ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2014
Dear Fellow Shareholders,
We’d like to begin our first letter to Sterling shareholders as Chief Executive Officer and
Chairman of the Board of Directors by stating our belief that we have the potential to
become a best-in-class company. The Company has struggled to deliver consistent results
over the past several years; however, Sterling is a business that has all of the elements
necessary for success in the heavy civil construction industry. The Company has a solid
reputation and strong competitive position in growth markets, a team of experienced
people, a large fleet of modern equipment, and a record-high backlog of projects that, if
managed diligently, can deliver consistent profitability.
Our financial performance in 2014 showed considerable improvement over 2013, but was
disappointing given our expectations heading into the year, and was far short of what we
believe we are capable of delivering. In addition to internal execution issues on several
projects, particularly in Texas, our results were negatively affected by external factors,
including unusually difficult weather conditions, spot shortages of commodities, over-
stretched sub-contractors and intense competition for craft labor in our Texas market.
We have completed an extensive review of all aspects of our Company, including processes,
procedures and personnel at all levels. We’ve already taken numerous actions aimed at
sharpening forward visibility in all our business units in order to deal with potential issues
before they erode profitability. This includes the recent strengthening of leadership in our
Texas operation. In addition, we negotiated a waiver of our bank covenant breach and are
evaluating several debt financing proposals to provide liquidity to our operations. With
these changes, along with others that we are in the process of implementing, we believe
that we have corrected a number of our internal challenges.
Looking ahead, we anticipate continued year-over-year revenue growth in 2015 stemming
from our robust backlog, which increased 11% during 2014 to a record high $764 million at
the end of the year. In addition, we have a strong pipeline of project opportunities that we
are pursuing throughout our primary markets. We are particularly encouraged by the
recent announcement by the Texas Department of Transportation that the state will put out
for bid more than $9.4 billion of new road and related infrastructure projects in 2015. We
expect that margin improvement will be driven by the enhancements we are making in our
selective bidding process, our project management procedures, and the leadership changes
we have already made and expect to continue to make. At December 31, 2014, the average
gross margin of our projects in backlog was in the low-to-mid 6% range. We continue to
focus on reducing our operating expenses, as evidenced by our industry-low general and
administrative expense levels. In addition, our capital expenditures this year should be well
below those of 2014.
In summary, while our results have been very disappointing, we firmly believe that the
fundamental underpinnings of this business, and the team we have assembled, can deliver
consistent profits and cash flow over the course of 2015 and beyond.
We would like to thank our outstanding employees, customers, lenders and surety, and
most of all you, our shareholders, for your continued support.
Sincerely,
Paul J. Varello
Chief Executive Officer
The Woodlands, Texas
March 27, 2015
Milton L. Scott
Chairman of the Board
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, 2014
[ ] 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
1800 Hughes Landing Blvd.
The Woodlands, Texas
(Address of principal executive offices)
25-1655321
(I.R.S. Employer
Identification No.)
77380
(Zip Code)
Registrant’s telephone number, including area code (281) 214-0800
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 [(cid:165)] 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 [(cid:165)] 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.
[(cid:165)] 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).
[(cid:165)] ] 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 [(cid:165)]
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 [(cid:165)] No
Aggregate market value of the voting and non-voting common equity held by non-affiliates at June 30, 2014: $166,755,548.
At March 6, 2015, the registrant had 18,768,244 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 8, 2015 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
Item 1. Business. ............................................................................................................................................................. 4
Item 1A. Risk Factors. .................................................................................................................................................. 12
Item 1B. Unresolved Staff Comments .......................................................................................................................... 21
Item 2. Properties .......................................................................................................................................................... 21
Item 3. Legal Proceedings ............................................................................................................................................ 21
Item 4. Mine Safety Disclosures ................................................................................................................................... 21
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities .......................................................................................................................................................... 23
Item 6. Selected Financial Data .................................................................................................................................... 25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ........................... 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ........................................................................ 38
Item 8. Financial Statements and Supplementary Data ................................................................................................ 39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................... 39
Item 9A. Controls and Procedures ................................................................................................................................ 39
Item 9B. Other Information .......................................................................................................................................... 39
PART III
Item 10. Directors, Executive Officers and Corporate Governance of the Registrant .................................................. 40
Item 11. Executive Compensation ................................................................................................................................ 40
Item 12. Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters ...... 40
Item 13. Certain Relationships and Related Transactions, and Director Independence ............................................... 40
Item 14. Principal Accountant Fees and Services ......................................................................................................... 40
PART IV
Item 15. Exhibits and Financial Statement Schedules .................................................................................................. 41
Financial Statement Schedules. .................................................................................................................................... 41
Exhibits. ........................................................................................................................................................................ 41
Signatures ..................................................................................................................................................................... 44
2
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:
(cid:120)
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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;
factors that affect the accuracy of estimates inherent in our bidding for contracts, estimates of backlog,
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 where non-compliance can result in penalties
and/or termination of contracts as well as civil and criminal liability;
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.
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
3
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 1800 Hughes Landing Boulevard, Suite 250, The Woodlands, Texas 77380, and our telephone
number at this address is (281) 214-0800. 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, Hawaii 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 consist of one reportable segment,
one operating segment and one reporting unit component, which is heavy civil construction. In making this
determination, the Company considered the discrete financial information used by our Chief Operating Decision
Maker (“CODM”). Based on this approach, the Company noted that the CODM organizes, evaluates and manages the
financial information around each heavy civil construction project when making operating decisions and assessing
the Company’s overall performance. Furthermore, we considered that each heavy civil construction project has
similar characteristics, includes similar services, has similar types of customers and is subject to similar economic
and regulatory environments.
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 2014, Operational Issues and Outlook for 2015 Financial Results.
In 2014, the Company had an operating loss of $4.2 million and net loss attributable to Sterling common
stockholders of $9.8 million. Our gross margins have increased to 4.8% in 2014 from (5.4)% in 2013 and decreased
from the 7.5% gross margin experienced in 2012. In 2014, our gross margins continued to be adversely impacted by
downward revisions to estimated profitability on projects primarily awarded in Texas; although, to a lesser extent
than in the prior year.
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, we continue to implement 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:
(cid:120) We continue to change roles and responsibilities to improve functional support and controls when needed.
(cid:120) We continue to develop management tools designed to improve the estimating process and increase the
oversight of that process where needed and continue to refine existing tools.
4
(cid:120) We continue to implement processes designed to better identify, evaluate and quantify risks for individual
projects where needed and continue to refine existing process.
(cid:120) We continue to improve the methodologies for allocating overhead, indirect costs and equipment costs to
individual projects in order to provide more accurate job cost and future bidding estimates.
(cid:120) We continue to improve 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. In recent years, federal and state
legislation related to infrastructure spending has been slow to pass. Funding for federal highway projects primarily
originate from the Highway Trust Fund where federal motor fuel taxes are the major source of income into the fund.
Additional income is provided from the General fund and certain other funds to maintain the solvency of the fund as
sources of income remain a challenge. While government spending on highway and related bridge work has not
significantly increased in recent years, our backlog has increased $77 million from $687 million at December 31,
2013 to $764 million at December 31, 2014, representing ample work to be bid on within our markets with acceptable
gross margins. In addition to highway and related bridge work, we continually look for projects that diversify our
book of projects to relieve the continued pressure on our gross margins related to new contract awards from local,
state and federal authorities.
Our Business Strategy.
Key features of our business strategy include:
(cid:120) 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.
(cid:120) 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.
(cid:120) 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.
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(cid:120) 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
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.
(cid:120) 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, Customers and Competition.
Currently, all our operations are performed within the United States. As such, we rely heavily on federal and
state infrastructure spending. Actual appropriations by the U.S. Department of Transportation (“U.S.DOT”) were
$38.9 billion for federal highway financial assistance to the states for 2013. Additionally, U.S.DOT had enacted funds
for the fiscal year ended September 30, 2014 of $40.1 billion and has requested authority to spend $47.3 billion in
fiscal 2015 for highways and bridges.
Within the United States, our principal markets are in Texas, Utah, Nevada, Arizona, California and Hawaii,
states that management believes benefit from both positive long-term demographic trends as well as a historical
commitment to funding transportation and water infrastructure projects. Currently, the Company also has highway
5
construction contracts in Montana, Idaho and Louisiana. According to the 2010 U.S. Census Bureau Information,
Texas, Utah, Nevada, Arizona, California and Hawaii are expected to experience population increases of 32.5%,
26.1%, 58.6%, 67.6%, 24.7 and 7.7%, respectively, during the twenty year period between 2010 and 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
are estimated to be $9.5 billion in 2015 and $4.2 billion in 2016.
Additionally, 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.
Texas’ approximately 306,000 miles of roadway is in need of repair and the shale oil traffic has placed an
additional burden on the transportation system. In November 2014, a ballot measure known as Proposition 1 was
approved which will utilize approximately $1.7 billion from the Texas Economic Stabilization Fund (Rainy Day
Fund) for these growing transportation needs. In the November 2013 election, Texans voted in favor of infrastructure
spending by passing a water bill. The Proposition 6 water initiative had widespread support in the legislature and 73
percent voted in favor of the amendment. Proposition 6 provides $2 billion from the Rainy Day Fund for low-interest
loans to help fund projects in the State Water Plan for the next 50 years.
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 $729 million in 2014, and $741 million
has been authorized for 2015. The details of the capital spending budget for 2016 have not been released; however
the Utah Governor’s recommendation for total capital spending in 2016 is approximately $687 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 estimated to be $375 million and $194 million in 2015 and 2016,
respectively, compared with expenditures of $557 million in 2014.
In Arizona, our principal customers are the Arizona Department of Transportation (“ADOT”) and municipal
airport authorities. Arizona’s expenditures for transportation construction were $1.4 billion in 2014, while such
expenditures are estimated to be $1.6 billion in each year 2015 and 2016.
In California, our principal customer is the California Department of Transportation (“Caltrans”). California’s
transportation capital outlays and local assistance were $5.2 billion in 2014, while such expenditures are estimated to
be $5.6 billion in 2015 and $5.9 billion in 2016.
In Hawaii, our principal customers are the City of Honolulu and the Hawaii Department of Transportation
(“HDOT”). Hawaii’s expenditures for transportation construction were $471 million in 2014, while expenditures for
2015 and 2016 are estimated to be $120 million and $133 million, respectively.
A significant portion of our contracts pertain to state highway and related bridge work. In 2014, state highway
and related bridge work accounted for 48% of our consolidated revenues compared with 62% and 61% in 2013 and
2012, respectively. The majority of the remaining work we perform is for local city municipalities.
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
in population in these metropolitan areas as a result of the migration 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.
Although we occasionally undertake contracts for private customers, the vast majority of our revenues are
attributable to work for public sector customers. Our larger construction projects are typically undertaken from work
6
bid and won as part of a letting through a particular state’s department of transportation. Refer to Note 18 to the
consolidated financial statements (references to “Note” or “Notes” are to the Notes to consolidated financial
statements for the year ended December 31, 2014, included in this document), for major customers that accounted for
10% or more of total revenue in any of the past three fiscal years. The majority of the services provided to 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, Nevada, Arizona, California and Hawaii 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.
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.
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. However, we believe that the Company is well-established in our particular
markets and has a fleet of modern equipment that gives us the ability to perform a broad range of work which will
allow us to weather current market conditions and to continue to compete successfully for projects as they become
available at acceptable profit margin levels.
Backlog.
Backlog is the revenue we expect to earn in future periods on our construction projects. However, low bid
awards not officially awarded are excluded from backlog. 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, 2014, our backlog was $764 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.
7
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.
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
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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 state departments of transportation, 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
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 generally 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
9
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
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 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
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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, including accounts receivable, as
collateral for such obligation.
Government and Environmental Regulations.
Our operations are subject to compliance with numerous regulatory requirements of federal, state and local
agencies and authorities, including regulations concerning safety, wage and hour, and other labor issues, immigration
controls, vehicle and equipment operations and other aspects of our business. For example, our construction
operations are subject to the requirements of the Occupational Safety and Health Act, or OSHA, and comparable state
laws directed toward the protection of employees. In addition, most of our construction contracts are entered into with
public authorities, and these contracts frequently impose additional governmental requirements, including
requirements regarding labor relations and subcontracting with designated classes of disadvantaged businesses.
All of our operations are also subject to federal, state and local laws and regulations relating to the environment,
including those relating to discharges into air, water and land, climate change, the handling and disposal of solid and
hazardous waste, the handling of underground storage tanks and the cleanup of properties affected by hazardous
substances. For example, we must apply water or chemicals to reduce dust on road construction projects and to
contain contaminants in storm run-off water at construction sites. In certain circumstances, we may also be required
to hire subcontractors to dispose of hazardous wastes encountered on a project in accordance with a plan approved in
advance by the customer. Certain environmental laws impose substantial penalties for non-compliance and others,
such as the federal Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, impose
strict 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
11
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, 2014, the Company had approximately 1,799 employees, including 1,498 field personnel.
Of our 1,498 field employees, 475 were union members in Nevada, Arizona, California and Hawaii, and these union
employees are represented by 16 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 experience 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. However, we have
recently experienced intense competition for craft labor, primarily in Texas.
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.strlco.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, some directly on the website and others through a link to the Securities and
Exchange Commission’s (“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
12
not to be as profitable as we expected. The final results under these types of contracts could negatively affect our cash
flow, earnings and financial position.
The costs incurred and gross profit realized on our contracts can vary, sometimes substantially, from our original
projections due to a variety of factors, including, but not limited to:
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onsite conditions that differ from those assumed in the original bid or contract;
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;
(cid:120) mechanical problems with our machinery or equipment;
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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
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Many of our contracts with public sector customers contain provisions that purport to shift some or all of the
above risks from the customer to us, even in cases where the customer is partly at fault. Our experience has often
been that public sector customers have been willing to negotiate equitable adjustments in the contract compensation
or completion time provisions if unexpected circumstances arise. 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 grow our revenues and increase our profitability.
Our revenue has grown rapidly in recent years, in part through acquisitions that expanded our geographical
footprint. We may be unable to grow our revenues 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. (cid:54)(cid:72)(cid:72)(cid:3)(cid:179)(cid:53)(cid:72)(cid:70)(cid:72)(cid:81)(cid:87)(cid:3)(cid:39)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:650)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:53)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)
for 2014, Operational Issues and Outlook for 2015 Financial Results” above for further discussion 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 most recent recession caused a nationwide decline in home sales and an increase in foreclosures, which
correspondingly 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,
13
which could adversely affect us. We are reliant upon contracts with state transportation departments for a significant
portion of our revenues.
(cid:54)(cid:72)(cid:72)(cid:3)(cid:179)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:237)Our Markets, Customers and Competition” above for a more detailed discussion of our markets
and their funding sources.
We operate in Texas, Utah, Nevada, Arizona, California, Hawaii 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, California and Hawaii 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:
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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;
(cid:120) we may experience additional financial and accounting challenges and complexities in areas such as tax
planning and financial reporting;
(cid:120) 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;
(cid:120) we may not adequately anticipate competitive and other market factors applicable to the acquired company;
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(cid:120) 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.
Management may have difficulty implementing its business strategy.
We have recently experienced significant losses primarily related to projects constructed in Texas. If
management is unable to timely implement its business strategy to return to profitability in its Texas, or other
markets, our results of operations, cash flows and shareholder returns could be adversely affected. In addition, if a
return to profitability does not occur within the time frame that we anticipate, or if we continue to incur losses in our
Texas, or other markets, we may not have sufficient working capital to timely complete our construction projects. If
adequate funds are not available, or are not available on acceptable terms, to alleviate our working capital constraints
as we execute our business strategy to return to profitability we may need to liquidate assets, sell our owner’s interest
in subsidiaries, or take other measures to provide sufficient working capital to continue our operations.
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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, California, or Hawaii. 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 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.
15
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
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
16
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 the 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.
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
17
of several consecutive years. For example, in 2014, approximately 9.1% of our revenue was generated from North
Texas Tollway Authority (“NTTA”) and approximately 14.5% 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 TxDOT and Caltrans which comprised 30.6%
and 23.2% of our backlog at December 31, 2014, 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.
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
18
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.
We rely on information technology systems to conduct our business, and disruption, failure or security breaches of
these systems could adversely affect our business and results of operations.
We rely on information technology (“IT”) systems in order to achieve our business objectives. We also rely upon
industry accepted security measures and technology to securely maintain confidential information maintained on our
IT systems. However, our portfolio of hardware and software products, solutions and services and our enterprise IT
systems may be vulnerable to damage or disruption caused by circumstances beyond our control such as catastrophic
events, power outages, natural disasters, computer system or network failures, computer viruses, cyber-attacks or
other malicious software programs. The failure or disruption of our IT systems to perform as anticipated for any
reason could disrupt our business and result in decreased performance, significant remediation costs, transaction
errors, loss of data, processing inefficiencies, downtime, litigation and the loss of suppliers or customers. A
significant disruption or failure could have a material adverse effect on our business operations, financial
performance and financial condition.
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.
19
We may need to raise additional capital in the future for working capital, capital expenditures and/or acquisitions,
and we may not be able to do so on favorable terms or at all, which would impair our ability to operate our
business or achieve our growth objectives.
Our ability to obtain additional financing in the future will depend in part upon prevailing credit and equity
market conditions, as well as conditions in our business and our operating results; such factors may adversely affect
our efforts to arrange additional financing on terms satisfactory to us. We have pledged the proceeds and other rights
under our construction contracts to our bond surety, and we have pledged substantially all of our other assets as
collateral in connection with our credit facility and mortgage debt. As a result, we may have difficulty in obtaining
additional financing in the future if such financing requires us to pledge assets as collateral. In addition, under our
credit facility, we must obtain the consent of our lenders to incur any amount of additional debt from other sources
(subject to certain exceptions). If future financing is obtained by the issuance of additional shares of common stock,
our stockholders may suffer dilution. If adequate funds are not available, or are not available on acceptable terms, we
may not be able to make future investments, take advantage of acquisitions or other opportunities, or respond to
competitive challenges.
We are subject to financial and other covenants under our credit facility that could limit our flexibility in managing
our business.
We have a credit facility that restricts us from engaging in certain activities, including our ability (subject to
certain exceptions) to:
(cid:120) make distributions, pay dividends and buy back shares;
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120) 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 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.
We must manage our liquidity carefully to fund our working capital.
The need for working capital for our business varies due to fluctuations in the following amounts, among other
factors:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
contract 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.
We have limited cash on hand and the timing of payments on our contract receivables are difficult to predict. If
the timing of payments on our receivables is delayed or the amount of such payments is less than expected, our
liquidity and ability to fund working capital could be materially and adversely affected.
