e424b5
PROSPECTUS
File Pursuant to Rule 424(B)(5)
Registration No. 333-147593
1,600,000 Shares
Sterling Construction Company,
Inc.
Common Stock
We are offering to sell 1,600,000 shares of our common
stock. Our common stock is listed on The NASDAQ Global Select
Market, or Nasdaq, under the symbol STRL. The last
reported sale price on Nasdaq on December 18, 2007 was
$20.83.
We have granted the underwriter the right to purchase up to
240,000 additional shares of common stock to cover any
over-allotments. The underwriter can exercise this right at any
time within 30 days after the offering.
Investing in our common stock involves risks, including those
incorporated by reference herein as described under Risk
Factors on page 8 of this prospectus.
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Per Share
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Total
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Offering price
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$
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20,00
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$
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32,000,000
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Discounts and commissions to underwriter
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$
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1.00
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$
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1,600,000
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Offering proceeds to us, before expenses
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$
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19.00
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$
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30,400,000
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The underwriter expects to deliver the shares of common stock to
investors on or about December 24, 2007.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or has determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
D.A.
Davidson & Co.
The
date of this prospectus is December 18, 2007
TABLE OF
CONTENTS
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Page
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8
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F-1
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You should rely only on the information contained or
incorporated by reference in this prospectus or in any related
free writing prospectus filed with the Securities and Exchange
Commission and used or referred to in an offering to you of
these securities. We have not authorized anyone to provide you
with different information. If anyone provides you with
different or inconsistent information, you should not rely on
it. We are offering to sell, and seeking offers to buy, shares
of our common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or any sale of our
common stock. Our business, financial condition, results of
operations and prospects may have changed since that date.
MARKET
DATA AND FORECASTS
Unless otherwise indicated, information in this prospectus
concerning economic conditions and our industry is based on
information from independent industry analysts and publications,
as well as our estimates. Our estimates are derived from
publicly available information released by third-party sources,
as well as data from our internal research, and are based on
such data and our knowledge of our industry. None of the
independent industry publications used in this prospectus were
prepared on our or our affiliates behalf and none of the
sources cited in this prospectus have consented to the inclusion
of any data from its reports, nor have we sought their consent.
These industry publications generally indicate that they have
obtained their information from sources believed to be reliable,
but the sources do not guarantee the accuracy and completeness
of their information.
i
This summary highlights information contained elsewhere in
this prospectus. This summary does not contain all of the
information that may be important to you. You should read this
entire prospectus carefully, including the risks discussed under
Risk Factors and the consolidated financial
statements and notes thereto included elsewhere in this
prospectus. In this prospectus, all references to
Sterling, Sterling Construction,
we, us and our refer to
Sterling Construction Company, Inc. and its subsidiaries, unless
otherwise stated or indicated by context.
Our
Company
We are a leading heavy civil construction company that
specializes in the building, reconstruction and repair of
transportation and water infrastructure. Our transportation
infrastructure projects include highways, roads, bridges and
light rail, and our water infrastructure projects include water,
wastewater and storm drainage systems. We provide general
contracting services primarily to public sector clients
utilizing our own employees and equipment for activities,
including excavating, concrete and asphalt paving, installation
of large-diameter water and wastewater distribution systems,
construction of bridges and similar large structures,
construction of light rail infrastructure, concrete batch plant
operations, concrete crushing and aggregates and asphalt paving
operations. We perform the majority of the work required by our
contracts with our own crews, and generally engage
subcontractors only for ancillary services.
Our business was founded in 1955 and has a history of profitable
growth, which we have achieved by expanding both our service
profile and our market areas. This involves adding services,
such as our concrete operations, in order to capture a greater
percentage of available work in our current and potential
markets. It also involves strategically expanding our
operations, either by establishing a branch 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. We extended both our service
profile and our geographic market reach with our recent
acquisition of Road and Highway Builders, LLC, which we refer to
as RHB, discussed below.
We operate in Texas and Nevada, two states that we believe
benefit from both positive long-term demographic trends as well
as an historical commitment to funding transportation and water
infrastructure projects. From 2000 to 2006, the population grew
12.7% in Texas and 24.9% in Nevada. Budgeted net expenditures
for transportation in 2007 totaled more than $7.6 billion
in Texas, an increase of 4% from 2006. In the recent November
election, Texas voters approved a $5 billion issuance of
bonds for highway improvements. In Nevada, total highway fund
revenue in 2006 reached $1.0 billion, an annual increase of
10.5% from 2001 levels, up 5% from 2005, and several large jobs
are scheduled to be let over the next year. We anticipate that
continued population growth and increased spending for
infrastructure in these markets will positively affect our
business opportunities over the coming years.
For the nine months ended September 30, 2007, we had
revenues of $217.9 million, 17.7% higher than the same
period in 2006. Over the same period, we had net income from
continuing operations of $9.8 million, modestly higher than
results for the same period in 2006. As of September 30,
2007, after giving effect to the RHB acquisition, we had a
backlog of approximately $494 million.
Road and
Highway Builders Acquisition
On October 31, 2007, we completed the acquisition of
privately-owned RHB, which is headquartered in Reno, Nevada. RHB
is a heavy civil construction business focused on the
construction of roads and highways throughout the state of
Nevada. We paid $53 million to acquire approximately 91.67%
of the equity interest in RHB. The remaining 8.33% interest is
owned by Mr. Richard Buenting, the chief executive officer
of RHB, who continues to run RHB as part of our senior
management team.
RHBs largest customer is the Nevada Department of
Transportation, which is responsible for planning, construction,
operation and maintenance of the 5,400 miles of highway and
over 1,000 bridges that make up the state highway system. RHB is
focused on providing timely and profitable execution of
construction projects along with high-value deployment of
construction materials such as aggregates and mixes for asphalt
1
paving. RHB has concentrated its business in suburban and rural
highway and road system projects requiring high-volume
production and materials handling, and has not historically
pursued municipal work such as water or storm water systems or
high density urban projects. Since its founding in 1999, RHB has
experienced profitable growth, capitalizing on strong market
conditions and solid long-term demographics in Nevada.
For the nine months ended September 30, 2007, RHB generated
revenue, net income and earnings before income, taxes,
depreciation and amortization, or EBITDA, of $64.9 million,
$20.9 million and $21.5 million, respectively. This
high level of profitability in 2007 resulted from the
exceptional profitability of specific RHB projects, and we do
not expect this high level of profitability to be normal for RHB
going forward. We purchased RHB based on an assumed sustainable
trailing twelve month EBITDA of approximately $12 million
and with the expectation of further future growth. EBITDA is not
a financial measure calculated in accordance with generally
accepted accounting principles, or GAAP. See
Business Recent RHB Acquisition for a
reconciliation of RHBs net income, the most directly
comparable GAAP financial measure, to RHBs EBITDA for the
nine months ended September 30, 2007. As of
September 30, 2007, RHB had a backlog of approximately
$127 million based on our methodology of calculating
backlog. See Selected Historical Financial and Operating
Data for information regarding our calculation of backlog.
We acquired RHB for a number of reasons, including those listed
below:
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expansion into growing western U.S. infrastructure
construction markets;
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strong management team with a shared corporate culture;
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expansion of our service lines into aggregates and asphalt
paving materials;
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opportunities to extend our municipal and structural
capabilities into Nevada; and
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RHBs strong financial results and immediate accretion to
our earnings and earnings per share.
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Our
Competitive Strengths
We believe our competitive strengths include:
Comprehensive Infrastructure Construction
Capabilities. We provide comprehensive construction
services to our customers, which allows us to capture additional
profit margin and to more aggressively bid on contracts as
compared to some competitors more reliant upon subcontractors.
Long and Successful Track Record of Infrastructure
Construction. We have over 50 years of experience
in the construction industry and have developed the processes
and controls that allow us to provide high-quality contracting
services.
Leadership Position in Our Markets. We are an
established leader in our markets based on our longevity, our
management expertise and our reputation, as well as our in-depth
knowledge of construction conditions in our market areas.
Consistent History of Managing Construction Projects and
Contract Risk. Our significant experience and longevity
in our markets provides us with an understanding of the many
risks of infrastructure construction, which we monitor and
manage from bidding through completion of a contract.
Track Record of Sourcing and Completing
Acquisitions. We have successfully completed several
acquisition transactions over the past five years, which have
materially augmented our organic growth.
Experienced Management Team and Skilled
Workforce. With over 30 years of industry
experience at the CEO and President level, five senior managers
averaging over 25 years of industry experience, and 15
project managers averaging over 15 years of industry
experience, we believe that our management team and employees
are key factors to our success.
2
Our
Business Strategy
Key features of our business strategy include:
Continue to Add Construction Capabilities. By adding
capabilities that augment our core construction competencies, we
are able to improve gross margin opportunities, more effectively
compete for contracts and compete for contracts that might not
otherwise be available to us.
Increase Our Market Leadership in Our Core
Markets. We have a strong presence in a number of
attractive growing markets in Texas and Nevada, in which we
intend to continue to expand our presence.
Apply Core Competencies Across Our Markets. We
intend to capitalize on opportunities to export our Texas
experience constructing bridges and water and sewer systems into
RHBs Nevada markets. Similarly, we believe RHBs
experience in aggregates and asphalt paving materials will open
new opportunities for us in our Texas markets.
Expand into Attractive New Markets and Selectively Pursue
Strategic Acquisitions. We will continue to seek to
identify attractive new markets and opportunities in select
western and southeastern U.S. markets. We will also
continue to assess opportunities to extend our service
capabilities and expand our markets through acquisitions.
Position Our Business for Future Infrastructure
Spending. We believe there is a growing awareness of
the need to build, reconstruct and repair our countrys
infrastructure, including water, wastewater and storm drainage
systems, and our transportation infrastructure such as bridges,
highways and mass transit systems. We will continue to build our
expertise to capture this infrastructure spending.
Continue to Develop Our Employees. We believe that
our employees are a 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.
Risks
Related to Our Business and Strategy
You should carefully read and consider the information set forth
below under Risk Factors, together with all of the
other information set forth in this prospectus, before deciding
to invest in shares of our common stock.
3
The
Offering
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Nasdaq symbol
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STRL
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Common stock offered by us
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1,600,000 shares
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Common stock to be outstanding after the offering
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12,762,942 shares
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Use of proceeds
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We will use the net proceeds of approximately $29.6 million
from the offering, after deducting underwriting discounts and
fees of $1.6 million in the aggregate and estimated
offering expenses of approximately $775,000:
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to repay indebtedness outstanding under our
new $75 million revolving credit facility, which we refer
to as our credit facility; and
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to strengthen our balance sheet, including our
working capital, in order to fund our business operations and
provide liquidity for future growth.
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The number of shares of common stock outstanding before and
after this offering is based on the number of shares outstanding
as of December 5, 2007 and excludes:
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552,516 shares of common stock reserved for issuance upon
the exercise of outstanding stock options at a weighted average
exercise price per share of $7.802; and
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356,266 shares of common stock reserved for issuance upon
the exercise of outstanding warrants at an exercise price per
share of $1.50.
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Unless we indicate otherwise, the number of shares of common
stock shown to be outstanding after the offering, as well as
share, per share, holders of record, and financial information
in this prospectus:
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assumes no exercise by the underwriter of its option to purchase
up to 240,000 additional shares of our common stock to cover
over-allotments; and
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does not give effect to the use of proceeds of this offering.
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Our
Executive Offices
Our principal executive offices are located at 20810 Fernbush
Lane, Houston, Texas 77073, and our telephone number at this
address is (281) 8219091. Our website is
www.sterlingconstructionco.com. Information on, or accessible
through, this website is not a part of, and is not incorporated
into, this prospectus.
4
Summary
Historical and Pro Forma Financial and Operating Data
The following table sets forth our summary historical and pro
forma financial and operating data for the periods indicated.
The summary historical condensed consolidated statement of
operations and cash flow data for the years ended
December 31, 2004, 2005 and 2006, and the summary
historical condensed consolidated balance sheet data as of
December 31, 2005 and 2006, have been derived from our
audited consolidated financial statements, which are included
elsewhere in this prospectus. The summary historical condensed
consolidated balance sheet data as of December 31, 2004,
have been derived from our audited consolidated balance sheet as
of December 31, 2004, which is not included in this
prospectus. The summary historical condensed consolidated
financial data as of and for the nine months ended
September 30, 2006 and 2007, are derived from our unaudited
condensed consolidated financial statements, which are included
elsewhere in this prospectus.
The unaudited condensed consolidated financial statements have
been prepared on the same basis as our audited consolidated
financial statements and include all adjustments, consisting of
normal and recurring adjustments, that we consider necessary for
a fair presentation of our financial position and operating
results for the unaudited periods. The summary financial and
operating data as of and for the nine months ended
September 30, 2007, are not necessarily indicative of the
results that may be obtained for a full year.
The summary pro forma condensed combined statement of operations
data for the year ended December 31, 2006 and nine months
ended September 30, 2007, gives effect on a pro forma basis
to the RHB acquisition as if it had been consummated on
January 1, 2006. The summary pro forma condensed combined
balance sheet information gives effect on a pro forma basis to
the consummation of the RHB acquisition, as if it had been
consummated on September 30, 2007.
The information presented below should be read in conjunction
with Selected Historical Financial and Operating
Data, Unaudited Pro Forma Condensed Combined
Financial Information, Managements Discussion
and Analysis of Financial Condition and Results of
Operations and the financial statements and the notes
thereto included elsewhere in this prospectus.
