth D. Brumley (incorporated by reference to Exhibit 10.12 to
Sterling Construction Company, Inc.’s Current Report on Form 8-K filed on May 12, 2011
(SEC File No. 1-31993)).
10.12.1#
Employment Agreement dated as of March 17, 2006 between Sterling Construction Company,
Inc. and Roger M. Barzun (incorporated by reference to Exhibit 10.11 to Sterling
Construction Company, Inc.’s Annual Report on Form 10-K for the year ended December 31,
2009, filed on March 15, 2010 (SEC File No. 1-31993)).
10.12.2#
Amendment dated January 18, 2012 of the Employment Agreement dated as of March 17, 2006
between Sterling Construction Company, Inc. and Roger M. Barzun.
39
10.13#*
Employment Agreement dated December 28, 2012 between Ralph L. Wadsworth Construction
Company, LLC and Kip L. Wadsworth.
10.14#
Employment Agreement dated as of September 1, 2012 between Sterling Construction Company,
Inc. and Peter E. MacKenna (incorporated by reference to Exhibit 10.1 to Sterling
Construction Company, Inc.’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2012, filed on November 8, 2012 (SEC File No. 1-31993)).
21
Subsidiaries of Sterling Construction Company, Inc.:
Name
Texas Sterling Construction Co.
Road and Highway Builders, LLC
Road and Highway Builders Inc.
Road and Highway Builders of California, Inc.
Ralph L. Wadsworth Construction Company, LLC
Ralph L. Wadsworth Construction Co. L.P.
J. Banicki Construction, Inc.
Consent of Grant Thornton LLP
Certification of Peter E. MacKenna, Chief Executive Officer of Sterling Construction Company,
State of Incorporation or
Organization
Delaware
Nevada
Nevada
California
Utah
California
Arizona
Inc.
23.1*
31.1*
31.2*
Certification of Elizabeth D. Brumley, Chief Financial Officer of Sterling Construction Company,
Inc.
32.0*
Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18
U.S.C. 1350) of Peter E. MacKenna, Chief Executive Officer, and Elizabeth D. Brumley,
Chief Financial Officer.
95.1*
Mine Safety Disclosure
# Management contract or compensatory plan or arrangement.
* Filed herewith.
40
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
STERLING CONSTRUCTION COMPANY, INC.
Date: March 18, 2013
By: /s/ Peter E. MacKenna
Peter E. MacKenna, Chief Executive Officer
(duly authorized officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ Patrick T. Manning
Patrick T. Manning
/s/ Peter E. MacKenna
Peter E. MacKenna
/s/ Elizabeth D. Brumley
Elizabeth D. Brumley
/s/ John D. Abernathy
John D. Abernathy
/s/ Robert A. Eckels
Robert A. Eckels
/s/ Joseph P. Harper, Sr.
Joseph P. Harper, Sr.
/s/Maarten D. Hemsley
Maarten D. Hemsley
/s/ Richard O. Schaum
Richard O. Schaum
/s/ Milton L. Scott
Milton L. Scott
/s/ David R. A. Steadman
David R. A. Steadman
/s/ Kip L. Wadsworth
Kip L. Wadsworth
Date
March 18, 2013
March 18, 2013
March 18, 2013
March 18, 2013
March 18, 2013
March 18, 2013
March 18, 2013
March 18, 2013
March 18, 2013
March 18, 2013
March 18, 2013
Title
Chairman of the Board of Directors
President & Chief Executive Officer (principal
executive officer), Director
Executive Vice President & Chief Financial
Officer, Controller (principal financial officer and
principal accounting officer), Treasurer
Director
Director
Director
Director
Director
Director
Director
Director
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Sterling Construction Company, Inc.:
We have audited the accompanying consolidated balance sheets of Sterling Construction Company, Inc. (a Delaware
corporation) and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated
statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Sterling Construction Company, Inc. and subsidiaries as of December 31, 2012 and 2011, and
the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012
in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Sterling Construction Company, Inc. and subsidiaries’ internal control over financial reporting as of
December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 18,
2013 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Houston, Texas
March 18, 2013
F1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Sterling Construction Company, Inc.:
We have audited Sterling Construction Company, Inc. (a Delaware corporation) and subsidiaries’ (the “Company”)
internal control over financial reporting as of December 31, 2012 based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on Sterling Construction Company, Inc. and subsidiaries’ internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Sterling Construction Company, Inc. and its subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal
Control – Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Sterling Construction Company Inc. and subsidiaries as of December 31,
2012 and 2011 and the related consolidated statements of operations, comprehensive income (loss), stockholders’
equity and cash flows for each of the three years in the period ended December 31, 2012, and our report dated
March 18, 2013 expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Houston, Texas
March 18, 2013
F2
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2012 and 2011
(Amounts in thousands, except share and per share data)
2012
2011
Current assets:
ASSETS
Cash and cash equivalents .............................................................................................. $
Short-term investments ...................................................................................................
Contracts receivable, including retainage ........................................................................
Costs and estimated earnings in excess of billings on uncompleted contracts ................
Inventories .......................................................................................................................
Deferred tax asset, net .....................................................................................................
Receivables from and equity in construction joint ventures ............................................
Other current assets .........................................................................................................
3,142 $
49,211
70,815
20,592
3,731
1,803
11,005
4,459
Total current assets ..................................................................................................... 164,758
Property and equipment, net ................................................................................................... 102,308
54,820
Goodwill .................................................................................................................................
2,973
Long-term deferred tax, asset, net ..........................................................................................
6,651
Other assets, net ......................................................................................................................
Total assets ................................................................................................................. $ 331,510
Current liabilities:
LIABILITIES AND EQUITY
16,371
44,855
74,875
16,509
1,922
1,302
6,057
2,132
164,023
83,429
54,050
828
1,501
$ 303,831
Accounts payable ............................................................................................................. $ 47,796 $
Billings in excess of costs and estimated earnings on uncompleted contracts .................
Current maturities of long-term debt ...............................................................................
Income taxes payable .......................................................................................................
Accrued compensation .....................................................................................................
Current obligation for noncontrolling owners’ interest in subsidiaries and joint
18,918
73
--
4,909
ventures .......................................................................................................................
Other current liabilities ....................................................................................................
Total current liabilities ...............................................................................................
2,887
2,691
77,274
Long-term liabilities:
Long-term debt, net of current maturities ........................................................................
Other long-term liabilities ................................................................................................
Total long-term liabilities ...........................................................................................
24,201
2,728
26,929
34,428
18,583
573
2,013
5,329
--
8,359
69,285
263
2,597
2,860
Commitments and contingencies (Note 12)
Obligations for noncontrolling owners’ interests in subsidiaries and joint ventures ..............
Equity:
14,721
16,848
Sterling stockholders’ equity:
Preferred stock, par value $0.01 per share; 1,000,000 shares authorized, none issued ....
Common stock, par value $0.01 per share; 19,000,000 shares authorized,
--
--
16,495,216 and 16,321,116 shares issued .....................................................................
163
165
196,143
Additional paid in capital ................................................................................................. 197,067
16,509
12,220
Retained earnings ............................................................................................................
496
696
Accumulated other comprehensive income .....................................................................
213,311
Total Sterling common stockholders’ equity .............................................................. 210,148
1,527
2,438
214,838
Total equity ................................................................................................................. 212,586
Total liabilities and equity .......................................................................................... $ 331,510 $ 303,831
Noncontrolling interests .......................................................................................................
The accompanying notes are an integral part of these consolidated financial statements.
F3
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2012, 2011 and 2010
(Amounts in thousands, except per share data)
Revenues .................................................................................................. $
Cost of revenues .......................................................................................
Gross profit .........................................................................................
General and administrative expenses .......................................................
Direct costs of acquisitions .......................................................................
Provision for loss on lawsuit ....................................................................
Goodwill impairment ...............................................................................
Other operating income (expense), net ....................................................
Operating income (loss) ......................................................................
Gain (loss) on sale of securities and other ................................................
Interest income .........................................................................................
Interest expense ........................................................................................
Income (loss) before income taxes and earnings attributable to
noncontrolling interests ........................................................................
Income tax benefit (expense) ....................................................................
Net income (loss) ................................................................................
Noncontrolling owners’ interests in earnings of subsidiaries and joint
2012
630,507
(583,035)
47,472
(35,187)
(202)
(309)
--
3,205
14,979
1,797
1,301
(944)
17,133
579
17,712
ventures .................................................................................................
Net income (loss) attributable to Sterling common stockholders ............. $
(18,009)
(297)
Net income (loss) per share attributable to Sterling common
stockholders:
Basic ................................................................................................... $
Diluted ................................................................................................ $
(0.26)
(0.26)
Weighted average number of common shares outstanding used in
computing per share amounts:
2011
501,156
(461,319)
39,837
(24,785)
(456)
(220)
(67,000)
390
(52,234)
94
1,655
(1,231)
(51,716)
17,012
(34,704)
$
2010
459,893
(397,188)
62,705
(24,895)
--
--
--
(1,900)
35,910
(38)
1,809
(1,187)
36,494
(10,270)
26,224
(1,196)
(35,900)
$
(7,137)
19,087
(2.24)
(2.24)
$
$
1.15
1.13
$
$
$
$
Basic .................................................................................................. 16,420,886
Diluted ................................................................................................ 16,420,886
16,395,739
16,395,739
16,194,708
16,563,169
The accompanying notes are an integral part of these consolidated financial statements.
F4
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the years ended December 31, 2012, 2011 and 2010
(Amounts in thousands)
(297) $ (35,900) $ 19,087
Net income (loss) attributable to Sterling common stockholders ...............................$
--
1,068
Net income attributable to noncontrolling interest included in equity........................
Net income attributable to noncontrolling interest included in liabilities ................... 16,941
7,137
Add /(deduct) other comprehensive income, net of tax:
261
935
2012
2011
2010
Realized (gain) / loss from available-for-sale securities......................................
Change in unrealized holding gain (loss) on available-for-sale securities ..........
Realized loss from settlement of derivatives .......................................................
Change in the effective portion of unrealized loss in fair market value of
derivatives ........................................................................................................
107
Comprehensive income (loss) ....................................................................................$ 17,912
(510)
560
43
(1)
779
72
25
(404)
--
(217)
--
$ (34,071) $ 25,845
The accompanying notes are an integral part of these consolidated financial statements.
F5
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the years ended December 31, 2012, 2011 and 2010
(Amounts in thousands)
STERLING CONSTRUCTION COMPANY, INC. STOCKHOLDERS
Accu-
mulated
Other
Compre-
hensive
Income
(Loss)
Addi-
tional
Paid in Retained
Capital Earnings
-- $ 197,898 $ 32,466 $
--
--
--
--
19,087
--
Common Stock
Shares Amount
160
--
--
Treasury Stock
Shares Amount
-- $
--
--
Noncon-
trolling
Interests
--
--
--
$
242
--
(379)
--
--
36
350
Balance at January 1, 2010 ............16,082 $
Net income ...................................
--
Other comprehensive loss ............
--
Stock issued upon option and
warrant exercises .......................
Excess tax benefits from
exercise of stock options ............
Issuance and amortization of
restricted stock ...........................
Stock-based compensation
expense ......................................
Revaluation of noncontrolling
interest RHB put/call liability ....
--
--
--
(289 )
--
Balance at December 31, 2010 ......16,468
Net loss ........................................
Other comprehensive income ......
Purchases of treasury shares ........
Cancellation of treasury shares ....
Stock issued upon option and
warrant exercises .......................
Excess tax benefits from
exercise of stock options ............
Issuance and amortization of
restricted stock ...........................
Stock-based compensation
expense ......................................
Revaluation of noncontrolling
interest RLW put/call liability....