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 $54.8 million of goodwill recorded on our consolidated balance sheet at December 31, 2014. 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 test of our goodwill to determine if it has become impaired. 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. Write downs of goodwill may be substantial. For example, in 2011, our annual
20
test 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
Our corporate headquarters are located in The Woodlands, Texas, in 12,340 square feet of office space leased
with an eight year term. Our executive, finance and accounting offices are located at this facility. We also have an
office located in Lafayette, Colorado where we lease a small office for our information technology professionals.
Our TSC office building is located in Houston, Texas, which houses TSC’s executive management, project
management and finance and accounting offices. The building is located on a seven-acre parcel of land on which the
TSC Houston division’s equipment repair center is also located. We also own land, have repair facilities and have
constructed offices in San Antonio and Dallas.
Our Utah operations leases office space in Draper, Utah, near Salt Lake City, and also repair facilities in West
Jordan City, Utah from entities owned primarily by certain officers of RLW. Refer to Note 19 to the consolidated
financial statements for additional information regarding related party transactions.
Our Nevada operations leases office space in Sparks, Nevada, and we 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. 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.
Our Arizona, California and Hawaii operations lease office space in Tempe, Sacramento and Honolulu,
respectively.
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.
21
EXECUTIVE OFFICERS OF THE REGISTRANT
(At March 1, 2015)
The following is a list of the Company's three 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
Paul J. Varello
Thomas R. Wright
Roger M. Barzun
71
51
73
Chairman of the Board of Directors, Chief
Executive Officer
Executive Vice President & Chief Financial
Officer, Treasurer
Senior Vice President & General Counsel,
Secretary
Executive
Officer Since
2015
2013
2006
Each executive officer is elected by the Board of Directors and, subject to the terms of any employment
agreement he may have with the Company, holds office for such term as the Board of Directors may prescribe, or
until his death, disqualification, resignation or removal.
Mr. Varello, who has been a director of the Company since January 2014, and Chairman of the Board of
Directors since December 2014, was elected acting Chief Executive Officer after the Company's former President &
Chief Executive Officer, Peter E. MacKenna, left the Company on January 31, 2015. Mr. Varello is the Founder and
President of Commonwealth Projects, LLC, a project development company specializing in developing LNG projects
in the Caribbean Basin and Bermuda. He is the former Founder and Chairman of Commonwealth Engineering &
Construction, LLC (CEC) an engineering and construction management company specializing in the design and
construction of major capital projects for the oil & gas, refining, alternative fuels, power, and related energy
industries, which he sold in 2014. Prior to founding CEC in May 2003, Mr. Varello was Senior Partner of Varello &
Associates, a company that provided technical assessments, economic evaluations, estimates and constructability
reviews to project lenders, plant operators and engineering companies from September 2001 to May 2003. From May
1990 to September 2001, Mr. Varello was Chairman of the Board and Chief Executive Officer of American Ref-Fuel
Company of Houston, Texas. The company was formed as a joint venture of two publicly-traded companies to
develop, own and operate plants that convert solid municipal waste into energy. For the eighteen years prior to 1990,
Mr. Varello was with Fluor Corporation, a Fortune 500 company that provides engineering, procurement,
construction, maintenance, and project management services to a wide range of global clients. Mr. Varello started
with Fluor as a project construction manager and rose to President of the Process Sector. Mr. Varello is a Registered
Professional Engineer in California, Texas and Louisiana, and holds a Bachelor of Civil Engineering from Villanova
University. He is also a graduate of Harvard Business School's Advanced Management Program.
Mr. Wright was elected Executive Vice President & Chief Financial Officer and Treasurer effective September
25, 2013. From February 2011 until he joined the Company, Mr. Wright was Chief Financial Officer of Toronto-
based St Mary's/CBM, a leading North American cement and concrete company. Prior to that, from April 2006 to
September 2010, he was with Boart Longyear Company, a global drilling services and products manufacturing
company, initially as Vice President, Finance, Global Products and Manufacturing, and subsequently as Vice
President, Financial Planning and Analysis, Mergers and Acquisitions, Investor Relations, Strategic Planning, and
Corporate Communications. Mr. Wright holds an MBA in Finance from the Indiana University.
Mr. Barzun has been an officer of the Company for more than the last five years and also serves as general
counsel to other companies from time to time on a part-time basis. He is a member of the bar of New York and
Massachusetts.
22
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 2013 and 2014 by quarter.
High
Low
Year Ended December 31, 2013
First Quarter .................................................................. $ 11.78
10.97
Second Quarter .............................................................
10.50
Third Quarter ................................................................
12.17
Fourth Quarter ..............................................................
Year Ended December 31, 2014
First Quarter .................................................................. $ 11.63
9.60
Second Quarter .............................................................
9.88
Third Quarter ................................................................
9.15
Fourth Quarter ..............................................................
$
$
9.80
8.91
9.13
8.67
8.67
6.78
7.46
5.67
On February 28, 2015, there were 930 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” – the credit facility entered into October 31, 2007
with Comerica Bank), 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 12. — Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters from the Company's
proxy statement for its 2015 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 Total Return Index, a broad market index, and the
Dow Jones US Heavy Construction Index, a group of companies whose marketing strategy is focused on a limited
product line, such as civil construction. Both indices are published in The Wall Street Journal.
The returns are calculated assuming that an investment with a value of $100 was made in the Company’s
common stock and in each index at the end of 2009 and that all dividends were reinvested in additional shares of
common stock; however, the Company has paid no dividends during the periods shown. The graph lines merely
connect the measuring dates and do not reflect fluctuations between those dates. The stock performance shown on the
graph is not intended to be indicative of future stock performance.
23
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Sterling Construction Company, Inc, the Dow Jones US Total Return Index,
and the Dow Jones US Heavy Construction Index
$250
$200
$150
$100
$50
$0
12/09
12/10
12/11
12/12
12/13
12/14
Sterling Construction Company, Inc
Dow Jones US Total Return
Dow Jones US Heavy Construction
*$100 invested on 12/31/09 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2015 Dow Jones & Co. All rights reserved.
December
2009
($)
December
2010
($)
December
2011
($)
December
2012
($)
December
2013
($)
December
2014
($)
Sterling Construction Company, Inc. .............. 100.00
68.13
56.27
51.93
61.29
33.39
Dow Jones US Total Return Index .................. 100.00
116.65
118.22
137.52
182.86
206.53
Dow Jones US Heavy Construction Index ...... 100.00
128.40
105.86
128.54
168.74
125.68
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 $10 million. The specific timing and amount of
repurchase will vary based on market conditions, securities law limitations and other factors. There were no
repurchases of shares during the three months ended December 31, 2014.
24
Item 6. Selected Financial Data
The following table sets forth selected financial and other data of the Company and its subsidiaries and should be
read in conjunction with both “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” which follows, and “Item 8. Financial Statements and Supplementary Data.” Amounts are in thousands,
except per share data:
Revenues .........................................................$
(Loss) Income before income taxes and
earnings attributable to noncontrolling
interests ........................................................$
Income tax (expense) benefit ..........................
Net (loss) income .....................................
Noncontrolling owners’ interests in earnings
of subsidiaries ..............................................
Net income (loss) attributable to Sterling
Years ended December 31,
2014
672,230 $
2013
556,236
$
2012
630,507
$
2011
501,156 $
2010
459,893
(4,593 ) $
(632 )
(5,225 )
(68,804 ) $
(1,222 )
(70,026 )
17,133 $
579
17,712
(51,716 ) $
17,012
(34,704 )
36,494
(10,270)
26,224
(4,556 )
(3,903 )
(18,009 )
(1,196 )
(7,137)
common stockholders ..................................$
(9,781 ) $
(73,929 ) $
(297 ) $
(35,900 ) $
19,087
Net income (loss) per share attributable to
Sterling common stockholders:
Basic .........................................................$
Diluted ......................................................$
(0.54 ) $
(0.54 ) $
(4.91 ) $
(4.91 ) $
(0.26 ) $
(0.26 ) $
(2.24 ) $
(2.24 ) $
1.15
1.13
Weighted average number of common shares
outstanding used in computing per share
amounts:
Basic ........................................................
Diluted ......................................................
18,063
18,063
16,635
16,635
16,421
16,421
16,396
16,396
16,195
16,563
Cash dividends declared .................................
$
Balance sheet:
Total assets ......................................................$
Long-term debt ...............................................$
Equity attributable to Sterling common
--
$
-- $
-- $
-- $
--
306,451 $
37,021 $
273,018 $
8,331 $
331,510 $
24,201 $
303,831 $
263 $
367,131
336
stockholders .................................................$
133,686 $
128,893
$
210,148
$
213,311 $
250,429
Book value per share of outstanding
common stock attributable to Sterling
common stockholders ..................................$
7.11 $
Shares outstanding ..........................................
18,803
7.74
16,658
$
12.74
16,495
$
13.07 $
16,321
15.21
16,468
25
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, California, Hawaii 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.
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:
(cid:120) Revenue recognition
(cid:120) Contracts receivable, including retainage
(cid:120) Valuation of long-lived assets and goodwill
(cid:120)
Income taxes
(cid:120) Segment reporting
Our significant accounting policies are described in Note 1 to the consolidated financial statements, and conform
to the Financial Accounting Standards Board’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.
Revenue Recognition.
The majority of our construction 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.
Revenue from these construction contracts is recognized using the percentage-of-completion accounting method.
Under this method, revenue is recognized as costs are incurred in an amount equal to cost plus the related expected
profit based on the ratio of costs incurred to estimated final costs. This cost to cost measure is used because
management considers it to be the best available measure of progress on these contracts. 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 change orders, 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.
Change orders are modifications of an original contract that effectively change the existing provisions of the
contract without adding new scope or terms. Change orders may include changes in specifications or designs, manner
of performance, facilities, equipment, materials, sites and period of completion of the work. Either we or our
customers may initiate change orders.
The Company considers unapproved change orders to be contract variations for which we have customer
approval for a change of scope but a price change associated with the scope change has not yet been agreed upon.
Costs associated with unapproved change orders are included in the estimated cost to complete the contracts and are
treated as project costs as incurred. The Company recognizes revenue equal to costs incurred on unapproved change
26
orders when realization of price approval is probable. Unapproved change orders involve the use of estimates, and it
is reasonably possible that revisions to the estimated costs and recoverable amounts may be required in future
reporting periods to reflect changes in estimates or final agreements with customers. Change orders that are
unapproved as to both price and scope are evaluated as claims.
The Company considers claims to be amounts in excess of agreed contract prices that we seek to collect from our
customers or others for customer-caused delays, errors in specifications and designs, contract terminations, change
orders that are either in dispute or are unapproved as to both scope and price, or other causes of unanticipated
additional contract costs. Revenue from claims is recognized when an agreement is reached with customers as to the
value of the claims, which in some instances may not occur until after completion of work under the contract. Costs
associated with claims are included in the estimated costs to complete the contracts and are treated as project costs
when incurred.
Our contracts generally take 12 to 36 months to complete. The Company generally provides a one to two-year
warranty for workmanship under its contracts when completed. 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 2014, 2013 and 2012 were adversely affected by revisions to estimated profitability on a number of
construction (cid:83)(cid:85)(cid:82)(cid:77)(cid:72)(cid:70)(cid:87)(cid:86)(cid:17)(cid:3)(cid:54)(cid:72)(cid:72)(cid:3)(cid:179)(cid:53)(cid:72)(cid:70)(cid:72)(cid:81)(cid:87)(cid:3)(cid:39)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:650)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:53)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)2014, Operational Issues and Outlook for
2015 Financial Results” (cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:179)(cid:53)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:650)(cid:3)Fiscal Year Ended December 31, 2014 Compared with
Fiscal Year Ended December 31, 2013” 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, 2014 and 2013,
contracts receivable included $16.4 million and $18.3 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.
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 it is recorded in
“Other assets, net” in our balance sheet. At December 2014 and 2013, there was $5.0 million and $7.8 million
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.
As the majority of our construction contracts are entered into with state or municipal government customers,
credit risk is minimal. 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.
Contracts receivable are written off based on individual credit evaluation and specific circumstances of the
customer, when such treatment is warranted. There was no bad debt expense recorded in 2014 or in 2012. In 2013,
27
the Company wrote off $1.8 million of contracts receivable to bad debt expense which was recorded in “Other
operating income, net.” During 2014, we recovered $1.0 million of this $1.8 million.
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, 2014 are fully collectible, and
accordingly, no allowance for doubtful accounts against contracts receivable is necessary.
Valuation of Long-Lived Assets and Goodwill.
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. For the years ended December 31,
2014 and 2013, there were no events or changes in circumstances that would indicate an impairment of our long-lived
assets.
Goodwill must be tested for impairment at least annually, and we performed our most recent annual impairment
test of historical goodwill on October 1, 2014. Based on our one reporting unit, our test indicated there was no
impairment of goodwill. See “Segment Reporting” below for further information regarding the determination of our
reporting unit. Note 8 to the consolidated financial statements discusses the two 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
factors are the Company’s stock price, 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
local, state and government spending which management expects to increase in the upcoming 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 1A. Risk Factors.” We determined that the fair
value of the Company’s equity was approximately 19% above the carrying value of the Company’s equity.
After the annual test was completed, the Company’s stock price decreased from $7.54 on October 1, 2014 to
$6.39 on December 31, 2014. Due to the decrease in the stock price, we noted that a goodwill impairment triggering
event occurred during the fourth quarter of 2014. Therefore, we updated our annual goodwill impairment assessment
using the two methods discussed in Note 8. The methods now included fourth quarter information which incorporated
the Company’s stock price at December 31, 2014 and reduced gross margins used in our discounted cash flow model
projections. Based on this revised testing, there was no goodwill impairment and we determined that the fair value of
the Company’s equity was approximately 13% above the carrying value of the Company’s equity.
On January 27, 2015, we announced our preliminary fourth quarter and full year 2014 results and that we were
not in compliance with our Credit Facility’s tangible net worth covenant as of December 31, 2014.
We believe these announcements negatively impacted the Company’s stock price which decreased from $5.52 on
January 26, 2015 to $3.97 on January 27, 2015, and has not yet recovered. Due to the decrease in the stock price, we
noted that a goodwill impairment triggering event may have occurred in January 2015. We believe an impairment is
possible if our stock price does not recover. At this time, we believe that our stock price is undervalued as a result of
these announcements and will ultimately recover. However, a modest change in estimated forecasted cash flows, a
continued depressed stock price, or declines in other key factors discussed above, could result in an impairment of
goodwill. At December 31, 2014, we had goodwill with a remaining carrying amount of approximately $54.8 million.
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.
Valuation allowances are established to reduce deferred tax assets if we determine that it is more likely than not
(e.g., a likelihood of more than 50%) that some or all of the deferred tax assets will not be realized in future periods.
To assess the likelihood, we use estimates and judgment regarding our future taxable income, as well as the
jurisdiction in which this taxable income is generated, to determine whether a valuation allowance is required. Such
evidence can include our current financial position, our results of operations, both actual and forecasted results, the
reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business
economics of our industry. Additionally, we record uncertain tax positions at their net recognizable amount, based on
the amount that management deems is more likely than not to be sustained upon ultimate settlement with the tax
authorities in the domestic and international tax jurisdictions in which we operate. On the basis of our evaluations, at
December 31, 2014 and 2013, a valuation allowance was recorded on our net deferred tax assets and we had no
material uncertain tax positions.
28
If our estimates or assumptions regarding our current and deferred tax items are inaccurate or are modified, these
changes could have potentially material impacts on our earnings.
Segment Reporting.
We operate in one segment and have only one reportable segment and one reporting unit component, which is
heavy civil construction. In making this determination, the Company considered the discrete financial information
used by our Chief Operating Decision Maker (“CODM”). Based on this approach, the Company noted that the
CODM organizes, evaluates and manages the financial information around each heavy civil construction project
when making operating decisions and assessing the Company’s overall performance. The service provided by the
Company, in all instances of our construction projects, is heavy civil construction. Furthermore, we considered that
each heavy civil construction project has similar characteristics, includes similar services, has similar types of
customers and is subject to similar economic and regulatory environments which would allow aggregation of
individual operating segments into one reportable segment if multiple operating segments existed.
In addition, the Company noted that 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 because our local offices all have similar economic characteristics and
are similar in all of the following areas:
(cid:120) 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.
(cid:120) 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.
(cid:120) 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.
(cid:120) 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).
(cid:120) 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 CODM 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, 2014
At December 31, 2014, our backlog of construction projects was $764 million, as compared to $687 million at
December 31, 2013. Our contracts are typically completed in 12 to 36 months. At December 31, 2014, there was
approximately $24 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 $16 million
attributable to our share of estimated revenues related to joint ventures where we are a noncontrolling joint venture
partner. As discussed further in “(cid:44)(cid:87)(cid:72)(cid:80)(cid:3)(cid:20)(cid:17)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:650)(cid:53)(cid:72)(cid:70)(cid:72)(cid:81)(cid:87)(cid:3)(cid:39)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:650)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:53)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)2014, Operational
Issues and Outlook for 2015 Financial Results,” our backlog reflects, in part, our recently implemented strategy to
target smaller, shorter duration projects with a particular focus on improved gross margins.
29
We expect that our markets will ultimately recover from the conditions discussed in “Item 1. Business.”
Furthermore, we believe that the Company is well-established in our particular markets and has a fleet of modern
equipment that gives us the ability to perform a broad range of work which will allow us to weather current market
conditions and continue to compete successfully for projects as they become available at acceptable profit margin
levels. See “Item 1. Business — Our Markets, Customers and Competition” for a more detailed discussion of our
markets and their funding sources.
Fiscal Year Ended December 31, 2014 Compared with Fiscal Year Ended December 31, 2013
Revenues ........................................................................$
Gross profit (loss) ..........................................................$
General and administrative expenses .............................
Other income ..................................................................
Operating loss ................................................................
Gains on sale of securities ..............................................
Interest income ...............................................................
Interest expense ..............................................................
Loss before income taxes and earnings attributable to
noncontrolling interests..............................................
Income tax expense ........................................................
Net loss ..........................................................................
Noncontrolling owners’ interests in earnings of
% Change
$
2013
2014
(Dollar amounts in thousands)
672,230
32,421
(36,897 )
252
(4,224 )
--
$
556,236
(29,944 )
(40,951 )
1,737
(69,158 )
91
879
(616 )
754
(1,123 )
(4,593 )
(632 )
(5,225 )
(68,804 )
(1,222 )
(70,026 )
20.9 %
NM
(9.9 )
(85.5 )
(93.9 )
NM
(14.2 )
82.3
(93.3 )
(48.3 )
(92.5 )
subsidiaries and joint ventures ...................................