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Pro Forma(1)
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Historical
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Nine Months
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Nine Months Ended
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Year Ended
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Ended
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Year Ended December 31,
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September 30,
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December 31,
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September 30,
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2004
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2005
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2006
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2006
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2007
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2006
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2007
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(Unaudited)
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(Unaudited)
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(in thousands, except per share data)
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Statement of Operations Data:
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Revenues
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$
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132,478
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$
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219,439
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$
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249,348
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$
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185,233
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$
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217,877
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$
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286,511
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$
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282,797
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Cost of revenues
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119,217
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195,683
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220,801
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163,358
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196,284
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252,268
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240,399
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Gross profit
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13,261
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23,756
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28,547
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21,875
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21,593
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34,243
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42,398
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General and administrative expenses and other
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7,696
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9,091
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10,549
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7,928
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8,292
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10,462
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8,691
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Operating income
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5,565
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14,665
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17,998
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13,947
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13,301
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23,781
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33,707
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Interest expense (income), net
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1,456
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1,336
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(1,206
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(803
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(1,366
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1,576
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908
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Income from continuing operations before minority interest and
income taxes
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4,109
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13,329
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19,204
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14,750
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14,667
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22,205
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32,799
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Minority interest
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(962
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(518
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(1,734
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Income from continuing operations before income taxes
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3,147
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13,329
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19,204
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14,750
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14,667
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21,687
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31,065
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Income tax (benefit) expense
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(2,134
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2,788
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6,566
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5,027
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4,890
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7,410
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10,465
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Net income from continuing operations
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5,281
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10,541
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12,638
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9,723
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9,777
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14,277
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20,600
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Net income (loss) from discontinued operations
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372
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559
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682
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444
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(25
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682
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(25
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Net income
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$
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5,653
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$
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11,100
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$
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13,320
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$
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10,167
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$
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9,752
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$
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14,959
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$
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20,575
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Basic income per share:
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Continuing operations
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$
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0.99
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$
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1.36
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$
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1.19
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$
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0.93
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$
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0.89
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$
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1.34
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$
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1.87
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Discontinued operations
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0.07
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0.07
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0.06
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0.04
|
|
|
|
0.00
|
|
|
|
0.06
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.06
|
|
|
$
|
1.43
|
|
|
$
|
1.25
|
|
|
$
|
0.97
|
|
|
$
|
0.89
|
|
|
$
|
1.40
|
|
|
$
|
1.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.75
|
|
|
$
|
1.11
|
|
|
$
|
1.08
|
|
|
$
|
0.84
|
|
|
$
|
0.83
|
|
|
$
|
1.21
|
|
|
$
|
1.74
|
|
Discontinued operations
|
|
|
0.05
|
|
|
|
0.05
|
|
|
|
0.06
|
|
|
|
0.04
|
|
|
|
0.00
|
|
|
|
0.06
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.80
|
|
|
$
|
1.16
|
|
|
$
|
1.14
|
|
|
$
|
0.88
|
|
|
$
|
0.83
|
|
|
$
|
1.27
|
|
|
$
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma(1)
|
|
|
|
Historical
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(in thousands, except per share data)
|
|
Weighted average number of shares outstanding used in computing
per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,343
|
|
|
|
7,775
|
|
|
|
10,583
|
|
|
|
10,455
|
|
|
|
10,963
|
|
|
|
10,623
|
|
|
|
11,002
|
|
Diluted
|
|
|
7,028
|
|
|
|
9,538
|
|
|
|
11,714
|
|
|
|
11,640
|
|
|
|
11,765
|
|
|
|
11,754
|
|
|
|
11,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data (end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,449
|
|
|
$
|
22,267
|
|
|
$
|
28,466
|
|
|
$
|
18,996
|
|
|
$
|
14,894
|
|
|
|
|
|
|
$
|
23,924
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
26,169
|
|
|
|
22,585
|
|
|
|
32,630
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
|
16,052
|
|
|
|
18,354
|
|
|
|
62,874
|
|
|
|
58,369
|
|
|
|
59,691
|
|
|
|
|
|
|
|
31,354
|
|
Total assets
|
|
|
89,544
|
|
|
|
118,455
|
|
|
|
167,772
|
|
|
|
171,293
|
|
|
|
187,107
|
|
|
|
|
|
|
|
222,903
|
|
Total debt
|
|
|
25,445
|
|
|
|
23,142
|
|
|
|
30,782
|
|
|
|
28,812
|
|
|
|
30,689
|
|
|
|
|
|
|
|
53,257
|
|
Total liabilities
|
|
|
54,336
|
|
|
|
69,843
|
|
|
|
76,781
|
|
|
|
83,950
|
|
|
|
85,172
|
|
|
|
|
|
|
|
125,383
|
|
Stockholders equity
|
|
|
35,208
|
|
|
|
48,612
|
|
|
|
90,991
|
|
|
|
87,343
|
|
|
|
101,935
|
|
|
|
|
|
|
|
97,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow data from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
4,171
|
|
|
$
|
31,266
|
|
|
$
|
23,089
|
|
|
$
|
9,846
|
|
|
$
|
14,648
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(5,809
|
)
|
|
|
(10,972
|
)
|
|
|
(52,358
|
)
|
|
|
(46,567
|
)
|
|
|
(28,586
|
)
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
2,436
|
|
|
|
(1,476
|
)
|
|
|
35,468
|
|
|
|
33,450
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(unaudited) (2)
|
|
$
|
9,520
|
|
|
$
|
20,288
|
|
|
$
|
25,691
|
|
|
$
|
19,965
|
|
|
$
|
20,040
|
|
|
$
|
30,626
|
|
|
$
|
39,842
|
|
Capital expenditures
|
|
|
3,555
|
|
|
|
11,392
|
|
|
|
27,055
|
|
|
|
24,706
|
|
|
|
23,033
|
|
|
|
27,268
|
|
|
|
27,394
|
|
Backlog at end of period (unaudited)(3)
|
|
|
232,000
|
|
|
|
307,000
|
|
|
|
395,000
|
|
|
|
418,000
|
|
|
|
367,000
|
|
|
|
|
|
|
|
494,000
|
|
|
|
|
(1) |
|
The high level of profitability for the nine months ended
September 30, 2007 reflects the exceptional profitability
of specific ongoing RHB prospects, and we do not expect the high
level of profitability to be normal for RHB going forward. |
|
(2) |
|
EBITDA is defined as net income before net interest expense,
income tax expense, and depreciation and amortization, and
before RHBs other miscellaneous income. EBITDA is a
non-GAAP financial measure that we use for our internal
budgeting process, which excludes the effects of financing
costs, income taxes and non-cash depreciation and amortization.
Although EBITDA is a common alternative measure of performance
used by investors, financial analysts and rating agencies to
assess operating performance for companies in our industry, it
is not a substitute for other GAAP financial measures such as
net income or operating income as calculated and presented in
accordance with GAAP. Furthermore, we believe that the non-GAAP
EBITDA financial measure is useful to investors in providing
greater transparency to the information used by management in
its operational and investment decision making. Our non-GAAP
financial measures may be different from such measures used by
other companies. We urge you to review the GAAP financial
measures included in this prospectus and our consolidated
financial statements, including the notes thereto, and the other
financial information contained in this prospectus and
incorporated herein by reference, and not to rely on any single
financial measure to evaluate our business. |
|
|
|
A reconciliation of net income to EBITDA for each of the
historical and pro forma fiscal periods indicated is as follows
(in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Historical
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Net income
|
|
$
|
5,653
|
|
|
$
|
11,100
|
|
|
$
|
13,320
|
|
|
$
|
10,167
|
|
|
$
|
9,752
|
|
|
$
|
14,959
|
|
|
$
|
20,575
|
|
Depreciation and amortization
|
|
|
4,545
|
|
|
|
5,064
|
|
|
|
7,011
|
|
|
|
5,574
|
|
|
|
6,764
|
|
|
|
6,681
|
|
|
|
7,894
|
|
Interest expense (income), net
|
|
|
1,456
|
|
|
|
1,336
|
|
|
|
(1,206
|
)
|
|
|
(803
|
)
|
|
|
(1,366
|
)
|
|
|
1,576
|
|
|
|
908
|
|
Income tax (benefit) expense
|
|
|
(2,134
|
)
|
|
|
2,788
|
|
|
|
6,566
|
|
|
|
5,027
|
|
|
|
4,890
|
|
|
|
7,410
|
|
|
|
10,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
9,520
|
|
|
$
|
20,288
|
|
|
$
|
25,691
|
|
|
$
|
19,965
|
|
|
$
|
20,040
|
|
|
$
|
30,626
|
|
|
$
|
39,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
Use of non-GAAP financial measures is subject to inherent
limitations because they do not include all the expenses that
must be included under GAAP and because they involve the
exercise of judgment of which charges should properly be
excluded from the non-GAAP financial measure. EBITDA has
material limitations as a performance measure because it
excludes (1) interest expense, which is a necessary element
of our costs and ability to generate revenues because we borrow
money to finance our operations, (2) depreciation, which is
a necessary element of our costs and ability to generate
revenues because we use capital assets, and (3) income
taxes, which we are required to pay. Management compensates for
these limitations by providing specific information regarding
the GAAP amounts excluded from EBITDA and by presenting
comparable GAAP measures more prominently in our disclosures. |
|
(3) |
|
Historical information does not include RHB backlog; pro forma
backlog does include RHB backlog of approximately
$127 million as of September 30, 2007, based on our
methodology of calculating backlog. Backlog is our estimate of
the billings that we expect to make in future periods on our
construction contracts. We add the revenue value of new
contracts to our backlog, typically when we are the low bidder
on a public sector contract and management determines that there
are no apparent impediments to award of the contract. At
September 30, 2007, historical and pro forma backlog
included approximately $12 million of low bids where the
contracts had not been officially awarded. RHB had no such
backlog at that date. Historically, subsequent non-awards to us
of contracts relating to such low bids have not materially
affected our backlog or financial condition. As construction on
our contracts progresses, we increase or decrease backlog to
take account changes in estimated quantities under fixed unit
price contracts, as well as to reflect changed conditions,
change orders and other variations from initially anticipated
contract revenues and costs, including completion penalties and
bonuses. We subtract from backlog the amounts we bill on
contracts. |
7
An investment in our common stock involves various risks.
Before making an investment in our common stock, you should
carefully consider the following risks, as well as the other
information contained in this prospectus, including our
consolidated financial statements and the notes thereto and
Managements Discussion and Analysis of Financial
Condition and Results of Operations. 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
and results of operations. As a result, the trading price of our
common stock could decline, and you could lose a part or all of
your investment.
Risks
Relating to Our Business
If we are
unable to accurately estimate the overall risks or costs when we
bid on a contract that is ultimately awarded to us, we may
achieve a lower than anticipated profit or incur a loss on the
contract.
Substantially all of our revenues and backlog are typically
derived from fixed unit price contracts. Fixed unit price
contracts require us to perform the contract for a fixed unit
price irrespective of our actual costs. As a result, we realize
a profit on these contracts only if we successfully estimate our
costs and then successfully control actual costs and avoid cost
overruns. If our cost estimates for a contract are inaccurate,
or if we do not execute the contract within our cost estimates,
then cost overruns may cause us to incur losses or cause the
contract not to be as profitable as we expected. This, in turn,
could negatively affect our cash flow, earnings and financial
position.
The costs incurred and gross profit realized on such contracts
can vary, sometimes substantially, from the original projections
due to a variety of factors, including, but not limited to:
|
|
|
|
|
onsite conditions that differ from those assumed in the original
bid;
|
|
|
|
delays caused by weather conditions;
|
|
|
|
contract 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;
|
|
|
|
our suppliers or subcontractors failure to perform;
|
|
|
|
fraud or theft committed by our employees;
|
|
|
|
mechanical problems with our machinery or equipment;
|
|
|
|
citations issued by any governmental authority, including the
Occupational Safety and Health Administration;
|
|
|
|
difficulties in obtaining required governmental permits or
approvals;
|
|
|
|
changes in applicable laws and regulations; and
|
|
|
|
claims or demands from third parties alleging damages arising
from our work or from the project of which our work is part.
|
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. If public sector
8
customers seek to impose contractual risk-shifting provisions
more aggressively, we could face increased risks, which may
adversely affect our cash flow, earnings and financial position.
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. For
example, state spending on highway and other projects can be
adversely affected by decreases or delays in, or uncertainties
regarding, federal highway funding, which could adversely affect
us, particularly in Texas. We are reliant upon contracts with
the Texas Department of Transportation, or TXDOT, and the Nevada
Department of Transportation, or NDOT, for a significant portion
of our revenues. Recent public statements by TXDOT officials
indicate potential TXDOT funding shortfalls and reductions in
spending. In addition, the recent nationwide declines in home
sales and increases in foreclosures could adversely affect
expenditures by state and local governments, particularly in
Nevada. Decreases in government funding of infrastructure
projects could decrease the number of civil construction
contracts available and limit our ability to obtain new
contracts, which could reduce our revenues and profits.
The
cancellation of significant 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 sudden
cancellation of a contract or our debarment from the bidding
process could cause our equipment and work crews to remain idled
for a significant period of time until other comparable work
became available, which could have a material adverse effect on
our business and results of operations.
We
operate in Texas and Nevada, and any adverse change to the
economy or business environment in Texas or Nevada could
significantly affect our operations, which would lead to lower
revenues and reduced profitability.
We operate in Texas and Nevada, and our Texas operations are
particularly concentrated in the Houston area. 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. A stagnant or depressed economy in Texas or
Nevada generally, or in Houston specifically, or in any of the
other markets that we serve, could adversely affect our
business, results of operations and financial condition.
Our
acquisition strategy involves a number of risks.
In addition to organic growth of our construction business, we
intend to continue pursuing growth through the acquisition of
companies or assets that may enable us to expand our project
skill-sets and capabilities, enlarge our geographic markets, add
experienced management and increase critical mass to enable us
to bid on larger contracts. However, we may be unable to
implement this growth strategy if we cannot reach agreements for
potential acquisitions on acceptable terms or for other reasons.
Moreover, our acquisition strategy involves certain risks,
including:
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difficulties in the integration of operations and systems;
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difficulties applying our expertise in one market into another
market;
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the key personnel and customers of the acquired company may
terminate their relationships with the acquired company;
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we may experience additional financial and accounting challenges
and complexities in areas such as tax planning and financial
reporting;
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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;
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our ongoing business may be disrupted or receive insufficient
management attention; and
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we may not be able to realize cost savings or other financial
benefits we anticipated.
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These risks apply to our recent acquisition and integration of
RHB.
Future acquisitions may require us to obtain additional equity
or debt financing, as well as additional surety bonding
capacity, which may not be available on terms acceptable to us
or at all. Moreover, to the extent that any acquisition results
in additional goodwill, it will reduce our tangible net worth,
which might have an adverse effect on our credit and bonding
capacity.
Our
industry is highly competitive, with a variety of larger
companies with greater resources competing with 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.
Essentially all of the contracts on which we bid are 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. Within our markets, we compete with many
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 have greater
financial and other resources than we do. In addition, there are
a number of 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, such as Nevada, where home building projects have
slowed, construction companies that lack available work in the
home building market have begun bidding on highway construction
contracts. 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. If we are unable to compete
successfully in our markets, our relative market share and
profits could 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 for trucking arrangements
needed for our Nevada operations. 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. 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, concrete, steel and pipe) for
our contracts, except in Nevada where RHB sources and produces
most of its own aggregates. We do not own or operate any
quarries in Texas, and there are no naturally occurring sources
of aggregates in the Houston metropolitan area. We normally do
not bid on contracts unless we have commitments from suppliers
for the materials required to complete the contract and at
prices that we have included in our bid, except for some
aggregates that RHB uses in its construction projects. Thus, to
the extent that we cannot obtain commitments from our suppliers
for materials, our ability to bid for contracts may be impaired.
In addition, if a supplier is unable to deliver materials
according to the negotiated terms of a supply agreement for any
reason, including the deterioration of its financial condition,
we may suffer delays and be
10
required to purchase the materials from another source at a
higher price. 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, RHB uses oil in combination
with aggregates to produce asphalt used in its road and highway
construction projects. Decreased supplies of such products
relative to demand, unavailability of petroleum supplies due to
refinery turnarounds, and other factors can increase the cost of
such products. Future increases in the costs of fuel and other
petroleum-based products used in our business, particularly if a
bid has been submitted for a contract and the costs of such
products have been estimated at amounts less than the actual
costs thereof, could result in a lower profit, or a loss, on a
contract.
We may
not accurately assess the quality, and we may not accurately
estimate the 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 these factors 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.
We may
not be able to fully realize the revenue anticipated by our
reported backlog.
Almost all of the contracts included in backlog are awarded by
public sector customers through a competitive bid process, with
the award generally being made to the lowest bidder. We add new
contracts to our backlog, typically when we are the low bidder
on a public sector contract and management determines that there
are no apparent impediments to award of the contract. As
construction on our contracts progresses, we increase or
decrease backlog to take account of changes in estimated
quantities under fixed unit price contracts, as well as to
reflect changed conditions, change orders and other variations
from initially anticipated contract revenues and costs,
including completion penalties and bonuses. We subtract from
backlog the amounts we bill on contracts.
Most of the contracts with our public sector customers can be
terminated at their discretion. If a customer cancels, suspends,
delays or reduces a contract, we may be reimbursed for certain
costs but typically will not be able to bill the total amount
that had been reflected in our backlog. Cancellation of one or
more contracts that constitute a large percentage of our
backlog, and our inability to find a substitute contract, would
have a material adverse effect on our business, results of
operations and financial condition.
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.
Competition for these employees is intense, and 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 future earnings may be negatively impacted.
In Texas, we rely heavily on immigrant labor. Any adverse
changes to existing laws and regulations, or changes in
enforcement requirements or practices, applicable to employment
of immigrants could negatively impact the availability and cost
of the skilled personnel and labor we need, particularly in
Texas. We may not
11
be able to continue to attract and retain sufficient employees
at all levels due to changes in immigration enforcement
practices or compliance standards or for other reasons.
In Nevada, a substantial portion of our equipment operators and
laborers are unionized. Any work stoppage or other labor dispute
involving our unionized workforce would have a material adverse
effect on our operations and operating results in Nevada.
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 generally 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.
Unanticipated
adverse weather conditions may cause delays, which could slow
completion of our contracts and negatively affect our current
and future 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 Hurricane Rita resulted in our inability to perform
work on all Houston-area contracts for several days. Lengthy
periods of wet weather will generally interrupt construction,
and this can lead to under-utilization of crews and equipment,
resulting in less efficient rates of overhead recovery. For
example, during much of 2007, we experienced an above-average
number of days and amount of rainfall across our Texas markets,
which impeded our ability to work on construction projects and
reduced our gross profit. While revenues can be recovered
following a period of bad weather, it is generally impossible to
recover the efficiencies, 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.