Tax benefit related to the
exercise of RHB’s put/call
liability .......................................
Equity attributable to
noncontrolling interest in
acquired companies....................
95
47
--
--
--
--
--
--
--
Balance at December 31, 2011 ......16,321
Net income (loss) .........................
Other comprehensive income ......
Stock issued upon option and
warrant exercises .......................
Tax impact from exercise of
stock options ..............................
Issuance and amortization of
restricted stock ...........................
Revaluation of noncontrolling
interest liabilities and other, net
of tax ..........................................
Distribution to owners .................
150
24
--
--
--
3
--
1
--
--
164
--
--
--
(2)
1
--
--
--
--
--
--
163
--
--
--
--
2
--
--
--
--
(3)
--
--
--
--
--
1,048
--
473
121
--
--
--
--
--
--
--
--
--
(3)
--
--
(286)
289
--
--
--
--
(3,592)
3,592
(691)
198,849
--
--
--
(3,422)
--
51,553
(35,900)
--
--
(168)
--
(137)
--
633
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
155
58
473
30
--
--
--
--
--
(1,268)
--
2,292
--
--
196,143
16,509
--
--
66
(79)
694
(297)
--
--
--
--
243
(3,992)
--
--
--
--
--
--
--
--
--
496
--
200
--
--
--
--
--
Total
$ 230,766
19,087
(379)
1,051
--
474
121
(691)
250,429
(35,639)
633
(3,592)
--
156
58
473
30
(1,268)
2,292
1,266
214,838
771
200
66
(79)
696
--
--
--
--
--
--
261
--
--
--
--
--
--
--
--
--
1,266
1,527
1,068
--
--
--
--
(40)
(117)
$ 2,438
(3,789)
(117)
$ 212,586
Balance at December 31, 2012 ......16,495 $
165
-- $
-- $ 197,067 $ 12,220 $
696
The accompanying notes are an integral part of these consolidated financial statements.
F6
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2012, 2011 and 2010
(Amounts in thousands)
Cash flows from operating activities:
Net income (loss) attributable to Sterling common stockholders ..................................$
Plus: Noncontrolling owners’ interests in earnings of subsidiaries and joint ventures .
Net income (loss) ..........................................................................................................
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
2012
2011
2010
(297) $ (35,900) $
18,009
17,712
1,196
(34,704)
19,087
7,137
26,224
Goodwill impairment .............................................................................................
Depreciation and amortization ...............................................................................
(Gain) loss on disposal of property and equipment ...............................................
Deferred tax expense (benefit) ...............................................................................
Interest expense accreted on noncontrolling interests ............................................
Stock-based compensation expense .......................................................................
Loss (gain) on sale of securities and other .............................................................
Tax expense (benefits) from exercise of stock options and restricted stock ..........
--
18,997
(3,184)
(1,167)
993
694
(918)
79
67,000
17,322
(390)
(18,651)
881
503
(3)
(58)
--
15,770
1,900
3,860
1,169
595
38
--
Other changes in operating assets and liabilities:
(Increase) decrease in contracts receivable ............................................................
(Increase) decrease in costs and estimated earnings in excess of billings on
uncompleted contracts .......................................................................................
(Increase) decrease in receivables from and equity in construction joint ventures
(Increase) decrease in other current assets .............................................................
Increase (decrease) in accounts payables ...............................................................
Increase (decrease) in billings in excess of costs and estimated earnings on
uncompleted contracts .......................................................................................
Increase (decrease) in accrued compensation and other liabilities .........................
Net cash provided by operating activities .....................................................................
Cash flows from investing activities:
Acquisition of noncontrolling interests ..................................................................
Net assets of acquired companies, net of cash acquired ........................................
Additions to property and equipment ....................................................................
Proceeds from sale of property and equipment ......................................................
Purchases of short-term securities, available for sale ............................................
Sales of short-term securities, available for sale ....................................................
Net cash used in investing activities ..............................................................................
Cash flows from financing activities:
Cumulative daily drawdowns – Credit Facility .....................................................
Cumulative daily repayments – Credit Facility .....................................................
Distributions to noncontrolling interest owners .....................................................
Purchases of treasury stock ....................................................................................
Issuance of common stock pursuant to warrants and options exercised ................
Tax benefits from exercise of stock options ..........................................................
Other ......................................................................................................................
Net cash provided by (used in) financing activities ......................................................
Net decrease in cash and cash equivalents ....................................................................
Cash and cash equivalents at beginning of period .........................................................
Cash and cash equivalents at end of period ...................................................................$
Supplemental disclosures of cash flow information:
4,060
1,933
9,982
(4,083)
(4,948)
(9,234)
7,730
335
(2,277)
24,789
(23,144)
--
(37,359)
12,464
(30,154)
26,661
(51,532)
75,012
(51,000)
(10,185)
--
68
(79)
(302)
13,514
(13,229)
16,371
3,142 $
(5,921)
687
(538)
(7,942)
(539)
1,408
20,988
(8,205)
(3,911)
(23,989)
1,296
(109,312)
101,415
(42,706)
(4,085)
(4,403)
2,284
1,355
(13,325)
5,709
47,073
--
--
(13,409)
1,607
(137,547)
140,493
(8,856)
18,500
(18,500)
(7,809)
(3,592)
156
58
(165)
(11,352)
(33,070)
49,441
16,371 $
57,700
(97,700)
(4,160)
--
1,051
--
(73)
(43,182)
(4,965)
54,406
49,441
Cash paid during the period for interest .................................................................$
Cash paid during the period for income taxes ........................................................$
88 $
2,990 $
299
$
1,444 $
44
3,740
Non-cash items:
Reclassification of amounts payable to noncontrolling interest owner .................. $
Tax benefit related to the exercise of RHB’s liability ............................................$
Net liabilities assumed in connection with acquisitions ........................................$
Revaluation of noncontrolling interest – RLW and RHB’s put/call liability ........$
Issuance of noncontrolling interest in RHB in exchange for net assets of
-- $
-- $
-- $
3,992 $
1,054 $
2,292 $
1,961 $
(1,268) $
acquired companies ............................................................................................$
Goodwill adjustments ............................................................................................$
9,767 $
410
$
--
--
The accompanying notes are an integral part of these consolidated financial statements.
--
--
--
--
--
--
F7
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Business and Significant Accounting Policies
Basis of Presentation
Sterling Construction Company, Inc. (“Sterling” or “the Company”), a Delaware corporation, is a leading heavy
civil construction company that specializes in the building and reconstruction of transportation and water
infrastructure projects in Texas, Utah, Nevada, Arizona, California and other states in which there are construction
opportunities. Our transportation infrastructure projects include highways, roads, bridges and light rail, and our
water infrastructure projects include water, wastewater and storm drainage systems. We perform the majority of the
work required by our contracts with our own crews and equipment.
Sterling owns equity interests in the following subsidiaries: Texas Sterling Construction Co. (“TSC”); Road and
Highway Builders, LLC (“RHB”); Road and Highway Builders, Inc. (“RHB Inc”); Road and Highway Builders of
California, Inc. (“RHBCa”); Ralph L. Wadsworth Construction Company, LLC (“RLW”) and Ralph L. Wadsworth
Construction Company, LP (“RLWLP”); J. Banicki Construction, Inc.(“JBC”); and Myers & Sons Construction,
L.P. (“Myers”). TSC, RHB, RHB Ca, RLW, JBC and Myers perform construction contracts, and RHB Inc produces
aggregates from a leased quarry, primarily for use by RHB.
The accompanying consolidated financial statements include the accounts of subsidiaries and construction joint
ventures in which the Company has a greater than 50% ownership interest or otherwise controls such entities, and all
significant intercompany accounts and transactions have been eliminated in consolidation. For all years presented,
the Company had no subsidiaries where its ownership interests were less than 50%.
Under accounting principles generally accepted in the United States (“GAAP”), the Company must determine
whether each entity, including joint ventures in which it participates, is a variable interest entity. This determination
focuses on identifying which owner or joint venture partner, if any, has the power to direct the activities of the entity
and the obligation to absorb losses of the entity or the right to receive benefits from the entity disproportionate to its
interest in the entity, which could have the effect of requiring us to consolidate the entity in which we have a non-
majority variable interest.
We determined that Myers is a variable interest entity. As discussed further in Note 3, the Company determined
that it exercises primary control over activities of the partnership and it is exposed to more than 50% of potential
losses from the partnership. Therefore, the Company consolidates this partnership in the consolidated financial
statements and includes the other partners’ interests in the equity and net income of the partnership in the balance
sheet line item “Noncontrolling interests” in “Equity” and the statement of operations line item “Noncontrolling
owners’ interests in earnings of subsidiaries and joint ventures,” respectively.
Where the Company is a noncontrolling joint venture partner, its share of the operations of such construction
joint venture is accounted for on a pro rata basis in the consolidated statements of operations and as a single line
item (“Receivables from and equity in construction joint ventures”) in the consolidated balance sheets. See Note 6
for further information regarding the Company’s construction joint ventures, including those where the Company
does not have a controlling ownership interest.
Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the 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. Certain of the Company’s accounting policies require higher degrees of judgment than others in
their application. These include the recognition of revenue and earnings from construction contracts under the
percentage-of-completion method, the valuation of long-term assets (including goodwill), and income taxes.
Management continually evaluates all of its estimates and judgments based on available information and experience;
however, actual amounts could differ from those estimates.
Construction Revenue Recognition
The Company is a general contractor which engages in various types of heavy civil construction projects
principally for public (government) owners. Credit risk is minimal with public owners since the Company ascertains
that funds have been appropriated by the governmental project owner prior to commencing work on such projects.
While most public contracts are subject to termination at the election of the government entity, in the event of
termination the Company is entitled to receive the contract price for completed work and reimbursement of
F8
termination-related costs. Credit risk with private owners is minimized because of statutory mechanics liens, which
give the Company high priority in the event of lien foreclosures following financial difficulties of private owners.
Revenues are recognized on the percentage-of-completion method, measured by the ratio of costs incurred up to
a given date to estimated total costs for each contract. Our contracts generally take 12 to 36 months to complete.
Contract costs include all direct material, labor, subcontract and other costs and those indirect costs related to
contract performance, such as indirect salaries and wages, equipment repairs and depreciation, insurance and payroll
taxes. Administrative and general expenses are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job
conditions and estimated profitability, including those changes arising from contract penalty provisions and final
contract settlements may result in revisions to costs and income and are recognized in the period in which the
revisions are determined. Changes in estimated revenues and gross margin during the year ended December 31,
2012 resulted in a net charge of $4.9 million included in operating income and a $5.3 million after-tax charge, or
$0.32 per diluted share attributable to Sterling common stockholders, included in net loss attributable to Sterling
common stockholders. Changes in estimated revenues and gross margin during the year ended December 31, 2011
resulted in a net charge of $11.8 million included in the operating loss and $7.6 million after-tax charge, or $0.46 per
diluted share attributable to Sterling common stockholders, included in net income attributable to Sterling common
stockholders. An amount attributable to contract claims is included in revenues when realization is probable and the
amount can be reasonably estimated. Costs and estimated earnings in excess of billings included $0 and $2.5
million at December 31, 2012 and 2011, respectively, for contract claims not approved by the customer (which
includes out-of-scope work, potential or actual disputes, and claims). The Company generally provides a one to two-
year warranty for workmanship under its contracts. Warranty claims historically have been insignificant.
The asset, “Costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues
recognized in excess of amounts billed on these contracts. The liability “Billings in excess of costs and estimated
earnings on uncompleted contracts” represents billings in excess of revenues recognized on these contracts.