(4,556 )
(3,903 )
16.7
$
Net loss attributable to Sterling common stockholders ..
Gross margin (deficit) ....................................................
Operating margin (deficit) .............................................
(9,781 )
$
4.8 %
(0.6 ) %
(73,929 )
(5.4 ) %
(12.5 ) %
Contract backlog, end of year ........................................$
764,000
$
687,000
(86.8 )
NM
(95.2 )
11.2
NM – Not meaningful.
Revenues.
Revenues for 2014 increased 20.9% compared with the prior year. This increase is primarily attributable to an
increase in the number of projects in progress, largely in our Texas and California markets. However, this increase in
revenue was weaker than we anticipated, primarily in our California, Utah and Hawaii markets. The 2013 revenues
were adversely affected by the completion of large projects in Utah and to a lesser extent the completion of
significant projects in Arizona.
Gross Profit.
Gross profit increased $62.4 million in 2014 compared with the prior year. Gross margin also increased to 4.8%
in 2014 from (5.4)% in 2013 primarily due to net downward revisions of estimated revenues and gross margins on
construction projects in Texas and Arizona in the prior year. In 2014, timing and weather issues impacted some large
projects in our Hawaii and California operations, while spot shortages of commodities, over-stretched sub-contractors
and vendors, and intense competition for craft labor continued to pressure our Texas operations which led to a less
than anticipated gross profit.
30
While there are a number of factors which 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 2014 were:
(cid:120) conditions or contract requirements that differed from those assumed in the original bid or contract;
(cid:120) delays in taking measures to address issues which arose during construction;
(cid:120) subcontractors performance issues and vendor material spot shortages which caused project progress delays;
and
(cid:120) shortage of skilled labor, particularly in our Texas market.
We may be entitled to claim proceeds related to customer-caused delays, errors in specification and designs or
other causes of unanticipated additional costs related to certain projects; however, we cannot predict the amount of
claim proceeds or the timing of the receipt of such proceeds. Claims are recognized in revenue when an agreement is
reached with the customer as to the value of the claims, which in some instances may not occur until after completion
of work under the contract.
At December 31, 2014, we had approximately 116 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 decreased $4.1 million during 2014 to $36.9 million from $41.0 million in
2013. This decrease is due to certain non-recurring costs in 2013 related to employee benefit costs, as well as costs
associated with the evaluation and pursuit of potential acquisition opportunities.
As a percentage of revenues, general and administrative expenses decreased to 5.5% in 2014 from 7.4% in 2013.
The decrease in the 2014 percentage as compared to 2013 percentage is the result of the decrease in expenses
mentioned above and the result of investments made in 2013 in our information systems infrastructure and
operational and financial process improvements which allowed us to increase our efficiency without a significant
increase in general and administrative expenses.
Income taxes.
Our effective income tax rates for 2014 and 2013 were (13.8)% and (1.8)%, respectively. In 2014 and in 2013,
our effective income tax rate varied from the statutory rate primarily as a result of our deferred tax asset valuation
allowance.
In order to determine that a valuation allowance was necessary, management assessed the available positive and
negative evidence to estimate whether sufficient future taxable income would be generated to use the existing
deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred
over the three-year period ended December 31, 2014. The cumulative three-year period loss that ended in the fourth
quarter of 2014 was the result of the write-downs recorded during 2013 and 2014. Such objective evidence limits the
ability to consider other subjective evidence such as our projections for future growth. On the basis of this evaluation,
as of December 31, 2014, a valuation allowance of $36.6 million has been recorded on our net deferred tax assets
including federal and state net operating losses as they are not likely to be realized. The amount of the deferred tax
asset considered realizable could be adjusted if objective negative evidence is no longer present and additional weight
may be given to subjective evidence such as our projections for growth.
Net income attributable to noncontrolling interests.
The increase of $0.7 million to $4.6 million from $3.9 million in net income attributable to noncontrolling
interest owners for the year ended December 31, 2014 compared with same period in 2013 is primarily related to net
income attributable to the 50% noncontrolling interest in Myers. Operations at the Myers subsidiary are conducted
primarily in California where Myers has seen significant growth.
31
Fiscal Year Ended December 31, 2013 Compared with Fiscal Year Ended December 31, 2012
% Change
Revenues........................................................................$
Gross profit (loss) ..........................................................$
General and administrative expenses .............................
Unusual items ................................................................
Other income .................................................................
Operating income (loss) .................................................
Gains on sale of securities .............................................
Interest income ..............................................................
Interest expense .............................................................
Income (loss) before income taxes and earnings
attributable to noncontrolling interests ...................
Income tax (expense) benefit .........................................
Net income (loss) ...........................................................
Noncontrolling owners’ interests in earnings of
$
$
2012
2013
(Dollar amounts in thousands)
556,236
(29,944 )
(40,951 )
--
1,737
(69,158 )
91
879
(616 )
630,507
47,472
(35,187 )
(511 )
4,217
15,991
785
1,301
(944 )
(68,804 )
(1,222 )
(70,026 )
17,133
579
17,712
(11.8 ) %
NM
16.4
NM
(58.8 )
NM
(88.4 )
(32.4 )
(34.7 )
NM
NM
NM
subsidiaries and joint ventures ..................................
(3,903 )
(18,009 )
(78.3 )
Net loss attributable to Sterling common stockholders .$
Gross margin (deficit) ....................................................
Operating margin (deficit) .............................................
(73,929 )
$
(5.4 ) %
(12.5 ) %
(297 )
7.5 %
2.4 %
Contract backlog, end of year ........................................$
687,000
$
656,000
NM
NM
NM
4.7
NM – Not meaningful.
Revenues.
Revenues for 2013 decreased 11.8% compared with prior year. This decrease is primarily attributable to the
completion of large projects in Utah and to a lesser extent the completion of significant projects in Arizona. In 2012,
a large part of our revenue in Utah related to our share of the results from a construction joint venture in which we
were a minority participant. This project was substantially completed in 2012. The revenues generated in our other
markets were similar to the revenues generated in the prior year.
Gross Profit.
Gross profit decreased $77.4 million in 2013 compared with the prior year. Gross margin declined to (5.4)% in
2013 from 7.5% in 2012 due to net downward revisions of estimated revenues and gross margins on construction
projects in Texas and Arizona. The majority of the write-downs related to three large projects awarded prior to 2012
in Texas, which continued to have a negative impact on profitability.
While there are a number of factors which 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 2013 were:
(cid:120) conditions or contract requirements that differed from those assumed in the original bid or contract;
(cid:120)
(cid:120) delays in quickly identifying and taking measures to address issues which arose during production.
lower than expected productivity levels; and
At December 31, 2013, we had approximately 102 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.
32
General and administrative expenses.
General and administrative expenses as a percentage of revenues for 2013 increased to 7.4% from 5.7% in 2012.
This increase included expenses for an expanded information systems team which was hired in the fourth quarter of
2012 as well as an increase in certain employee benefit costs. The information systems team is expected to generate
benefits by upgrading our information systems infrastructure, improving measurement, and focusing on process
improvements that will offset their costs in the long-term. Additionally, during 2013, there were costs related to
operational and financial process improvements that the Company believes are non-recurring.
Income taxes.
Our effective income tax rates for 2013 and 2012 were (1.8)% and (3.4)%, respectively. Our effective income tax
rate varied from the statutory rate in 2013 primarily as a result of our deferred tax asset valuation allowance.
In order to determine that a valuation allowance was necessary, management assessed the available positive and
negative evidence to estimate whether sufficient future taxable income would be generated to use the existing
deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred
over the three-year period ended December 31, 2013. The cumulative three-year period loss that occurred in the
fourth quarter of 2013 was the result of the significant write-downs recorded during the quarter. Such objective
evidence limits the ability to consider other subjective evidence such as our projections for future growth. On the
basis of this evaluation, as of December 31, 2013, a valuation allowance of $28.2 million has been recorded on our
net deferred tax assets including federal and state net operating losses as they are not likely to be realized. The
amount of the deferred tax asset considered realizable could be adjusted if objective negative evidence or cumulative
losses are no longer present, and additional weight may be given to subjective evidence such as our projections for
growth. In 2012, our effective tax rate was impacted by net income attributable to noncontrolling interest owners
which is taxed to those owners rather than Sterling.
Net income attributable to noncontrolling interests.
The decrease in net income attributable to noncontrolling interest owner in 2013 compared with 2012 is
primarily related to net income attributable to the 20% noncontrolling interest owners in RLW. The Company
purchased the remaining 20% interest in RLW on December 31, 2012 which has resulted in lower net income
attributable to noncontrolling interest owners during 2013. Additionally, 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 owners. This amendment resulted in an
increase in the net income attributable to RLW’s noncontrolling interests of $6.7 million during 2012. This increase
had a related tax impact of $2.4 million which increased the tax benefit for 2012.
33
Historical Cash Flows.
The following table sets forth information about our cash flows and liquidity (amounts in thousands):
Net cash provided by (used in):
Operating activities ......................................................$
Capital expenditures.....................................................
Proceeds from sale of property and equipment ............
Acquisition of noncontrolling interest .........................
Net sales (purchases) of short-term securities ..............
Distributions to noncontrolling interest owners ...........
Net proceeds from stock issuance ................................
Net drawdowns (repayment) on the Credit Facility .....
Other ............................................................................
Total increase (decrease) in cash and cash
Years Ended December 31,
2013
2014
2012
(10,513 ) $
(13,509 )
6,078
--
--
(1,191 )
14,046
26,793
(733 )
(22,072) $
(14,390)
6,787
--
48,236
(3,565)
--
(16,204)
(62)
24,789
(37,359 )
12,464
(23,144 )
(3,493 )
(10,185 )
--
24,012
(313 )
equivalents ............................................................$
20,971
$
(1,270)
$
(13,229 )
Cash and cash equivalents ....................................................$
Working capital ....................................................................$
Operating Activities.
As of December 31,
2014
2013
22,843 $
52,324 $
1,872
8,686
Significant non-cash items included in operating activities include depreciation and amortization expense which
was $18.3 million in 2014, $18.7 million in 2013 and $19.0 million in 2012. Depreciation expense has decreased
slightly from 2012 to 2014 as a result of our efforts to maintain our current fleet of equipment and supplement it as
necessary with leased equipment during seasonal peak operating times.
Besides the net loss in 2014, 2013 and 2012 and the non-cash items discussed above, other significant
components of cash flows from operations were:
(cid:120)
(cid:120)
(cid:120)
contracts receivable increased by $1.7 million and $6.4 million in 2014 and 2013, respectively, and
decreased by $4.1 million in 2012 while the net cash flow result of billings in excess of costs and estimated
earnings and costs and estimated earnings in excess of billings decreased by $27.6 million in 2014, increased
by $21.6 million in 2013, and decreased by $3.7 million in 2012;
accounts payable increased by $5.2 million in 2014, $13.8 million in 2013 and $7.7 million in 2012;
accrued compensation and other liabilities decreased by $2.5 million in 2014 and increased by $4.1 million
in 2013 and decreased by $2.4 million in 2012; and
(cid:120) Member’s interest subject to mandatory redemption and undistributed earnings decreased by $1.1 million as
a result of an increase in undistributed earnings of $2.1 million and distributions of $3.2 million for the year
ended December 31, 2014.
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 $16.7 million in 2014 which includes $3.2 million of financed capital expenditures. Proceeds from the sale of
property and equipment totaled $6.1 million for 2014 with an associated net gain of $1.0 million. For the years ended
December 31, 2013 and 2012, capital expenditures totaled $14.9 million, which includes $0.5 million of financed
capital expenditures, and $37.4 million, respectively, while proceeds from the sale of property and equipment totaled
$6.8 million and $12.5 million, respectively, with an associated net gain of $1.8 million and $3.2 million,
respectively. The level of expenditure in 2014 increased minimally by $1.8 million from 2013 as a result of
management’s efforts to optimize utilization of our existing fleet of equipment based on current and projected
workloads while supplementing our fleet with leased equipment during seasonal peak operating times.
During 2014, we owned no short-term securities. In 2013 and 2012, we had sales of short-term securities of
$48.2 million and net purchases of $3.5 million, respectively. The net sales of short-term securities in 2013 were
34
primarily used to pay the drawdown on our Credit Facility which was used to purchase the remaining 20% RLW
interest in December 31, 2012 and also maintain a lower outstanding Credit Facility balance which we use to fund
our operations. This sale included all of our short-term investments; therefore, at December 31, 2013, we had no
short-term investment securities on our balance sheet.
Financing Activities.
Financing activities in 2014 consisted of net proceeds from our common stock offering of $14.0 million which
was used to strengthen our balance sheet. In addition, the net drawdown on our Credit Facility of $26.8 million was
used to fund our operating activities. Distributions to noncontrolling interest owners were $1.2 million for the year.
Financing activities in 2013 primarily reflected a net repayment of $16.2 million and distributions to noncontrolling
interest owners of $3.6 million. Financing activities in 2012 primarily reflected a net drawdown of $24.0 million and
distributions to noncontrolling interest owners of $10.2 million. The amount of borrowings associated with 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:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
contract 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, 2014, we had working capital of $52.3 million, an increase of $43.6 million over
December 31, 2013. The increase in working capital was the result of the following (amounts in thousands):
Net loss ............................................................................................................. $
Depreciation and amortization ..........................................................................
Capital expenditures .........................................................................................
Proceeds from sales of property and equipment, net of gain (loss) ..................
Distributions to noncontrolling interest owners ................................................
Net drawdown on the Credit Facility ................................................................
Net proceeds from stock issued ........................................................................
Other .................................................................................................................
(5,225 )
18,348
(13,509 )
5,083
(1,191 )
26,793
14,046
(707 )
Total increase in working capital ...................................................................... $
43,638
In addition to our available cash, cash equivalents and cash provided by operations, from time to time, we use
borrowings under our Credit Facility with Comerica Bank to finance our capital expenditures and working capital
needs.
On October 31, 2007, the Company and its subsidiaries entered into a new Credit Facility with Comerica Bank
with a maturity date of October 31, 2012. In December 2009, the Credit Facility was amended to permit the
acquisition of RLW and in November 2011, the Credit Facility was amended to extend the maturity date to
September 30, 2016. Subject to the conditions under the terms of the Credit Facility, including the financial
covenants and further amendments discussed below, up to $40.0 million in borrowings and letters of credit are
available under the Credit Facility. 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, 2014, there was $34.6 million in borrowing outstanding under the Credit Facility; additionally, there
was a letter of credit of $3.0 million outstanding which reduced availability under the Credit Facility to $2.4 million.
The Credit Facility is subject to our compliance with certain covenants, including financial covenants relating to
leverage, tangible net worth and asset coverage. The Credit Facility contains restrictions on our ability to:
(cid:120) Make distributions and dividends;
(cid:120)
Incur liens and encumbrances;
(cid:120)
Incur further indebtedness;
(cid:120) Guarantee obligations;
(cid:120) Dispose of a material portion of assets or merge with a third party;
(cid:120) Make acquisitions; and
35
(cid:120) Make investments in securities.
At the end of the fourth quarter of 2013, we were not in compliance with the minimum tangible net worth and the
leverage ratio financial covenants. As a result, subsequent to year end, we obtained a Waiver and Fourth Amendment
to Credit Agreement (the “Fourth Amendment”) with our bank which waived the noncompliance with the financial
covenants as of December 31, 2013 and provided less restrictive covenant requirements. The Fourth Amendment also
imposed liquidity thresholds that we are required to meet in 2014. Refer to the discussion below of our revised
amendment which eased our required liquidity thresholds.
Among other things, the Fourth Amendment reduced the borrowings available to $40 million from the previously
available $50 million and has eliminated the option to increase the Credit Facility by an additional $50 million. The
Fourth Amendment also modified the existing borrowing interest fee schedule and increased borrowing rates by 50
basis points to 4.75% effective December 31, 2013. In addition, if certain liquidity thresholds are not met in 2014 the
interest rate may increase 200 basis points and continue to increase 100 basis points every quarter after 2015 until
such thresholds are met. Furthermore, the Fourth Amendment requires the payment of a quarterly commitment fee of
0.75% per annum, which is an increase of 25 basis points, on unused availability.
On April 29, 2014, we obtained an amendment (the “Fifth Amendment”) with our bank which removed a
requirement that we raise $20 million of new equity capital by September 30, 2014, in addition to raising $10 million
of other liquidity by June 30, 2014, provided that we raise $10 million of new equity capital by May 30, 2014. As
discussed below, the Company raised $14.1 million and the cash was used to repay a portion of our outstanding
indebtedness under the Credit Facility. The equity raise did not reduce the Company’s borrowing capacity.
In addition, as discussed in Note 16 to the accompanying financial statements, on April 29, 2014, an amended
“shelf” registration statement filed by the Company with the SEC became effective. Under the amended shelf
registration statement, the Company may offer from time to time any combination of securities described in the
prospectus in one or more offerings up to a total of $80 million, the proceeds of which may be used for working
capital, capital expenditures and general corporate purposes, including future acquisitions.
On May 6, 2014, we closed a public offering with D.A. Davidson & Co. as sole underwriter (the “Underwriter”),
pursuant to which the Underwriter purchased from the Company 2,100,000 shares of the Company’s common stock
at a price of $6.90 per share. The net proceeds of $14.0 million from the offering, after deducting underwriting
discounts and offering expenses, was used to repay a portion of the indebtedness outstanding under our $40 million
revolving credit facility in accordance with the Fifth Amendment mentioned above.
On September 5, 2014, the Company and its lender amended the Credit Facility (the “Sixth Amendment”) which
accomplished the following:
(cid:120) Removed the prohibition against acquisitions and amended the definition of Permitted Acquisition in the
Credit Agreement to provide that the Company may, without the lender's consent, but subject to certain
restrictions, acquire another entity or its assets for a price of up to $8 million payable in shares of the
Company's common stock.
(cid:120) Modified the Company’s Tangible Net Worth requirement.
(cid:120) Eliminated the covenant which capped losses per quarter.
(cid:120) Changed the monthly Covenant Compliance Reports to quarterly reports.