At any point in time, a substantial portion of our revenues may
be derived from a limited number of large construction
contracts. 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, financing arrangements and governmental
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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, storms or flooding, delays in receiving
material and equipment from suppliers 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
dependence on a limited number of customers could adversely
affect our business and results of operations.
Due to the size and nature of our construction contracts, one or
a few customers have in the past and may in the future represent
a substantial portion of our consolidated revenues and gross
profits in any one year or over a period of several consecutive
years. For example, in 2006, approximately 84% of our revenue
was generated from three customers, and approximately 90% of
RHBs revenue was generated from one customer. Similarly,
our backlog frequently reflects multiple contracts for
individual customers; therefore, one customer may comprise a
significant percentage of backlog at a certain point in time. An
example of this is TXDOT, with which we had 21 contracts
representing an aggregate of approximately 69% of our backlog at
September 30, 2007. Similarly, seven contracts with NDOT
represented 100% of RHBs backlog at September 30,
2007. The loss of business from any one of such customers could
have a material adverse effect on our business or results of
operations. Because we do not maintain any reserves for payment
defaults, a default or delay in payment on a significant scale
could materially adversely affect our business, results of
operations 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.
We have traditionally owned most of the construction equipment
used to build our projects. 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. Such a decline would reduce the borrowing base
under our credit facility, thereby reducing the amount of credit
available to us and impeding our ability to continue to expand
our business.
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 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 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
13
adequate bonding, and, as a result, to bid on new contracts,
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 self-insure our
workers compensation claims, subject to stop-loss
insurance coverage. We also maintain insurance coverage in
amounts and against the risks that we believe are consistent
with 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 also 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 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 and the emission and discharge of
pollutants into the air and water. We could be held liable for
such contamination created not only from our own activities but
also from the historical activities of others on our project
sites or on properties that we acquire or lease. Our operations
are also subject to laws and regulations relating to workplace
safety and worker health, which, among other things, regulate
employee exposure to hazardous substances. Immigration laws
require us to take certain steps intended to confirm the legal
status of our immigrant labor force, but we may nonetheless
unknowingly employ illegal immigrants. Violations of such laws
and regulations could subject us to substantial fines and
penalties, cleanup costs, third-party property damage or
personal injury claims. In addition, these laws and regulations
have become, and enforcement practices and compliance standards
are becoming, increasingly stringent. Moreover, we cannot
predict the nature, scope or effect of legislation or regulatory
requirements that could be imposed, or how existing or future
laws or regulations will be administered or interpreted, with
respect to products or activities to which they have not been
previously applied. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of
the regulatory agencies, could require us to make substantial
expenditures for, among other things, pollution control systems
and other equipment that we do not currently possess, or the
acquisition or modification of permits applicable to our
activities.
RHBs lease of an aggregate quarry in Nevada could subject
us to costs and liabilities. A limited environmental assessment
report that we received in connection with the RHB acquisition
was inconclusive about potential environmental contamination at
the quarry resulting from various mining activities and landfill
operations that may have occurred on or near the property. Due
to the limited nature of the report, we are unable to assess the
extent of our liability, if any, at the quarry. As lessee and
operator of the quarry, RHB 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.
We may be
unable to sustain our historical revenue growth rate.
Our revenue has grown rapidly in recent years. However, we
may be unable to sustain these recent revenue growth rates for a
variety of reasons, including limits on additional growth in our
current markets, less
14
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
decline in our revenue growth could have a material adverse
effect on our financial condition and results of operations if
we are unable to reduce the growth of our operating expenses at
the same rate.
Terrorist
attacks have impacted, and could continue to negatively impact,
the U.S. economy and the markets in which we operate.
Terrorist attacks, like those that occurred on
September 11, 2001, have contributed to economic
instability in the United States, and further acts of terrorism,
violence or war could affect the markets in which we operate,
our business and our expectations. Armed hostilities may
increase, or terrorist attacks, or responses from the United
States, may lead to further acts of terrorism and civil
disturbances in the United States or elsewhere, which may
further contribute to economic instability in the United States.
These attacks or armed conflicts may affect our operations or
those of our customers or suppliers and could impact our
revenues, our production capability and our ability to complete
contracts in a timely manner.
Risks
Related to Our Financial Results and Financing Plans
Actual
results could differ from the estimates and assumptions that we
use to prepare our financial statements.
To prepare financial statements in conformity with 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 and 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; valuation of assets
acquired and liabilities assumed in connection with business
combinations; and accruals for estimated liabilities, including
litigation and insurance reserves. Our actual results could
differ from, and could require adjustments to, those estimates.
In particular, as is more fully discussed in
Managements Discussion and Analysis of Financial
Condition and Results of OperationsCritical 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 to the total estimated
revenue for the contract. Estimated contract losses are
recognized in full when determined. Contract revenue and total
cost estimates are reviewed and revised on a continuous basis as
the work progresses and as change orders are initiated or
approved, and adjustments based upon the percentage of
completion are reflected in contract revenue in the accounting
period when these estimates are revised. To the extent that
these adjustments result in an increase, a reduction or an
elimination of previously reported contract profit, we recognize
a credit or a charge against current earnings, which could be
material.
We may
need to raise additional capital in the future for working
capital, capital expenditures and/or acquisitions, and we may
not be able to do so on favorable terms or at all, which would
impair our ability to operate our business or achieve our growth
objectives.
Our growth has been funded in part by our utilization of net
operating loss carry-forwards, or NOLs, to reduce the amounts
that we have paid for income taxes, and we expect our NOLs to be
fully utilized in 2007. Paying taxes will reduce cash flows from
operations compared to prior periods, as we will be required to
fund the payment of taxes in 2008 and future periods. To the
extent that cash flow from operations is insufficient to fund
future investments, make acquisitions or provide needed
additional working capital, we may require additional financing
from other sources of funds.
Our ability to obtain such additional financing in the future
will depend in part upon prevailing capital 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
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and other rights under our construction contracts to our bond
sureties, 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 revolving credit facility that restricts us from
engaging in certain activities, including restrictions on the
ability (subject to certain exceptions) to:
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make distributions and dividends;
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incur liens or encumbrances;
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incur indebtedness;
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guarantee obligations;
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dispose of a material portion of assets or otherwise engage in a
merger with a third party;
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make acquisitions; and
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incur negative income for two consecutive quarters.
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Our credit facility contains financial covenants that require us
to maintain specified fixed charge coverage ratios, asset ratios
and leverage ratios, and to maintain specified levels of
tangible net worth. Our ability to borrow funds for any purpose
will depend on our satisfying these tests. If we are unable to
meet the terms of the financial covenants or fail to comply with
any of the other restrictions contained in our credit facility,
an event of default could occur. An event of default, if not
waived by our lenders, could result in the acceleration of any
outstanding indebtedness, causing such debt to become
immediately due and payable. If such an 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.
Risks
Related to Our Common Stock and This Offering
Market
prices of our common stock have changed significantly and could
change further.
The market price of our common stock has substantially increased
since January 2005, at a rate exceeding our growth in earnings
generally. The market price may decline from its current levels
in response to various factors and events beyond our control,
including the following:
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a shortfall in operating revenue or net income from that
expected by securities analysts and investors;
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changes in securities analysts estimates of our financial
performance or the financial performance of our competitors or
companies in our industry generally;
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general conditions in our industry;
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announcements of significant contracts by us or our competitors;
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the passage of legislation or other regulatory developments that
affect us adversely;
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general conditions in the securities markets;
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the limited trading volume of our common stock;
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investor expectations resulting from the filing of the
registration statement of which this prospectus is a part;
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our seeking stockholder approval to increase the number of
shares of common stock that we are authorized to issue, which we
anticipate we may do in connection with our next annual meeting
of stockholders;
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our issuance of a significant number of shares of our common
stock, including upon exercise of employee stock options or
warrants; and
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the other risk factors described herein.
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Limited
trading volume of our common stock may contribute to its price
volatility.
The average daily trading volume for our common stock as
reported by the Nasdaq during the first eleven months of 2007
was approximately 100,000 shares. Even if we achieve a
wider dissemination by means of the shares offered pursuant to
this prospectus, we are uncertain as to whether a more active
trading market in our common stock will develop. As a result,
relatively small trades may have a significant impact on the
price of our common stock.
Fluctuations
in our revenues, operating results and backlog may lead to
reduced prices for our common stock.
Because our operating results are primarily generated from a
limited number of significant construction contracts, operating
results in any given fiscal quarter can vary depending on the
progress achieved and changes in the estimated profitability of
those particular contracts being reported. We anticipate that
the exceptionally high profitability achieved by RHB on certain
contracts in 2007 is unlikely to be achievable in future periods
on a sustainable basis. Progress on contracts may also be
delayed by unanticipated adverse weather conditions, as occurred
in Texas during much of 2007. Such delays, if they occur, may
result in fluctuating quarterly operating results and reduced
profitability, which may in turn lead to reduced prices for our
common stock.
We
currently do not intend to pay dividends on our common stock
and, consequently, your only opportunity to achieve a return on
your investment will be if the market price of our common stock
appreciates above the price that you pay for it.
We currently do not plan to declare dividends on shares of our
common stock for the foreseeable future. Furthermore, the
payment of dividends by us is restricted by our credit facility.
See Dividend Policy for more information.
Consequently, your only opportunity to achieve a return on your
investment in our company will be if the market price of our
common stock appreciates and you are able to sell your shares at
a profit.
Future
sales of our common stock in the public market could lower our
stock price.
Our principal stockholders, directors and executive officers
will beneficially own approximately 1.9 million shares of
our common stock after completion of this offering. These
stockholders will be free to sell those shares, subject to the
limitations of Rule 144 or Rule 144(k) under the
Securities Act of 1933, as amended, or the Securities Act (which
are discussed under Shares Eligible for Future
Sale), and, subject to certain exceptions, the
90-day
lock-up
agreements that certain of these stockholders have entered into
with the underwriter. The holders of warrants to purchase
356,266 shares of our common stock have registration rights
that allow them to participate in any future public offering of
our shares (with certain exceptions). Registration of these
restricted shares of common stock or shares purchasable under
these warrants would permit their sale into the public market
immediately. We cannot predict when these stockholders may sell
their shares or in what volumes. However, the market price of
our common stock could decline significantly if these
stockholders sell a large number of shares into the public
market after this offering or if the market believes that these
sales may occur.
We may also issue our common stock from time to time as
consideration for future acquisitions and investments. In the
event that any such acquisition or investment is significant,
the number of shares of our common stock that we may issue could
in turn be significant. In addition, we may also grant
registration rights covering those shares in connection with any
such acquisition and investment.
Delaware
law, our charter documents and our rights agreement may impede
or discourage a takeover or change of control.
Our rights agreement, certain provisions of our restated and
amended certificate of incorporation, as amended, our bylaws and
the provisions of Delaware law, individually or collectively,
may impede a merger, takeover or other business combination
involving us or discourage a potential acquirer from making a
tender offer for our common stock, which could affect the market
price of our common stock.
17
CAUTIONARY
COMMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes statements that are, or may be
considered to be, forward-looking statements within
the meaning of Section 27A of 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 prospectus and in the materials
incorporated by reference into this prospectus 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, goal, seek,
forecast, intend, may,
should, would, plan,
potential, predict, project,
will, future and similar terms and
phrases to identify forward-looking statements in this
prospectus.
Forward-looking statements reflect our current expectations
regarding future events, results or outcomes. These expectations
may or may not be realized. Some of these expectations may be
based upon assumptions or judgments that prove to be incorrect.
In addition, our business and operations involve numerous risks
and uncertainties, many of which are beyond our control, that
could result in our expectations not being realized or otherwise
could materially affect our financial condition, results of
operations and cash flows.
Actual events, results and outcomes may differ materially from
our expectations due to a variety of factors. Although it is not
possible to identify all of these factors, they include, among
others, the following:
|
|
|
|
|
changes in general economic conditions and resulting reductions
or delays in, or uncertainties regarding, governmental funding
for infrastructure services;
|
|
|
|
adverse economic conditions in our markets;
|
|
|
|
delays or difficulties related to the commencement or completion
of contracts, including additional costs, reductions in revenues
or the payment of completion penalties or liquidated damages;
|
|
|
|
actions of suppliers, subcontractors, customers, competitors and
others which are beyond our control;
|
|
|
|
the estimates inherent in our percentage-of-completion
accounting policies;
|
|
|
|
possible cost increases;
|
|
|
|
our dependence on a few significant customers;
|
|
|
|
adverse weather conditions;
|
|
|
|
the presence of competitors with greater financial resources
than we have and the impact of competitive services and pricing;
|
|
|
|
our ability to successfully identify, complete and integrate
acquisitions; and
|
|
|
|
the other factors incorporated by reference as described under
Risk Factors.
|
In reading this prospectus, you should consider these factors
carefully in evaluating any forward-looking statements, and you
are cautioned not to place undue reliance on 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 prospectus and in the documents
incorporated by reference into this prospectus are reasonable,
we can provide no assurance that they will be achieved.
The forward-looking statements included herein and in the
documents incorporated by reference into this prospectus are
made only as of the date hereof or thereof, and we undertake no
obligation to update any information contained in this
prospectus or in the documents incorporated herein by reference
or to publicly release the results of any revisions to any
forward-looking statements to reflect events or circumstances
that occur, or that we become aware of after the date of this
prospectus, except as may be required by applicable securities
laws.
18
We estimate that our net proceeds from the sale of
1,600,000 shares of our common stock in this offering will
be approximately $29.6 million ($34.2 million if the
underwriters option to purchase additional shares is
exercised in full), after deducting estimated underwriting
discounts and commissions and estimated offering expenses.
We intend to use the net proceeds from this offering:
|
|
|
|
|
to repay indebtedness outstanding under our credit
facility; and
|
|
|
|
to strengthen our balance sheet, including our working capital,
in order to fund our business operations and provide liquidity
for future growth.
|
The indebtedness to be repaid consists of revolving borrowings
under our credit agreement with Comerica Bank, as a lender and
as agent for the lenders from time to time party thereto.
Borrowings under our credit agreement currently bear interest at
an average rate of 7.75%. The credit agreement was entered into
October 31, 2007, when approximately $22.4 million was
borrowed to fund a portion of our costs in completing the
acquisition of RHB. The amount of borrowings under our credit
facility fluctuates from time to time. The actual amount of net
proceeds from the offering used to repay our indebtedness under
our credit facility will depend on the amounts that are
outstanding at the time of repayment.
19
MARKET
PRICE OF COMMON STOCK
Our common stock traded on AMEX under the symbol STV
through January 19, 2006 and began trading on the Nasdaq
under the symbol STRL on January 20, 2006. The
quarterly market high and low sales prices for our common stock
for 2005, 2006 and 2007 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
7.97
|
|
|
$
|
5.16
|
|
Second Quarter
|
|
$
|
9.00
|
|
|
$
|
6.70
|
|
Third Quarter
|
|
$
|
28.35
|
|
|
$
|
7.25
|
|
Fourth Quarter
|
|
$
|
26.98
|
|
|
$
|
16.06
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
24.85
|
|
|
$
|
15.05
|
|
Second Quarter
|
|
$
|
33.00
|
|
|
$
|
21.25
|
|
Third Quarter
|
|
$
|
30.99
|
|
|
$
|
16.51
|
|
Fourth Quarter
|
|
$
|
25.34
|
|
|
$
|
18.91
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
22.74
|
|
|
$
|
17.42
|
|
Second Quarter
|
|
$
|
23.86
|
|
|
$
|
18.90
|
|
Third Quarter
|
|
$
|
23.97
|
|
|
$
|
18.64
|
|
Fourth Quarter (through December 18, 2007)
|
|
$
|
26.98
|
|
|
$
|
19.79
|
|
On December 18, 2007, the closing sale price of our common
stock as reported on the Nasdaq was $20.83 per share. At
November 30, 2007, there were approximately 1,255 holders
of record of our common stock.