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, short-term and long-term contracts receivable, derivatives, accounts payable, mortgage
payable, a credit facility with Comerica Bank (“Credit Facility”), demand notes payable, the put related to certain
noncontrolling owners’ interests in subsidiaries and an earn-out liability related to the acquisition of J. Banicki
Construction, Inc. (“JBC”). The recorded values of cash and cash equivalents, short-term investments, short-term
contracts receivable and accounts payable approximate their fair values based on their short-term nature. The
recorded value of long-term contracts receivable is based on the amount of future cash flows discounted using the
creditor’s borrowing rate and such recorded value approximates fair value. The recorded value of the Credit Facility
debt approximates its fair value, as interest approximates market rates. See Note 9 regarding the fair value of
derivatives and Note 2 regarding the fair value of the put and the earn-out liability. We had one mortgage
outstanding at December 31, 2012 and December 31, 2011 with a remaining balance of $262,000 and $336,000,
respectively. The mortgage was accruing interest at 3.50% at both December 31, 2012 and December 31, 2011 and
contains pre-payment penalties. At December 31, 2012 and December 31, 2011 the fair value of the mortgage
approximated its book value. 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. The recorded value of the demand notes
payable approximates the fair value as the interest rate approximates market rates and as the notes are due upon
demand (i.e., they are short-term in nature). See Note 10 for further information regarding the demand notes
payable which was paid during the 2012 third quarter. The Company does not have any off-balance sheet financial
instruments other than operating leases (see Note 13).
Contracts Receivable
Contracts receivable are generally based on amounts billed to the customer. At December 31, 2012 and 2011,
contracts receivable included $18.1 million and $22.6 million of retainage, respectively, discussed below, which is
being withheld by customers until completion of the contracts, and at December 31, 2012, there were no unbilled
receivables on contracts completed or substantially complete at that date. All other contracts receivable include only
balances approved for payment by the customer.
Many of the contracts under which the Company performs work contain retainage provisions. Retainage refers
to that portion of billings made by the Company but held for payment by the customer pending satisfactory
completion of the project. Unless reserved, the Company assumes that all amounts retained by customers under such
provisions are fully collectible. Retainage on active contracts is classified as a current asset regardless of the term of
the contract and is generally collected within one year of the completion of a contract.
F9
There are certain contracts that are completed in advance of full payment. When the receivable will not be
collected within our normal operating cycle, we consider it a long-term contract receivable and is recorded in “Other
assets, net” in our balance sheet. At December, 2012 and 2011 there was $4.6 million and $0 recorded, respectively.
We consider the credit quality of the borrower to assess the appropriate discount rate to apply and continuously
monitor the borrower’s credit quality.
Contracts receivable are written off based on individual credit evaluation and specific circumstances of the
customer, when such treatment is warranted. However, based upon a review of outstanding contracts receivable,
historical collection information and existing economic conditions, management has determined that all contracts
receivable at December 31, 2012 and 2011 are fully collectible, and, accordingly, no allowance for doubtful
accounts against contracts receivable is necessary.
Inventories
The Company’s inventories are stated at the lower of cost or market as determined by the average cost method.
Inventories at December 31, 2012 and 2011 consist primarily of concrete, aggregate and millings which are
expected to be utilized on construction projects in the future. The cost of inventory includes labor, trucking and
other equipment costs.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line
method. The estimated useful lives used for computing depreciation and amortizations are as follows:
Buildings .................................
39 years
Construction equipment .......... 5-15 years
Land improvements ................. 5-15 years
Office furniture and fixtures .... 3-10 years
5 years
Transportation equipment ........
Depreciation expense was $19.0 million, $16.9 million, and $15.5 million in 2012, 2011 and 2010, respectively.
Equipment under Capital Leases
The Company’s policy is to account for capital leases, which transfer substantially all the benefits and risks
incident to the ownership of the leased property to the Company, as the acquisition of an asset and the incurrence of
an obligation. Under this method of accounting, the recorded value of the leased asset is amortized principally using
the straight-line method over its estimated useful life and the obligation, including interest thereon, is reduced
through payments over the life of the lease. Depreciation expense on equipment subject to capital leases and the
related accumulated depreciation is included with that of owned equipment. The Company had no capital leases
during the years ended December 31, 2012, 2011 and 2010.
Deferred Loan Costs
Deferred loan costs represent loan origination fees paid to the lender and related professional fees such as legal
fees related to drafting of loan agreements. These fees are amortized over the term of the loan. Unamortized costs
are $289,000 and $321,000 at December 31, 2012 and 2011, respectively, and are primarily attributable to the Credit
Facility (see Note 10). Loan cost amortization expense for fiscal years 2012, 2011 and 2010 was $32,000, $326,000
and $304,000 respectively.
Goodwill and Intangibles
Goodwill represents the excess of the cost of companies acquired over the fair value of their net assets at the
dates of acquisition. GAAP requires that: (1) goodwill and indefinite lived intangible assets not be amortized, (2)
goodwill is to be tested for impairment at least annually at the reporting unit level and (3) intangible assets deemed
to have an indefinite life are to be tested for impairment at least annually by comparing the fair value of these assets
with their recorded amounts. Refer to Note 8 for our disclosure regarding goodwill impairment.
Evaluating Impairment of Long-Lived Assets
When events or changes in circumstances indicate that long-lived assets may be impaired, an evaluation is
performed. The evaluation would be based on estimated undiscounted cash flow associated with the assets as
compared to the asset’s carrying amount to determine if a write-down to fair value is required. As described in Note
8, the testing under step one of the goodwill impairment test in 2011 indicated the adjusted fair value of the
Company’s stock was less than its book value. Management then determined the fair value of its assets and
liabilities, and found that no long-lived assets were impaired except for goodwill in 2011. For 2012, management
believes that there are no events or changes in circumstances have indicated that long-lived assets may be impaired.
F10
Segment reporting
We operate in one segment and have only one reportable segment and one reporting unit component, heavy
civil construction. In making this determination, we considered that each project has similar characteristics, includes
similar services, has similar types of customers and is subject to similar economic and regulatory environments. We
organize, evaluate and manage our financial information around each project when making operating decisions and
assessing our overall performance.
Even if our local offices were to be considered separate components of our heavy civil construction operating
segment, those components could be aggregated into a single reporting unit for purposes of testing goodwill for
impairment under Accounting Standards Codification 280 and EITF D-101 because our local offices all have similar
economic characteristics and are similar in all of the following areas:
The nature of the products and services — each of our local offices perform similar construction projects
— they build, reconstruct and repair roads, highways, bridges, light rail and water, waste water and storm
drainage systems.
The nature of the production processes — our heavy civil construction services rendered in the construction
process for each of our construction projects performed by each local office is the same — they excavate
dirt, remove existing pavement and pipe, lay aggregate or concrete pavement, pipe and rail and build
bridges and similar large structures in order to complete our projects.
The type or class of customer for products and services — substantially all of our customers are federal and
state departments of transportation, cities, counties, and regional water, rail and toll-road authorities. A
substantial portion of the funding for the state departments of transportation to finance the projects we
construct is furnished by the federal government.
The methods used to distribute products or provide services — the heavy civil construction services
rendered on our projects are performed primarily with our own field work crews (laborers, equipment
operators and supervisors) and equipment (backhoes, loaders, dozers, graders, cranes, pug mills, crushers,
and concrete and asphalt plants).
The nature of the regulatory environment — we perform substantially all of our projects for federal, state
and municipal governmental agencies, and all of the projects that we perform are subject to substantially
similar regulation under U.S. and state department of transportation rules, including prevailing wage and
hour laws; codes established by the federal government and municipalities regarding water and waste water
systems installation; and laws and regulations relating to workplace safety and worker health of the U.S.
Occupational Safety and Health Administration and to the employment of immigrants of the U.S.
Department of Homeland Security.
While profit margin objectives included in contract bids have some variability from contract to contract, our
profit margin objectives are not differentiated by our chief operating decision maker or our office management
based on local office location. Instead, the projects undertaken by each local office are primarily competitively-bid,
fixed unit or negotiated lump sum price contracts, all of which are bid based on achieving gross margin objectives
that reflect the relevant skills required, the contract size and duration, the availability of our personnel and
equipment, the makeup and level of our existing backlog, our competitive advantages and disadvantages, prior
experience, the contracting agency or customer, the source of contract funding, anticipated start and completion
dates, construction risks, penalties or incentives and general economic conditions.
Federal and State Income Taxes
We determine deferred income tax assets and liabilities using the balance sheet method. Under this method, the
net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the
book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax
rates and laws. Valuation allowances are established when necessary to reduce deferred tax assets to the amount
expected to be realized. We recognize the financial statement benefit of a tax position only after determining that the
relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting
the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a
greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
Stock-Based Compensation
The Company’s stock-based incentive plan is 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. See Note 14 for further
information regarding the stock-based incentive plans.
F11
Interest Costs
Approximately $2,000 and $6,000 of interest related to the construction of maintenance facilities and an office
building was capitalized as part of construction costs during 2011 and 2010, respectively, no interest was capitalized
in 2012.
Net Income (Loss) Per Share Attributable to Sterling Common Stockholders
Basic net income (loss) per share attributable to Sterling common stockholders is computed by dividing net
income (loss) attributable to Sterling common stockholders by the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per common share attributable to Sterling common
stockholders is the same as basic net income (loss) 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 (loss) attributable to Sterling common stockholders for
2012, 2011 and 2010 (in thousands, except per share data):
Years Ended December 31,
2011
2012
2010
Numerator:
Net income (loss) attributable to Sterling common stockholders ............... $
Revaluation of noncontrolling interest put/call liability reflected in
(297)
$ (35,900) $
19,087
additional paid in capital or retained earnings, net of tax ......................
$
(3,992)
(4,289)
$
(824)
(36,724) $
(449)
18,638
Denominator:
Weighted average common shares outstanding — basic ...........................
Shares for dilutive stock options and warrants ...........................................
Weighted average common shares outstanding and assumed
16,421
--
16,396
--
16,195
368
conversions— diluted ...........................................................................
16,421
16,396
16,563
Basic net income (loss) per share attributable to Sterling common
stockholders ................................................................................................ $
(0.26)
$
(2.24)
$
1.15
Diluted net income (loss) per share attributable to Sterling common
stockholders ................................................................................................ $
(0.26)
$
(2.24)
$
1.13
Options outstanding but considered antidilutive as the option exercise price exceeded the average share market
price were: zero in 2012, 53,900 in 2011, and 95,107 in 2010. In addition, 109,424 shares and 88,426 shares for
stock options and warrants were excluded from the diluted weighted average common shares outstanding in 2012
and 2011, respectively, as the Company incurred a loss in these years and the impact of such shares would have
been antidilutive.
Recent Accounting Pronouncements
In July 2012, the FASB amended authoritative guidance associated with indefinite-lived intangible assets. This
amended guidance states that an entity would not be required to calculate the fair value of an indefinite-lived
intangible asset unless the entity determines, based on a qualitative assessment, that it is not more likely than not that
the indefinite-lived intangible asset is impaired. The amendments to this authoritative guidance become effective
for the Company after September 15, 2012. The Company does not currently have indefinite-lived intangible assets,
other than goodwill; therefore, this guidance did not have a material impact on our consolidated financial statements.
In May 2011, the FASB amended authoritative guidance associated with fair value measurements. This
amended guidance defines certain requirements for measuring fair value and for disclosing information about fair
value measurement in accordance with GAAP. The amendments to authoritative guidance associated with fair value
measurements were effective for the Company on January 1, 2012 and have been applied prospectively. The
adoption of this guidance did not have a material impact on our consolidated financial statements.
Reclassifications
Balances related to accrued job costs which had been included in “Other current liabilities” in the prior year
balance sheet have been reclassified to “Accounts payable” to conform to current year presentation.