As a result of the fourth quarter loss, we were not in compliance with the tangible net worth covenant related to
the Company’s Credit Facility at December 31, 2014. On March 12, 2015, we obtained a waiver and amendment (the
“Seventh Amendment”) which includes the following key modifications:
(cid:120) A reduction in our availability of $5 million for total availability of $35 million as of March 12, 2015;
(cid:120) A reduction in our availability of $10 million at June 1, 2015, for total availability of $25 million;
(cid:120) A reduction in our availability of $10 million at September 1, 2015, for total availability of $15 million;
(cid:120) An increase in our annual interest rate from prime rate plus 150 basis points, or 4.75%, to prime rate plus
350 basis points, or 6.75%;
(cid:120) The tangible net worth covenant is modified to include $11.3 million of available headroom from the $86.3
million of tangible net worth calculated at December 31, 2014;
(cid:120) Our first covenant test will begin at the end of April using April annualized figures; and
(cid:120) A fee of $0.4 million is due in four equal payments. The first payment was due upon execution of the
Seventh Amendment and the second, third and fourth payments are due on June 30th, September 30th, and
December 31st of 2015, respectively. However, any remaining unpaid fees are waived if at any point during
the year we liquidate and terminate our Credit Facility a month before a payment becomes due.
36
We believe that we will be able to maintain compliance with all covenants under the Seventh Amendment
through at least the next twelve months.
Due to the fourth quarter losses, which are largely due to projects constructed in Texas, and our Credit Facility’s
tangible net worth debt covenant violation, we are monitoring our cash position very closely. If we are unable to
return to profitability in the near future we may encounter working capital constraints. If adequate funds are not
available, or are not available on acceptable terms, to alleviate our working capital constraints we may be required to
sell Company equipment or property to maintain sufficient levels of working capital during our peak operating
periods.
Average borrowings under the Credit Facility for the 2014 fiscal year were $16.9 million and the largest amount
of borrowings under the Credit Facility was $36.8 million on April 21, 2014. Average borrowings under the Credit
Facility for the 2013 fiscal year were $18.6 million and the largest amount of borrowings under the Credit Facility
was $37.4 million on July 12, 2013.
Based on our average borrowings for 2014 and our 2015 forecasted cash needs, we continue to believe that the
Company has sufficient liquid financial resources to fund our requirements for the next twelve months of operations,
including our bonding requirements. Furthermore, the Company is continually assessing ways to increase revenues
and reduce costs to improve liquidity. In 2015, our capital expenditures will be less than in 2014 and we are currently
scrutinizing our fleet of equipment in order to identify and liquidate underutilized equipment.
Contractual Obligations.
The following table sets forth our fixed, non-cancelable obligations at December 31, 2014:
Payments due by period
Total
Credit Facility ...................................................$ 34,601
Operating leases* ..............................................
8,793
Mortgage ...........................................................
116
Notes payable for equipment ............................
3,269
Earn-out liability to former owner of JBC ........
333
Member’s interest subject to mandatory
redemption and undistributed earnings** ....... 22,879
$ 69,991
4 – 5
Years
$
< 1
Year
1 - 3
Years
(Amounts in thousands)
$ 34,601
2,591
43
1,565
165
--
1,550
73
892
168
$
--
2,476
--
812
--
> 5
Years
$
--
2,176
--
--
--
--
$ 2,683
--
$ 38,965
$
--
3,288
22,879
$ 25,055
* Operating leases are stated at minimum annual rentals for all operating leases having initial non-cancelable lease terms in excess of one
year.
** Mandatory redemption is based on the death or disability of the interest holder which is not expected to occur within the next five
years. Undistributed earnings can be distributed upon unanimous consent from the members. At this time we cannot predict when such
distributions will be made. Refer to Note 2 for further information.
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 2014, interest paid on the Credit Facility
was approximately $1.1 million.
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.
37
Capital Expenditures.
Capital equipment is acquired as needed by increased levels of production and to replace retiring equipment.
Management expects capital expenditures in 2015 to be less than the $16.7 million incurred in 2014; 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, 2014, we had diesel futures contracts for 0.1 million gallons
which fixed prices at an average of $2.77 per gallon. This compares to the December 31, 2014 price for off-road
ultra-low sulfur diesel published by Platts of $1.63. Due to the recent decline in oil and fuel prices, we have not
entered into any new derivative instruments in 2014. In addition, we intend to retire this program when our last swap
contract is settled in August 2015.
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
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, 2014, there was approximately $55 million of construction work to be completed on
unconsolidated construction joint venture contracts, of which $16 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, 2014, 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.
Refer to “Recent Accounting Pronouncements” in Note 1 to the consolidated financial statements 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 2014 were $16.9 million.
Based on our level of borrowings during 2014, a change of 1% to our interest rate may have a $0.2 million impact on
our results from operations.
38
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, 2014:
Beginning
January 1, 2015
Ending
August 31, 2015
Range
$2.75 – 2.79
Weighted
Average
$2.77
Price Per Gallon
Fair Value of
Derivatives at
December 31,
2014
(in thousands)
101
Remaining
Volume
(gallons)
100,000 $
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 F1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
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, 2014. 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, 2014 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, 2014. In making this assessment, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control-Integrated
Framework. The Company’s management has concluded that, at December 31, 2014, the Company’s internal control
over financial reporting is effective based on these criteria.
Changes in Internal Control over Financial Reporting.
We maintain a system of internal control over financial reporting that is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States. Based on the most recent
evaluation we have concluded that no significant changes in our internal control over financial reporting occurred
during the three months ended December 31, 2014 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.
39
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
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 8, 2015 and is incorporated herein by reference. The information can be found under
the following headings in the proxy statement:
Item 10 Information
Location or Heading
in the Proxy Statement
Election of Directors (Proposal 1)
Directors ..........................................................
Board Operations
Compliance With Section 16(a) of the
Exchange Act ...........................................
Stock Ownership Information
Code of Ethics .................................................
Nominating Committee
The Corporate Governance &
Communication with the Board;
nominations; Board and committee
meetings; committees of the Board;
Board leadership and risk oversight;
and director compensation. ......................
The Board of Directors
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 8, 2015 and is incorporated herein by reference. The information can be found under
the headings Executive Compensation and Board Operations 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 8, 2015 and is incorporated herein by reference.
(cid:120) Equity Compensation Plan Information can be found in the proxy statement under the heading Executive
(cid:120)
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 8, 2015 and is incorporated herein by reference.
(cid:120)
(cid:120)
Information regarding any relationships between directors and officers and the Company can be found in the
proxy statement under the heading Transactions with Related Persons.
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 8, 2015 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.
40
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, 2014 and 2013
Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2014, 2013 and
2012
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014, 2013 and 2012
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’s name was
Oakhurst Company, Inc. 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
3.1
3.2
4.1
10.1.1#
10.1.2#
10.2#
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)).
Certificate of Incorporation of Sterling Construction Company, Inc. as amended through May 9,
2014 (incorporated by reference to Exhibit 3 to Sterling Construction Company, Inc.'s
Current Report on Form 8-K, filed on May 13, 2014 (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 Sterling Construction Company, Inc.'s Form 8-A, filed on January
11, 2006 (SEC File No. 1-31993)).
The Sterling Construction Company, Inc. Stock Incentive Plan as amended through May 9, 2014
(incorporated by reference to Exhibit 10.2 to Sterling Construction Company, Inc.'s. Current
Report on Form 8-K, filed on May 13, 2014 (SEC File No. 1-31993)).
2014 Sterling Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to Sterling
Construction Company, Inc.’s Current Report on Form 8-K, filed on May 13, 2014 (SEC File
No. 1-31993)).
Forms of Stock Option Agreement under the Oakhurst Company, Inc. 2001 Stock Incentive Plan
(now known as The Sterling Construction Company, Inc. Stock Incentive Plan) (incorporated
by reference to Exhibit 10.52 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)).
10.3#
Summary of standard compensation arrangements for non-employee directors of Sterling
Construction Company, Inc. adopted by the Board of Directors on May 9, 2014 (incorporated
by reference to Exhibit 10.1 to Sterling Construction Company, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2014, filed on August 11, 2014 (SEC File No. 1-
31993)).
41
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
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 F 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)).
10.4.3
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)).
10.4.4
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)).
10.4.5
Waiver and Third Amendment to Credit Agreement by and among Sterling Construction
10.4.6
Company, Inc., and certain of its subsidiaries, certain of the Lenders, and Comerica Bank as
administrative agent for the lenders, dated as of August 8, 2013 (incorporated by reference to
Exhibit 10.4.5 to Sterling Construction Company, Inc.'s Annual Report on Form 10-K filed
on March 17, 2014 (SEC File No. 1-31993)).
Waiver and Fourth Amendment to Credit Agreement dated as of March 14, 2014 by and among
Sterling Construction Company, Inc., certain of its affiliates and subsidiaries, certain of the
Lenders, and Comerica Bank as Administrative Agent (incorporated by reference to Exhibit
10.4.6 to Sterling Construction Company, Inc.'s Annual Report on Form 10-K filed on March
17, 2014 (SEC File No. 1-31993)).
10.4.7
Fifth Amendment to Credit Agreement dated as of April 29, 2014 by and among Sterling
Construction Company, Inc., Comerica Bank, as administrative agent and certain of the
lenders (incorporated by reference to Exhibit 10.1 to Sterling Construction Company, Inc.'s
Current Report on Form 8-K filed on April 30, 2014 (SEC File No. 1-31993)).
10.4.8
Sixth Amendment to Credit Agreement dated as of September 5, 2014 by and among Sterling
Construction Company, Inc., Comerica Bank, as administrative agent and certain of the
lenders (incorporated by reference to Exhibit 10.1 to Sterling Construction Company, Inc.'s
Current Report on Form 8-K filed on September 5, 2014 (SEC File No. 1-31993)).
10.5.1#
Employment Agreement dated as of March 17, 2006 between Sterling Construction Company,
10.5.2#
Inc. and Roger M. Barzun (incorporated by reference to Exhibit 10.11 to Sterling
Construction Company, Inc.'s Annual Report on Form 10-K/A for the year ended December
31, 2009, filed on March 18, 2010 (SEC File No. 1-31993)).
Amendment dated January 18, 2012 of the Employment Agreement dated as of March 17, 2006
between Sterling Construction Company, Inc. and Roger M. Barzun (incorporated by
reference to Exhibit 10.7.1 to Sterling Construction Company, Inc.'s Annual Report on Form
10-K filed on March 17, 2014 (SEC File No. 1-31993)).
10.6#
Employment Agreement dated December 28, 2012 between Ralph L. Wadsworth Construction
Company, LLC and Con L. Wadsworth (incorporated by reference to Exhibit 10.9 to Sterling
Construction Company, Inc.'s Annual Report on Form 10-K filed on March 17, 2014 (SEC
File No. 1-31993)).
10.7#
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)).
10.8.1#
Employment Agreement dated as of September 25, 2013 between Sterling Construction
Company, Inc. and Thomas R. Wright (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, 2013, filed on November 8, 2013 (SEC File No. 1-31993)).
42
10.8.2#
Amendment to the Employment Agreement of Thomas R. Wright dated September 26, 2014
10.9.1#
(incorporated by reference to Exhibit 10.1 to Sterling Construction Company, Inc.'s Current
Report on Form 8-K filed on September 29, 2014 (SEC File No. 1-31993)).
Program Description — 2015 Short-Term Incentive Compensation Program & 2015 Long-Term
Incentive Compensation Program (incorporated by reference to Exhibit 10.1 to Sterling
Construction Company, Inc.'s Current Report on Form 8-K filed on December 17, 2014 (SEC
File No. 1-31993))
10.9.2#
Form of Long-Term Incentive Program Award Agreement (incorporated by reference to Exhibit
10.2 to Sterling Construction Company, Inc.'s Current Report on Form 8-K filed on
December 17, 2014 (SEC File No. 1-31993)).
10.9.3#*
10.10#*
Amended form of Long-Term Incentive Program Award Agreement.
Employment Agreement dated as of March 9, 2015 between Sterling Construction Company, Inc.
and Paul J. Varello.
21
23.1*
31.1*
31.2*
State of Incorporation or Organization
Subsidiaries of Sterling Construction Company, Inc.:
Name
Texas Sterling Construction Co.
Road and Highway Builders, LLC
Road and Highway Builders Inc.
RHB Properties, LLC
Road and Highway Builders of California, Inc.
Sterling Hawaii Asphalt, LLC
Ralph L. Wadsworth Construction Company, LLC
Ralph L. Wadsworth Construction Co. LP
J. Banicki Construction, Inc.
Myers & Sons Construction, L.P.
Consent of Grant Thornton, LLP
Certification of Paul J. Varello, Chief Executive Officer of Sterling Construction Company, Inc.
Certification of Thomas R. Wright, Executive Vice President & Chief Financial Officer of
Delaware
Nevada
Nevada
Nevada
California
Hawaii
Utah
California
Arizona
California
Sterling Construction Company, Inc.
32.1*
Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18
U.S.C. 1350) of Paul J. Varello Chief Executive Officer, and Thomas R. Wright, Executive
Vice President & Chief Financial Officer.
95.1*
Mine Safety Disclosure
# Management contract or compensatory plan or arrangement.
* Filed herewith.
43
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 16, 2015
By: /s/ Paul J. Varello
Paul J. Varello, Chief Executive Officer
(duly authorized officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Milton L. Scott
Milton L. Scott
/s/ Paul J. Varello
Paul J. Varello
/s/ Thomas R. Wright
Thomas R. Wright
/s/ Marian M. Davenport
Marian M. Davenport
/s/Maarten D. Hemsley
Maarten D. Hemsley
/s/ Charles R. Patton
Charles R. Patton
/s/ Richard O. Schaum
Richard O. Schaum
Chairman of the Board of Directors
March 16, 2015
Chief Executive Officer (principal executive
officer)
March 16, 2015
Executive Vice President & Chief Financial
Officer (principal financial officer and principal
accounting officer), Treasurer
Director
Director
Director
Director
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
44
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, 2014 and 2013, 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, 2014. 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, 2014 and 2013, and
the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014
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), the Company’s internal control over financial reporting as of December 31, 2014, based on criteria
established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 16, 2015 expressed an unqualified
opinion.
/s/ GRANT THORNTON LLP
Houston, Texas
March 16, 2015
F1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Sterling Construction Company, Inc.:
We have audited the internal control over financial reporting of Sterling Construction Company, Inc. (a Delaware
corporation) and subsidiaries (the “Company”) as of December 31, 2014 based on criteria established in the 2013
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 the Company’s 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, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2014, based on criteria established in the 2013 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 financial statements of the Company as of and for the year ended December 31, 2014, and
our report dated March 16, 2015 expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Houston, Texas
March 16, 2015
F2
STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2014 and 2013
(Amounts in thousands, except share and per share data)
Current assets:
ASSETS
2014
2013
Cash and cash equivalents ..............................................................................................$ 22,843 $
Contracts receivable, including retainage........................................................................
Costs and estimated earnings in excess of billings on uncompleted contracts ................
Inventories .......................................................................................................................
Receivables from and equity in construction joint ventures ............................................
Other current assets .........................................................................................................
Total current assets .....................................................................................................
Property and equipment, net ...................................................................................................
Goodwill .................................................................................................................................
Other assets, net......................................................................................................................
78,896
33,403
7,401
9,153
5,278
156,974
87,098
54,820
7,559
Total assets .................................................................................................................$ 306,451
1,872
77,245
11,684
6,189
6,118
11,377
114,485
93,683
54,820
10,030
$ 273,018
Current liabilities:
LIABILITIES AND EQUITY
Accounts payable .............................................................................................................$ 66,792 $
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
25,649
965
1,868
5,169
61,599
31,576
134
2,035
5,755
ventures .......................................................................................................................
Other current liabilities ....................................................................................................
Total current liabilities ...............................................................................................
--
4,207
104,650
196
4,504
105,799
Long-term liabilities:
Long-term debt, net of current maturities ........................................................................
Member’s interest subject to mandatory redemption and undistributed earnings............
Other long-term liabilities................................................................................................
Total long-term liabilities ...........................................................................................
37,021
22,879
753
60,653
8,331
23,989
2,105
34,425
Commitments and contingencies (Note 13)
Equity:
Sterling stockholders’ equity:
Preferred stock, par value $0.01 per share; 1,000,000 shares authorized, none issued ....
Common stock, par value $0.01 per share; 28,000,000 shares authorized,
--
--
18,802,679 and 16,657,754 shares issued .....................................................................
167
190,926
Additional paid in capital.................................................................................................
Retained deficit ................................................................................................................
(62,317 )
Accumulated other comprehensive (loss) income ...........................................................
117
Total Sterling common stockholders’ equity ..............................................................
128,893
3,901
Noncontrolling interests .......................................................................................................
Total equity .................................................................................................................
132,794
Total liabilities and equity ..........................................................................................$ 306,451 $ 273,018
188
205,697
(72,098 )
(101 )
133,686
7,462
141,148
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, 2014, 2013 and 2012
(Amounts in thousands, except per share data)
Revenues .................................................................................................. $
Cost of revenues .......................................................................................
Gross profit (loss) ...............................................................................
General and administrative expenses .......................................................
Direct costs of acquisitions .......................................................................
Provision for loss on lawsuit ....................................................................
Other operating income, net ....................................................................
Operating (loss) income ......................................................................
Gain on sale of securities ..........................................................................
Interest income .........................................................................................
Interest expense ........................................................................................
(Loss) income before income taxes and earnings attributable to
noncontrolling interests ........................................................................
Income tax (expense) benefit....................................................................
Net (loss) income ................................................................................
Noncontrolling owners’ interests in earnings of subsidiaries and joint
$
2014
672,230
(639,809 )
32,421
(36,897 )
--
--
252
(4,224 )
--
754
(1,123 )
(4,593 )
(632 )
(5,225 )
2013
556,236 $
(586,180)
(29,944)
(40,951)
--
--
1,737
(69,158)
91
879
(616)
(68,804)
(1,222)
(70,026)
2012
630,507
(583,035 )
47,472
(35,187 )
(202 )
(309 )
4,217
15,991
785
1,301
(944 )
17,133
579
17,712
ventures .................................................................................................
Net loss attributable to Sterling common stockholders ............................ $
(4,556 )
(9,781 ) $
(3,903)
(73,929) $
(18,009 )
(297 )
Net loss per share attributable to Sterling common stockholders:
Basic and diluted ................................................................................ $
(0.54 )
$
(4.91) $
(0.26 )
Weighted average number of common shares outstanding used in
computing per share amounts:
Basic and diluted ................................................................................ 18,063,466
16,635,179
16,420,886
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, 2014, 2013 and 2012
(Amounts in thousands)
Net loss attributable to Sterling common stockholders ..............................................$ (9,781 ) $ (73,929 ) $
1,879
Net income attributable to noncontrolling interest included in equity .......................
2,024
Net income attributable to noncontrolling interest included in liabilities ...................