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 our board of directors, considering then-existing
conditions, including our financial condition and results of
operations, capital requirements, bonding prospects, contractual
restrictions (including those under our revolving credit
agreements), business prospects and other factors that our board
of directors considers relevant.
20
The following table sets forth our capitalization as of
September 30, 2007:
|
|
|
|
|
on an actual basis;
|
|
|
|
on a pro forma basis, assuming the RHB acquisition and the
borrowing under our credit facility in connection therewith had
been effected on September 30, 2007; and
|
|
|
|
on a pro forma as adjusted basis, assuming the RHB acquisition
and the borrowing under our credit facility in connection
therewith had been effected on September 30, 2007 and
reflecting the application of the net proceeds from this
offering, after deducting $1.6 million for the underwriting
discounts and commissions payable by us and estimated offering
expenses of approximately $775,000, as set forth under Use
of Proceeds.
|
You should read this table in conjunction with Use of
Proceeds, Selected Historical Financial and
Operating Data, Unaudited Pro Forma Condensed
Combined Financial Information, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and
the notes thereto included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2007
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
|
(Amounts in thousands, except share data)
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt(1)
|
|
$
|
123
|
|
|
$
|
190
|
|
|
$
|
190
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility(2)
|
|
|
30,000
|
|
|
|
52,400
|
|
|
|
22,775
|
|
Mortgages(1)
|
|
|
566
|
|
|
|
667
|
|
|
|
667
|
|
Other indebtedness
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
30,689
|
|
|
|
53,257
|
|
|
|
23,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 14,000,000 shares
authorized; 11,017,310 shares issued and outstanding,
actual; 11,058,012 shares issued and outstanding, pro
forma; 12,760,692 shares issued and outstanding, pro forma
as adjusted(3)
|
|
|
110
|
|
|
|
111
|
|
|
|
127
|
|
Preferred stock, $0.01 par value, 1,000,000 shares
authorized; no shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(13,996
|
)
|
|
|
(13,996
|
)
|
|
|
(13,996
|
)
|
Additional paid-in capital
|
|
|
115,821
|
|
|
|
111,405
|
|
|
|
141,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
101,935
|
|
|
|
97,520
|
|
|
|
127,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
132,624
|
|
|
$
|
150,777
|
|
|
$
|
150,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The mortgage in the original principal amount of
$1.1 million on land and facilities where our headquarters
is located had a floating rate of interest at September 30,
2007 of 8.0% per annum, repayable over 15 years commencing
in 2001. This mortgage is cross-collateralized with a prior
mortgage on the land and equipment repair facilities, which were
purchased in 1998, in the original amount of $500,000, repayable
over 10 years with an interest rate of 9.3% per annum. |
|
(2) |
|
The revolving credit facility in place on September 30,
2007 provided for revolving loans up to a maximum of
$35.0 million with a maturity date of May 10, 2009.
The average interest rate on revolving debt outstanding during
the nine months ended September 30, 2007 was approximately
8.25%. |
|
(3) |
|
At September 30, 2007, we had 11,017,310 shares of
common stock outstanding; 657,446 shares of common stock
reserved for issuance upon the exercise of outstanding stock
options at a weighted average exercise price per share of $6.99;
and 356,266 shares of common stock reserved for issuance
upon the exercise of outstanding warrants at an exercise price
per share of $1.50. The issuance of shares in this offering will
reduce the total number of remaining authorized and unissued
shares, 78,276 of which will be available for future
awards under our stock incentive plan. |
21
SELECTED
HISTORICAL FINANCIAL AND OPERATING DATA
The following tables set forth our summary historical financial
and operating data for the periods indicated. The summary
condensed consolidated statement of operations and cash flow
data for the years ended December 31, 2004, 2005 and 2006,
and the summary condensed consolidated balance sheet data as of
December 31, 2005 and 2006, have been derived from our
audited consolidated financial statements, which are included
elsewhere in this prospectus. The summary condensed consolidated
statement of operations and cash flow data for 2002 and 2003,
and the condensed consolidated balance sheet data as of
December 31, 2002, 2003 and 2004, have been derived from
our audited consolidated financial statements, which are not
included in this prospectus. The summary condensed consolidated
financial data as of and for the nine months ended
September 30, 2006 and 2007, are derived from our unaudited
consolidated financial statements, which are included elsewhere
in this prospectus. The unaudited consolidated financial
statements have been prepared on the same basis as our audited
consolidated financial statements and include all adjustments,
consisting of normal and recurring adjustments, that we consider
necessary for a fair presentation of our financial position and
operating results for the unaudited periods. The summary
historical financial and operating data as of and for the nine
months ended September 30, 2007, are not necessarily
indicative of the results that may be obtained for a full year.
The information presented below should be read in conjunction
with Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
financial statements and the notes thereto included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(in thousands, except per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
111,747
|
|
|
$
|
149,006
|
|
|
$
|
132,478
|
|
|
$
|
219,439
|
|
|
$
|
249,348
|
|
|
$
|
185,233
|
|
|
$
|
217,877
|
|
Cost of revenues
|
|
|
98,935
|
|
|
|
131,181
|
|
|
|
119,217
|
|
|
|
195,683
|
|
|
|
220,801
|
|
|
|
163,358
|
|
|
|
196,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
12,812
|
|
|
|
17,825
|
|
|
|
13,261
|
|
|
|
23,756
|
|
|
|
28,547
|
|
|
|
21,875
|
|
|
|
21,593
|
|
General and administrative expenses, and other
|
|
|
6,862
|
|
|
|
7,400
|
|
|
|
7,696
|
|
|
|
9,091
|
|
|
|
10,549
|
|
|
|
7,928
|
|
|
|
8,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
5,950
|
|
|
|
10,425
|
|
|
|
5,565
|
|
|
|
14,665
|
|
|
|
17,998
|
|
|
|
13,947
|
|
|
|
13,301
|
|
Interest expense (income), net
|
|
|
2,427
|
|
|
|
1,842
|
|
|
|
1,456
|
|
|
|
1,336
|
|
|
|
(1,206
|
)
|
|
|
(803
|
)
|
|
|
(1,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before minority interest and
income taxes
|
|
|
3,523
|
|
|
|
8,583
|
|
|
|
4,109
|
|
|
|
13,329
|
|
|
|
19,204
|
|
|
|
14,750
|
|
|
|
14,667
|
|
Minority interest
|
|
|
(873
|
)
|
|
|
(1,627
|
)
|
|
|
(962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
2,650
|
|
|
|
6,956
|
|
|
|
3,147
|
|
|
|
13,329
|
|
|
|
19,204
|
|
|
|
14,750
|
|
|
|
14,667
|
|
Income tax (benefit) expense
|
|
|
(174
|
)
|
|
|
1,752
|
|
|
|
(2,134
|
)
|
|
|
2,788
|
|
|
|
6,566
|
|
|
|
5,027
|
|
|
|
4,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
2,824
|
|
|
|
5,204
|
|
|
|
5,281
|
|
|
|
10,541
|
|
|
|
12,638
|
|
|
|
9,723
|
|
|
|
9,777
|
|
Net income (loss) from discontinued operations
|
|
|
528
|
|
|
|
215
|
|
|
|
372
|
|
|
|
559
|
|
|
|
682
|
|
|
|
444
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,352
|
|
|
$
|
5,419
|
|
|
$
|
5,653
|
|
|
$
|
11,100
|
|
|
$
|
13,320
|
|
|
$
|
10,167
|
|
|
$
|
9,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.56
|
|
|
$
|
1.02
|
|
|
$
|
0.99
|
|
|
$
|
1.36
|
|
|
$
|
1.19
|
|
|
$
|
0.93
|
|
|
$
|
0.89
|
|
Discontinued operations
|
|
|
0.10
|
|
|
|
0.04
|
|
|
|
0.07
|
|
|
|
0.07
|
|
|
|
0.06
|
|
|
|
0.04
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.66
|
|
|
$
|
1.06
|
|
|
$
|
1.06
|
|
|
$
|
1.43
|
|
|
$
|
1.25
|
|
|
$
|
0.97
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.46
|
|
|
$
|
0.80
|
|
|
$
|
0.75
|
|
|
$
|
1.11
|
|
|
$
|
1.08
|
|
|
$
|
0.84
|
|
|
$
|
0.83
|
|
Discontinued operations
|
|
|
0.09
|
|
|
|
0.03
|
|
|
|
0.05
|
|
|
|
0.05
|
|
|
|
0.06
|
|
|
|
0.04
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.55
|
|
|
$
|
0.83
|
|
|
$
|
0.80
|
|
|
$
|
1.16
|
|
|
$
|
1.14
|
|
|
$
|
0.88
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(in thousands, except per share data)
|
|
|
Weighted average number of shares outstanding used in computing
per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,062
|
|
|
|
5,090
|
|
|
|
5,343
|
|
|
|
7,775
|
|
|
|
10,583
|
|
|
|
10,455
|
|
|
|
10,963
|
|
Diluted
|
|
|
6,102
|
|
|
|
6,488
|
|
|
|
7,028
|
|
|
|
9,538
|
|
|
|
11,714
|
|
|
|
11,640
|
|
|
|
11,765
|
|
Balance sheet data (end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,111
|
|
|
$
|
2,651
|
|
|
$
|
3,449
|
|
|
$
|
22,267
|
|
|
$
|
28,466
|
|
|
$
|
18,996
|
|
|
$
|
14,894
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,169
|
|
|
|
22,585
|
|
|
|
32,630
|
|
Working capital
|
|
|
9,556
|
|
|
|
6,834
|
|
|
|
16,052
|
|
|
|
18,354
|
|
|
|
62,874
|
|
|
|
58,369
|
|
|
|
59,691
|
|
Total assets
|
|
|
72,757
|
|
|
|
75,578
|
|
|
|
89,544
|
|
|
|
118,455
|
|
|
|
167,772
|
|
|
|
171,293
|
|
|
|
187,107
|
|
Total debt
|
|
|
32,784
|
|
|
|
20,058
|
|
|
|
25,445
|
|
|
|
23,142
|
|
|
|
30,782
|
|
|
|
28,812
|
|
|
|
30,689
|
|
Total liabilities
|
|
|
61,931
|
|
|
|
58,942
|
|
|
|
54,336
|
|
|
|
69,843
|
|
|
|
76,781
|
|
|
|
83,950
|
|
|
|
85,172
|
|
Stockholders equity
|
|
|
10,825
|
|
|
|
16,636
|
|
|
|
35,208
|
|
|
|
48,612
|
|
|
|
90,991
|
|
|
|
87,343
|
|
|
|
101,935
|
|
Cash flow data from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
5,004
|
|
|
$
|
18,185
|
|
|
$
|
4,171
|
|
|
$
|
31,266
|
|
|
$
|
23,089
|
|
|
$
|
9,846
|
|
|
$
|
14,648
|
|
Net cash used in investing activities
|
|
|
(6,801
|
)
|
|
|
(4,270
|
)
|
|
|
(5,809
|
)
|
|
|
(10,972
|
)
|
|
|
(52,358
|
)
|
|
|
(46,567
|
)
|
|
|
(28,586
|
)
|
Net cash provided by (used in) financing activities
|
|
|
1,288
|
|
|
|
(13,376
|
)
|
|
|
2,436
|
|
|
|
(1,476
|
)
|
|
|
35,468
|
|
|
|
33,450
|
|
|
|
366
|
|
Other operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (unaudited)(1)
|
|
$
|
9,360
|
|
|
$
|
13,703
|
|
|
$
|
9,520
|
|
|
$
|
20,288
|
|
|
$
|
25,691
|
|
|
$
|
19,965
|
|
|
$
|
20,040
|
|
Capital expenditures
|
|
|
4,245
|
|
|
|
4,340
|
|
|
|
3,555
|
|
|
|
11,392
|
|
|
|
27,055
|
|
|
|
24,706
|
|
|
|
23,033
|
|
Backlog at end of period (unaudited)(2)
|
|
|
138,000
|
|
|
|
120,000
|
|
|
|
232,000
|
|
|
|
307,000
|
|
|
|
395,000
|
|
|
|
418,000
|
|
|
|
367,000
|
|
|
|
|
(1) |
|
EBITDA is defined as net income before net interest expense,
income tax expense, and depreciation and amortization. EBITDA is
a non-GAAP financial measure that we use for our internal
budgeting process, which excludes the effects of financing
costs, income taxes and non-cash depreciation and amortization.
Although EBITDA is a common alternative measure of performance
used by investors, financial analysts and rating agencies to
assess operating performance for companies in our industry, it
is not a substitute for other GAAP financial measures such as
net income or operating income as calculated and presented in
accordance with GAAP. Furthermore, we believe that the non-GAAP
EBITDA financial measure is useful to investors in providing
greater transparency to the information used by management in
its operational and investment decision making. Our non-GAAP
financial measures may be different from such measures used by
other companies. We urge you to review the GAAP financial
measures included in this prospectus and our consolidated
financial statements, including the notes thereto, and the other
financial information contained in this prospectus and
incorporated herein by reference, and not to rely on any single
financial measure to evaluate our business. |
|
|
|
A reconciliation of net income to EBITDA for each of the fiscal
periods indicated is as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
Net income
|
|
$
|
3,352
|
|
|
$
|
5,419
|
|
|
$
|
5,653
|
|
|
$
|
11,100
|
|
|
$
|
13,320
|
|
|
$
|
10,167
|
|
|
$
|
9,752
|
|
Depreciation and amortization
|
|
|
3,755
|
|
|
|
4,690
|
|
|
|
4,545
|
|
|
|
5,064
|
|
|
|
7,011
|
|
|
|
5,574
|
|
|
|
6,764
|
|
Interest expense (income), net
|
|
|
2,427
|
|
|
|
1,842
|
|
|
|
1,456
|
|
|
|
1,336
|
|
|
|
(1,206
|
)
|
|
|
(803
|
)
|
|
|
(1,366
|
)
|
Income tax (benefit) expense
|
|
|
(174
|
)
|
|
|
1,752
|
|
|
|
(2,134
|
)
|
|
|
2,788
|
|
|
|
6,566
|
|
|
|
5,027
|
|
|
|
4,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
9,360
|
|
|
$
|
13,703
|
|
|
$
|
9,520
|
|
|
$
|
20,288
|
|
|
$
|
25,691
|
|
|
$
|
19,965
|
|
|
$
|
20,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
Use of non-GAAP financial measures is subject to inherent
limitations because they do not include all the expenses that
must be included under GAAP and because they involve the
exercise of judgment of which charges should properly be
excluded from the non-GAAP financial measure. EBITDA has
material limitations as a performance measure because it
excludes (1) interest expense, which is a necessary element
of our costs and ability to generate revenues because we borrow
money to finance our operations, (2) depreciation, which is
a necessary element of our costs and ability to generate
revenues because we use capital assets, and (3) income
taxes, which we are required to pay. Management compensates for
these limitations by providing specific information regarding
the GAAP amounts excluded from EBITDA and by presenting
comparable GAAP measures more prominently in our disclosures. |
|
(2) |
|
Historical information does not include RHB backlog, which was
approximately $127 million at September 30, 2007,
based on our methodology of calculating backlog, Backlog is our
estimate of the billings that we expect to make in future
periods on our construction contracts. We add the revenue value
of new contracts to our backlog, typically when we are the low
bidder on a public sector contract and management determines
that there are no apparent impediments to award of the contract.
At September 30, 2007, backlog included approximately
$12 million of low bids where the contracts had not been
officially awarded. RHB had no such backlog at that date.
Historically, subsequent non-awards to us of contracts relating
to such low bids have not materially affected our backlog or
financial condition. As construction on our contracts
progresses, we increase or decrease backlog to take account
changes in estimated quantities under fixed unit price
contracts, as well as to reflect changed conditions, change
orders and other variations from initially anticipated contract
revenues and costs, including completion penalties and bonuses.
We subtract from backlog the amounts we bill on contracts. |
24
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial
information gives effect to our acquisition of a 91.67% interest
in RHB, accounted for as a business combination using the
purchase method of accounting. The preliminary allocation of the
purchase price used in the unaudited pro forma condensed
combined financial information is based on managements
preliminary valuation. The estimates and assumptions are subject
to change upon the finalization of valuations, which are
contingent upon final appraisals of plant and equipment,
identifiable intangible assets, adjustments to contract-related
and other accounts and the results of operations in October
2007. Revisions to the preliminary purchase price allocation
could result in significant deviations from the accompanying pro
forma information.