F12
2. Acquisitions and Subsidiaries and Joint Ventures with Noncontrolling Owners’ Interests
In January 2012, RHB, a wholly owned subsidiary, assumed six construction contracts with $25.0 million of
unearned revenues from Aggregate Industries―SWR, Inc. (“AI”), an unrelated third party. In addition, Aggregate
South West Holdings, LLC (“ASWH”) and RHB Properties, LLC (“RHBP”), newly formed entities owned by
Richard Buenting, the President and Chief Executive Officer of RHB, acquired construction related machinery and
equipment and land with quarries from AI. AI entered into a two-year non-compete agreement with respect to Utah,
Idaho and Montana as well as certain areas of Nevada. On April 27, 2012, RHB merged with ASWH and acquired
RHBP. In exchange, RHB granted Mr. Buenting a 50% member interest in RHB. These transactions allowed RHB
to expand its operations in Nevada.
The Company also agreed with Mr. Buenting to amend and restate the operating agreement for RHB. The
amended agreement provides that the Company is the Manager of RHB and retains full, exclusive and complete
power, authority and discretion to manage, supervise, operate and control RHB; therefore, the Company
consolidates RHB with its other subsidiaries. The Company also entered into a buy/sell and management agreement
with Mr. Buenting. Under this agreement, the Company or Mr. Buenting may annually elect to make offers to buy
the other owner’s 50% interest in RHB and sell their 50% interest in RHB at a price which they specify. Upon
receipt of the offers, the other owner must elect either to sell their interest or purchase the interest from the owner
making the offers. The agreement also requires that the Company acquire Mr. Buenting’s interest in the event of his
termination without cause, death, or disability. To the extent that the redemption value under the buy/sell and
management agreement exceeds the initial valuation of Mr. Buenting’s noncontrolling interest, the Company shall
record an adjustment to retained earnings. In 2012, a pre-tax adjustment of $2.5 million was recorded. Under the
agreement, the Company will provide RHB with access to a $5 million line of credit.
These transactions were accounted for as a business combination. In December 2012, the Company finalized its
valuation of the assets acquired, the membership interest granted and the tax related impact of the transaction. The
purchase price for the transaction was $9.8 million for the assets acquired net of a contract liability. In addition, the
Company recorded a credit of $233,000 to “Additional paid in capital” resulting from the excess of the post-merger
member capital over the Company’s book value of the 50% investment in RHB issued to Mr. Buenting. As a result
of the merger, an additional difference between the Company’s tax basis related to RHB and its book basis was
created. Accordingly, the Company recorded an additional deferred tax liability of $360,000 with an offset to
goodwill.
Revenues and earnings related to the contracts assumed and the acquired companies for 2012 were $26.1
million and $152,000, respectively. In connection with this transaction, AI did not agree to provide us with
historical information related to the earnings from the acquired operations except for information related to the
specific contracts being assumed. Furthermore, we determined that such information was not needed in order to
evaluate the transaction based on our knowledge of the assets acquired and the Nevada road and highway
construction market. Therefore, we are not able to present pro forma financial information as if the transactions had
occurred on January 1, 2011.
In connection with the August 1, 2011, acquisition of J. Banicki Construction, Inc. (“JBC”) by 80% owned
Ralph L. Wadsworth Construction Company, LLC (“RLW”), RLW agreed to additional purchase price payments of
up to $5 million to be paid over a five-year period. The additional purchase price is in the form of an earn-out which
is classified as a Level 3 fair value measurement. In making this valuation, the unobservable input consisted of
forecasted earnings before interest, taxes and depreciation and amortization (“EBITDA”) for the periods after the
period being reported on through July 31, 2016. The additional purchase price is calculated generally as 50% of the
amount by which earnings before interest, taxes, depreciation and amortization (“EBITDA”) exceeds $2 million for
each of the calendar years 2011 through 2015 and $1.2 million for the seven months ended July 31, 2016. The
yearly excess forecasted EBITDA in our calculation ranged from 0% to 205% of the minimum EBITDA threshold
for the years 2012 through 2016. The discounted present value of the additional purchase price was estimated to be
$2.4 million as of August 1, 2011, the acquisition date, and $2.3 million as of December 31, 2012. The
undiscounted earn-out liability as of December 31, 2012 is estimated at $2.4 million and could increase by $2.6
million if EBITDA during the earn-out period increases $5.2 million or more and could decrease by the full amount
of the liability if EBITDA does not exceed the minimum threshold in any of the periods during the earn-out period.
Any significant increase or decrease in actual EBITDA compared to the forecasted amounts would result in a
significantly higher or lower fair value measurement of the additional purchase price. This liability is included in
other long-term liabilities in the accompanying consolidated balance sheets.
F13
The following table summarizes the initial allocation of the purchase price for JBC (in thousands):
Assets acquired and liabilities assumed:
Current assets, including cash of $4,662 ............................................................ $ 8,839
Current liabilities ................................................................................................ (5,708)
Working capital acquired .................................................................................... 3,131
Property and equipment ...................................................................................... 2,018
Other ...................................................................................................................
9
Total tangible net assets acquired at fair value .......................................... 5,158
Goodwill ............................................................................................................. 4,803
Total consideration .................................................................................... 9,961
Fair value of earn-out ............................................................................................... (2,370)
Cash paid, net of $409 receivable from seller .......................................................... $ 7,591
The purchase price allocation has been finalized, and our analysis of the assets acquired indicates that there are
no material separately identifiable intangible assets. The goodwill attributable to the acquisition is deductible for tax
purposes over 15 years.
Acquisition related costs of $328,000 are included in direct costs of acquisitions in the Company’s consolidated
statements of operations for the twelve months ended December 31, 2011.
The fair value of the financial assets acquired includes receivables with a fair value of $3.8 million, which are
deemed fully collectible.
On August 1, 2011, the Company purchased a 50% limited partner interest in Myers. Myers is a construction
limited partnership located in California and was acquired in order to expand the geographic scope of the
Company’s operations into California.
The following table summarizes the initial allocation of the purchase price for Myers (in thousands):
Assets acquired and liabilities assumed:
Current assets, including cash of $654 ........................................................... $ 3,207
Current liabilities ............................................................................................
Working capital acquired ................................................................................
Property and equipment ..................................................................................
Debt due to noncontrolling interest owner ......................................................
Total tangible net assets acquired at fair value ........................................
Goodwill .........................................................................................................
Total consideration ..................................................................................
Fair value of noncontrolling owners’ interest in Myers .......................................
Cash paid ............................................................................................................. $ 1,227
(2,464)
743
708
(500)
951
1,502
2,453
(1,226)
The fair value of the noncontrolling interests was determined based on the negotiated price at which the
Company purchased its 50% interest which was based in part on expectations of future earnings. The purchase price
allocation has been finalized, and our analysis of the assets acquired indicates that there are no material separately
identifiable intangible assets. The goodwill attributable to the acquisition is deductible for tax purposes over 15
years.
Acquisition related costs of $128,000 are included in direct costs of acquisitions in the Company’s consolidated
statements of operations for the year ended December 31, 2011. The fair value of the financial assets acquired
includes receivables with a fair value of $2.1 million, which are expected to be fully collectible.
See Note 3 regarding the determination that Myers’ is a variable interest entity and the resulting impact on the
consolidated financial statements.
The following table shows the amounts of JBC’s and Myers’ revenues and earnings included in the Company’s
consolidated statements of operations and cash flows for the year ended December 31, 2011, and the revenues and
earnings of the combined entity had the acquisition dates been January 1, 2010 (in thousands):
F14
JBC actual from 8/1/2011 – 12/31/2011 ................................................. $
Myers actual from 8/1/2011 – 12/31/2011 .............................................
Supplemental pro forma results of the Company, JBC, and Myers on a
combined basis for 1/1/2010 – 12/31/2010 (unaudited) ...................
Net Income
(Loss)
Attributable
to Sterling
Common
Stockholders
245
170
Revenues
12,303
7,153
$
475,906
19,596
In connection with the December 3, 2009 acquisition of RLW, the noncontrolling interest owners of RLW,
who are related and also its executive management, had the right to require the Company to buy their remaining
20.0% interest in RLW in 2013, and concurrently, the Company had the right to require those owners to sell their
20.0% interest to the Company by July 2013 (the “RLW put/call”). The purchase price in each case was 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 valuation
of this purchase price was classified as a Level 3 fair value measurement. In making this valuation, the observable
input was RLW’s EBITDA for the period from January 1, 2010 through December 31, 2012. The noncontrolling
owners’ interests, including the obligation under the RLW put/call, were recorded at their estimated fair value at the
date of acquisition as “Obligation for noncontrolling owners’ interests in subsidiaries and joint ventures” in the
accompanying consolidated balance sheets.
Annual interest was accreted for the RLW put/call obligation based on the Company’s borrowing rate
under its Credit Facility plus two percent. Such accretion amounted to $993,000, $881,000, and $807,000 for the
years ended December 31, 2012, 2011 and 2010, respectively, and is recorded in “Interest expense” in the
accompanying consolidated statement of operations. In addition, based on the estimated average of RLW’s
EBITDA for the calendar years 2010, 2011 and 2012 and the expected multiple, the estimated fair value of the RLW
put/call was increased by $3.8 million and $1.3 million during the years ended December 31, 2012 and 2011,
respectively, and this change, net of tax of $1.3 million and $0.5 million, respectively, has been reported as a charge
to retained earnings.
Under an agreement with the noncontrolling interest owners of RLW, the Company purchased their 20%
interest in RLW on December 31, 2012 subject to a final determination of RLW’s EBITDA for the period from
January 1, 2010 through December 31, 2012. A payment of $23.1 million was made, and the Company expects to
make a final additional payment of $568,000 in March 2013. This amount as well as any undistributed earnings to
the noncontrolling interest owners for 2012 is included in current liabilities under “Current obligation for
noncontrolling owners’ interests in subsidiaries and joint ventures” in the accompanying consolidated balance
sheets.
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 ................................................. $
Current liabilities .....................................................................................
Working capital acquired ........................................................................
Property and equipment ..........................................................................
Total tangible net assets acquired at fair value ..............................
Goodwill .................................................................................................
Total consideration ........................................................................
Fair value of noncontrolling owners’ interests in RLW, including put .......
Cash paid .................................................................................................... $
43,053
(31,953)
11,100
11,212
22,312
57,513
79,825
(15,965)
63,860
The goodwill attributable to the acquisition is deductible for tax purposes over 15 years.
On October 31, 2007, the Company purchased a 91.67% interest in RHB. The noncontrolling interest owner of
RHB had the right to put, or require the Company to buy, his remaining 8.33% interest in the subsidiary and,
concurrently, the Company had the right to require that the owner sell his 8.33% interest to the Company, in 2011.
On March 17, 2011, the right to put/call the RHB noncontrolling interest was extended to anytime between that date
and December 31, 2012. In addition the price was increased from $7.1 million to $8.2 million which settled $1.1
million of accrued amounts due to the noncontrolling interest owner under the October 31, 2007 purchase
F15
agreement. In September 2011, the noncontrolling owner exercised his right to put his remaining interest of 8.33%
in RHB to the Company for $8.2 million. This transaction was completed in December 2011 under the terms of the
agreement.
Changes in noncontrolling interests
The following table summarizes the changes in the noncontrolling owners’ interests in subsidiaries and
consolidated joint ventures for the years ended December 31, 2010 through 2012 (in thousands):
Balance, beginning of period ..................................................................$ 18,375
Net income attributable to noncontrolling interest included in
$ 28,724 $ 23,887
Years Ended December 31,
2010
2011
2012
liabilities ............................................................................................. 16,941
1,068
993
3,797
2,473
--
--
Net income attributable to noncontrolling interest included in equity ....