Add /(deduct) other comprehensive income, net of tax:
4,556
--
(297 )
1,068
16,941
Realized gain from available-for-sale securities .................................................
Change in unrealized holding gain (loss) on available-for-sale securities ..........
Realized (gain) loss from settlement of derivatives ............................................
Change in the effective portion of unrealized (loss) gain in fair market value
--
--
137
(90 )
(601 )
(48 )
(510 )
560
43
2014
2013
2012
of derivatives ...................................................................................................
107
Comprehensive (loss) income ....................................................................................$ (5,443 ) $ (70,605 ) $ 17,912
(355 )
160
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, 2014, 2013 and 2012
(Amounts in thousands)
STERLING CONSTRUCTION COMPANY, INC.
STOCKHOLDERS
Addi-
tional
Paid in
Amount Capital
Common Stock
Shares
Accu-
mulated
Other
Compre-
hensive
Income
(Loss)
Retained
Earnings
(Deficit)
$ 196,143 $ 16,509
16,495
165
197,067
16,321 $
--
--
163
--
--
24
--
150
--
--
--
--
2
--
--
--
--
9
--
--
--
--
--
--
--
2
--
--
$
(297 )
--
--
--
--
(3,992 )
--
12,220
(73,929 )
--
--
--
--
--
--
66
(79 )
694
243
--
--
--
26
(15 )
926
496
--
200
--
--
--
--
--
696
--
(579)
--
--
--
--
--
(7,078 )
--
(608 )
--
16,658
167
190,926
--
--
4
41
--
--
--
--
--
--
--
--
12
849
--
(62,317 )
(9,781 )
--
--
117
--
(218)
--
--
--
--
--
Noncon-
trolling
Interests Total
$ 1,527 $ 214,838
771
200
1,068
--
--
--
--
66
(79 )
696
(40)
(117)
2,438
1,879
--
--
(3,789 )
(117 )
212,586
(72,050 )
(579 )
26
--
--
(15 )
928
--
(416)
3,901
4,556
--
--
--
(994)
(7,686 )
(416 )
132,794
(5,225 )
(218 )
12
849
(994 )
2,100
--
18,803 $
21
--
14,025
(115 )
188 $ 205,697 $ (72,098 ) $
--
--
--
--
(101) $
--
(1)
7,462 $
14,046
(116 )
141,148
Balance at January 1, 2012 ........................
Net (loss) income ...................................
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 ...........................
Balance at December 31, 2012 ..................
Net (loss) income ...................................
Other comprehensive loss ......................
Stock issued upon option exercises ........
Tax impact from exercise of stock
options ...............................................
Issuance and amortization of common
Revaluation of noncontrolling interest
and other, net of tax ...........................
Distribution to owners ...........................
Balance at December 31, 2013 ..................
Net (loss) income ...................................
Other comprehensive loss ......................
Stock issued upon option exercises ........
Issuance and amortization of restricted
stock ...................................................
Distribution to owners ...........................
Stock issued in equity offering, net of
expense ..............................................
Other ......................................................
Balance at December 31, 2014 ..................
and restricted stock ............................
154
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, 2014, 2013 and 2012
(Amounts in thousands)
Cash flows from operating activities:
Net loss attributable to Sterling common stockholders .................................................$
Plus: Noncontrolling owners’ interests in earnings of subsidiaries and joint ventures ..
Net (loss) income ..........................................................................................................
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Depreciation and amortization ...............................................................................
Gain on disposal of property and equipment .........................................................
Deferred tax expense (benefit) ...............................................................................
Interest expense accreted on noncontrolling interests ............................................
Stock-based compensation expense .......................................................................
Gain on sale of securities .......................................................................................
Tax impact from exercise of stock options and restricted stock ............................
Changes in operating assets and liabilities:
Contracts receivable ..............................................................................................
Costs and estimated earnings in excess of billings on uncompleted contracts .......
Receivables from and equity in construction joint ventures ..................................
Income tax receivable ............................................................................................
Other current assets ...............................................................................................
Accounts payable ...................................................................................................
Billings in excess of costs and estimated earnings on uncompleted contracts .......
Accrued compensation and other liabilities ...........................................................
Member’s interest subject to mandatory redemption and undistributed earnings ..
Net cash (used in) provided by operating activities ......................................................
Cash flows from investing activities:
Acquisition of noncontrolling interests ..................................................................
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) provided by investing activities .......................................................
Cash flows from financing activities:
Cumulative daily drawdowns – Credit Facility .....................................................
Cumulative daily repayments – Credit Facility .....................................................
Distributions to noncontrolling interest owners .....................................................
Net proceeds from stock issued .............................................................................
Issuance of common stock pursuant to warrants and options exercised ................
Tax impact from exercise of stock options ............................................................
Other ......................................................................................................................
Net cash provided by (used in) financing activities ......................................................
Net increase (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:
2014
2013
2012
(9,781 ) $ (73,929) $
4,556
(5,225 )
3,903
(70,026)
(297 )
18,009
17,712
18,348
(995 )
--
--
849
--
--
(1,651 )
(21,719 )
(3,035 )
4,784
2,480
5,192
(5,927 )
(2,504 )
(1,110 )
(10,513 )
--
(13,509 )
6,078
--
--
(7,431 )
18,650
(1,837)
5,150
--
928
(91)
15
(6,430)
8,908
4,887
(6,011)
(6,722)
13,794
12,658
4,055
--
(22,072)
--
(14,390)
6,787
(1,638)
49,874
40,633
18,997
(3,184 )
(1,167 )
993
694
(785 )
79
4,060
(4,083 )
(4,948 )
--
(9,234 )
7,730
335
(2,410 )
--
24,789
(23,144 )
(37,359 )
12,464
(30,154 )
26,661
(51,532 )
330,338
(303,545 )
(1,191 )
14,046
12
--
(745 )
38,915
20,971
1,872
22,843 $
219,026
(235,230)
(3,565)
--
26
(15)
(73)
(19,831)
(1,270)
3,142
1,872 $
75,012
(51,000 )
(10,185 )
--
68
(79 )
(302 )
13,514
(13,229 )
16,371
3,142
Cash paid during the period for interest .................................................................$
Cash paid during the period for income taxes........................................................$
1,075 $
1 $
595
$
170 $
88
2,990
Non-cash items:
Revaluation of noncontrolling interests .................................................................$
Issuance of noncontrolling interest in RHB in exchange for net assets of
acquired companies ............................................................................................$
Goodwill adjustments ............................................................................................$
Transportation and construction equipment acquired through financing
-- $
(7,686) $
3,992
-- $
-- $
--
$
-- $
9,767
410
arrangements ......................................................................................................$
3,159 $
510
$
--
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
Business Summary
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, Hawaii 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”); RHB Properties, LLC (“RHBP”); Ralph L. Wadsworth Construction Company, LLC
(“RLW”); Ralph L. Wadsworth Construction Co., LP (“RLWLP”); J. Banicki Construction, Inc.(“JBC”); Myers &
Sons Construction, L.P. (“Myers”); and Sterling Hawaii Asphalt (“SHA”). TSC, RHB, RHB Ca, RLW, JBC and
Myers perform construction contracts, RHB Inc. produces aggregates from a leased quarry, primarily for use by
RHB, and SHA produces asphalt for use by RHB and has minimal sales to third parties. RHBP and RLWLP are
dormant entities.
Significant Accounting Policies
Principles of Consolidation
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. For
investments in subsidiaries and construction joint ventures that are not wholly-owned, but where the Company
exercises control, the equity held by the remaining owners and their portions of net income (loss) are reflected 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. 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%.
Where the Company is a noncontrolling joint venture partner, and otherwise not required to consolidate the
joint venture entity, 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. This method is an acceptable modification of the equity method
of accounting which is a common practice in the construction industry. Refer to Note 6 for further information
regarding the Company’s construction joint ventures.
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
noncontrolling variable interest. Refer to Note 3 for further information regarding the Company’s consolidated
variable interest entity.
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.
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
F8
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.
Refer to Note 18 for further information regarding the Company’s concentration of risk.
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. This cost to cost measure is used because management
considers it to be the best available measure of progress on these contracts. 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, 2014 resulted in a net
charge of $9.1 million included in operating loss, or $0.50 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, 2013 resulted in a net charge of $57.6 million included in
operating loss, or $3.46 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, 2012 resulted in a net charge of $4.9 million included in operating loss 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.
Change orders are modifications of an original contract that effectively change the existing provisions of the
contract without adding new scope or terms. Change orders may include changes in specifications or designs,
manner of performance, facilities, equipment, materials, sites and period of completion of the work. Either we or our
customers may initiate change orders.
The Company considers unapproved change orders to be contract variations for which we have customer
approval for a change of scope but a price change associated with the scope change has not yet been agreed upon.
Costs associated with unapproved change orders are included in the estimated cost to complete the contracts and are
treated as project costs as incurred. The Company recognizes revenue equal to costs incurred on unapproved change
orders when realization of price approval is probable. Unapproved change orders involve the use of estimates, and it
is reasonably possible that revisions to the estimated costs and recoverable amounts may be required in future
reporting periods to reflect changes in estimates or final agreements with customers. Change orders that are
unapproved as to both price and scope are evaluated as claims.
The Company considers claims to be amounts in excess of agreed contract prices that we seek to collect from
our customers or others for customer-caused delays, errors in specifications and designs, contract terminations,
change orders that are either in dispute or are unapproved as to both scope and price, or other causes of
unanticipated additional contract costs. Revenue from claims is recognized when an agreement is reached with
customers as to the value of the claims, which in some instances may not occur until after completion of work under
the contract. Costs associated with claims are included in the estimated costs to complete the contracts and are
treated as project costs when incurred.
There was $3.5 million in costs and estimated earnings in excess of billings at December 31, 2014 and no costs
and estimated earnings in excess of billing at December 31, 2013, for contract change orders not approved by the
customer. In addition, the Company has not recorded revenues related to claims during the years ended December
31, 2014, 2013 and 2012.
Our contracts generally take 12 to 36 months to complete. The Company generally provides a one to two-year
warranty for workmanship under its contracts when completed. 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 and will be billed at a later date, usually due to contract
terms. In addition, revenue associated with unapproved change orders is also included when realization is probable
and amounts can be reliably determined. The liability, “Billings in excess of costs and estimated earnings on
uncompleted contracts” represents billings in excess of revenues recognized on these contracts.
F9
Reclassification
A reclassification has been made to historical financial data on our consolidated financial statements to conform
to our current year presentation. The caption, “Gains on sale of securities” has been modified to exclude “other”
items. The “other” items included gains from insurance proceeds and miscellaneous other income and expense.
Therefore, these amounts have been reclassified into “Other operating income, net” on the consolidated statement of
operations to improve transparency.
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 and notes
payable, a credit facility with Comerica Bank (“Credit Facility”), the buy/sell agreement 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. Refer to Note 9 regarding the fair value of
derivatives and Note 2 regarding the fair value of the buy/sell option and the earn-out liability along with the current
amendments. The Company had one mortgage outstanding at December 31, 2014 and December 31, 2013 with a
remaining balance of $0.1 million and $0.2 million, respectively. The mortgage was accruing interest at 3.5% at
both December 31, 2014 and December 31, 2013 and contains pre-payment penalties. At December 31, 2014 and
December 31, 2013 the fair value of the mortgage approximated its book value. The Company also has long-term
notes payable of $3.3 million related to machinery and equipment purchased which have payment terms ranging
from 3 to 5 years and associated interest rates ranging from 3.12% to 6.29%. The fair value of the notes payable
approximates their book value. The Company does not have any off-balance sheet financial instruments other than
operating leases (Refer to Note 14).
In order to assess the fair value of the Company’s financial instruments, the Company uses the fair value
hierarchy established by GAAP which prioritizes the inputs used in valuation techniques into the following three
levels:
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.
For each financial instrument, the Company uses the highest priority level input that is available in order to
appropriately value that particular instrument. In certain instances, Level 1 inputs are not available and the Company
must use Level 2 or Level 3 inputs. In these cases, the Company provides a description of the valuation techniques
used and the inputs used in the fair value measurement.
Contracts Receivable
Contracts receivable are generally based on amounts billed to the customer. At December 31, 2014 and 2013,
contracts receivable included $16.4 million and $18.3 million of retainage, respectively, discussed below, which is
being withheld by customers until completion of the contracts, and at December 31, 2014, and 2013, there were no
unbilled receivables on contracts completed or substantially complete at that date. All 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.
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 it is recorded in
“Other assets, net” in our balance sheet. At December 31, 2014 and 2013, there was $5.0 million and $7.8 million
F10
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. Interest income related to this receivable was $0.4 million,
$0.3 million and $0.1 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Contracts receivable are written off based on individual credit evaluation and specific circumstances of the
customer, when such treatment is warranted. There was no bad debt expense recorded in 2014 or 2012. In 2013, the
Company wrote off $1.8 million of contracts receivable to bad debt expense which was recorded in “Other operating
income, net.” During 2014, we recovered $1.0 million of this $1.8 million.
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, 2014 are fully
collectible, and accordingly, no allowance for doubtful accounts against contracts receivable is necessary.
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, including
accounts receivable, as collateral for such obligation.
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, 2014 and 2013 were $7.4 million and $6.2 million, respectively. Inventories consist
primarily of concrete, aggregate and millings which are primarily expected to be utilized on construction projects in
the future. A small portion is sold to third parties. 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
Leasehold improvements ............. 3-10 years or lease period, if shorter
Transportation equipment ............ 5 years
Depreciation expense was $18.2 million, $18.6 million and $19.0 million in 2014, 2013 and 2012, respectively.
Leases
We lease property and equipment in the ordinary course of our business. Our leases have varying terms. Some
may include renewal options, escalation clauses, restrictions, penalties or other obligations that we consider in
determining minimum lease payments. The leases are classified as either operating leases or capital leases, as
appropriate.
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, 2014, 2013 and 2012.
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. During 2014, the Company capitalized an additional $0.2 million in loan
fees paid to our lender as part of the Fourth Amendment, discussed further in Note 11. These capitalized fees are
amortized over the term of the loan. Unamortized costs were $0.2 million at December 31, 2014 and 2013 and are
attributable to the Credit Facility (Refer to Note 11). Loan cost amortization expense for the years ended December
31, 2014 and 2013 was $0.2 million and $0.1 million, respectively, and were minimal for 2012.
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)
F11
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 testing.
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. There was no
impairment in 2014, 2013 and 2012, and management believes that there are no events or changes in circumstances
which have indicated that long-lived assets may be impaired.
Segment reporting
We operate in one segment and have only one reportable segment and one reporting unit component, which is
heavy civil construction. In making this determination, the Company considered the discrete financial information
used by our Chief Operating Decision Maker (“CODM”). Based on this approach, the Company noted that the
CODM organizes, evaluates and manages the financial information around each heavy civil construction project
when making operating decisions and assessing the Company’s overall performance. The service provided by the
Company, in all instances of our construction projects, is heavy civil construction. Furthermore, we considered that
each heavy civil construction project has similar characteristics, includes similar services, has similar types of
customers and is subject to similar economic and regulatory environments which would allow aggregation of
individual operating segments into one reportable segment if multiple operating segments existed.
The Company noted that 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:
(cid:120) 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.
(cid:120) 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.
(cid:120) 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.
(cid:120) 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).
(cid:120) 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 CODM 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
F12
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. Refer to
Note 12 for further information regarding our federal and state income taxes.
Stock-Based Compensation
The Company’s stock-based incentive plan is administered by the Compensation Committee of the Board of
Directors. The Compensation Committee may reward employees and non-employees with various types of awards
including but not limited to warrants, stock options, common stock, and unvested common stock (or restricted stock)
vesting on service or performance criteria. The Company recognizes expense based on the grant-date fair value of
the award and amortizes the award based on accelerated or straight line methods. Awards based on performance
vesting are subsequently remeasured at each reporting date through the settlement date.
Upon the vesting of unvested common stock the Company may withhold shares, based on the employee’s
election, in order to satisfy federal tax withholdings. The shares held by the Company are considered constructively
retired and are retired shortly after withholding. The Company then remits the withholding taxes required. Refer to
Note 16 for further information regarding the stock-based incentive plans.
Recent Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-14, “Presentation of
Financial Statement – Going Concern.” The guidance, which is effective for annual reporting periods ending after
December 15, 2016 and interim periods within annual periods beginning after December 15, 2016, requires
management to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern
and to provide related footnote disclosures. Early adoption is permitted. Although early adoption is permitted, the
Company expects to adopt this guidance as required and does not expect a material impact to our financial
statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The guidance, which
is effective for annual reporting periods beginning after December 15, 2016, defines the steps to recognize revenue
for entities that have contracts with customers. Early adoption is not permitted. The Company is currently evaluating
the impact to the Company’s financial statements.
In July 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." This ASU clarifies the
financial statement presentation of unrecognized tax benefits in certain circumstances. ASU 2013-11 is effective for
interim and annual reporting periods beginning after December 15, 2013 and should be applied prospectively to all
unrecognized tax benefits that exist at the effective date. The adoption of ASU 2013-11 did not have a material
impact on the Company's consolidated financial statements.
In February 2013, the FASB issued ASU 2013-04, "Obligations Resulting from Joint and Several Liability
Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date," which addresses the
recognition, measurement and disclosure of certain obligations including debt arrangements, other contractual
obligations and settled litigation and judicial rulings. ASU 2013-04 is effective for interim and annual reporting
periods beginning after December 15, 2013. The adoption of ASU 2013-04 did not have a material impact on the
Company's consolidated financial statements.
2. Acquisitions and Subsidiaries and Joint Ventures with Noncontrolling Owners’ Interests
RHB
In January 2012, RHB, a wholly owned subsidiary, assumed six construction contracts with $25.0 million of
(cid:88)(cid:81)(cid:72)(cid:68)(cid:85)(cid:81)(cid:72)(cid:71)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:36)(cid:74)(cid:74)(cid:85)(cid:72)(cid:74)(cid:68)(cid:87)(cid:72)(cid:3)(cid:44)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:76)(cid:72)(cid:86)(cid:650)(cid:54)(cid:58)(cid:53)(cid:15)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17)(cid:3)(cid:11)(cid:179)(cid:36)(cid:44)(cid:180)(cid:12)(cid:15)(cid:3)(cid:68)(cid:81)(cid:3)(cid:88)(cid:81)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:76)(cid:85)(cid:71)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:92)(cid:17) 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.
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
F13
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.