The pro forma condensed combined statements of income reflect
the acquisition of RHB as if it occurred on January 1,
2006. The historical results of operations included in the
unaudited pro forma condensed combined statement of income for
the fiscal year ended December 31, 2006 were derived from
the audited financial statements of each entity, included
elsewhere in this prospectus. The historical results of
operations included in the unaudited pro forma condensed
combined statement of income for the nine months ended
September 30, 2007 were derived from the unaudited
financial statements of each entity, included elsewhere in this
prospectus.
The pro forma condensed combined balance sheet reflects the
acquisition of RHB as if it occurred on September 30, 2007.
The historical balance sheets of Sterling Construction and RHB
included in the unaudited pro forma condensed combined balance
sheet were derived from the unaudited financial statements of
each entity, included elsewhere in this prospectus.
This unaudited pro forma condensed combined financial
information has been prepared by management for illustrative
purposes only. The unaudited pro forma condensed combined
financial information is not intended to represent or be
indicative of the financial position or results of operations in
future periods or the results that actually would have been
realized had Sterling Construction and RHB been a combined
company during the specified periods. Additionally,
classifications of certain financial accounts of the acquired
company may differ from those of Sterling Construction. The
unaudited pro forma condensed combined financial information
reflects the acquisition of the interest in RHB, which we
financed with a combination of proceeds from the sale of
short-term investments, repayment of an amount receivable,
borrowings under our new credit facility and 40,702 shares
of common stock issued in the acquisition. The proceeds of this
offering, a portion of which will be used to repay our credit
facility borrowings, have not been reflected in the pro forma
results. The unaudited pro forma condensed combined financial
information, including the notes thereto, is qualified in its
entirety by reference to, and should be read in conjunction
with, the historical financial statements and notes thereto
included elsewhere in this prospectus.
25
STERLING
CONSTRUCTION COMPANY, INC.
Unaudited Pro Forma Condensed Combined Balance Sheet
At September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sterling
|
|
|
Road and
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Highway Builders,
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
Company, Inc.
|
|
|
LLC
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
(Amounts in Thousands)
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
14,894
|
|
|
$
|
0
|
|
|
$
|
9,030
|
(a)(b)(d)(e)(f)
|
|
$
|
23,924
|
|
Short-term investments
|
|
|
32,630
|
|
|
|
0
|
|
|
|
(32,630
|
) (e)
|
|
|
0
|
|
Contract receivables, including retention
|
|
|
52,498
|
|
|
|
5,434
|
|
|
|
|
|
|
|
57,932
|
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
|
|
7,247
|
|
|
|
553
|
|
|
|
|
|
|
|
7,800
|
|
Inventories
|
|
|
1,047
|
|
|
|
449
|
|
|
|
|
|
|
|
1,496
|
|
Due from related party
|
|
|
0
|
|
|
|
12,000
|
|
|
|
(12,000
|
) (a)
|
|
|
0
|
|
Deferred tax asset
|
|
|
1,038
|
|
|
|
0
|
|
|
|
|
|
|
|
1,038
|
|
Other current assets
|
|
|
1,968
|
|
|
|
237
|
|
|
|
|
|
|
|
2,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
111,322
|
|
|
|
18,673
|
|
|
|
(35,600
|
)
|
|
|
94,395
|
|
Property and Equipment
|
|
|
88,009
|
|
|
|
17,712
|
|
|
|
(566
|
) (c)(g)
|
|
|
105,155
|
|
Less: Accumulated depreciation
|
|
|
(25,619
|
)
|
|
|
(6,719
|
)
|
|
|
44
|
(c)
|
|
|
(32,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,390
|
|
|
|
10,993
|
|
|
|
(522
|
)
|
|
|
72,861
|
|
Investment in RHB
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
(f)(g)
|
|
|
0
|
|
Goodwill
|
|
|
12,735
|
|
|
|
0
|
|
|
|
42,252
|
(g)
|
|
|
54,987
|
|
Other assets
|
|
|
660
|
|
|
|
0
|
|
|
|
|
|
|
|
660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
187,107
|
|
|
$
|
29,666
|
|
|
$
|
6,130
|
|
|
$
|
222,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of outstanding checks over bank balance
|
|
$
|
0
|
|
|
$
|
1,756
|
|
|
$
|
|
|
|
$
|
1,756
|
|
Current maturities of long term debt
|
|
|
123
|
|
|
|
67
|
|
|
|
|
|
|
|
190
|
|
Accounts payable
|
|
|
22,257
|
|
|
|
5,886
|
|
|
|
|
|
|
|
28,143
|
|
Billings in excess of costs and estimated earnings on
uncompleted contracts
|
|
|
21,979
|
|
|
|
3,035
|
|
|
|
|
|
|
|
25,014
|
|
Accrued expenses
|
|
|
7,272
|
|
|
|
666
|
|
|
|
|
|
|
|
7,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
51,631
|
|
|
|
11,410
|
|
|
|
|
|
|
|
63,041
|
|
Long term debt, less current maturities
|
|
|
30,566
|
|
|
|
101
|
|
|
|
(22,400
|
) (d)
|
|
|
53,067
|
|
Deferred tax liability
|
|
|
2,975
|
|
|
|
0
|
|
|
|
|
|
|
|
2,975
|
|
Minority interest in RHB
|
|
|
0
|
|
|
|
0
|
|
|
|
(6,300
|
) (g)
|
|
|
6,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
85,172
|
|
|
|
11,511
|
|
|
|
(28,700
|
)
|
|
|
125,383
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
110
|
|
|
|
0
|
|
|
|
(1
|
) (f)
|
|
|
111
|
|
Additional paid-in capital
|
|
|
115,821
|
|
|
|
0
|
|
|
|
(4,416
|
) (f)(g)
|
|
|
111,405
|
|
Accumulated deficit
|
|
|
(13,996
|
)
|
|
|
0
|
|
|
|
|
|
|
|
(13,996
|
)
|
Members equity
|
|
|
0
|
|
|
|
18,155
|
|
|
|
18,155
|
(b)(c)(g)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
101,935
|
|
|
|
18,155
|
|
|
|
22,570
|
|
|
|
97,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
187,107
|
|
|
$
|
29,666
|
|
|
$
|
(6,130
|
)
|
|
$
|
222,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
STERLING
CONSTRUCTION COMPANY, INC.
Unaudited Pro Forma Condensed Combined Balance Sheet
Pro Forma Entries and Explanatory Notes
At September 30, 2007
|
|
|
|
|
|
|
|
|
Amounts in
|
|
Pro Forma Entries
|
|
Thousands
|
|
|
(a)
|
|
Collection in October 2007 of receivable due from Fisher Sand
& Gravel, a related party of RHB
|
|
|
|
|
|
|
Cash
|
|
$
|
12,000
|
|
|
|
Due from related party
|
|
|
(12,000
|
)
|
(b)
|
|
October 2007 cash distributions to Members of RHB
|
|
|
|
|
|
|
Members equity
|
|
$
|
6,000
|
|
|
|
Cash
|
|
|
(6,000
|
)
|
(c)
|
|
October 2007 distribution of land and buildings to Members of
RHB
|
|
|
|
|
|
|
Accumulated depreciation
|
|
$
|
44
|
|
|
|
Property and equipment
|
|
|
(1,566
|
)
|
|
|
Members equity
|
|
|
1,522
|
|
(d)
|
|
Cash borrowed under new credit facility to purchase RHB
|
|
|
|
|
|
|
Cash
|
|
$
|
22,400
|
|
|
|
Long-term debt
|
|
|
(22,400
|
)
|
(e)
|
|
Liquidation of investments to fund a portion of the purchase
price of RHB
|
|
|
|
|
|
|
Cash
|
|
$
|
32,630
|
|
|
|
Short-term investments
|
|
|
(32,630
|
)
|
(f)
|
|
Cash and common stock paid to purchase investment in RHB
|
|
|
|
|
|
|
Investment in RHB
|
|
$
|
53,000
|
|
|
|
Cash
|
|
|
(52,000
|
)
|
|
|
Common stock
|
|
|
(1
|
)
|
|
|
Additional paid-in capital
|
|
|
(999
|
)
|
(g)
|
|
Entries in consolidation to reflect goodwill, step-up in
basis of
property and equipment and minority interest in RHB
|
|
|
|
|
|
|
Goodwill
|
|
$
|
42,252
|
|
|
|
Property and equipment
|
|
|
1,000
|
|
|
|
Additional paid-in capital
|
|
|
5,415
|
|
|
|
Members equity
|
|
|
10,633
|
|
|
|
Investment in RHB
|
|
|
(53,000
|
)
|
|
|
Minority interest in RHB (cost basis)
|
|
|
(6,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Purchase Price
and Pro Forma Preliminary Allocation of Purchase
Price
|
|
|
|
|
|
|
Summary of Purchase Price
|
|
|
|
|
|
|
Cash borrowed under new credit facility
|
|
$
|
22,400
|
|
|
|
Issuance of common stock
|
|
|
1,000
|
|
|
|
Cash from sale of short-term investments
|
|
|
29,600
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
53,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Preliminary Allocation of Purchase Price
|
|
|
|
|
|
|
Working capital
|
|
$
|
1,263
|
|
|
|
Property and equipment
|
|
|
10,471
|
|
|
|
Long-term debt, less current maturities
|
|
|
(101
|
)
|
|
|
Goodwill
|
|
|
42,252
|
|
|
|
Minority interest
|
|
|
(885
|
)
|
|
|
|
|
|
|
|
|
|
Total preliminary purchase price allocation
|
|
$
|
53,000
|
|
|
|
|
|
|
|
|
27
STERLING
CONSTRUCTION COMPANY, INC.
Unaudited Pro Forma Condensed Combined Statements of
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
Sterling
|
|
|
Road and
|
|
|
|
|
|
|
|
|
Sterling
|
|
|
Road and
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
Highway
|
|
|
|
|
|
Pro
|
|
|
Construction
|
|
|
Highway
|
|
|
|
|
|
Pro
|
|
|
|
Company,
|
|
|
Builders,
|
|
|
Pro Forma
|
|
|
Forma
|
|
|
Company,
|
|
|
Builders,
|
|
|
Pro Forma
|
|
|
Forma
|
|
|
|
Inc.
|
|
|
LLC
|
|
|
Adjustments
|
|
|
Combined
|
|
|
Inc.
|
|
|
LLC
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
(Amounts in thousands, except per share amounts)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
249,348
|
|
|
$
|
37,163
|
|
|
$
|
|
|
|
$
|
286,511
|
|
|
$
|
217,877
|
|
|
$
|
64,920
|
|
|
$
|
|
|
|
$
|
282,797
|
|
Costs of earned contract revenues
|
|
|
220,801
|
|
|
|
31,467
|
|
|
|
|
|
|
|
252,268
|
|
|
|
196,284
|
|
|
|
44,115
|
|
|
|
|
|
|
|
240,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
28,547
|
|
|
|
5,696
|
|
|
|
|
|
|
|
34,243
|
|
|
|
21,593
|
|
|
|
20,805
|
|
|
|
|
|
|
|
42,398
|
|
General and administrative expenses
|
|
|
(10,825
|
)
|
|
|
(462
|
)
|
|
|
|
|
|
|
(11,287
|
)
|
|
|
(8,725
|
)
|
|
|
(399
|
)
|
|
|
|
|
|
|
(9,124
|
)
|
Other operating income
|
|
|
276
|
|
|
|
549
|
|
|
|
|
|
|
|
825
|
|
|
|
433
|
|
|
|
0
|
|
|
|
|
|
|
|
433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
17,998
|
|
|
|
5,783
|
|
|
|
|
|
|
|
23,781
|
|
|
|
13,301
|
|
|
|
20,406
|
|
|
|
|
|
|
|
33,707
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,426
|
|
|
|
487
|
|
|
|
(1,426
|
) (c)
|
|
|
487
|
|
|
|
1,421
|
|
|
|
471
|
|
|
|
(1,421
|
) (c)
|
|
|
471
|
|
Gain on sale of land & buildings
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
90
|
|
|
|
|
|
|
|
90
|
|
Interest expense
|
|
|
(220
|
)
|
|
|
(52
|
)
|
|
|
(1,792
|
) (a)
|
|
|
(2,064
|
)
|
|
|
(55
|
)
|
|
|
(70
|
)
|
|
|
(1,344
|
) (a)
|
|
|
(1,469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before minority interest and
income taxes
|
|
|
19,204
|
|
|
|
6,219
|
|
|
|
(3,218
|
)
|
|
|
22,205
|
|
|
|
14,667
|
|
|
|
20,897
|
|
|
|
(2,765
|
)
|
|
|
32,799
|
|
Minority interest
|
|
|
0
|
|
|
|
0
|
|
|
|
(518
|
) (d)
|
|
|
(518
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
(1,734
|
) (d)
|
|
|
(1,734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
19,204
|
|
|
|
6,219
|
|
|
|
(3,736
|
)
|
|
|
21,687
|
|
|
|
14,667
|
|
|
|
20,897
|
|
|
|
(4,499
|
)
|
|
|
31,065
|
|
Income tax expense
|
|
|
(6,566
|
)
|
|
|
0
|
|
|
|
(844
|
) (a)(b)(c)
|
|
|
(7,410
|
)
|
|
|
(4,890
|
)
|
|
|
0
|
|
|
|
(5,575
|
) (a)(b)(c)
|
|
|
(10,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
12,638
|
|
|
|
6,219
|
|
|
|
(4,580
|
)
|
|
|
14,277
|
|
|
|
9,777
|
|
|
|
20,897
|
|
|
|
(10,074
|
)
|
|
|
20,600
|
|
Income (loss) from discontinued operations, net
|
|
|
682
|
|
|
|
0
|
|
|
|
|
|
|
|
682
|
|
|
|
(25
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,320
|
|
|
$
|
6,219
|
|
|
$
|
(4,580
|
)
|
|
$
|
14,959
|
|
|
$
|
9,752
|
|
|
$
|
20,897
|
|
|
$
|
(10,074
|
)
|
|
$
|
20,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
|
$
|
1.34
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
$
|
1.87
|
|
Discontinued operations
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
0.06
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
|
$
|
1.40
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
$
|
1.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used in computing
basic per share amounts
|
|
|
10,583
|
|
|
|
|
|
|
|
|
|
|
|
10,623
|
|
|
|
10,962
|
|
|
|
|
|
|
|
|
|
|
|
11,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.08
|
|
|
|
|
|
|
|
|
|
|
$
|
1.21
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
$
|
1.74
|
|
Discontinued operations
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
0.06
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.14
|
|
|
|
|
|
|
|
|
|
|
$
|
1.27
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
$
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used in computing
diluted per share amounts
|
|
|
11,714
|
|
|
|
|
|
|
|
|
|
|
|
11,754
|
|
|
|
11,765
|
|
|
|
|
|
|
|
|
|
|
|
11,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
STERLING
CONSTRUCTION COMPANY, INC.