Accretion of interest on puts ...................................................................
Change in fair value of RLW put/call.....................................................
Change in fair value of RHB put/call .....................................................
Acquisition by Sterling of RHB noncontrolling interest ........................
Noncontrolling interest associated with Myers acquisition ....................
Issuance of noncontrolling interest in RHB in exchange for net assets
of acquired companies ........................................................................
9,767
Distributions to noncontrolling interests owners .................................... (10,185)
Acquisition by Sterling of RLW noncontrolling interest ........................ (23,144)
Other .......................................................................................................
(39)
Balance, end of period ............................................................................$ 20,046
935
261
881
1,268
1,054
(8,205)
1,227
7,137
--
1,169
--
691
--
--
--
(7,809)
--
39
--
(4,160)
--
--
$ 18,375 $ 28,724
Noncontrolling owners’ interest in earnings of subsidiaries and joint ventures for the year ended December 31,
2012 shown in the accompanying consolidated statement of operations of $18.0 million includes $15.0 million
attributable to the RLW noncontrolling interest owners, which is reflected in “Current obligation for noncontrolling
owners’ interests in subsidiaries and joint ventures,” $1.9 million attributable to RHB noncontrolling interest
owners, which is reflected in “Obligation for noncontrolling owners’ interest in subsidiaries and joint ventures” and
income of $1.1 million attributable to Myers’ noncontrolling interest owners which is reflected in equity in
“Noncontrolling interests” in the accompanying consolidated balance sheet.
In 2012, the Company agreed to amend RLW’s operating agreement effective January 1, 2012 to provide that
any goodwill impairment, including the 2011 fourth quarter goodwill impairment of the Company described in Note
8 below is not to be allocated to RLW for the purpose of calculating the distributions to be made to the RLW
noncontrolling interest holders. This amendment resulted in an increase in the net income attributable to RLW’s
noncontrolling interests of $6.7 million during the year ended December 31, 2012. This increase is included in
“Noncontrolling owners’ interests in earnings of subsidiaries and joint ventures” in the accompanying consolidated
statement of operations. This increase has a related tax impacted of $2.4 million which increased the tax benefit for
the period.
3. Variable Interest Entities
Under GAAP, the Company must determine whether each entity, including joint ventures in which it
participates, is a variable interest entity. This determination focuses on identifying which owner or joint venture
partner, if any, has the power to direct the activities of the entity and the obligation to absorb losses of the entity or
the right to receive benefits from the entity disproportionate to its interest in the entity, which could have the effect
of requiring us to consolidate the entity in which we have a non-majority variable interest. Where the Company has
determined that it is appropriate to consolidate a variable interest entity in which it owns a 50% or less interest, the
remaining owners’ interests in the equity and net income of the entity are included in the balance sheet line item:
“Noncontrolling owners’ interests in subsidiaries and joint ventures.”
The Company owns a 50% interest in Myers of which it is the primary beneficiary and has consolidated Myers
into these financial statements. Further see Note 2 above for additional information on the acquisition of this limited
partnership. The partnership agreement requires that Sterling provide a $3 million line of credit to the limited
partnership. In addition the partnership is relying on the Company’s surety bonding capacity in order to bid and
F16
perform large construction jobs resulting in the Company having joint and several liability for completion of such
jobs, and the Company will provide management to the partnership to oversee bidding and management of larger
projects. Although the Company will receive 50% of the income from the partnership, it may suffer more than 50%
of any losses as a result of its obligation to provide the $3 million line of credit and its obligations under the surety
bonds. Because the Company exercises primary control over activities of the partnership and it is exposed to the
majority of potential losses of the partnership, the Company consolidated Myers within the Company’s financial
statements from August 1, 2011, the date of acquisition.
The financial information of Myers which is reflected in our consolidated balance sheets and statements of
operations is as follows (in thousands):
Assets:
Current assets:
Cash and cash equivalents ........................................................................................... $
Contracts receivable, including retainage .....................................................................
Other current assets .......................................................................................................
Total current assets ..................................................................................................
Property and equipment, net .................................................................................................
Goodwill ...............................................................................................................................
Total assets .............................................................................................................. $
Liabilities:
Current liabilities:
Accounts payable .......................................................................................................... $
Other current liabilities .................................................................................................
Total current liabilities ............................................................................................
Long-term liabilities:
Other long-term liabilities .............................................................................................
Total long-term liabilities ........................................................................................
Total liabilities ................................................................................................ $
As of December 31,
2011
2012
7,164
2,866
1,214
11,244
3,041
1,501
15,786
4,627
6,283
10,910
--
--
10,910
$
$
$
$
1,365
2,244
419
4,028
926
1,541
6,495
1,134
2,323
3,457
--
--
3,457
Period from
August 1, 2011
(the acquisition
date) to
December 31,
2011
Year Ended
December 31,
2012
Revenues ..................................................................................................$
Operating income .....................................................................................
Net income (loss) attributable to Sterling common stockholders .............
84,877 $
2,152
694
7,153
531
170
Other current liabilities shown in the table above include $500,000 in demand notes payable that are due to one
of the noncontrolling interest owners in 2011 and paid in 2012.
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. At December 31, 2012, approximately $2.7 million of cash and
cash equivalents were fully insured by the FDIC under its standard maximum deposit insurance amount guidelines.
At December 31, 2012, cash and cash equivalents included $980,000 belonging to majority-owned joint ventures
that are consolidated in these financial statements which generally cannot be used for purposes outside such joint
ventures.
The Company includes certificates of deposit with a remaining maturity of 90 days or less at purchase in “Cash
and cash equivalents.” All other short-term investments are included in “Short-term investments.” Mutual funds,
government bonds and exchange traded funds are considered available-for-sale securities. Government bonds have
maturity dates of 2013-2050. At December 31, 2012 and 2011, the Company had short-term investments as follows
(in thousands):
F17
Mutual funds ......................................................................... $
Municipal bonds ...................................................................
Total securities available-for-sale ......................... $
27,582 $
21,629
49,211 $
Total Fair
Value
As of December 31, 2012
Level 1
27,582
--
27,582
Level 2
-- $
21,629
21,629 $
$
$
Gross
Unrealized
Gains
(pre-tax)
337
862
1,199
$
$
Gross
Unrealized
Losses
(pre-tax)
9
128
137
Mutual funds ......................................................................... $
Municipal bonds ...................................................................
Total securities available-for-sale ......................... $
As of December 31, 2011
Total Fair
Value
24,851
20,004
$
Level 1
24,851
--
44,855
$
24,851
Level 2
$
$
-- $
20,004
20,004 $
Gross
Unrealized
Gains
(pre-tax)
383 $
617
1,000 $
Gross
Unrealized
Losses
(pre-tax)
--
15
15
The amortized cost basis of the above securities at December 31, 2012 and 2011 was $48.1 million and $44.3
million, respectively. Municipal bond securities are the only securities held by the Company where fair value does
not equal amortized cost. The amortized cost for municipal bond securities was $20.5 million and $19.4 million in
2012 and 2011, respectively.
The valuation inputs for Levels 1, 2 and 3 are as follows:
Level 1 Inputs - 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 Company had no short-term investments valued with Level 3 inputs at either of the balance sheet dates.
Gains and losses realized on short-term investment securities are included in “Gains (losses) on sale of
securities and other” in the accompanying statements of operations. Unrealized gains (losses) on short-term
investments are included in accumulated other comprehensive income in stockholders’ equity, net of tax, as the
gains and losses may be temporary. For the year ended December 31, 2012 and 2011, total proceeds from sales of
short-term investments were $26.7 million and $101.4 million, respectively, with gross realized gains of $785,000
and $390,000, respectively, and gross realized losses of $0 and $388,000, respectively. Accumulated other
comprehensive income at December 31, 2012 included unrealized gains (losses) on short-term investments of $1.1
million less the associated taxes of $372,000. Upon the sale of short-term investments, the cost basis used to
determine the gain or loss is based on the specific identification of the security sold. All items included in
accumulated other comprehensive income are at the corporate level, and no portion is attributable to noncontrolling
interests.
For the years ended December 31, 2012, 2011 and 2010, the Company recorded interest income of $1.3 million,
$1.7 million and $1.8 million, respectively.
5. Costs and Estimated Earnings and Billings on Uncompleted Contracts
Billing practices for our contracts are governed by the contract terms of each project based on progress toward
completion approved by the owner, achievement of milestones or pre-agreed schedules. Billings do not necessarily
correlate with revenue recognized under the percentage-of-completion method of accounting. The current liability,
“Billings in excess of costs and estimated earnings on uncompleted contracts,” represents billings in excess of
revenues recognized. The current asset, “Costs and estimated earnings in excess of billings on uncompleted
contracts,” represents revenues recognized in excess of amounts billed to the customer, which are usually billed
during normal billing processes following achievement of contractual requirements.
The two tables below set forth the costs incurred and earnings accrued on uncompleted contracts (revenues)
compared with the billings on those contracts through December 31, 2012 and 2011 and reconcile the net excess
billings to the amounts included in the consolidated balance sheets at those dates (in thousands).
F18
As of December 31,
2011
2012
Costs incurred and estimated earnings on uncompleted
contracts ................................................................................ $ 1,361,973
(1,360,299)
Billings on uncompleted contracts ...........................................
Excess of costs incurred and estimated earnings over billings
$ 997,527
(999,601)
(excess of billings over costs incurred and estimated
earnings) on uncompleted contracts ...................................... $
1,674
$
(2,074)
Included in the accompanying balance sheets under the following captions:
As of December 31,
2011
2012
Costs and estimated earnings in excess of billings on
uncompleted contracts .......................................................... $
20,592
$ 16,509
Billings in excess of costs and estimated earnings
on uncompleted contracts .....................................................
Net amount of costs and estimated earnings on uncompleted
(18,918)
(18,583)
contracts above (below) billings ....................................... $
1,674
$
(2,074)
Revenues recognized and billings on uncompleted contracts include cumulative amounts recognized as revenues and
billings in prior years.
6. Construction Joint Ventures
We participate in various construction joint venture partnerships. 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 are limited to our stated percentage interest in the
venture. We have no significant commitments beyond completion of the contract with the customer.
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.
Under GAAP, the Company must determine whether each joint venture in which it participates is a variable
interest entity. This determination focuses on identifying which joint venture partner, if any, has the power to direct
the activities of a joint venture and the obligation to absorb losses of the joint venture or the right to receive benefits
from the joint venture in excess of their ownership interests and could have the effect of requiring us to consolidate
joint ventures in which we have a non-majority variable interest. Except for Myers as discussed in Note 3 above, at
December 31, 2012, we had no participation in a joint venture where we had a material non-majority variable
interest.
Where we are a noncontrolling venture partner, we account for our share of the operations of such construction
joint ventures on a pro rata basis using proportionate consolidation in our consolidated statements of operations and
as a single line item (“Receivables from and equity in construction joint ventures”) in the consolidated balance
sheets. Combined financial amounts of joint ventures in which the Company has a noncontrolling interest and the
Company’s share of such amounts which are included in the Company’s consolidated financial statements are
shown below (in thousands):
F19
Total combined:
Current assets ..................................................................... $ 92,102
(48,002)
Less current liabilities ........................................................