The Company also agreed with Mr. Buenting to amend and restate the operating and management agreements
for RHB. The amended agreements provide 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. Under the amendments, the Company will provide RHB with access to
a $5 million line of credit. 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 records a charge to retained
earnings, or in the absence of retained earnings, additional paid-in capital (“APIC”). Any related benefit as a result
of a lower valuation of Mr. Buenting’s noncontrolling interest compared to previous valuations shall be offset to
retained earnings up to the amounts previously charged to retained earnings. The calculation used in the buy/sell and
management agreement is the higher of the trailing twelve months of earnings before interest, taxes and depreciation
and amortization (“EBITDA”) times a multiple of 4.5 or the orderly liquidation value of RHB. The valuation of the
orderly liquidation value is classified as a Level 2 fair value measurement. These values have been updated based on
recent sales and dispositions of assets and liabilities to obtain a current estimate of the orderly liquidation value.
Based on the Company’s calculation on December 31, 2013, the trailing twelve months EBITDA times the multiple
of 4.5 provided the higher result of the two methods. As such, the total charge resulted in a net pre-tax charge of
$1.9 million and $2.5 million, for the periods ending December 31, 2013 and 2012, respectively.
On December 30, 2013, the Company and Mr. Buenting revised the Second Amended and Restated Operating
Agreement entered into on April 27, 2012 and their Management Agreement entered into on February 1, 2012. The
Third Amended and Restated Operating Agreement and the amended Management Agreement eliminated the
buy/sell option and instead included the obligation for the Company to purchase Mr. Buenting’s interest upon his
death or permanent disability for $20 million or $18 million, respectively. In the event of Mr. Buenting’s death or
permanent disability, his estate representative, trustee or designee shall become the selling representative and sell his
50% interest to the Company. In order to fund the purchase of Mr. Buenting’s interest, the Company has purchased
term life insurance with a payout of $20 million in the event of Mr. Buenting death. The Company will be the
beneficiary and will also pay the premiums related to this life insurance contract. The life insurance proceeds of $20
million shall be used as full payment for Mr. Buenting’s interest in the occurrence of his death. In the event of Mr.
Buenting’s permanent disability, the $18 million payment will be made by using the Company’s available cash on
hand, and/or to the extent necessary, the Company’s line of credit. No other transfer of Member’s interest is
permitted other than to the selling representative in the event of Mr. Buenting’s death or permanent disability. In the
event that Mr. Buenting resigns or is terminated without cause (i.e., termination other than through permanent
disability or death) RHB shall be dissolved unless both members agree otherwise. The amended agreements were
entered into in order to eliminate the earnings per share volatility caused by the buy/sell option.
F14
The amended agreements resulted in an obligation that the Company is certain to incur, either through Mr.
Buenting’s permanent disability or death for Mr. Buenting’s 50% members interest; therefore, the Company has
classified the noncontrolling interest as mandatorily redeemable and has recorded a liability in “Member’s interest
subject to mandatory redemption and undistributed earnings” on the consolidated balance sheet. The liability
consists of the following (in thousands):
Member’s interest subject to mandatory redemption ............................. $
Undistributed earnings attributable to this interest .................................
Earnings distributed ................................................................................
Total liability ....................................................................................... $
Years Ended December 31,
2013
2014
20,000
6,079
(3,200 )
22,879
$
$
20,000
3,989
--
23,989
Undistributed earnings increased by $2.1 million for the year ended December 31, 2014, and were included in
“Other operating income, net” on the Company’s consolidated statement of operations. Distributions for the year
ended December 31, 2014 were $3.2 million.
At September 30, 2013, the total Obligation for noncontrolling owners’ interests in subsidiaries and joint
ventures was $17.8 million which included $14.1 million as the fair value in the noncontrolling interest and $3.7
million in undistributed earnings. During the fourth quarter of 2013, the Company made a final entry of $5.9 million
to adjust the member’s interest to its final payout value of $20.0 million. The adjustment was made to APIC as there
was a retained deficit on the Company’s consolidated balance sheet. Undistributed earnings increased by $0.3
million during the fourth quarter and there was no payout of undistributed earnings.
RHB Inc.
On June 20, 2014, the Company sold to Mr. Buenting a 50% interest in RHB Inc. RHB Inc. is currently an
ancillary company that provides certain services for RHB LLC. RHB Inc. is run as a cost center with a financial goal
to break-even, and has an immaterial amount of assets. The purchase price and the accounting effects of the total
transaction were immaterial to the Company.
JBC
In connection with the August 1, 2011, acquisition of J. Banicki Construction, Inc. (“JBC”) by 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 is classified as
a Level 3 fair value measurement. In making this valuation, the unobservable input consisted of forecasted 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 EBITDA exceeds $2.0 million for each of the calendar years 2011 through
2015 and $1.2 million for the seven months ended July 31, 2016.
On January 23, 2014, RLW, the former owner of JBC and the Company agreed to amend the above-mentioned
earn-out agreement in order to reduce the Company’s currently recorded liability while providing the former owner,
who at the time was the chief executive officer of JBC, a greater incentive to meet earnings benchmarks. The
amendment resulted in a reduction of $0.6 million in the Company’s earn-out liability, thereby reducing the total
earn-out liability to $1.4 million on December 31, 2013. As part of the amendment, a payment of $0.8 million was
made during the first quarter of 2014. The amendment increases the total available earn-out from $5.0 million to
$10.0 million if certain EBITDA benchmarks are met. The amendment extends the earn-out period through
December 31, 2017 and reduces the benchmark EBITDA for 2014 and 2015 to $1.5 million and increases it to $2.0
million in 2016 and 2017. The yearly excess forecasted EBITDA in our calculation ranged from 0% to 22.4% of the
minimum EBITDA threshold for the years 2015 through 2017. 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 $0.3 million as of
December 31, 2014. The undiscounted earn-out liability as of December 31, 2014 is estimated at $0.3 million and
could increase by $9.0 million if EBITDA during the earn-out period increases $18.0 million or more and could
decrease by the full amount of the liability for the year if EBITDA does not exceed the minimum threshold for that
year. Each year is considered a discrete earnings period and future losses by JBC, if any, would not reduce the
Company’s liability in years in which JBC has exceeded its earnings benchmark. 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 on the
accompanying consolidated balance sheets. As part of recording the present value of this liability, the Company
incurs accreted interest expense for the passage of time until the time of settlement. The Company incurred accreted
interest expense of less than $0.1 million for the year ended December 31, 2013 and slightly over $0.1 million in the
same period of 2012. As part of the amendment in 2014 and the fair value adjustment, the Company recorded
interest income of $0.3 million for the year ended December 31, 2014.
F15
RLW
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 for the calendar years 2010, 2011 and 2012 times a multiple of a
minimum of 4 and a maximum of 4.5.
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 $1.0 million for the year ended December 31, 2012 and
was 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 approximately $3.8 million for the year ended December
31, 2012 and this change, net of tax of $1.3 million was reported as a charge to retained earnings.
Under the agreement with the noncontrolling interest owners of RLW, the Company purchased the 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 on December 31, 2012, and the Company
made a final payment of $509,000 in April 2013. In addition, $2.3 million of undistributed earnings was also paid in
April 2013.
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, is not to be allocated to RLW for
the purpose of calculating the distributions to be made to the RLW noncontrolling interest owners. 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 with an increase in the
“Current obligation for noncontrolling owners’ interests in subsidiaries and joint ventures” in the consolidated
balance sheet. This increase had a related tax impacted of $2.4 million which increased the tax benefit for the
period.
Changes in noncontrolling interests
The following table summarizes the changes in the noncontrolling owners’ interests in subsidiaries and
consolidated joint ventures for the years ended December 31, 2012 through 2014 (amounts in thousands):
Years Ended December 31,
2013
2012
2014
Balance, beginning of period ..................................................................$
Net income attributable to noncontrolling interest included in
liabilities .............................................................................................
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 .....................................................
Change due to the RHB amendment ......................................................
Issuance of noncontrolling interest in RHB in exchange for net assets
of acquired companies ........................................................................
Distributions to noncontrolling interests owners ....................................
Acquisition of RLW noncontrolling interest ..........................................
Other .......................................................................................................
Balance, end of period ............................................................................$
4,097
$ 20,046 $ 18,375
--
4,556
--
--
--
--
2,024
1,879
--
(59 )
1,875
(18,103 )
16,941
1,068
993
3,797
2,473
--
--
(1,191 )
--
--
7,462
$
--
(3,056 )
(509 )
--
9,767
(10,185 )
(23,144 )
(39 )
4,097 $ 20,046
Noncontrolling owners’ interest in earnings of subsidiaries and joint ventures for the year ended December 31,
2014 shown in the accompanying consolidated statement of operations is $4.6 million, which the Company includes
in ”Equity”, “Noncontrolling interests” in the accompanying consolidated balance sheet. There were distributions of
$1.2 million to certain noncontrolling interest members during the year ended December 31, 2014.
Noncontrolling owners’ interest in earnings of subsidiaries and joint ventures for the year ended December 31,
2013 shown in the accompanying consolidated statement of operations of $3.9 million, includes income of $2.0
million attributable to noncontrolling interest owners, which the Company includes in liabilities and $1.9 million
which the Company includes in equity. Of the $2.0 million included in liabilities, less than $0.1 million of net loss
was reflected in “Current obligations for noncontrolling owners’ interests in subsidiaries and joint ventures,” and
$2.1 million of net income has been reclassified from “Obligations for noncontrolling owners’ interests in
F16
subsidiaries and joint ventures,” leaving the Company with a zero balance in this account, to “Member’s interest
subject to mandatory redemption” in the accompanying consolidated balance sheet. The remaining $1.9 million was
attributable to noncontrolling interest owners which the Company includes in equity and was reflected in equity in
“Noncontrolling interests” in the accompanying consolidated balance sheet.
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 was reflected in “Current obligation for
noncontrolling owners’ interests in subsidiaries and joint ventures,” $1.9 million attributable to RHB noncontrolling
interest owners, which was 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 was reflected in
equity in “Noncontrolling interests” in the accompanying consolidated balance sheet.
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 (“VIE”). 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 noncontrolling variable interest. Where the
Company has determined that it is appropriate to consolidate a VIE which it owns a 50% or less interest, the equity
held by the remaining owners and their portions of net income (loss) are reflected 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.”
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 Company has determined that Myers is a VIE for which the Company is
the primary beneficiary and has consolidated Myers into these financial statements.
The determination that Myers is a VIE and that the Company is the primary beneficiary is primarily due to the
following factors. 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
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.
F17
The financial information of Myers which is reflected in our consolidated balance sheets and statements of
operations is as follows (amounts in thousands):
As of December 31,
2013
2014
Assets:
Current assets:
Cash and cash equivalents ........................................................................................... $
Contracts receivable, including retainage .....................................................................
Other current assets .......................................................................................................
Total current assets ..................................................................................................
Property and equipment, net .................................................................................................
Other assets, net....................................................................................................................
Goodwill ...............................................................................................................................
148 $
21,327
7,656
29,131
9,303
--
1,501
Total assets .............................................................................................................. $
39,935 $
566
6,475
7,964
15,005
6,869
5
1,501
23,380
Liabilities:
Current liabilities:
Accounts payable .......................................................................................................... $
Other current liabilities .................................................................................................
Total current liabilities ............................................................................................
15,795 $
9,000
24,795
8,361
7,080
15,441
Long-term liabilities:
Other long-term liabilities .............................................................................................
Total liabilities ........................................................................................................ $
16
24,811 $
137
15,578
Revenues........................................................................$
Operating income ..........................................................
Net income attributable to Sterling common
144,837 $
9,319
82,421 $
3,764
stockholders ............................................................
4,657
1,879
84,877
2,152
694
Year Ended December 31,
2014
2013
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. Cash and cash equivalents include cash balances held by our
wholly-owned subsidiaries as well as the Company’s VIE.
The Company holds cash on deposit in U.S. banks, at times, in excess of federally insured limits. Management
does not believe that the risk associated with keeping cash deposits in excess of federal deposit insurance limits
represents a material risk.
At December 31, 2014 and 2013, the Company had no short-term investments.
At December 31, 2014, there were no cash and cash equivalents belonging to majority-owned joint ventures that
are consolidated in these financial statements. At December 31, 2013, cash and cash equivalents included $0.4
million belonging to majority-owned joint ventures that are consolidated in these financial statements which
generally cannot be used for purposes outside such joint ventures.
Gains and losses realized on short-term investment securities are included in “Gains on sale of securities” 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, 2013 and 2012, total proceeds from sales of short-term investments
were $49.9 million and $26.7 million, respectively, with gross realized gains of $0.7 million and $0.8 million,
respectively, and gross realized losses of $0.6 million and $0, respectively. Accumulated other comprehensive
income at December 31, 2013 included no unrealized gains on short-term investments and $1.1 million at December
31, 2012. Upon the sale of short-term investments, the cost basis used to determine the gain or loss 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.
At each reporting date, the Company performs separate evaluations of impaired debt and equity securities to
determine if the unrealized losses are other-than-temporary. The evaluations include a number of factors, including
but not limited to, the length of time and extent to which the fair value has been less than cost, the financial
F18
condition and near-term prospects of the issuer, and management’s ability and intent to hold the securities until fair
value recovers. The assessment of the ability and intent to hold these securities to recovery focuses primarily on
liquidity needs and securities portfolio objectives. At December 31, 2014 and 2013, the Company had no short-term
investments; thus no evaluation was required.
The Company earned interest income of $0.6 million and $1.5 million for the years ended December 31, 2013
and 2012, respectively, on its cash, cash equivalents and short-term investments. These amounts are recorded in
“interest income” in the Company’s consolidated statement of operations.
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. In addition, revenue associated
with unapproved change orders is also included when realization is probable and amounts can be reliably
determined.
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, 2014 and 2013 and reconcile the net excess
billings to the amounts included in the consolidated balance sheets at those dates (amounts in thousands).
As of December 31,
2014
2013
Costs incurred and estimated earnings on uncompleted
contracts ................................................................................. $ 1,566,831
$ 1,334,322
Billings on uncompleted contracts ............................................
Excess of costs incurred and estimated earnings over billings
(1,559,077)
(1,354,214 )
(excess of billings over costs incurred and estimated
earnings) on uncompleted contracts ....................................... $
7,754
$
(19,892 )
Included in the accompanying balance sheets under the following captions:
As of December 31,
2014
2013
Costs and estimated earnings in excess of billings on
uncompleted contracts ............................................................ $
33,403
$
11,684
Billings in excess of costs and estimated earnings
on uncompleted contracts .......................................................
Net amount of costs and estimated earnings on uncompleted
(25,649)
(31,576 )
contracts above (below) billings ............................................. $
7,754
$
(19,892 )
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 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.
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.
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
F19
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. Historically, the Company has
not incurred a liability related to the nonperformance of a joint venture partner.
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.
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 noncontrolling variable interest. At December 31, 2014, 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 on our consolidated statements of operations and
as a single line item (“Receivables from and equity in construction joint ventures”) in the consolidated balance
sheets. This method is an acceptable modification of the equity method of accounting which is a common practice in
the construction industry. 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 (amounts in thousands):
Total combined:
Current assets .................................................................... $ 18,132
Less current liabilities ....................................................... (49,035 )
Net assets ....................................................................... $ (30,903 )
Backlog ............................................................................. $ 55,063
$ 51,329
(64,531 )
$ (13,202 )
$ 101,014
As of December 31,
2013
2014
Years Ended December 31,
2013
2012
2014
Total combined:
Revenues ........................................................................... $ 51,015
3,606
Income before tax ..............................................................
$ 135,699
(20,758 )
$ 438,756
95,765
Sterling’s noncontrolling interest:
Share of revenues .............................................................. $ 20,243
2,111
Share of income before tax ...............................................
$ 54,096
(11,088 )
$ 82,519
12,424
Sterling’s noncontrolling interest in backlog .......................... $ 15,889
Sterling’s receivables from and equity in construction joint
As of December 31,
2013
2014
$ 30,652
ventures ...............................................................................
9,153
6,118
Approximately $16 million of the Company’s backlog at December 31, 2014 was attributable to projects
performed by joint ventures. The majority of this amount is attributable to the Company’s joint venture with
Shimmick Construction Company, where the Company has a 30% interest.
The caption “Receivables from and equity in construction joint ventures,” includes undistributed earnings and
receivables owed to the Company. Undistributed earnings are typically released to the joint venture partners after the
customer accepts the project as completed and any warranty period, if any, has passed.
F20
7. Property and Equipment
Property and equipment are summarized as follows (amounts in thousands):
Construction equipment ............................................................................$ 129,150
18,205
Transportation equipment .........................................................................
10,777
Buildings ..................................................................................................
2,761
Office equipment ......................................................................................
878
Leasehold Improvement ...........................................................................
387
Construction in progress ...........................................................................
5,530
Land ..........................................................................................................
200
Water rights ..............................................................................................
167,888
(80,790)
87,098
Less accumulated depreciation .................................................................
$
As of December 31,
2013
2014
$ 127,199
19,132
10,512
2,025
816
--
5,309
200
165,193
(71,510 )
93,683
$
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 on October 1st of each
calendar year. There are two steps involved in the testing of goodwill, excluding a qualitative analysis. The first step
compares the book value of the Company’s stock (stockholders’ equity or net assets) to the adjusted fair market
value of those shares. 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, then step two of determining the fair value of net assets must be taken to determine the
impairment amount.
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 (market) approach and a discounted cash
flow (income) approach. The market approach includes level one fair value inputs, such as the Company’s stock
price, at October 1, 2014, and level two fair value inputs, such as the control premiums based on prior year sales
transactions of construction contractors and engineering services, similar sized transactions based on the Company’s
market capitalization, and all-inclusive total industries transactions. The income approach includes level three inputs
such as the Company’s calculated weighted average cost of capital and future income projections that include
assumptions about revenue and gross profit growth, along with other assumptions.
Based on our calculation, we determined that the fair value of the Company’s equity was approximately 19%
above the carrying value of the Company’s equity for our 2014 step one test. Testing under step one in 2013 and
2012 also did not indicate that the adjusted fair value of the Company’s stock was less than its book value.
The following table details changes in recorded goodwill (amounts in thousands):
Balance at January 1, 2012 .......................................................... $ 54,050
360
410
Balance at December 31, 2013 and 2014 ..................................... $ 54,820
Additional goodwill related to acquisitions ............................
Goodwill adjustments .............................................................
After the annual test was completed, the Company’s stock price decreased from $7.54 on October 1, 2014 to
$6.39 on December 31, 2014. Due to the decrease in the stock price, the Company noted that a goodwill impairment
triggering event occurred during the fourth quarter of 2014. Therefore, the Company updated its annual goodwill
impairment assessment using the two valuation methods discussed above. The methods now included fourth quarter
information which incorporated the Company’s stock price at December 31, 2014 and reduced gross margins used in
our discounted cash flow model projections. Based on this revised testing, there was no goodwill impairment and we
determined that the fair value of the Company’s equity was approximately 13% above the carrying value of the
Company’s equity.