Unaudited Pro Forma Condensed Combined Statements of Income
Pro Forma Entries and Explanatory Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
Pro Forma Entries(1)
|
|
December 31, 2006
|
|
|
September 30, 2007
|
|
|
|
|
|
(Amounts in Thousands)
|
|
|
(a)
|
|
Interest expense at 8 percent per annum on funds
borrowed to purchase interest in RHB
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
(1,183
|
)
|
|
$
|
(887
|
)
|
|
|
Interest expense(2)
|
|
|
1,792
|
|
|
|
1,344
|
|
|
|
Income tax expense
|
|
|
(609
|
)
|
|
|
(457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
|
Income taxes on RHBs income
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
(1,938
|
)
|
|
$
|
(6,515
|
)
|
|
|
Income tax expense
|
|
|
1,938
|
|
|
|
6,515
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
Reduction in interest income for investments used in purchase
of RHB
|
|
|
|
|
|
|
|
|
|
|
Interest income(2)
|
|
$
|
1,426
|
|
|
$
|
1,421
|
|
|
|
Income tax expense
|
|
|
(485
|
)
|
|
|
(483
|
)
|
|
|
Retained earnings
|
|
|
(941
|
)
|
|
|
(938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(d)
|
|
Minority interest in income of RHB
|
|
|
|
|
|
|
|
|
|
|
Minority interest - income statement
|
|
$
|
518
|
|
|
$
|
1,344
|
|
|
|
Minority interest - balance sheet
|
|
|
(518
|
)
|
|
|
(1,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Explanatory Notes
|
|
|
(1) |
|
No depreciation expense on the step up in basis of property and
equipment has been reflected in the pro forma condensed combined
statements of income as any such expense would be an additional
cost of contract revenues and, on the percentage-of-completion
method of accounting, would increase revenues by approximately
the increase in costs plus the gross profit thereon. As the
amount of such depreciation on an annual basis, based on
preliminary valuation, and increase in revenues would be
approximately $200,000 each, the effect on the pro forma
combined results of operations would be immaterial for the
periods presented. |
|
(2) |
|
A change of
1/8
percent in the per annum interest rate based on pro forma
borrowings for the acquisition of RHB would change annual
interest expense by $28,000. |
29
On November 8, 2007, we reaffirmed the following guidance
for 2007, although we indicated that our expectations for 2007
results were at the lower end of the ranges, set forth below. On
December 5, 2007, we issued the initial guidance for 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands, except per share information)
|
|
|
Revenues
|
|
$
|
285,000
|
|
|
|
-
|
|
|
$
|
310,000
|
|
|
$
|
428,000
|
|
|
|
-
|
|
|
$
|
473,000
|
|
Income before income taxes
|
|
$
|
20,300
|
|
|
|
-
|
|
|
$
|
22,800
|
|
|
$
|
27,700
|
|
|
|
-
|
|
|
$
|
30,700
|
|
Net income
|
|
$
|
13,400
|
|
|
|
-
|
|
|
$
|
15,000
|
|
|
$
|
18,000
|
|
|
|
-
|
|
|
$
|
20,000
|
|
Net income per diluted share
|
|
$
|
1.13
|
|
|
|
-
|
|
|
$
|
1.26
|
|
|
$
|
1.51
|
|
|
|
-
|
|
|
$
|
1.68
|
|
Notes:
|
|
|
|
|
Our expectations for 2007 actual results are at the lower end of
the ranges set forth above.
|
|
|
|
Guidance for 2007 and 2008 does not reflect any effects from
this offering.
|
|
|
|
We expect that the completion of this offering, assuming full
exercise of the over-allotment option, would reduce 2008 net
income per diluted share by approximately $0.09.
|
|
|
|
Guidance reflects the results of operations of RHB and the new
credit facility beginning November 1, 2007.
|
|
|
|
Assumes 11,900,000 weighted average shares of common stock
outstanding.
|
Our current practice is to issue guidance about our expected
results of operations on an annual basis, and to update it, as
appropriate. Because of the seasonal variations in our business
and its susceptibility to adverse weather conditions and other
factors, it is not our practice to issue guidance as to
quarterly results of operations.
As of September 30, 2007, we estimate that our backlog (not
including RHB) was approximately $367 million, reflecting
new contracts of approximately $41 million added during our
third quarter through September 30, 2007.
The following discussion outlines certain factors applicable to
the issuance of guidance by us. Such guidance is forward-looking
information that is subject to risks and uncertainties as
described in Risk Factors and elsewhere in this
prospectus.
The preparation of budgets for a civil construction business
such as ours are inherently inaccurate as predictors of the
future due to the large number of variables, especially the need
to win contracts in a competitive bidding process, and the
effects that unusually good or bad weather can have on our
project performance.
Guidance is based on our budgets and reforecasts as appropriate.
Because our budget process reflects equipment and work crew
requirements, production goals and incentive compensation
benchmarks, and is subject to many assumptions, risks and
uncertainties, when we publish guidance as to expected results
of operations, we evaluate the likelihood of achieving those
budgets.
Our determination of budgeted revenues and operating profits
reflects the following factors, among other things:
|
|
|
|
|
The level and potential profitability of uncompleted contracts
in backlog;
|
|
|
|
The size of our equipment fleet, its suitability for the
contracts in backlog and expected to be added, and the capital
expenditures that may be required, or equipment rental costs if
such equipment is not required on a permanent basis;
|
|
|
|
Forecast depreciation, which is based on our existing fleet and
expected additions and disposals;
|
30
|
|
|
|
|
Our existing work crews, their suitability for the contracts in
backlog and expected to be added, and our ability to add further
crews if necessary;
|
|
|
|
The bidding climate, which affects our ability to replace
contracts built and also affects the gross margins that may be
achieved on new contract wins;
|
|
|
|
The levels of activity in the various geographic markets in
which we operate, and the opportunities available to enter new
markets;
|
|
|
|
Our competitors and their expected impacts on our markets;
|
|
|
|
Our expectations about efficiency, including the extent to which
we can best match our equipment and work crews to the mix of
contracts in backlog at any time;
|
|
|
|
Our expectations about the weather and the effects of weather on
our efficiency and project profitability. We assume that we
will suffer rain interruptions, particularly in Texas, based on
historical averages, and this is inherently inaccurate;
|
|
|
|
The expected availability and cost of bonding, which depends on
levels of working capital and stockholders equity, among
other factors;
|
|
|
|
Our expectations about changes in the availability and costs of
materials, subcontract services, fuel, and other expense items;
|
|
|
|
The extent to which our work-in-progress can absorb the indirect
costs of our equipment fleet;
|
|
|
|
Expectations about changes in the number and compensation of our
construction crews;
|
|
|
|
Expected additions to, and costs of, our supervisory and project
management staff;
|
|
|
|
Expected changes in overhead expense levels to support the level
of our business;
|
|
|
|
Employee incentive compensation, which is generally budgeted at
the level expected to be paid if the budget is achieved;
|
|
|
|
Our expected insurance costs, which are significant and can
fluctuate materially;
|
|
|
|
Other anticipated changes in our expenses; and
|
|
|
|
Our expectations as to the likelihood of incurring or achieving
any contract performance penalties or incentive awards that
depend on the timeliness of project completion.
|
The budgeting of corporate expenses reflects personnel
requirements, expected legal and accounting needs (especially
changes in the regulatory environment), public company costs,
expenses relating to existing and forecast stock option grants,
and other expected changes in the overhead structure or costs
thereof.
Interest costs are budgeted based on existing and anticipated
levels of cash and debt, and the expected costs of borrowing to
finance our equipment fleet and working capital needs. Taxation
is budgeted based on prevailing and expected federal and state
tax rates, and the expected impact of full utilization of our
NOLs in 2007.
Unless otherwise indicated, our guidance does not reflect any
possible future business acquisitions.
31
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with the
consolidated financial statements and the notes thereto included
elsewhere in this prospectus. This discussion contains
forward-looking statements that are based on managements
current expectations, estimates and projections about our
business and operations. The cautionary statements made in this
prospectus should be read as applying to all forward-looking
statements wherever they appear in this prospectus. Our actual
results may differ materially from those currently anticipated
and expressed in such forward-looking statements as a result of
a number of factors, including those we discuss under Risk
Factors and elsewhere in this prospectus.
Overview
We are a leading heavy civil construction company that
specializes in the building, reconstruction and repair of
transportation and water infrastructure. Our transportation
infrastructure projects include highways, roads, bridges and
light rail, and our water infrastructure projects include water,
wastewater and storm drainage systems. We provide general
contracting services primarily to public sector clients
utilizing our own employees and equipment for activities,
including excavating, concrete and asphalt paving, installation
of large-diameter water and wastewater distribution systems,
construction of bridges and similar large structures,
construction of light rail infrastructure, concrete batch plant
operations, concrete crushing and aggregates and asphalt paving
operations. We perform the majority of the work required by our
contracts with our own crews, and generally engage
subcontractors only for ancillary services.
Our business was founded in 1955 and has a history of profitable
growth, which we have achieved by expanding both our service
profile and our market areas. This involves adding services,
such as our concrete operations, in order to capture a greater
percentage of available work in our current and potential
markets. It also involves strategically expanding our
operations, either by establishing a branch 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. We extended both our service
profile and our geographic market reach with our recent
acquisition of Road and Highway Builders, LLC, which we refer to
as RHB.
Critical
Accounting Policies
Our significant accounting policies are described in Note 1
of the Notes to Consolidated Financial Statements for the fiscal
year ended December 31, 2006, included in this prospectus.
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 and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Our business involves
making significant estimates and assumptions in the normal
course of business relating to our contracts due to, among other
things, the one-of-a-kind nature of most of our contracts, the
long-term duration of our contract cycle and the type of
contract utilized. Therefore, management believes that
Revenue Recognition is the most important and
critical accounting policy. The most significant estimates with
regard to these financial statements relate to the estimating of
total forecasted construction contract revenues, costs and
profits in accordance with accounting for long-term contracts.
Actual results could differ from these estimates and such
differences could be material.
Our estimates of contract revenue and cost are highly detailed.
We believe, based on our experience, that our current systems of
management and accounting controls allow management to produce
reliable estimates of total contract revenue and cost during any
accounting period. However, many factors can and do change
during a contract performance period, which can result in a
change to contract profitability from one financial reporting
period to another. Some of the factors that can change the
estimate of total contract revenue, cost and profit include
differing site conditions (to the extent that contract remedies
are unavailable), the failure of major material suppliers to
deliver on time, the performance of subcontractors, unusual
weather conditions,
32
our productivity and efficient use of labor and equipment and
the accuracy of the original bid estimate. Because we have a
large number of contracts in process at any given time, these
changes in estimates can sometimes offset each other without
affecting overall profitability. However, significant changes in
cost estimates on larger, more complex projects can have a
material impact on our financial statements and are reflected in
our results of operations when they become known.
When recording revenue from change orders on contracts that have
been approved as to scope but not price, we include in revenue
an amount equal to the amount that we currently expect to
recover from customers in relation to costs incurred by us for
changes in contract specifications or designs, or other
unanticipated additional costs. Revenue relating to change order
claims is recognized only if it is probable that the revenue
will be realized. When determining the likelihood of eventual
recovery, we consider such factors as evaluation of entitlement,
settlements reached to date and our experience with the
customer. When new facts become known, an adjustment to the
estimated recovery is made and reflected in the current period
results.
Revenue
Recognition
The majority of our contracts with our customers are fixed
unit price. Under such contracts, we are committed to
providing materials or services required by a contract at fixed
unit prices (for example, dollars per cubic yard of concrete
poured or per cubic yard of earth excavated). To minimize
increases in the material prices and subcontracting costs used
in tendering bids, we obtain firm quotations from our suppliers
and subcontractors. After we are advised that our bid is the
winning bid, we enter into firm contracts with our materials
suppliers and sub-contractors, thereby mitigating the risk of
future price variations affecting those contract costs. Such
quotations do not include any quantity guarantees, and we
therefore 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. The principal remaining risks under fixed price
contracts relate to labor and equipment costs and productivity
levels. As a result, we have rarely been exposed to material
price or availability risk on contracts in our backlog, except
with respect to fuel and other petroleum products. 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.
We use the percentage of completion accounting method for
construction contracts in accordance with the American Institute
of Certified Public Accountants Statement of Position
81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. Revenue and earnings on
construction contracts are recognized on the percentage of
completion method in the ratio of costs incurred to estimated
final costs. Contract cost consists of direct costs on
contracts, including labor and materials, amounts payable to
subcontractors and equipment expense (primarily depreciation,
fuel, maintenance and repairs). Depreciation is computed using
the straight-line method for construction equipment. Contract
cost is recorded as incurred, and revisions in contract revenue
and cost estimates are reflected in the accounting period when
known.
The accuracy of our revenue and profit recognition in a given
period is dependent on the accuracy of our estimates of the
total billings that will be rendered and the cost to finish
uncompleted contracts. Our cost 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 contracts 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 contracts 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 more
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 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
33
geographic location of the contract 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.
Valuation
of Long-Term Assets
Long-lived assets, which include property, equipment and
acquired identifiable intangible assets, 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 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. In addition, we had goodwill with a value of
approximately $13 million at December 31, 2006, which
must be reviewed for impairment at least annually in accordance
with Statement of Financial Accounting Standards No. 142,
or SFAS 142. The impairment testing required by
SFAS 142 requires considerable judgment, and an impairment
charge may be required in the future. We completed our last
annual impairment review for goodwill as of October 1,
2006, and it did not result in an impairment. While the review
for impairment analysis of goodwill for 2007 has not been
completed, we do not expect any impairment.
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 establish a valuation
allowance based upon projected future taxable income and the
expected timing of the reversals of existing temporary
differences. Because realization of deferred tax assets related
to net operating loss carry forwards, or NOLs, is not assured,
our valuation allowance at the respective time represents the
amount of the deferred tax assets that we determine are more
likely than not to expire unutilized. Reflecting
managements assessment of expected future operating
profitability, we expect to utilize all remaining NOLs;
therefore, we eliminated our valuation allowance in 2005. We had
previously reduced our valuation allowance in 2004 by
$18.9 million. We are subject to the alternative minimum
tax (AMT). Because we are still utilizing our NOLs to offset
taxable income, payment of AMT results in a reduction of our
deferred tax liability.
An ownership change, which may occur if there is a transfer of
ownership exceeding 50% of our outstanding shares of common
stock in any three-year period, may lead to a limitation in the
usability of, or a potential loss of some or all of, the NOLs.
In order to reduce the likelihood of an ownership change
occurring, our restated and amended certificate of
incorporation, as amended, prohibits transfers of our common
stock resulting in, or increasing, individual holdings in excess
of 4.5% of our common stock, unless such transfer is made by us
or with the consent of our board of directors.
Because the regulations governing NOLs are highly complex and
may be changed from time to time, and because our attempts to
prevent an ownership change from occurring may not be
successful, the NOLs could be limited or lost. We believe that
the NOLs are currently available in full, however, and intend to
take all reasonable and appropriate steps to ensure that they
will remain available. To the extent the NOLs become unavailable
to us, our future taxable income and that of any consolidated
affiliate will be subject to federal taxation, thus reducing
funds otherwise available for corporate purposes.
As of December 31, 2006, we had NOLs of approximately
$9.8 million, which will expire in 2020, if unused. We
expect that our NOLs will be fully utilized during 2007. After
the expiration or utilization of our NOLs, we have available to
us the excess tax benefit resulting from exercise of a
significant number of non-qualified in-the-money options
amounting to $4.1 million as of December 31, 2006.
However, because we will no longer have the significant offsets
provided by the NOLs, a comparison of our future cash flows to
our historic cash flows may not be meaningful.
On January 1, 2007, we adopted the provisions of Financial
Interpretation No. 48, (FIN 48) which establishes
the criteria that an individual tax position must meet for some
or all of the benefits of that position
34
to be recognized in our financial statements. Adoption of
FIN 48 did not have a material impact on our consolidated
financial statements.
Results
of Operations
The following compares our results of operations for the nine
months ended September 30, 2007 and 2006 and for the fiscal
years ended December 31, 2006, 2005 and 2004.
Three
months ended September 30, 2007 compared with three months
ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
(unaudited)
|
|
|
Revenues
|
|
$
|
77,714
|
|
|
$
|
68,743
|
|
|
|
13.1
|
%
|
Gross profit
|
|
|
7,915
|
|
|
|
7,878
|
|
|
|
0.5
|
%
|
Gross margin
|
|
|
10.2
|
%
|
|
|
11.5
|
%
|
|
|
(11.3
|
%)
|
General and administrative expenses and other
|
|
|
3,257
|
|
|
|
2,777
|
|
|
|
17.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4,658
|
|
|
|
5,101
|
|
|
|
(8.7
|
%)
|
Operating margin
|
|
|
6.0
|
%
|
|
|
7.4
|
%
|
|
|
(18.9
|
%)
|
Interest income, net
|
|
|
467
|
|
|
|
253
|
|
|
|
84.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, before taxes
|
|
|
5,125
|
|
|
|
5,354
|
|
|
|
(4.3
|
%)
|
Income taxes
|
|
|
1,682
|
|
|
|
1,809
|
|
|
|
(7.0
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
3,443
|
|
|
|
3,545
|
|
|
|
(2.9
|
%)
|
Net income from discontinued operations
|
|
|
|
|
|
|
65
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,443
|
|
|
$
|
3,610
|
|
|
|
(4.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Revenues increased approximately
$9 million (13%) during the third quarter of 2007 compared
with the third quarter of the prior year, reflecting continued
growth in our resources. Our workforce increased by
approximately 13% during the same period, and we have continued
to increase the size of our equipment fleet. However, the
increase in revenues in the third quarter of 2007 was less than
expected principally because of the above-average number of days
and amounts of heavy rainfall experienced across all our Texas
markets throughout the quarter.