Net assets ...................................................................... $ 44,100
Backlog .............................................................................. $ 213,924
$ 108,458
(86,023)
$ 22,435
$ 539,844
$
As of December 31,
2012
2011
Years Ended December 31,
2011
2010
2012
Total combined:
Revenues ............................................................................ $ 438,756
Income before tax ............................................................... $ 95,765
$ 440,085
$ 46,683
Sterling’s noncontrolling interest:
Share of revenues ............................................................... $ 82,519
Share of income before tax ................................................ $ 12,424
$ 62,763
6,417
$
$ 302,289
$ 24,573
$ 37,684
3,018
$
As of December 31,
2012
Sterling’s noncontrolling interest in backlog ........................... $ 77,222
Sterling’s receivables from and equity in net assets of
$ 127,130
2011
construction joint ventures ................................................... $ 11,005
$
6,057
7. Property and Equipment
Property and equipment are summarized as follows (in thousands):
Construction equipment ............................................................................$ 130,014
19,266
Transportation equipment .........................................................................
10,176
Buildings ..................................................................................................
1,279
Office equipment ......................................................................................
Construction in progress ...........................................................................
--
4,916
Land ..........................................................................................................
200
Water rights ..............................................................................................
165,851
(63,543)
$ 102,308
Less accumulated depreciation .................................................................
As of December 31,
2011
2012
$125,222
17,963
4,729
1,077
2,544
3,026
200
154,761
(71,332)
$ 83,429
At December 31, 2011, construction in progress primarily consisted of expenditures for new offices in San
Antonio and Dallas, Texas, which were completed during 2012.
8. Goodwill
Goodwill represents the excess of the cost of companies acquired over the fair value of their net assets at the
dates of acquisition. GAAP requires that goodwill not be amortized and that goodwill is to be tested for impairment
at least annually at the reporting unit level. The Company tests for goodwill impairment during the last quarter of
each calendar year. The first step compares the book value of the Company’s stock (stockholders’ equity) to the
adjusted fair market value of those shares. To determine the fair value of the Company’s net assets, the Company
used the weighted average of the following valuation techniques: market capitalization plus control premium
approach, guideline company (market) approach, and a discounted cash flow (income) approach. If the adjusted fair
value of the stock is greater than the calculated book value of the stock, goodwill is deemed not to be impaired and
no further testing is required. If the adjusted fair value is less than the calculated book value, additional steps of
determining the fair value of net assets must be taken to determine impairment. Testing under step one in 2012 and
2010 did not indicate that the adjusted fair value of the Company’s stock was less than its book value. However,
this was not the case in 2011.
As a result, in 2011 the Company performed the second-step test to determine the fair value of the Company’s
net assets and the amount of implied goodwill. The majority of the Company’s assets and liabilities are current in
F20
nature and, therefore, approximate fair value. The Company engaged a third party to conduct an independent
appraisal of its property, plant and equipment. In addition, the Company performed a fair market assessment of
interest bearing debt, deferred tax assets and liabilities and other intangible assets. The results of the second-step
test indicated a goodwill impairment of approximately $67.0 million which was recorded in the fourth quarter of
2011.
The following table details changes in recorded goodwill (in thousands):
Additional goodwill related to 2011 acquisitions ...................
Goodwill impairment in 2011 ................................................
Balance at December 31, 2011 ....................................................
Additional goodwill related to acquisitions ............................
Goodwill adjustments .............................................................
Balance at January 1, 2011 and 2010........................................... $ 114,745
6,305
(67,000)
54,050
360
410
Balance at December 31, 2012 .................................................... $ 54,820
9. Derivative Financial Instruments
The Company enters into various fixed rate commodity swap contracts in an effort to manage its exposure to
price volatility of diesel fuel. Historically, fuel prices have been volatile because of supply and demand factors,
worldwide political factors and general economic conditions. The objective of the Company in executing the hedge
is to mitigate the fuel price volatility that could adversely affect forecasted cash flows and earnings related to
construction contracts. Swaps are designed so that the Company receives or makes payments based on a differential
between fixed and variable prices for off-road ultra-low sulfur diesel (“ULSD”). The Company has designated its
commodity derivative contracts as cash flow hedges designed to achieve more predictable cash flows, as well as to
reduce its exposure to price volatility. While the use of derivative instruments limits the downside risk of adverse
price movements, they also limit future benefits from reductions in costs as a result of favorable market price
movements.
All of the Company’s outstanding derivative financial instruments are recognized in the balance sheet at their
fair values. All changes in the fair value of outstanding derivatives, except any ineffective portion, are recorded in
accumulated other comprehensive income (loss) until earnings are impacted by the hedged transaction. Amounts in
accumulated other comprehensive income (loss) are reclassified to earnings when the related hedged items affect
earnings or the anticipated transactions are no longer probable. All items included in accumulated other
comprehensive income (loss) are at the corporate level, and no portion is attributable to noncontrolling interests.
At December 31, 2012 and 2011, pre-tax accumulated other comprehensive income (loss), excluding taxes of
$2,800 and $78,000, respectively, consisted of unrecognized gains of $8,000 and $223,000, respectively,
representing the unrealized change in mark-to-market value of the effective portion of the Company’s commodity
contracts, designated as cash flow hedges, as of the balance sheet date. For the years ended December 31, 2012,
2011, and 2010, the Company recognized pre-tax net realized cash settlement losses on commodity contracts of
$66,000, $111,000, and $0, respectively.
At December 31, 2012, the Company had hedged its exposure to the variability in future cash flows from
forecasted diesel fuel purchases totaling 1.2 million gallons. The monthly volumes hedged range from 10,000
gallons to 20,000 gallons over the period from January 2013 to December 2014 at fixed prices per gallon ranging
from $2.79 to $3.29.
The derivative instruments are recorded on the consolidated balance sheet at fair value as follows (in
thousands):
F21
Balance Sheet Location
Derivative assets:
Deposits and other current assets...................................... $
Other assets, net ................................................................
$
Derivative liabilities:
Other current liabilities ..................................................... $
Other long-term liabilities ................................................
$
As of December 31,
2012
2011
7
1
8
--
--
--
$
$
$
$
--
--
--
147
76
223
The following table summarizes the effects of commodity derivative instruments on the consolidated statements
of operations and comprehensive income (in thousands):
Years Ended December 31,
2011
2012
2010
Increase (decrease) in fair value of derivatives included in
other comprehensive income (effective portion) ................$
231
$
(223)
$
Realized gain (loss) included in cost of revenues (effective
portion) ................................................................................
(66)
Increase (decrease) in fair value of derivatives included in
cost of revenues (ineffective portion) ..................................
--
(111)
--
--
--
--
The Company’s derivative instruments contain certain credit-risk-related contingent features which apply both
to the Company and to the counterparties. The counterparty to the Company’s derivative contracts is a high credit
quality financial institution.
Fair Value
The Company’s swaps are valued based on a discounted future cash flow model. The primary input for the
model is the forecasted prices for ULSD. The Company’s model is validated by the counterparty’s mark-to-market
statements. The swaps are designated as Level 2 within the valuation hierarchy. Refer to Note 4 for a description of
the inputs used to value the information shown above.
At December 31, 2012 and 2011, the Company did not have any derivative assets or liabilities measured at fair
value on a recurring basis that meet the definition of Level 1 or Level 3.
10. Line of Credit and Long-Term Debt
Long-term debt consists of the following (in thousands):
Credit facility...............................................................................$
Notes payable to related party .....................................................
Mortgage due monthly through June 2016 ..................................
Less current maturities of long-term debt ....................................
Total long-term debt ....................................................................$
As of December 31,
2012
2011
24,012
--
262
24,274
(73)
24,201
$
$
--
500
336
836
(573)
263
Line of Credit Facility
On October 31, 2007, the Company and its subsidiaries entered into a new credit facility (“Credit Facility”)
with Comerica Bank with a maturity date of October 31, 2012. In November 2011, the Credit Facility was amended
to extend the maturity date to September 30, 2016. Up to $50 million in borrowings are available under the
amended Credit Facility with, under certain circumstances, an optional increase of $50 million. The Credit Facility
is secured by all assets of the Company, other than proceeds and other rights under our construction contracts, which
are pledged to our bond surety. The Credit Facility requires the payment of a quarterly commitment fee of 0.25% per
F22
annum of the unused portion of the Credit Facility. At December 31, 2012 and 2011, the Company had $24.0
million and no aggregate borrowings outstanding under the Credit Facility, respectively, and the aggregate amount
of letters of credit outstanding under the Credit Facility was $1.8 million for both years and reduces availability
under the Credit Facility. Availability under the Credit Facility was, therefore, $24.2 million and $48.2 million at
December 31, 2012 and 2011, respectively, without violating any of the covenants discussed in the next paragraph.
The Credit Facility is subject to our compliance with certain covenants, including financial covenants relating to
fixed charges, leverage, tangible net worth and asset coverage. The Credit Facility contains restrictions on the
Company’s ability to:
Make distributions and dividends;
Incur liens and encumbrances;
Incur further indebtedness;
Guarantee obligations;
Dispose of a material portion of assets or merge with a third party;
Make acquisitions;
Make investments in securities.
The Company was in compliance with all covenants under the Credit Facility as of December 31, 2012.
The unpaid principal balance of each loan will bear interest at a variable rate equal to either Comerica’s prime
rate or a rate equal to LIBOR plus 1.75%. The interest rate on funds borrowed under this revolver during the year
ended December 31, 2012 was 3.25% at all times that the Company had debt outstanding under this facility.
In January 2013, the Company sold approximately $27.7 million of its short-term investments in order to repay
the $24.0 million of borrowings outstanding under the Credit Facility at December 31, 2012.
Mortgage
In 2001, TSC completed the construction of a headquarters building and financed it principally through a
mortgage of $1.1 million on the land and facilities, at a floating interest rate, which at December 31, 2012 was 3.5%
per annum, repayable over 15 years. The outstanding balance on this mortgage was $262,000 at December 31,
2012.
Related Party Notes Payable
As of December 31, 2011, Myers had $500,000 of outstanding notes payable to Clinton Charles Myers, a
noncontrolling interest owner. These notes were paid in full during 2012.
Maturities of Debt
The Company’s long-term obligations mature in future years as follows (in thousands):
Years Ending
December 31,
2013 ....................... $
2014 .......................
2015 .......................
2016 .......................
Thereafter ...............
$
73
73
73
24,055
--
24,274
11. Income Taxes and Deferred Tax Asset/Liability
The Company and its subsidiaries file U.S. federal and various U.S. state income tax returns. The Company’s
2007 through 2009 U.S. federal income tax returns have been examined by the I.R.S. Based on their examination,
$314,000 was calculated as additional tax owed. The Company’s policy is to recognize interest related to any
underpayment of taxes as interest expense, and penalties as administrative expenses. No interest or penalties have
been accrued at December 31, 2012, and interest and penalties for the years ended December 31, 2011 and 2010
were not significant. The Company’s U.S. federal income tax returns for 2010 and later years are open and subject
to examination by the I.R.S.
Current income tax expense represents federal and state income tax paid or expected to be payable for the years
shown in the statements of operations. The income tax expense (benefit) in the accompanying consolidated financial
statements consists of the following (in thousands):
F23
Current tax expense (benefit) ..........................................$
Deferred tax expense (benefit) ........................................
Total tax expense (benefit) ..............................................$
588 $
(1,167)
1,639
(18,651)
(579) $ (17,012)
Deferred tax assets and liabilities consist of the following (in thousands):
Years Ended December 31,
2011
2012
$
2010
6,410
3,860
$ 10,270
As of December 31,
2012
Current
Long
Term
2011
Current
Long
Term
Assets related to:
Accrued compensation and other ...........................$
Amortization and impairment of goodwill ............
Accreted interest to put ..........................................
Contingency on lawsuit ..........................................
Noncontrolling interest ...........................................
Revaluation of put/call liabilities
Liabilities related to:
Depreciation of property and equipment ................
Noncontrolling interest ...........................................
Other .......................................................................