Refer to Note 21 for further information regarding the Company’s assessment of Goodwill after considering
certain subsequent events.
F21
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. The Company has a master netting arrangement with the counterparty; however, the gross amounts are
recorded on the balance sheet. All changes in the fair value of outstanding derivatives, except any ineffective
portion, are recorded in accumulated other comprehensive income until earnings are impacted by the hedged
transaction. Amounts in accumulated other comprehensive income 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 are at the corporate level, and no portion is attributable to noncontrolling
interests.
At December 31, 2014 and 2013, the accumulated other comprehensive (loss) income consisted of
unrecognized loss of $0.1 million and unrecognized gain of $0.1 million, respectively, representing the unrealized
change in fair 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, 2014, 2013 and 2012, the Company recognized pre-
tax net realized cash settlement losses on commodity contracts of over $0.1 million, gains of less than $0.1 million
and losses of less than $0.1 million, respectively.
At December 31, 2014, the Company had hedged its exposure to the variability in future cash flows from
forecasted diesel fuel purchases totaling 0.1 million gallons. The monthly volumes hedged range from 10,000
gallons to 15,000 gallons over the period from January 2015 to August 2015 at fixed prices per gallon ranging from
$2.75 to $2.79. Due to the recent decline in oil and fuel prices, the Company has not entered into any new derivative
instruments.
The derivative instruments are recorded on the consolidated balance sheet at fair value as follows (amounts in
thousands):
Balance Sheet Location
2014
2013
As of December 31,
Derivative assets:
Deposits and other current assets...................................... $
Other assets, net ................................................................
$
Derivative liabilities:
Other current liabilities ..................................................... $
Other long-term liabilities ................................................
$
--
--
--
(101 )
--
(101 )
$
$
$
$
109
8
117
--
--
--
The following table summarizes the effects of commodity derivative instruments on the consolidated statements
of operations and comprehensive income (loss) (in thousands):
Years Ended December 31,
2013
2012
2014
Increase (decrease) in fair value of derivatives included in
other comprehensive income (loss) (effective portion) .......$
(218 )
$
109
$
231
Realized gain (loss) included in cost of revenues (effective
portion) ................................................................................
(137 )
Increase (decrease) in fair value of derivatives included in
cost of revenues (ineffective portion) ..................................
--
48
--
(66 )
--
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.
F22
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 fair value
statements. The swaps are designated as Level 2 within the valuation hierarchy. Refer to Note 1 for a description of
the inputs used to value the information shown above.
At December 31, 2014 and 2013, 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 fair value inputs.
10. Changes in Accumulated Other Comprehensive (Loss) Income by Component
The changes in the balances of each component of accumulated other comprehensive (loss) income, net of tax,
which is included as a component of stockholders’ equity, are as follows (amounts in thousands):
Twelve Months
Ended
December 31,
2014 (*)
Unrealized Gain
and Loss on Cash
Flow Hedges
Beginning Balance .......................................................................................................$
Other comprehensive loss before reclassification .................................................
Amounts reclassified from accumulated other comprehensive income ................
Net current-period other comprehensive loss ...............................................................
Ending Balance ............................................................................................................$
117
(355 )
137
(218 )
(101 )
(*) Amounts in parentheses represent reductions to accumulated other comprehensive (loss) income.
The significant amounts reclassified out of each component of accumulated other comprehensive (loss)
income are as follows (amounts in thousands):
Amount Reclassified From
Accumulated Other Comprehensive
(Loss) Income (*)
Twelve Months Ended December 31,
Details About Accumulated Other
Comprehensive (Loss) Income Components
2014
2013
2012
Statement of
Operations
Classification
Realized gains on available-for sale securities ....... $
Less: Income tax expense ................................
Tax valuation allowance ..................................
Total reclassification related to available-for-sale
securities ............................................................. $
--
--
--
--
Realized gains (losses) on cash flow hedges .......... $
Less: Income tax (expense) benefit .................
Tax valuation allowance ..................................
(137)
--
--
Total reclassification related to cash flow
$
$
$
$
$
$
90
(33 )
33
90
48
(17 )
17
Gain on sale of
securities and other
785
(275) Income tax (expense)
--
benefit
510 Net income (loss)
(66) Cost of revenues
23 Income tax (expense)
--
benefit
hedges ................................................................. $
(137)
$
48
$
(43) Net income (loss)
(*) Amounts in parentheses represent reductions to earnings in the statement of operations.
F23
11. Line of Credit and Long-Term Debt
Long-term debt consists of the following (in thousands):
Credit facility...............................................................................$
Mortgage due monthly through June 2016 ..................................
Notes payable for transportation and construction equipment ....
Less current maturities of long-term debt....................................
Total long-term debt ....................................................................$
As of December 31,
2014
2013
34,601
116
3,269
37,986
(965 )
37,021
$
$
7,808
189
468
8,465
(134 )
8,331
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 December 2009, the Credit Facility was amended
to permit the acquisition of RLW and in November 2011, the Credit Facility was amended to extend the maturity
date to September 30, 2016. 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 is subject to our compliance with certain covenants, including financial covenants relating to
leverage, tangible net worth and asset coverage. The Credit Facility contains restrictions on the Company’s ability
to:
(cid:120) Make distributions and dividends;
(cid:120)
Incur liens and encumbrances;
(cid:120)
Incur further indebtedness;
(cid:120) Guarantee obligations;
(cid:120) Dispose of a material portion of assets or merge with a third party;
(cid:120) Make acquisitions; and
(cid:120) Make investments in securities.
At the end of the second quarter of 2013, the Company was not in compliance with the leverage ratio financial
covenant. On August 8, 2013, the Company obtained a Waiver and Third Amendment to Credit Agreement with its
lender which waived the noncompliance with the leverage ratio financial covenant as of June 30, 2013 and provided
a less restrictive leverage ratio covenant requirement. In addition, the waiver amended the existing borrowing
interest fee schedule and increased borrowing rates by 100 basis points to 4.25% effective June 30, 2013.
At the end of the fourth quarter of 2013, the Company was not in compliance with the minimum tangible net
worth and the leverage ratio financial covenants. As a result, subsequent to year end, the Company obtained a
Waiver and Fourth Amendment to Credit Agreement (the “Fourth Amendment”) with its lender which waived the
noncompliance with the financial covenants as of December 31, 2013 and provided less restrictive covenant
requirements. The Fourth Amendment also imposed liquidity thresholds that the Company is required to meet in
2014. Refer to the discussion below of our revised amendment which eased our required liquidity thresholds.
Among other things, the Fourth Amendment reduced the borrowings available to $40 million from the
previously available $50 million and has eliminated the option to increase the Credit Facility by an additional $50
million. The Fourth Amendment also modified the existing borrowing interest fee schedule and increased borrowing
rates by 50 basis points to 4.75% effective December 31, 2013. In addition, if certain liquidity thresholds are not met
in 2014 the interest rate may increase 200 basis points and continue to increase 100 basis points every quarter after
2015 until such thresholds are met. Furthermore, the Fourth Amendment requires the payment of a quarterly
commitment fee of 0.75% per annum, which is an increase of 25 basis points, on unused availability.
On April 29, 2014, the Company obtained an amendment (the “Fifth Amendment”) with our bank which
removed a requirement that we raise $20 million of new equity capital by September 30, 2014, in addition to raising
$10 million of other liquidity by June 30, 2014, provided that we raise $10 million of new equity capital by May 30,
2014. As discussed below, the Company raised $14.0 million and the cash was used to repay a portion of our
outstanding indebtedness under the Credit Facility. The equity raise did not reduce the Company’s borrowing
capacity.
F24
On September 5, 2014, the Company and its lender amended the Credit Facility (the “Sixth Amendment”)
which accomplished the following:
(cid:120) Removed the prohibition against acquisitions and amended the definition of Permitted Acquisition in the
Credit Agreement to provide that the Company may, without the lender's consent, but subject to certain
restrictions, acquire another entity or its assets for a price of up to $8 million payable in shares of the
Company's common stock.
(cid:120) Modified the Company’s Tangible Net Worth requirement.
(cid:120) Eliminated the covenant which capped losses per quarter.
(cid:120) Changed the monthly Covenant Compliance Reports to quarterly reports.
As a result of the fourth quarter loss, the Company was not in compliance with the tangible net worth covenant
related to the Company’s Credit Facility at December 31, 2014. Refer to Note 21 for the subsequent events related to
the resolution of our noncompliance with this debt covenant.
At December 31, 2014 and 2013, the Company had $34.6 million and $7.8 million outstanding under the Credit
Facility, respectively, and the aggregate amount of letters of credit outstanding under the Credit Facility was $3.0
million and $2.0 million, respectively, which reduces availability under the Credit Facility. Availability under the
Credit Facility was, therefore, $2.4 million and $30.2 million at December 31, 2014 and 2013, respectively.
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, 2014 was 3.5%
per annum, repayable over 15 years with a prepayment penalty. The outstanding balance on this mortgage was $0.1
million at December 31, 2014.
Notes Payable for transportation and construction equipment
The Company purchased and financed various transportation and construction equipment to enhance the
Company’s fleet of equipment. The total long-term notes payable related to the purchase of financed equipment was
$3.3 million and $0.5 million at December 31, 2014 and 2013, respectively. The purchases have payment terms
ranging from 3 to 5 years and the associated interest rates range from 3.12% to 6.29%.
Maturities of Debt
The Company’s long-term obligations mature in future years as follows (amounts in thousands):
Years Ending
December 31,
2015 ....................... $
2016 .......................
2017 .......................
2018 .......................
2019 .......................
Thereafter ...............
$
Amount
965
35,499
710
553
259
--
37,986
12. Income Taxes and Deferred Tax Asset/Liability
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, 2014 and 2013,
and interest and penalties for the year ended December 31, 2012 were not significant. The Company’s U.S. federal
income tax returns for 2011 and later years are open and subject to examination by the I.R.S. In addition, the
Company’s state income tax returns for 2010 and later years are open and subject to examination.
F25
Current income tax expense represents federal and state income tax paid or expected to be payable for the years
shown in the consolidated statements of operations. The income tax expense (benefit) in the accompanying
consolidated financial statements consists of the following (amounts in thousands):
Current tax expense (benefit) ..........................................$
Deferred tax expense (benefit) ........................................
Total tax expense (benefit) ..............................................$
2014
Years Ended December 31,
2013
(3,928 )
5,150
1,222
632 $
--
632
$
$
$
588
(1,167)
(579)
2012
Deferred tax assets and liabilities consist of the following (amounts in thousands):
As of December 31,
2014
Long
Term
Current
2013
Current
Long
Term
Assets related to:
Accrued compensation and other ...........................$
Amortization and impairment of goodwill ............
Accreted interest to put ..........................................
Contingency on lawsuit ..........................................
Noncontrolling interest ...........................................
Deferred revenue ....................................................
Revaluation of put/call liabilities ...........................
Net operating loss carryforwards ...........................
Valuation allowance for deferred tax assets ...........
1,059
--
--
--
--
125
--
--
(1,184 )
$
809
$
10,816
--
--
2,326
--
8,471
27,172
(35,393)
265
--
--
--
--
6,993
--
--
(7,258)
$
451
11,108
985
106
1,439
--
5,127
18,302
(23,773)
Liabilities related to:
Depreciation of property and equipment ................
Other.......................................................................
Net asset.......................................................................$
--
--
--
(14,186)
(15)
--
$
$
--
--
--
(12,669)
(1,076)
--
$
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):
2014
Years Ended December 31,
2013
2012
Amount
%
Amount
%
Amount
%
Tax expense (benefit) at the U.S.
federal statutory rate.............................$
(1,608 )
35.0 %
$ (24,081 )
35.0 %
$
5,997
35.0 %
State tax based on income, net of
refunds and federal benefits .................
(155 )
3.4
(1,280 )
1.8
(58 )
(0.3 )
Taxes on subsidiaries’ and joint
ventures’ earnings allocated to
noncontrolling interests owners ...........
Tax benefits of Domestic Production
Activities Deduction ............................
Impairment associated with goodwill
that is not amortizable for tax...............
Valuation Allowance ...............................
Reduction of tax receivable .....................
Non-taxable interest income ....................
Other permanent differences ....................
Income tax expense (benefit) ...................$
(2,365 )
51.5
(1,375 )
2.0
(5,938 )
(34.7 )
--
--
4,152 (90.4 )
524 (11.4 )
--
84
632
(1.9 )
(13.8 ) % $
--
--
(84 )
(0.5 )
--
28,215
--
(195 )
(62 )
1,222
--
(41.0 )
--
0.3
0.1
(1.8 ) % $
--
--
--
(529 )
--
--
--
(3.1 )
33 0.2
(579 )
(3.4 ) %
F26
We have federal and state income tax net operating loss (“NOL”) carryforwards of $73.1 million and $36.4
million, which will expire at various dates in the next 20 years for U.S. federal income tax and in the next 6 to 20
years for the various state jurisdictions where we operate. Such NOL carryforwards expire as follows (in thousands):
Year
Amount
2020 ................................................... $
2021 ...................................................
2028 ...................................................
2029 ...................................................
2033 ...................................................
2034 ...................................................
Total ............................................... $
15
50
8,744
3,410
70,003
27,312
109,534
Management assesses the available positive and negative evidence to estimate if sufficient future taxable
income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence
evaluated was the cumulative loss incurred over the three-year period ended December 31, 2014. The cumulative
three-year period loss that remained in the fourth quarter 2014 was the result of write-downs recorded during the
year. Such objective evidence limits the ability to consider other subjective evidence such as our projections for
future growth. On the basis of this evaluation, as of December 31, 2014, a valuation allowance of $36.6 million has
been recorded on the net deferred tax assets including federal and state net operating losses as they are not likely to
be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if objective
negative evidence or cumulative losses are no longer present and additional weight may be given to subjective
evidence such as our projections for growth.
If our assumptions change and we determine we will be able to realize these NOLs, the tax benefits relating to
any reversal of the valuation allowance on deferred tax assets as of December 31, 2014, will be accounted for as
follows: approximately $34.0 million will be recognized as a reduction of income tax expense and $2.6 million will
be recorded as an increase in equity.
As a result of certain realization requirements by GAAP, the table of deferred tax assets and liabilities shown
above does not include certain deferred tax assets as of December 31, 2014, and December 31, 2013, that arose
directly from (or the use of which was postponed by) tax deductions related to equity compensation that are greater
than the compensation recognized for financial reporting. Equity will be increased by $16,000 if and when such
deferred tax assets are ultimately realized.
On September 13, 2013, the U.S. Treasury Department and the I.R.S. issued final regulations that address costs
incurred in acquiring, producing, or improving tangible property (the "tangible property regulations"). The tangible
property regulations are generally effective for tax years beginning on or after January 1, 2014. The Company
intends to adopt the tax treatment of expenditures to improve tangible property and the capitalization of inherently
facilitative costs to acquire tangible property as of January 1, 2014. The tangible property regulations will require
the Company to make additional tax accounting method changes as of January 1, 2014; however, management does
not anticipate the impact of these changes to be material to the Company’s consolidated financial position, its results
of operations, or both.
As a result of the Company’s analysis, management has determined that the Company does not have any
material uncertain tax positions.
13. Commitments and Contingencies
Employment Agreements
At December 31, 2014, the Company’s Chief Executive Officer, its Executive Vice Presidents and certain
executive officers of its subsidiaries had employment agreements which provided 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.
F27
Self-Insurance
The Company is self-insured for employee health claims. Its policy is to accrue the estimated liability for
known claims and for estimated claims that have been incurred but not reported as of each reporting date. In order to
reduce the Company’s exposure to large health claims, it has obtained stop-loss coverage for the policy period as
follows:
(cid:120) Coverage for medical and prescription drug claim amounts in excess of $55,000 for RLW and JBC, and
$95,000 for all other entities, for each insured person within a plan year.
(cid:120) Combined coverage for medical and prescription drug claim amounts in excess of $5.2 million within a
plan year.
For the years ended December 31, 2014, 2013 and 2012, the Company incurred $2.2 million, $2.4 million, and
$2.0 million, respectively, in claim expenses related to this plan.
The Company and its subsidiaries are also self-insured for workers’ compensation, general liability, and auto
claims up to $250,000, $250,000 and $50,000 per occurrence, respectively, with a maximum aggregate liability of
$4.2 million combined casualty losses 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, 2014 and 2013, the Company had recorded an estimated liability of $2.8 million
and $1.7 million, respectively, which it believes is adequate for such claims based on its claims history and actuarial
studies. 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.
The Company is required by our insurance provider to obtain and hold a standby letter of credit that serves as a
guarantee by our lender to pay our insurance provider the incurred claim costs attributable to our general liability,
workers compensation and automobile liability claims, up to the amount stated in the standby letter of credit, in the
event that these claims were not paid by the Company. If ever demanded, the standby letter of credit would be
drawn against our Credit Facility and as a result, reduces our current credit availability. Historically, this standby
letter of credit has not been drawn upon. Refer to Note 11 for the amount held in our standby letter of credit at
December 31, 2014 and 2013.
Guarantees
The Company obtains bonding on construction contracts through Travelers Casualty and Surety Company of
America (“Travelers”). 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.
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. There are no significant unresolved legal issues as of December 31,
2014.
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.
F28
Purchase Commitments
To manage the risk of changes in material prices and subcontracting costs used in tendering bids for
construction contracts, most of the time, we obtain firm quotations from suppliers and subcontractors before
submitting a bid. These quotations do not include any quantity guarantees. As soon as we are advised that our bid is
the lowest, we enter into firm contracts with most of our materials suppliers and sub-contractors, thereby mitigating
the risk of future price variations affecting the contract costs.
14. Operating Leases
The Company leases certain property and equipment under cancelable and non-cancelable agreements including
office space.
Minimum annual rentals for all operating leases having initial non-cancelable lease terms in excess of one year
are as follows (amounts in thousands):
Years Ending December 31,
2015 ........................................................... $
2016 ...........................................................
2017 ...........................................................
2018 ...........................................................
2019 ...........................................................
Thereafter ..................................................
Total future minimum rental payments $
Amount
1,550
1,359
1,232
1,251
1,225
2,176
8,793
Total rent expense for all operating leases amounted to approximately $1.6 million, $0.9 million and $1.2
million in fiscal years 2014, 2013 and 2012, respectively.