Backlog. At the end of the third quarter of 2007,
our backlog of construction projects was $367 million,
which was down by about one months billings from the
$394 million backlog at the beginning of the quarter. We
added approximately $41 million of new contracts in the
third quarter of 2007. At September 30, 2007, we included
in backlog approximately $12 million of contracts on which
we were the apparent low bidder and expect to be awarded the
contracts, but as of the quarter-end these contracts had not
been officially awarded. Historically, subsequent non-awards of
such low bids have not materially affected our backlog or
financial condition.
Gross profit. Gross profit was flat at
$7.9 million for the period-to-period comparison. This
represents a decline in gross margins to 10.2% for the three
months ended September 30, 2007 from 11.5% in the
comparable period of the prior year. The decrease in gross
margins was due to, among other things, a lower average gross
margin in backlog and work in progress in 2007 compared to the
prior year in part because of a higher mix of lower margin
highway work, and the downward pressure that rainfall has had on
productivity. Due to the geographic diversity of our contracts
and their different stages of completion, it is difficult to
quantify the effect the rainfall has had. The lower productivity
resulted in lower utilization of our equipment during the third
quarter of 2007, causing our
work-in-progress
to bear a higher level of equipment cost than expected.
General and administrative expenses, net of other
income. General and administrative expenses, net,
increased by $480,000 predominantly due to the hiring of
additional personnel and higher salaries.
35
Operating income. The decrease in operating income
stems from the increase in general and administrative expenses
combined with flat gross profit.
Interest income and expense. In the third quarter of
2007, interest income increased by $151,000 compared with the
third quarter of the prior year. The increase was due to
interest earned on higher cash balances and investment in
short-term auction rate securities throughout the period, which
resulted principally from proceeds received from operating
activities, including proceeds received in the mobilization
phase of certain contracts, the unutilized portion of the
proceeds of our 2006 equity offering, and higher interest rates.
Interest expense in the third quarter of 2007 was approximately
$13,000 compared with interest expense of $76,000 in the
comparable period of the prior year.
Income taxes. Our effective income tax rate was
33.3% and 34.2% for the three months ended September 30,
2007 and 2006, respectively. The decrease in the effective tax
rate resulted from an increase in non-taxable income from
investments in municipal instruments. For the periods, our
federal income taxes were largely offset by net operating loss
carry-forwards.
Nine
Months Ended September 30, 2007 Compared to the Nine Months
Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
(Dollar amounts in thousands)
|
|
|
Revenues
|
|
$
|
217,877
|
|
|
$
|
185,233
|
|
|
|
17.6
|
%
|
Gross profit
|
|
|
21,593
|
|
|
|
21,875
|
|
|
|
(1.3
|
%)
|
Gross margin
|
|
|
9.9
|
%
|
|
|
11.8
|
%
|
|
|
(16.1
|
%)
|
General and administrative expenses and other
|
|
|
8,292
|
|
|
|
7,928
|
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
13,301
|
|
|
|
13,947
|
|
|
|
(4.6
|
%)
|
Operating margin
|
|
|
6.1
|
%
|
|
|
7.5
|
%
|
|
|
(18.7
|
%)
|
Interest income, net
|
|
|
1,366
|
|
|
|
803
|
|
|
|
70.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, before taxes
|
|
|
14,667
|
|
|
|
14,750
|
|
|
|
(0.6
|
%)
|
Income taxes
|
|
|
4,890
|
|
|
|
5,027
|
|
|
|
(2.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
9,777
|
|
|
|
9,723
|
|
|
|
0.6
|
%
|
Net (loss) income from discontinued operations
|
|
|
(25
|
)
|
|
|
444
|
|
|
|
(105.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,752
|
|
|
$
|
10,167
|
|
|
|
(4.1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Revenues increased approximately
$32.6 million in the first nine months of 2007 compared
with the first nine months of the prior year, reflecting the
continued expansion of our construction fleet, addition of a
concrete plant and addition of crews. We achieved 45% growth in
our state highway construction revenues during the first nine
months of 2007 as a result of increased state highway contracts
in the past two years. Our ability to be the successful low
bidder on these contracts was assisted by an improved bidding
climate principally due to a large state highway program which
increased total funding in the Houston area. We had a 16%
decrease in our municipal construction during the first nine
months of 2007 as a result of decreased contract awards in this
sector.
Our workforce grew by 13% year-over-year, and we purchased over
$25 million in property, plant and equipment within the
twelve month period ending September 30, 2007. Both of
these increases in resources have allowed us to increase our
volume when the poor weather did not restrict us from working on
projects.
Backlog. As of September 30, 2007, our backlog
of construction projects was $367 million, compared with
$395 million at the beginning of fiscal 2007. In the first
nine months of 2007, we added approximately $181 million of
new contracts.
Gross profit. Gross profits decreased by
$0.3 million, despite the higher revenues this year, due to
a decrease in gross margins to 9.9% for the nine months ended
September 30, 2007 from 11.8% in the prior year period. The
decrease in gross margins was due principally to the lower
average margin in backlog during
36
the nine months ended September 30, 2007 due to the change
in mix of construction of transportation versus water
infrastructure projects, compared with the comparable period in
the prior year, and to the wetter weather in the period, which
adversely affected productivity, including higher equipment
costs in the third quarter as discussed above.
General and administrative expenses, net of other
income. General and administrative expenses, net of
other income, increased $0.4 million during the first nine
months of 2007 compared with the comparable period in 2006 due
to the hiring of additional personnel and higher salaries.
Operating income. There was a decrease in operating
income of $0.6 million for the first nine months of 2007
compared to the comparable 2006 period due to the decreased
gross profit and an increase in general and administrative
expenses.
Interest income and expense. Through the third
quarter of 2007, net interest income increased by
$0.6 million compared with the comparable prior years
period. The increase was due to interest earned on higher cash
balances and investment in short-term auction rate securities
throughout the period, which resulted principally from net cash
provided by operating activities, including proceeds received in
the mobilization phase of certain contracts, the unutilized
proceeds of our 2006 equity offering, and higher interest rates.
Interest cost in the first nine months of 2007 was approximately
$79,000, of which $24,000 was capitalized as part of the
expansion of our office and shop facilities, compared with
interest expense of $190,000 in the comparable prior year period.
Income taxes. Our effective income tax rate was
33.3% and 34.1% for the nine months ended September 30,
2007 and 2006, respectively. The decrease in the effective tax
rate is a result of an increase in non-taxable income from
investments in municipal instruments. Through the periods
reported, our federal income taxes were largely offset by net
operating loss carryforwards.
Fiscal
Year Ended December 31, 2006 (2006) Compared with
Fiscal Year Ended December 31, 2005 (2005).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
% Change
|
|
|
|
(Dollar amounts in thousands)
|
|
|
Revenues
|
|
$
|
249,348
|
|
|
$
|
219,439
|
|
|
|
13.6
|
%
|
Gross profit
|
|
|
28,547
|
|
|
|
23,756
|
|
|
|
20.2
|
%
|
Gross margin
|
|
|
11.4
|
%
|
|
|
10.8
|
%
|
|
|
5.6
|
%
|
General and administrative expenses and other
|
|
|
10,549
|
|
|
|
9,091
|
|
|
|
15.0
|
%
|
Operating income
|
|
|
17,998
|
|
|
|
14,665
|
|
|
|
22.7
|
%
|
Operating margin
|
|
|
7.2
|
%
|
|
|
6.7
|
%
|
|
|
7.5
|
%
|
Interest income
|
|
|
1,426
|
|
|
|
150
|
|
|
|
850.6
|
%
|
Interest expense
|
|
|
220
|
|
|
|
1,486
|
|
|
|
(85.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
|
19,204
|
|
|
|
13,329
|
|
|
|
44.1
|
%
|
Income taxes
|
|
|
6,566
|
|
|
|
2,788
|
|
|
|
135.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
12,638
|
|
|
|
10,541
|
|
|
|
19.9
|
%
|
Net income from discontinued operations, including gain on sale
|
|
|
682
|
|
|
|
559
|
|
|
|
22.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,320
|
|
|
$
|
11,100
|
|
|
|
20.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog, end of year
|
|
$
|
395,000
|
|
|
$
|
307,000
|
|
|
|
28.7
|
%
|
Revenues. Our revenue increase of
$29.9 million, or 14%, from 2005 to 2006 included a
substantial increase in revenues from state highway work of
$89.0 million, or 114%, to $166.3 million as we took
advantage of the very strong bidding climate in this sector and
the resultant increase in the proportion of state highway
contracts in our backlog. In particular, we saw a near-tripling
of revenues in the Dallas market, where we won several major
contracts in early 2006, and also good growth in the
San Antonio market. State highway contracts generally allow
us to achieve greater revenue and gross profit production from
our
37
equipment and work crews, although on average the gross margins
on this work are slightly lower than on our water infrastructure
contracts in the municipal markets.
At the same time there was a decrease in our municipal revenues
of $59.0 million, or 41.5%, to $83 million.
The overall revenue expansion was facilitated by an increase of
over one hundred employees in 2006, and a significant increase
in our equipment fleet. The increase was achieved despite a
generally wetter year in 2006 in most of our markets than in
2005, which adversely affected production rates, and the impact
of some significant delays in starting certain contracts in the
first three quarters of 2006, which were due to factors outside
our control.
Gross Profit. The improvement in gross profits in
2006 was due principally to the increase in revenues, combined
with the higher gross margins. This margin improvement was
attributable principally to a better margin mix in backlog
resulting from the improved bidding climate since 2004, and to
efficiencies resulting from the higher revenue levels achieved
in 2006. These factors overcame the negative impact on gross
margins of the wetter weather in 2006 and the delay in starting
certain contracts, as described above. They also helped offset
the downward pressure on gross margins arising from the
increased percentage of state highway work, from 39% in 2005 to
67% in 2006. In both years, we achieved a number of incentive
awards upon the successful completion of contract milestones.
Backlog. The $88 million increase in backlog in
2006 reflected the on-going broadening of our service platform
and the generally good bidding environment in our markets,
especially in the Dallas/Fort Worth area where our backlog
expanded significantly during the year.
General and Administrative Expenses, Net of Other Income and
Expense. The increase in general and administrative
expenses, or G&A, in 2006 was principally due to higher
employee expenses, including an increase in staff, increased
stock-based compensation expense resulting from our higher share
price in 2006, and higher legal and accounting fees. Despite
these increases in G&A expenses in support of the growing
business, our ratio of G&A expenses to revenue remained
essentially unchanged from 2005 to 2006, at 4%.
Operating Income. The 2006 increase in operating
income resulted principally from the higher revenues and gross
margins, which led to an increase in operating margin from 6.7%
to 7.2%.
Interest Expense Net of Interest Income. In 2006, we
invested cash raised in our public stock offering on which we
earned over $1.4 million of interest. In 2005, we incurred
$1.5 million of interest expense primarily on related party
debt which was repaid in January 2006 from the proceeds of our
public offering.
Income Taxes. In 2005, we recorded a reduction in
the valuation allowance related to the deferred tax asset
following managements review of the likelihood that tax
loss carryforwards would be substantially utilized in the
future. This resulted in an effective tax rate of 21% in 2005.
In 2006, we recorded a more normal tax charge at 34.2% of income.
Net Income From Continuing Operations. The 2006
increase in net income from continuing operations was the result
of the various factors discussed above.
Effect of Income Tax Benefits. Although we have the
benefit of significant NOLs, which offset most of our income
from federal income taxes, we are required to reflect a full tax
charge in our financial statements through an adjustment to the
deferred tax asset. In addition, certain adjustments resulting
from our recovery of the deferred tax asset are recorded in the
income statement. Those adjustments resulted in a benefit of
$1.4 million in 2005. Assuming an income tax rate of 34%,
and disregarding adjustments to our deferred tax asset and other
timing differences, net income would have been $8.8 million
for 2005 so that, on a comparative basis, the net income level
of $13.3 million for 2006 represents an increase of
approximately 44%. Similarly, basic and fully diluted earnings
from continuing operations per common share for 2005, reflecting
an effective tax rate of 34%, would have been $1.13 and $0.92,
respectively, for 2005. A
38
reconciliation of reported net income for 2006 and 2005 to net
income as if a 34% tax rate had been applied is set forth in the
table below.
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands, except per share data)
|
|
|
Income from continuing operations before income taxes, as
reported
|
|
$
|
19,204
|
|
|
$
|
13,329
|
|
Provision for income taxes (assuming a 34% effective rate)
|
|
|
6,529
|
|
|
|
4,532
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations as if a 34% rate had been
applied
|
|
$
|
12,675
|
|
|
$
|
8,797
|
|
|
|
|
|
|
|
|
|
|
Basic income from continuing operations per common share as if a
34% effective tax rate had been applied
|
|
$
|
1.20
|
|
|
$
|
1.13
|
|
Diluted income from continuing operations per common share as if
a 34% effective tax rate had been applied
|
|
$
|
1.08
|
|
|
$
|
0.92
|
|
Discontinued Operations, Net of Tax. Discontinued
operations for 2006 and 2005 represent the results of operations
of our distribution business, which was operated by Steel City
Products, LLC. The increase in the net income from discontinued
operations was primarily due to increases in gross margins from
16% in 2005 to 16.5% in 2006 through the date of sale.
The distribution business was sold on October 27, 2006. We
recorded proceeds from the sale of approximately
$5.4 million and paid $3.8 million to retire the Steel
City Products, LLC revolving line of credit. We recorded a
pre-tax gain on the sale of approximately $250,000 and recorded
$128,000 in income tax expense related to that gain.
Fiscal
Year Ended December 31, 2005 (2005) Compared with
Fiscal Year Ended December 31, 2004 (2004).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
% Change
|
|
|
|
(Dollar amounts in thousands)
|
|
|
Revenues
|
|
$
|
219,439
|
|
|
$
|
132,478
|
|
|
|
65.6
|
%
|
Gross profit
|
|
|
23,756
|
|
|
|
13,261
|
|
|
|
79.1
|
%
|
Gross margin
|
|
|
10.8
|
%
|
|
|
10.0
|
%
|
|
|
8.2
|
%
|
General and administrative expenses and other
|
|
|
9,091
|
|
|
|
7,696
|
|
|
|
18.3
|
%
|
Operating income
|
|
|
14,665
|
|
|
|
5,565
|
|
|
|
163.5
|
%
|
Operating margin
|
|
|
6.7
|
%
|
|
|
4.2
|
%
|
|
|
59.1
|
%
|
Interest income
|
|
|
150
|
|
|
|
9
|
|
|
|
1,567
|
%
|
Interest expense
|
|
|
1,486
|
|
|
|
1,465
|
|
|
|
(8.2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, before minority interest and
taxes
|
|
|
13,329
|
|
|
|
4,109
|
|
|
|
224.4
|
%
|
Minority interest
|
|
|
|
|
|
|
962
|
|
|
|
(100.0
|
%)
|
Income taxes
|
|
|
2,788
|
|
|
|
(2,134
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
10,541
|
|
|
|
5,281
|
|
|
|
99.6
|
%
|
Net income from discontinued operations
|
|
|
559
|
|
|
|
372
|
|
|
|
50.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,100
|
|
|
$
|
5,653
|
|
|
|
96.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog, end of year
|
|
$
|
307,000
|
|
|
$
|
232,000
|
|
|
|
32.3
|
%
|
Revenues. The revenue increase from 2004 to 2005,
which includes an increase in revenues from state highway work
of $39.0 million, or 98%, to $77.4 million and an
increase in municipal revenues of $48.7 million, or 52%, to
$141.9 million was due to several factors, including:
|
|
|
|
|
a growing backlog, which enabled us to expand our equipment
fleet and to hire more field crews, especially in the
San Antonio and Austin markets;
|
|
|
|
the continuing expansion of our construction capabilities, which
allowed us to bid for and take on larger and more complex work;
|
39
|
|
|
|
|
certain water main contracts that included large diameter pipe,
facilitating greater revenues to be generated by our crews;
|
|
|
|
the increase in the proportion of state highway contracts, which
generally allow greater revenue production from our equipment
and work crews; and
|
|
|
|
generally better weather during 2005, which allowed for
continuous work on construction contracts, compared with one of
the wettest years on record in 2004.
|
Gross Profit. The improvement in gross profits in
2005 was due principally to the 66% revenue increase, combined
with the slightly higher gross margins. The margin improvement
was attributable to the gradual improvement in gross margins in
our backlog during 2005 combined with improved productivity
resulting from good weather during the year and the efficiencies
arising from having a greater number of larger and longer
duration contracts than in the past.