Net asset (liability).......................................................$
1,803
--
--
--
--
--
--
--
--
1,803
$
--
$
13,181
939
130
915
2,194
(13,615)
--
(771)
2,973
$
$
1,302
--
--
--
--
--
--
--
--
1,302
$
--
15,900
587
391
--
--
(14,040)
(1,720)
(290)
828
$
The Company expects that the deferred tax asset will be realized and accordingly no valuation allowance is
necessary. During 2012, we recorded a long-term deferred tax liability of $360,000 on depreciable property as a
result of a business combination. Refer to Note 2 for a description of the business combination.
The income tax provision (benefit) differs from the amount using the statutory federal income tax rate of 35%
for the following reasons (amounts in thousands):
Years Ended December 31,
2012
2011
2010
Amount
%
Amount
%
Amount
%
Tax expense (benefit) at the U.S.
federal statutory rate .............................$
5,997
35.0 % $ (18,101)
35.0 %
$ 12,773
35.0 %
State tax based on income, net of
refunds and federal benefits .................
(58)
(0.3)
(573)
1.1
879
2.4
Taxes on subsidiaries’ and joint
ventures’ earnings allocated to
noncontrolling interests owners ...........
Tax benefits of Domestic Production
(5,938)
(34.7)
Activities Deduction .........................
(84)
(0.5)
(444)
(202)
0.9
0.4
(2,498)
(6.8)
(500)
(1.4)
Impairment associated with goodwill
that is not amortizable for tax ...........
Non-taxable interest income ....................
Other permanent differences ....................
Income tax expense (benefit) ...................$
--
(529)
33
(579)
2,603
--
(376)
(3.1)
81
0.2
(3.4)% $ (17,012)
--
(5.0)
(494)
0.7
110
(0.2)
32.9 % $ 10,270
--
(1.4)
0.3
28.1 %
As a result of the Company’s analysis, management has determined that the Company does not have any
material uncertain tax positions.
12. Commitments and Contingencies
Employment Agreements
The Company’s Chief Executive Officer, its Executive Vice Presidents and certain executive officers of its
subsidiaries have employment agreements which provide for payments of annual salary, deferred salary, incentive
compensation and certain benefits if their employment is terminated without cause. The Company has also entered
into change of control agreements with certain officers providing for additional payments in the event that their
employment is terminated without cause just before or within two years after a change of control of the Company.
F24
Self-Insurance
The Company except RLW, JBC and Myers is self-insured for employee health claims, and RLW is partially
self-insured. Its policy is to accrue the estimated liability for known claims and for estimated claims that have been
incurred but not reported as of each reporting date. The Company has obtained reinsurance coverage for the policy
period as follows:
Specific excess reinsurance coverage for medical and prescription drug claims per insured person in excess
of $95,000 within a plan year.
Aggregate reinsurance coverage for medical and prescription drug claims within a plan year with a
maximum of $1.0 million in excess of an aggregate deductible of $2.5 million.
For the years ended December 31, 2012, 2011 and 2010, the Company incurred $2.0 million, $1.2 million, and
$1.1 million, respectively, in expenses related to this plan.
The Company and its subsidiaries, other than RLW, JBC and Myers, are also self-insured for workers’
compensation claims up to $250,000 per occurrence, with a maximum aggregate liability of $2.9 million per year.
The Company’s policy is to accrue the estimated liability for known claims and for estimated workers
compensation, employee health, general liability and other claims that have been incurred but not reported as of each
reporting date. At December 31, 2012 and 2011, the Company had recorded an estimated liability of $1.4 million
and $1.3 million, respectively, which it believes is adequate for such claims based on its claims history and an
actuarial study. The Company has a safety and training program in place to help prevent accidents and injuries and
works closely with its employees and the insurance company to monitor all claims. RLW, JBC and Myers have
purchased insurance to cover its workers’ compensation losses.
The Company obtains bonding on construction contracts through Travelers Casualty and Surety Company of
America. As is customary in the construction industry, the Company indemnifies Travelers for any losses incurred
by it in connection with bonds that are issued. The Company has granted Travelers a security interest in accounts
receivable and contract rights for that obligation.
Guarantees
The Company typically indemnifies contract owners for claims arising during the construction process and
carries insurance coverage for such claims, which in the past have not been material.
The Company’s Certificate of Incorporation provides for indemnification of its officers and directors. The
Company has a directors and officers insurance policy that limits their exposure to litigation against them in their
capacities as such.
Litigation
In January 2010, a jury trial was held to resolve a dispute between RHB and a subcontractor. The jury rendered
a verdict of $1.0 million against RHB, exclusive of interest, court costs and attorney’s fees. The Company recorded
this verdict as an expense in the year ended December 31, 2009, but appealed this judgment. The appeal was heard
by the Nevada Supreme Court, and during the quarter ended September 30, 2012, the Court upheld the original
verdict against RHB. The Company recorded additional expense of $156,000 during that same period to cover court
costs and attorney’s fees. Payment for the total judgment, court costs and attorney’s fees was made in October 2012,
and this matter is now resolved in its entirety.
The Company is the subject of certain other claims and lawsuits occurring in the normal course of business.
Management, after consultation with legal counsel, does not believe that the outcome of these other actions will
have a material impact on the financial statements of the Company.
Purchase Commitments
To manage the risk of changes in material prices and subcontracting costs used in tendering bids for
construction contracts, most of the time, we obtain firm quotations from suppliers and subcontractors before
submitting a bid. These quotations do not include any quantity guarantees. As soon as we are advised that our bid
is the lowest, we enter into firm contracts with most of our materials suppliers and sub-contractors, thereby
mitigating the risk of future price variations affecting the contract costs.
13. Operating Leases
The Company leases certain property and equipment under cancelable and non-cancelable agreements including
office space in Texas, Utah, Nevada, Arizona and California.
F25
Minimum annual rentals for all operating leases having initial non-cancelable lease terms in excess of one year
are as follows (in thousands):
Years Ending December 31,
2013 ........................................................... $
2014 ...........................................................
2015 ...........................................................
2016 ...........................................................
2017 ...........................................................
Thereafter ..................................................
Total future minimum rental payments $
941
688
635
580
548
2,614
6,006
Total rent expense for all operating leases amounted to approximately $1.2 million, $1.4 million, and $1.2
million in fiscal years 2012, 2011, and 2010, respectively.
14. Stockholders’ Equity
Holders of common stock are entitled to one vote for each share on all matters voted upon by the stockholders,
including the election of directors, and do not have cumulative voting rights. Subject to the rights of holders of any
then outstanding shares of preferred stock, common stockholders are entitled to receive ratably any dividends that
may be declared by the Board of Directors out of funds legally available for that purpose. Holders of common stock
are entitled to share ratably in net assets upon any dissolution or liquidation after payment of provision for all
liabilities and any preferential liquidation rights of our preferred stock then outstanding. Common stock shares are
not subject to any redemption provisions and are not convertible into any other shares of capital stock. The rights,
preferences and privileges of holders of common stock are subject to those of the holders of any shares of preferred
stock that may be issued in the future.
The Board of Directors may authorize the issuance of one or more classes or series of preferred stock without
stockholder approval and may establish the voting powers, designations, preferences and rights and restrictions of
such shares. No preferred shares have been issued.
In October 2008, the Company announced a share-repurchase program to purchase up to $5 million in shares of
common stock. In August 2010, the Company announced an increase to the share-repurchase program to purchase
an additional $5 million in shares of common stock, for a total up to $10 million. The specific timing and amount of
repurchase will vary based on market conditions, securities law limitations and other factors. During 2011, 286,000
shares were repurchased. There were no shares repurchases in 2012 or 2010.
The Company accounts for the repurchase of treasury shares under the cost method. When shares are
repurchased, cash is paid and the treasury stock account is debited for the price paid. Under the cost method,
retirement of treasury stock would result in a debit to the common stock account for the original par value, a debit to
additional paid-in capital for the excess between the par value and the original sales price, a debit to retained
earnings for any excess amounts paid above the original sales price and a credit to the treasury stock account for the
price paid.
During 2011, one employee left the Company and forfeited 395 shares of restricted common stock. Such stock
was held as treasury stock and canceled during the year. At December 31, 2012 and 2011, there was no treasury
stock held by the Company.
The total number of authorized shares of the Company’s common stock reserved as of December 31, 2012 for
our stock-based compensation plans and warrants was 305,567.
Stock Options and Grants
The Company has a stock-based incentive plan that is administered by the Compensation Committee of the
Board of Directors (the “2001 Plan”). The 2001 Plan provides for the issuance of stock awards for up to 1,000,000
shares of the Company’s common stock. In general, the plan provides for all stock option grants to be issued with a
per-share exercise price equal to the fair market value of a share of common stock on the date of grant. The original
terms of the grants typically do not exceed 10 years. Stock options generally vest over a three to five year period.
The Company’s and its subsidiaries’ directors, officers, employees, consultants and advisors are eligible to be
granted awards under the 2001 plan.
At December 31, 2012 there were 283,367 shares of common stock available under the 2001 Plan for issuance
pursuant to future stock option and share grants. No options are outstanding and no shares are or will be available
for grant under the Company’s other option plans, all of which have been terminated. In May 2011, the 2001 Plan
was amended to extend its term for an additional ten years.
F26
The 2001 plan provides for restricted stock grants, and pursuant to non-employee director compensation
arrangements, non-employee directors of the Company were awarded restricted stock with one-year vesting as
follows:
Years Ended December 31,
2011
2012
2010
Shares awarded to each non-employee director .........................
5,155
Total shares awarded ..................................................................
30,930
Average grant-date market price per share .................................$
9.70
Total compensation cost attributable to shares awarded .............$ 300,000
Compensation cost recognized related to current and prior
3,418
20,508
14.46
$
$ 297,000
3,147
25,176
15.89
$
$ 400,000
year awards ...........................................................................$ 283,333
$ 194,667
$ 283,333
In 2012, 2011 and 2010, several key employees were granted an aggregate total of 149,704, 25,815 and 10,714
shares of restricted stock, respectively, with a market value of $9.70, $12.67 and $15.89 per share, respectively,
resulting in compensation expense of $1.5 million, $327,000 and $170,000, respectively, to be recognized ratably
over the five-year restriction periods.
The following tables summarize the stock option activity under the 2001 Plan and previously active plans:
2001 Plan
Shares
Outstanding at December 31, 2010 ............... 166,540
(20,333)
(92,307)
53,900
(24,400)
(7,300)
22,200
Exercised ....................................................
Expired/forfeited ........................................
Outstanding at December 31, 2011 ...............
Exercised ....................................................
Expired/forfeited ........................................
Outstanding at December 31, 2012 ...............
$
Weighted
Average
Exercise
Price
14.85
2.14
24.12
3.77
3.04
9.35
3.08
The following table summarizes information about stock options outstanding and exercisable at December 31,
2012:
Range of
Exercise Price
per Share
$
3.05 – 3.10
Number
of Shares
22,200
Options Outstanding
Weighted
Average
Remaining
Contractual
Life (Yrs.)
1.30
$
Weighted
Average
Exercise
Price per
Share
Options Exercisable
Weighted
Average
Exercise
Price per
Share
Number of
Shares
3.08
22,200
$
3.08
Number
of Shares
Aggregate
Intrinsic Value
Total outstanding and vested in-the-
money options at December 31, 2012 ..
22,200
Total options exercised during 2012 ........
24,400
$
$
148,441
176,513
For unexercised options, aggregate intrinsic value represents the total pretax intrinsic value (the difference
between the Company’s closing stock price on December 31, 2012 and the exercise price, multiplied by the number
of in-the-money option shares) that would have been received by the option holders had all option holders exercised
their options and sold them on December 31, 2012. For options exercised during 2012, aggregate intrinsic value
represents the total pretax intrinsic value based on the Company’s closing stock price on the day of exercise.