15. Net Loss Per Share Attributable to Sterling Common Stockholders
Basic net loss per share attributable to Sterling common stockholders is computed by dividing net loss
attributable to Sterling common stockholders by the weighted average number of common shares outstanding during
the period. Diluted net loss per common share attributable to Sterling common stockholders is the same as basic net
loss per share attributable to Sterling common stockholders but assumes the exercise of dilutive unvested common
stock and stock options using the treasury stock method. The following table reconciles the numerators and
denominators of the basic and diluted per common share computations for net loss attributable to Sterling common
stockholders for 2014, 2013 and 2012 (amounts in thousands, except per share data):
Years Ended December 31,
2013
2014
2012
Numerator:
Net loss attributable to Sterling common stockholders .............................. $
Revaluation of noncontrolling interest put/call liability reflected in
(9,781 ) $ (73,929 ) $
(297)
additional paid in capital or retained earnings, net of tax ......................
--
(7,686 )
$
(9,781 ) $ (81,615 ) $
Denominator:
Weighted average common shares outstanding — basic ...........................
Shares for dilutive stock options and warrants ...........................................
Weighted average common shares outstanding and assumed
18,063
--
16,635
--
(3,992)
(4,289)
16,421
--
conversions— diluted ...........................................................................
18,063
16,635
16,421
Basic and diluted net loss per share attributable to Sterling common
stockholders................................................................................................ $
(0.54 ) $
(4.91 )
$
(0.26)
The Company had no options outstanding but considered antidilutive due to the option exercise price exceeding
the average share market price at December 31, 2014, 2013 and 2012, respectively. In addition, 152,900, 160,206
and 109,424 shares for unvested stock and stock options were excluded from the diluted weighted average common
shares outstanding in 2014, 2013 and 2012, respectively, as the Company incurred a loss in these years and the
impact of such shares would have been antidilutive.
F29
16. 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.
Treasury and Forfeited Shares
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 shares
repurchases in 2014, 2013 and 2012 related to the share-repurchase program.
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.
Forfeited shares are generally the result of employee separation from the Company. There were forfeitures of
20,412 and 8,944 shares in 2014 and 2013, respectively, and no shares forfeited in 2012. Such stock is held briefly
as treasury stock and canceled during the year. At December 31, 2014 and 2013, there was no treasury stock held by
the Company.
Upon the vesting of unvested common stock (or restricted stock) the Company may withhold shares, based on
the employee’s election, in order to satisfy federal tax withholdings. The shares held by the Company are considered
constructively retired and are retired shortly after withholding. The Company then remits the withholding taxes
required by the taxing agencies. During 2014 and 2013 there were 8,120 and 6,652 shares withheld for tax purposes
and retired.
Stock-based Compensation 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 is in effect until May 2021 as a result of a May 2011
amendment to extend its term for an additional ten years. The 2001 Plan provides for the issuance of stock awards
for up to 1,900,000 shares of the Company’s common stock. The Compensation Committee may reward employees
and non-employees with various types of awards including but not limited to warrants, stock options, common
stock, and unvested common stock (or restricted stock) vesting on service, performance or market criteria.
At December 31, 2014, there were 997,377 shares of common stock available under the 2001 Plan. All 997,377
shares under the plan are available for issuance pursuant to future stock-based compensation awards.
There were no options outstanding at December 31, 2014 and 2013 and no shares are, or will be, available for
grant under the Company’s other option plans, all of which have been terminated.
F30
Common Stock Awards
The following table summarizes the Company’s service-based share compensation awards:
Nonvested at January 1, 2012 ..........................................
Granted ........................................................................
Vested ..........................................................................
Forfeited .......................................................................
Nonvested at December 31, 2012 ....................................
Granted ........................................................................
Vested ..........................................................................
Forfeited .......................................................................
Nonvested at December 31, 2013 ....................................
Granted ........................................................................
Vested ..........................................................................
Forfeited .......................................................................
Nonvested at December 31, 2014 ....................................
Number of Shares
71,469 $
Weighted Average
Fair Value Per Share
14.68
9.75
13.05
--
11.03
9.74
10.57
13.57
10.61
9.05
6.88
11.66
11.65
149,704
(34,543 )
--
186,630
60,032
(56,602 )
(8,944 )
181,116
61,957
(73,190 )
(20,412 )
149,471
In 2014, 2013 and 2012, several key employees were granted an aggregate total of 18,536, 25,207 and 118,774
shares of unvested common stock, respectively, with a weighted average fair value per share of $11.38, $9.30 and
$9.76 per share, respectively, resulting in compensation expense of $0.2 million, $0.2 million and $1.2 million,
respectively, to be recognized ratably over a three- or five-year restriction period.
The 2001 plan provides for unvested (or restricted) and vested common stock grants, and pursuant to non-
employee director compensation arrangements, non-employee directors of the Company were awarded unvested
stock with one-year vesting as follows:
Years Ended December 31,
2013
2012
2014
6,203
Shares awarded to each non-employee director .........................
43,421
Total shares awarded ..................................................................
Average grant-date market price per share .................................$
8.06
Total compensation cost attributable to shares awarded .............$ 350,000
Compensation cost recognized related to current and prior
4,975
34,825
$
10.06
$ 350,000
5,155
30,930
$
9.70
$ 300,000
year awards ...........................................................................$ 316,750
$ 333,499
$ 283,333
During the year ended December 31, 2014, a director of the Company retired and forfeited 6,203 unvested
shares. The amortized expense was adjusted for this forfeiture.
In addition to the service based compensation awards discussed above, the Company also awarded
performance-based awards. There were no performance-based shares awarded in 2012. In 2013, the Company issued
100,000 shares of unvested common stock to the Company’s CEO. These shares were to vest on March 31, 2018
subject to the satisfaction of a performance condition. In 2014, there were a total of 7,500 performance-based shares
issued. In order to recognize compensation expense for these performance based shares, the Company must assess,
at each reporting period, whether it is probable that the performance condition will be met. These shares must also
be re-valued at each reporting period until they vest. At December 31, 2014, the Company assessed that it would not
be probable that the performance condition would be met, as such; no expense was incurred during the year.
At December 31, 2014, total unrecognized compensation cost related to unvested common stock was $0.8
million. This cost is expected to be recognized over a weighted average period of 1.4 years. Compensation expense
for stock options and unvested common stock (or restricted stock) grants was $0.8 million (with no tax benefit) in
each of 2014 and 2013 and $0.7 million ($0.5 million after tax benefit of 35.0%) in 2012. Proceeds received by the
Company from the exercise of options in 2014, 2013 and 2012 were less than $0.1 million for each of these years.
The Company also awards common stock as part of its incentive plan with no service or performance vesting
requirements. There were no such shares awarded in 2014 and 2012 and 9,521 shares with a grant date fair value of
$0.1 million awarded in 2013 which was treated as compensation expense in 2013.
F31
Stock Option Awards
The following tables summarize the stock option activity under the 2001 Plan and previously active plans:
2001 Plan
Outstanding at December 31, 2012 ................
Exercised ....................................................
Expired/forfeited ........................................
Outstanding at December 31, 2013 ................
Exercised ....................................................
Expired/forfeited ........................................
$
Shares
22,200
(8,500 )
(6,200 )
7,500
(4,000 )
(3,500 )
Outstanding at December 31, 2014 ................
--
Weighted
Average
Exercise
Price
3.08
3.08
3.07
3.10
3.10
3.10
--
Total options exercised during 2014 .............
4,000
$
21,911
Number
of Shares
Aggregate
Intrinsic
Value
For options exercised during 2014, aggregate intrinsic value represents the total pre-tax intrinsic value based on
the difference between Company’s closing stock price on the day of exercise and the exercise price multiplied by the
shares received upon exercise. There were no options outstanding as of December 31, 2014.
At December 31, 2014, there was no unrecognized stock-based compensation expense related to stock options.
Stock Offering
On April 29, 2014, an amended “shelf” registration statement filed by the Company with the SEC became
effective. Under the amended shelf registration statement, the Company may offer from time to time any
combination of securities described in the prospectus in one or more offerings up to a total of $80 million. The
securities described in the prospectus include common and preferred stock, depository shares, debt securities,
warrants entitling the holders to purchase one or more classes or series of these securities or units consisting of two
or more of these issuances, classes or series of securities. Net proceeds from the sales of the offered securities may
be used for working capital needs, capital expenditures and other expenditures related to general corporate purposes,
including future acquisitions.
On May 6, 2014, the Company closed a public offering with D.A. Davidson & Co. as sole underwriter (the
“Underwriter”), pursuant to which the Underwriter purchased from the Company 2,100,000 shares of the
Company’s common stock at a price of $6.90 per share. The net proceeds of $14.0 million from the offering, after
deducting underwriting discounts and offering expenses, was used to repay a portion of the indebtedness outstanding
under our Credit Facility.
17. Employee Benefit Plans
The Company maintains two defined contribution profit-sharing plan (401(k) plans) covering substantially all
non-union persons employed by the Company, whereby employees may contribute a percentage of compensation,
limited to maximum allowed amounts under the Internal Revenue Code. The Plans provide 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 $1.3 million, $1.1 million
and $1.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.
F32
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:
(cid:120) 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.
(cid:120) 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.
The following table presents our participation in these plans (amounts in thousands):
Pension Trust
Fund
Pension Trust
Fund for
Operating
Engineers
Pension Plan .....
Laborers
Pension Trust
for Northern
California .........
Carpenter
Funds
Administrative
Office ...............
Cement
Mason
Pension Trust
Fund For
Northern
California .........
All other funds
(84)4 ..........................
Pension Plan
Employer
Identification
Number
Pension Protection
Act (“PPA”)
Certified Zone
Status1
2014
2013
FIP / RP
Status
Pending /
Implemented2
Contributions
2013
2012
2014
Expiration
Date of
Collective
Bargaining
Agreement3
Surcharge
Imposed
94-6090764
Red
Red
Yes
$ 1,757 $ 1,654 $ 508
No
6/30/2016
94-6277608
Yellow
Yellow
Yes
1,447
897
431
No
6/30/2019
94-6050970
Red
Red
Yes
1,015
759
47
No
6/30/2019
94-6277669
Yellow
Yellow
Yes
322
517
265
No
6/30/2016
Total Contributions: $ 10,808 $ 6,435 $ 5,541
6,267 2,608 4,290
Various
1The most recent PPA zone status available in 2014 and 2013 is for the plan’s year-end during 2013 and 2012, 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 $903,000, $603,000 and $466,000 for 2014, 2013 and 2012, 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.
The work the Company performed in California has increased resulting in an increased contribution to the
Laborers Pension Trust for Northern California and the Carpenters Fund Administrative Office during 2014, 2013
and 2012.
We currently have no intention of withdrawing from any of the multi-employer pension plans in which we
participate.
F33
18. Concentration of Risk and Enterprise Wide Disclosures
The following table shows contract revenues generated from the Company’s customers that accounted for more
than 10% of revenues (amounts in thousands):
2014
Amount %
Years Ended December 31,
2013
2012
Amount
%
Amount
%
Utah Department of Transportation
(“UDOT”) ............................................. $
*
* %
$
*
* %
$ 100,658
16.0 %
California Department of Transportation
(“Caltrans”) ...........................................
*Represents less than 10% of revenues
97,637 14.5
92,159
16.6
94,171
15.0
At December 31, 2014, Foursquare Properties Inc. owed $8.5 million and TxDOT owed $7.6 million to the
Company, which is greater than 10% of contract receivables. At December 31, 2013, Central Texas Mobility
Constructors (“CTMC”) owed $16.3 million, Foursquare Properties Inc. owed $11.4 million and City of Honolulu
owed $10.0 million to the Company, which was greater than 10% of contract receivables. At December 31, 2012,
North Texas Tollway Authority (“NTTA”) owed $8.8 million to the Company, which was greater than 10% of
contract receivables.
The Company’s revenue and receivables are entirely derived from the construction of U.S. projects and all of
the Company’s assets are held domestically within the U.S.
A portion of our labor force is subject to collective bargaining agreements. Refer to Note 17 for further
information regarding this concentration of risk.
19. Related Party Transactions
The Company has limited related party transactions. The most material transactions relate to the Company’s
RLW subsidiary and its executive management who own or have an ownership interest in certain real estate and
other companies. RLW has historically performed construction contracts, leased properties, or has provided
professional and other services for entities owned by the executive managers of RLW. The total RLW related party
revenue related to construction contracts totaled $0.5 million, $0.2 million and less than $0.1 million in 2014, 2013
and 2012, respectively. The total RLW related party billings for professional and other services, which include
accounting, payroll, reimbursement for computer and postage usage, provided by RLW was $0.9 million and $1.0
million in 2013 and 2012, respectively. RLW leases its main office and equipment maintenance shop for its Utah
operations for an annual cost of approximately $0.2 million each, plus annual common area maintenance charges of
less than $0.1 million each. The office and shop leases expire in 2022. RLW had other miscellaneous related party
transactions which aggregated to less than $0.2 million in each 2014, 2013 and 2012 year.
The Company had individually immaterial miscellaneous transactions with related parties that totaled $0.4
million, during each year 2014, 2013 and 2012.
During 2012, the Company entered into a business combination with Richard Buenting, the President and Chief
Executive Officer of RHB. Refer to Note 2 for a description of the related party transaction.
An independent member of senior management of the Company reviewed all related party sales and purchases
before they were transacted.
F34
20. Quarterly Financial Information
The following table summarizes the unaudited quarterly results of operations for 2014 and 2013 (amounts in
thousands, except per share data):
2014 Quarters Ended (unaudited)
March 31
June 30
September 30
December 31
Total
Revenues...................................................$ 134,538 $ 194,806
Gross profit ...............................................
Income (loss) before income taxes and
7,869
12,499
$ 189,275
$
8,356
153,611
3,697
$
672,230
32,421
earnings attributable to noncontrolling
interests .................................................
Net income (loss) attributable to Sterling
common stockholders ...........................
Net income (loss) per share attributable
to Sterling common stockholders:
480
205
2,473
(1,671 )
(5,875 )
(4,593)
1,200
(3,935 )
(7,251 )
(9,781)
Basic ..................................................$
Diluted ...............................................
$
0.01
0.01
$
0.07
0.07
(0.21 )
(0.21 )
$
(0.39 )
(0.39 )
$
(0.54)
(0.54)
2013 Quarters Ended (unaudited)
Revenues...................................................$ 111,035 $ 133,350 $
Gross profit (loss) .....................................
Income (loss) before income taxes and
(16,635)
1,385
March 31
June 30
September 30
185,935
8,359
December 31
$ 125,916
(23,053 )
$
Total
556,236
(29,944 )
earnings attributable to noncontrolling
interests .................................................
Net loss attributable to Sterling common
stockholders ..........................................
Net loss per share attributable to Sterling
common stockholders:
(7,219)
(25,967)
1,715
)
(37,333
)
(68,804
(4,580)
(17,025)
(189 )
(52,135 )
)
(73,929
Basic ..................................................$
Diluted ...............................................
(0.39) $
(0.39)
(0.93) $
(0.93)
(0.06 )
(0.06 )
$
(3.52 )
(3.52 )
$
(4.91 )
(4.91 )
The Company’s operating revenues tend to be somewhat higher in the summer months which are typically due
to warmer and dryer weather conditions. Our second and third quarter revenues and results of operations typically
reflect these seasonal trends. However, from time to time, the Company’s operating results are significantly affected
by certain transactions or events that management believes are not indicative or representative of our results.
During the third and fourth quarters of 2014, the Company recorded changes in estimated revenues and gross
margin which resulted in net charges of $4.5 million and $9.5 million, respectively. Gross profit was depressed by
downward revisions of gross profit on problem projects, the majority of which are being constructed in Texas,
primarily due to spot shortages of commodities, over-stretched sub-contractors and vendors, and intense competition
for craft labor.
During the first, second and fourth quarters of 2013, the Company recorded changes in estimated revenues and
gross margin which resulted in net charges of $4.3 million, $20.6 million and $37.7 million, respectively. A
significant portion of these revisions were attributable to three projects. Furthermore, during the fourth quarter,
management recorded a valuation allowance of $28.2 million on the net deferred tax assets as a result of the fourth
quarter revisions mentioned above. Refer to Note 12 for our disclosure regarding income taxes and deferred assets
and liabilities.
F35
21. Subsequent Events – CEO Departure, Goodwill and Covenant Compliance
CEO Departure
On February 2, 2015, the Company announced that Peter MacKenna, formerly the Company’s President &
Chief Executive Officer and a director, had left the Company effective January 31, 2015, with Paul J. Varello, the
Chairman of the Board of Directors, being named acting Chief Executive Officer effective February 1, 2015.
The Company expensed $1.8 million in February 2015 related to severance received by Mr. MacKenna.
Goodwill
On January 27, 2015, the Company announced its preliminary fourth quarter and full year 2014 results and that
the Company was not in compliance with the Credit Facility’s tangible net worth covenant.
The Company believes these announcements negatively impacted the Company’s stock price which decreased
from $5.52 on January 26, 2015 to $3.97 on January 27, 2015 and has not yet recovered. Due to the decrease in the
stock price, the Company noted that a goodwill impairment triggering event may have occurred in January 2015.
Covenant Compliance
As a result of the fourth quarter loss, the Company was not in compliance with the tangible net worth covenant
related to the Company’s Credit Facility at December 31, 2014. On March 12, 2015, the Company obtained a waiver
and amendment (the “Seventh Amendment”) which included the following key modifications:
(cid:120) A reduction in our availability of $5 million for total availability of $35 million as of March 12, 2015;
(cid:120) A reduction in our availability of $10 million at June 1, 2015, for total availability of $25 million;
(cid:120) A reduction in our availability of $10 million at September 1, 2015, for total availability of $15 million;
(cid:120) An increase in our annual interest rate from the prime rate plus 150 basis points, or 4.75%, to the prime rate
plus 350 basis points, or 6.75%;
(cid:120) The tangible net worth covenant is modified to include $11.3 million of available headroom from the $86.3
million of tangible net worth calculated at December 31, 2014;
(cid:120) Our first covenant test will begin at the end of April using April annualized figures; and
(cid:120) A fee of $0.4 million is due in four equal payments. The first payment was due upon execution of the
Seventh Amendment and the second, third and fourth payments are due on June 30th, September 30th, and
December 31st of 2015, respectively. However, any remaining unpaid fees are waived if at any point during
the year the Company liquidates and terminates the Credit Facility a month before a payment becomes due.
F36
1800 Hughes Landing Blvd (cid:127) The Woodlands, Texas 77380 (cid:127) 281-214-0800
www.strlco.com