At December 31, 2012, total unrecognized compensation cost related to restricted stock was $1.3 million. This
cost is expected to be recognized over a weighted average period of 2.1 years. Pre-tax compensation expense for
stock options and restricted stock grants was $694,000 ($451,000 after tax benefit of 35%), $503,000 ($327,000
F27
after tax benefit of 35%), and $594,000 ($386,000 after tax benefit of 35.0%), in 2012, 2011 and 2010, respectively.
Proceeds received by the Company from the exercise of options in 2012, 2011 and 2010 were $66,000, $43,000, and
$692,000, respectively. At December 31, 2012, there was no unrecognized stock-based compensation expense
related to stock options.
Warrants
Warrants attached to zero coupon notes were issued to certain members of management and to certain
stockholders in 2001. These ten-year warrants to purchase shares of the Company’s common stock at $1.50 per
share became exercisable 54 months from the July 2001 issue date, except that one warrant covering 322,661 shares
by amendment became exercisable forty-two months from the issue date. These warrants were fully exercised prior
to their 2011 expiration date. The following table shows the warrant shares outstanding and the proceeds that have
been received by the Company from exercises during the three years ended December 31, 2012.
Shares
Warrants outstanding on January 1, 2010 ....................... 314,412
Warrants exercised in 2010 ............................................. 238,981
Warrants exercised in 2011 ............................................. 75,431
--
Warrants exercised in 2012 .............................................
Warrants Exercised
Company’s
Proceeds
from
Exercise
33,330
358,471
113,147
--
Year-End
Warrant
Share
Balance
334,046
75,431
--
--
$
$
$
$
15. Employee Benefit Plans
The Company and its subsidiaries maintain a defined contribution profit-sharing plan (401(k)) covering
substantially all non-union persons employed by the Company and its subsidiaries, whereby employees may
contribute a percentage of compensation, limited to maximum allowed amounts under the Internal Revenue Code.
The Plan provides for discretionary employer contributions, the level of which, if any, may vary by subsidiary and is
determined annually by each company’s board of directors. The Company made aggregate matching contributions
of $570,000, $573,000, and $430,000 for the years ended December 31, 2012, 2011, and 2010, respectively.
The Company contributes to a number of multiemployer defined benefit pension plans under the terms of
collective-bargaining agreements that cover its union-represented employees. The risks of participating in these
multiemployer plans are different from single-employer plans in the following aspects:
Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees
of other participating employers.
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne
by the remaining participating employers.
If the Company chooses to stop participating in some of its multiemployer plans, the Company may be
required to pay those plans an amount based on the underfunded status of the plan, referred to as a
withdrawal liability.
F28
The following table presents our participation in these plans (dollars in thousands):
Pension Plan
Employer
Identification
Number
Pension Protection
Act (“PPA”)
Certified Zone
Status1
2012
2011
FIP / RP
Status
Pending /
Implemented2
Contributions
2011
2012
2010
Expiration
Date of
Collective
Bargaining
Agreement3
Surcharge
Imposed
94-6090764
Orange
Orange
Yes
$
508 $
246 $ 193
No
86-6025732
Yellow
Yellow
Yes
560
121
--
No
6/30/2008 -
6/30/2014
1/1/2012 -
5/31/2013
94-6277608
Yellow
Yellow
Yes
431
64
--
No
N/A5
94-6277669
Yellow
Yellow
Yes
265
46
--
No
1,307
Total Contributions: $ 5,541 $ 2,542 $ 1,500
2,065
3,777
6/16/09 –
6/15/13
Various
Pension
Trust Fund
Pension
Trust Fund
for Operating
Engineers
Pension Plan
....................
Operating
Engineers
Local 428
Pension Trust
Fund ...........
Laborers
Pension Trust
for Northern
California ...
Cement
Mason
Pension Trust
Fund For
Northern
California ...
All other
funds (41)4 ....
1The most recent PPA zone status available in 2012 and 2011 is for the plan’s year-end during 2011 and 2010, respectively. The
zone status is based on information that we received from the plan and is certified by the plan’s actuary. Among other factors,
plans in the red zone are generally less than 65 percent funded, plans in the orange zone are less than 80 percent funded and
have an Accumulated Funding Deficiency in the current year or projected into the next six years, plans in the yellow zone are
less than 80 percent funded, and plans in the green zone are at least 80 percent funded.
2Indicates whether the plan has a financial improvement plan (“FIP”) or a rehabilitation plan (“RP”) which is either pending or
has been implemented.
3Lists the expiration date(s) of the collective-bargaining agreement(s) to which the plans are subject.
4These funds include multiemployer plans for pensions and other employee benefits. The total individually insignificant
multiemployer pension costs contributed were $466,000, $299,000 and $37,000 for 2012, 2011, and 2010, respectively, and
are included in the contributions to all other funds along with contributions to other types of benefit plans. Other employee
benefits include certain coverage for medical, prescription drug, dental, vision, life and accidental death and dismemberment,
disability and other benefit costs. Due to our 2011 acquisitions (see Note 2) there has been an increase in the number of
Sterling employees that participate in multiemployer plans affecting the comparability between 2012, 2011 and 2010 years.
The acquisitions occurred August 1, 2011 and resulted in five months of pension and other retirement expenses in that year.
During 2012, the Company incurred the entire year of expenses and there were no pension and other retirement expenses
related to the acquisitions during 2010
5The expiration of the collective bargaining agreement related to this pension fund was not available at the time of our filing.
We currently have no intention of withdrawing from any of the multi-employer pension plans in which we
participate.
F29
16. Customers
The following table shows contract revenues generated from the Company’s customers that accounted for more
than 10% of revenues (dollars in thousands):
Years Ended December 31,
2012
2011
2010
Amount
%
Amount
%
Amount
%
Texas Department of Transportation
(“TxDOT”) ............................................ $
*
*% $ 75,818
15.1%
$ 95,198
20.7%
Utah Department of Transportation
(“UDOT”) ............................................. 100,658
16.0
144,398
28.8
120,492
26.2
California Department of Transportation
(“Caltrans”) ...........................................
*Represents less than 10% of revenues
94,171
15.0
*
*
*
*
At December 31, 2012, the North Texas Tollway Authority (“NTTA”) owed $8.8 million to the Company,
which is greater than 10% of contract receivables. At December 31, 2011, UDOT owed $8.8 million to the
Company, which is greater than 10% of contract receivables. At December 31, 2010, TxDOT ($10.8 million),
UDOT ($10.1 million), and the Utah Transit Authority ($9.6 million) each owed balances to the Company greater
than 10% of contract receivables.
17. Related Party Transactions
RLW has historically performed construction contracts for entities owned by its noncontrolling interest owners.
These noncontrolling interest owners are also executive managers of RLW, including Mr. Kip Wadsworth who is a
member of the board of directors of the Company. During 2011, the Company recognized approximately $283,000
in revenue and $46,000 in gross profit from a few smaller projects owned by the noncontrolling interest owners’
privately-owned entities. These related party contracts had a total contract value of $3.2 million. Collections on
account related to these projects during 2011 approximated $525,000. During 2011, one of these contractors filed
for bankruptcy and as a result $24,000 billed to such entity was deemed uncollectible. Total related party contract
amounts for 2012 were less than $102,000.
The noncontrolling interest owners are also majority owners of a company with which RLW has a service
agreement to provide monthly professional and other services (accounting, payroll, reimbursement, computer and
postage) for which RLW is reimbursed on a monthly basis. Billings for these services totaled $1.0 million in 2012
and $615,000 in 2011. The Company leases its main office for its Utah operations from a second company which is
98% owned by these owners for $228,500 annually plus common area maintenance charges of $80,800 per year.
The office lease expires in 2022. In addition, the Company leases its equipment maintenance shop for its Utah
operations from a third company, which is 98% owned by those owners, for $178,300 annually, plus common area
maintenance charges of $71,700 per year. The shop lease expires in 2022. The Company also leases field housing
for its Utah operations from a company owned by the noncontrolling interest owners for $47,000 annually. This
lease expires in 2014. During 2012 and 2011, the Company also paid $52,000 and $72,300, respectively, for aircraft
services to a company owned 100% by the noncontrolling interest owners of RLW.
In June 2012, RLW signed a lease for eighteen months with KIWA Properties LLC for the use of property
located in Mesa, Arizona to be used in conjunction with one of RLW’s construction contracts. KIWA Properties
LLC is owned by the former owner of JBC who has continued as an employee of JBC.
JBC leases office and shop space from the former owner who has continued as an employee of JBC. Monthly
rent is approximately $8,000, and the leases expire in August 2016. Rentals under these leases totaled $95,000 and
$40,000 in 2012 and 2011, respectively.
During 2012, the Company paid $34,000 for aircraft service to a company owned 100% by the noncontrolling
interest owner of RHB. During 2012 and 2011, the Company paid approximately $243,000 and $274,000 to
businesses owned by family members of Myers’ management for services, materials and partnership distributions.
The Company entered into a business combination with Richard Buenting, the President and Chief Executive
Officer of RHB. Refer to Note 2 for a description of the related party transaction.
An independent member of senior management of the Company reviewed all related party purchases before
they were transacted.
F30
18. Quarterly Financial Information (amounts in thousands, except per share data)
March 31
Revenues................................................... $ 98,425
Gross profit ...............................................
Income (loss) before income taxes and
1,873
2012 Quarters Ended (unaudited)
June 30
$ 168,709
15,159
September 30
205,284
$
14,170
December 31
158,089
$
16,270
Total
$ 630,507
47,472
earnings attributable to noncontrolling
interests .................................................
Net income (loss) attributable to Sterling
common stockholders ...........................
Net income (loss) per share attributable
to Sterling common stockholders:
(3,781)
(7,500)
8,652
3,287
4,915
990
7,347
17,133
2,926
(297)
Basic ..................................................$
Diluted ...............................................
(0.44)
(0.44)
$
$
0.15
0.15
$
0.01
0.01
$
0.01
0.01
(0.26)
(0.26)
2011 Quarters Ended (unaudited)
March 31
June 30
September 30
December 31
Total
Revenues................................................... $ 99,242
Gross profit ...............................................
Income (loss) before income taxes and
7,599
$ 128,498
$
159,427
$
113,989
13,582
14,756
3,900
$ 501,156
39,837
earnings attributable to noncontrolling
interests .................................................
Net income (loss) attributable to Sterling
common stockholders ...........................
Net income (loss) per share attributable
to Sterling common stockholders:
1,648
44
7,437
4,211
7,925
3,461
(68,726
)
(51,716)
(43,616)
(35,900)
Basic ..................................................$
Diluted ...............................................
$
0.00
0.00
$
0.26
0.25
$
0.21
0.21
(2.72)
(2.72)
$
(2.24)
(2.24)
During the fourth quarter of 2011, the Company completed an evaluation of the carrying value of goodwill
resulting in an impairment charge of $67.0 million. This charge had an impact of $41.8 million on the net loss
attributable to Sterling common stockholders (net of the related tax benefits and reduced for the amount attributable
to noncontrolling interest owners) or $2.55 per diluted share. During the fourth quarter of 2011, changes in
estimated revenues and gross margin resulted in a net charge of $5.9 million included in the operating loss and a
$4.2 million after-tax charge, or $0.26 per diluted share attributable to Sterling common stockholders, included in
net loss attributable to Sterling common stockholders. During the first quarter of 2012, the Company recorded a $4.4
million after-tax charge, or $0.27 per diluted share attributable to Sterling common shareholders, related to an
agreement with the noncontrolling interest owners of RLW to exclude the impact of any goodwill impairment from
earning attributable to such owners.
F31
20810 Fernbush Lane • Houston, Texas 77073 • 281-821-9091
www.sterlingconstructionco.com