Backlog. The $75 million increase in backlog
reflected the on-going broadening of our service platform and
the continuation of a favorable bidding climate in our markets,
and included the winning of several large contracts,
particularly two TXDOT contracts with an aggregate value of
$103 million and a $46 million contract with Travelers
Casualty and Surety Company of America to complete a TXDOT
contract taken over by Travelers after a default by the original
contractor.
General and Administrative Expenses, Net of Other Income and
Expense. The increase in general and administrative
expenses, or G&A, in 2005 was principally due to higher
employee expenses, including an increase in staff, increased
variable compensation resulting from our improved profits, and
higher legal and accounting fees. Despite these increases in
G&A expenses in support of the growing business, the
significantly higher revenues in 2005 meant that the ratio of
G&A expenses to revenue decreased from 6% in 2004 to 4% in
2005.
Operating Income. The 2005 increase in operating
income and operating margin resulted from the higher gross
margins and lower ratio of G&A expenses to revenues.
Interest Expense Net of Interest Income. The
decrease in net interest expense in 2005 resulted from a
$141,000 increase in interest income earned on higher cash
balances.
Minority Interest. Because we acquired the remaining
19.9% of Sterling Houston Holdings, Inc. in December 2004, no
minority interest expense was recorded in 2005.
Income Taxes. In both 2005 and 2004, we recorded a
reduction in the valuation allowance related to the deferred tax
asset following managements review of the likelihood that
tax loss carryforwards would be substantially utilized in the
future. This resulted in an effective tax rate of 21% in 2005
and a tax benefit in 2004.
Net Income From Continuing Operations. The 2005
increase in net income from continuing operations was the result
of the factors discussed above and resulted in the increase in
basic and diluted income per common share from continuing
operations.
40
Effect of Income Tax Benefits. Although we have the
benefit of significant NOLs, which offset most of our income
from federal income taxes, we are required to reflect a full tax
charge in our financial statements through an adjustment to the
deferred tax asset. In addition, certain adjustments resulting
from our recovery of the deferred tax asset are recorded in the
income statement. Those adjustments resulted in a benefit of
$1.4 million in 2005 and $1.9 million in 2004.
Assuming an income tax rate of 34%, and disregarding adjustments
to our deferred tax asset and other timing differences, net
income would have been $8.8 million for 2005 and
$2.1 million for 2004, and on the same basis, basic and
fully diluted earnings from continuing operations per common
share would have been $1.13 and $0.92, respectively, for 2005
compared with $0.39 and $0.30, respectively, for 2004. A
reconciliation of reported net income for 2005 and 2004 to net
income as if a 34% tax rate had been applied is set forth in the
table below.
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands, except per share data)
|
|
|
Income from continuing operations before income taxes, as
reported
|
|
$
|
13,329
|
|
|
$
|
3,147
|
|
Provision for income taxes (assuming a 34% effective rate)
|
|
|
4,532
|
|
|
|
1,070
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations as if a 34% rate had been
applied
|
|
$
|
8,797
|
|
|
$
|
2,077
|
|
|
|
|
|
|
|
|
|
|
Basic income from continuing operations per common share as if a
34% rate had been applied
|
|
$
|
1.13
|
|
|
$
|
0.39
|
|
Diluted income from continuing operations per common share as if
a 34% rate had been applied
|
|
$
|
0.92
|
|
|
$
|
0.30
|
|
Discontinued Operations, Net of Tax. Discontinued
operations for 2005 and 2004 represent the results of operations
of our distribution business, which was operated by Steel City
Products, LLC. The increase in the net income of discontinued
operations was primarily due to a 2% increase in sales in 2005
combined with an improvement in gross margins from 15% to 16%.
Historical
Cash Flows
The following table sets forth information about our cash flows
for the years ended December 31, 2006, 2005 and 2004 and
for the nine months ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(Amounts in thousands)
|
|
|
Cash and cash equivalents (at end of period)
|
|
$
|
28,466
|
|
|
$
|
22,267
|
|
|
$
|
3,449
|
|
|
$
|
14,894
|
|
|
$
|
18,996
|
|
Net cash provided by (used in) Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
23,089
|
|
|
|
31,266
|
|
|
|
4,171
|
|
|
|
14,648
|
|
|
|
9,846
|
|
Investing activities
|
|
|
(52,358
|
)
|
|
|
(10,972
|
)
|
|
|
(5,809
|
)
|
|
|
(28,586
|
)
|
|
|
(46,567
|
)
|
Financing activities
|
|
|
35,468
|
|
|
|
(1,476
|
)
|
|
|
2,436
|
|
|
|
366
|
|
|
|
33,450
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
495
|
|
|
|
(294
|
)
|
|
|
(977
|
)
|
|
|
|
|
|
|
782
|
|
Investing activities
|
|
|
4,739
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
(38
|
)
|
Financing activities
|
|
|
(5,357
|
)
|
|
|
349
|
|
|
|
964
|
|
|
|
|
|
|
|
(743
|
)
|
Supplementary information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
24,849
|
|
|
|
11,392
|
|
|
|
3,555
|
|
|
|
23,033
|
|
|
|
24,706
|
|
Working capital (at end of period)
|
|
|
62,874
|
|
|
|
18,354
|
|
|
|
16,052
|
|
|
|
59,691
|
|
|
|
62,874
|
|
41
Operating
activities
Significant non-cash items included in operating activities are:
|
|
|
|
|
depreciation and amortization, which for the first nine months
of 2007 totaled $6.8 million, an increase of
$1.2 million from the first nine months of 2006, as a
result of the continued increase in the size of our construction
fleet in recent years; and
|
|
|
|
stock-based compensation expense increased by $0.2 million
as a result of restricted stock and stock option grants in the
first nine months of 2006 and 2007 that were issued at higher
grant prices due to increases in our stock price.
|
The significant components of the changes in working capital are
as follows:
|
|
|
|
|
contracts receivable increased $9.7 million in the first
nine months of 2007, compared with an increase of
$18.3 million in the first nine months of 2006, both of
which are attributable to revenue increases and to higher levels
of customer retentions;
|
|
|
|
cost and estimated earnings in excess of billings on uncompleted
contracts increased by $4.1 million in the first nine
months of 2007 compared to the first nine months of 2006
increase of $1.1 million, principally due to the start up
of several new jobs;
|
|
|
|
billings in excess of costs on uncompleted contracts increased
by $0.4 million in the first nine months of 2007, compared
with the first nine months of 2006 increase of
$6.8 million. These changes principally reflect
fluctuations in the timing and amount of mobilization payments
received for the
start-up of
certain contracts; and
|
|
|
|
trade payables, which increased by $4.9 million in the
first nine months of 2007, compared with a decrease of
$0.9 million in the first nine months of 2006; these
variations resulted from changes in the volume of materials and
sub-contractors in the respective periods due to the change in
the mix of contracts in progress.
|
Investing
activities
Expenditures for the replacement of certain equipment, to expand
our construction fleet, and to acquire real estate for materials
handling and future shop and office sites in Dallas and
San Antonio, totaled $23 million in the first nine
months of 2007, compared with a total of $24.7 million of
equipment purchases in the same period last year. In 2006, we
began investing surplus funds generated by our equity offering
into short-term auction rate securities.
Financing
activities
Financing activities in the first nine months of 2007 primarily
reflected no change in the outstanding revolving line of credit
balance. In the prior year period, funds generated by the
offering of common stock in January 2006 totaled approximately
$27.0 million, net of expenses, and funds generated from
the exercise of options and warrants in that period totaled
$742,000. In addition, in the first nine months of 2006,
$8.5 million of the offering proceeds was used to prepay
all of our outstanding 12% five-year promissory notes held by
members of management.
Liquidity
The level of working capital for our construction business
varies due to fluctuations in:
|
|
|
|
|
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;
|
|
|
|
customer receivables and contract retentions; and
|
|
|
|
the amounts owed to suppliers and subcontractors.
|
42
Some of these fluctuations can be significant.
The significant increase in our working capital in 2006, due in
part to our public offering in January 2006, was an important
element in enabling us to expand our bonding facilities and
therefore to bid on larger and longer-lived projects than in the
past.
We believe that we have sufficient liquid financial resources,
including the unused portion of our new credit facility
described below, to fund our requirements for the next twelve
months of operations, including our bonding requirements. We
expect no other material changes in our liquidity.
Sources
of Capital
Revolving
Credit Facility
In addition to cash provided from operations, we use our
revolving credit facility within Comerica Bank to finance
working capital needs and capital expenditures. Prior to
October 31, 2007, our credit facility had a maturity date
of May 10, 2009 and was a collateral-based facility with
total borrowing capacity, subject to a borrowing base, of up to
$35.0 million. At September 30, 2007,
$30.0 million in borrowings were outstanding under the
credit Facility and we had unused availability of
$5.0 million, in addition to cash and cash equivalents of
$14.9 million and short-term investment securities
available for sale of $32.6 million. We were in compliance
with all of the covenants under our credit facility in existence
at September 30, 2007.
On October 31, 2007, we entered into a new credit facility
with Comerica Bank, which replaced the prior credit facility and
will mature on October 31, 2012. The new credit facility is
also collateral-based with total borrowing capacity, subject to
a borrowing base, of up to $75.0 million. Borrowings under
the new credit facility were used to finance the RHB acquisition
and refinance indebtedness outstanding under the prior credit
facility, and will be used to finance working capital. At
October 31, 2007, the aggregate borrowings outstanding
under the new credit facility were $22.4 million, and the
aggregate amount of letters of credit outstanding under the new
credit facility was $1.5 million.
At our election, the loans under the new credit facility bear
interest at either a LIBOR-based interest rate or a prime-based
interest rate. The unpaid principal balance of each LIBOR-based
loan bears interest at a variable rate equal to LIBOR plus an
amount ranging from 1.25% to 2.25% depending on the pricing
leverage ratio that we achieve. The pricing leverage
ratio is determined by the ratio of our average total
debt, less cash and cash equivalents, to the EBITDA that we
achieve on a rolling four-quarter basis. The pricing leverage
ratio is measured quarterly. If we achieve a pricing leverage
ratio of (a) less than 1.00 to 1.00; (b) equal to or
greater than 1.00 to 1.00 but less than 1.75 to 1.00; or
(c) greater than or equal to 1.75 to 1.00, then the
applicable LIBOR margins will be 1.25%, 1.75% and 2.25%,
respectively. Interest on LIBOR-based loans is payable at the
end of the relevant LIBOR interest period, which must be one,
two, three or six months. The new credit facility is subject to
our compliance with certain covenants, including financial
covenants relating to fixed charges, leverage, tangible net
worth, asset coverage and consolidated net losses.
The unpaid principal balance of each prime-based loan will bear
interest at a variable rate equal to Comericas prime rate
plus an amount ranging from 0% to 0.50% depending on the pricing
leverage ratio that we achieve. If we achieve a pricing leverage
ratio of (a) less than 1.00 to 1.00; (b) equal to or
greater than 1.00 to 1.00 but less than 1.75 to 1.00; or
(c) greater than or equal to 1.75 to 1.00, then the
applicable prime margins will be 0.0%, 0.25% and 0.50%,
respectively.
Mortgages
In 2001, we completed the construction of a new headquarters
building on land owned by us adjacent to our equipment repair
facility in Houston. The building was financed principally
through an additional mortgage of $1.1 million on the land
and facilities at a floating interest rate which at
September 30, 2007 was 8.0% per annum, repayable over
15 years. This mortgage is cross-collateralized with a
prior mortgage on the land and equipment repair facilities,
which were purchased in 1998, in the original amount of
$500,000, repayable over 10 years with an interest rate of
9.3% per annum. In addition, we have available to us a long-
43
term facility of up to $1.5 million repayable over
15 years to finance the expansion of our office building
and maintenance facilities.
Uses of
Capital
Contractual
Obligations
The following table sets forth our fixed, non-cancelable
obligations at December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
13 Years
|
|
|
45 Years
|
|
|
5 Years
|
|
|
|
(Amounts in thousands)
|
|
|
Revolving credit facility
|
|
$
|
30,000
|
|
|
$
|
|
|
|
$
|
30,000
|
|
|
$
|
|
|
|
$
|
|
|
Operating leases
|
|
|
3,502
|
|
|
|
1,010
|
|
|
|
2,024
|
|
|
|
468
|
|
|
|
|
|
Mortgages
|
|
|
782
|
|
|
|
123
|
|
|
|
248
|
|
|
|
146
|
|
|
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,284
|
|
|
$
|
1,133
|
|
|
$
|
32,272
|
|
|
$
|
614
|
|
|
$
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 revolving credit
facility is paid monthly and fluctuates with the balances
outstanding during the year, as well as with fluctuations in
interest rates. In 2006 that interest was approximately $92,000.
All other debt is expected to have future annual interest
expense payments of approximately $67,000 in 2007, $147,000 in
the one to three year period, and $63,000 in the four to five
year period.
To manage risks of changes in the material prices and
subcontracting costs used in tendering bids for construction
contracts, we 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.
Capital
Expenditures
Our capital expenditures during 2006 and the first nine months
of 2007 were $27.3 million and $23.0 million,
respectively, and consisted primarily of expenditures to
purchase heavy construction equipment. In 2008, we expect that
our capital expenditure spending will be at similar levels to
2006.
Off-Balance
Sheet Arrangements
We have no off-balance sheet arrangements. Our operating leases
are described in the notes to our financial statements.
New
Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities
Including an amendment to FASB Statement No. 115
(SFAS No. 159). This statement allows a
company to irrevocably elect fair value as a measurement
attribute for certain financial assets and financial liabilities
with changes in fair value recognized in the results of
operations. SFAS No. 159 also establishes presentation
and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes
for similar types of assets and liabilities.
SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. We are currently evaluating the
impact of adoption on our results of operations and financial
position.
In May 2007, the FASB issued FASB Staff Position
FIN 48-1,
an amendment to FIN 48, which provides guidance on how an
entity is to determine whether a tax position has effectively
been settled for purposes of recognizing previously unrecognized
tax benefits. Specifically, this guidance states that an entity
would recognize a benefit when a tax position is effectively
settled using the following criteria: (1) the taxing
44
authority has completed its examination including all appeals
and administrative reviews; (2) the entity does not plan to
appeal or litigate any aspect of the tax position; and
(3) it is remote that the taxing authority would examine or
reexamine any aspect of the tax position, assuming the taxing
authority has full knowledge of all relevant information
relative to making their assessment on the position. We applied
the provisions of this FASB Staff Position in conjunction with
the adoption of FIN 48 on January 1, 2007, and their
application did not have a material adverse effect on our
results of operations or financial position.
Quantitative
and Qualitative Disclosures About Market Risk
We are exposed to certain market risks from transactions that
are entered into during the normal course of business. Our
primary market risk exposure is related to changes in interest
rates. We manage our interest rate risk by balancing in part our
exposure to fixed and variable interest rates while attempting
to minimize interest costs.
Financial derivatives are used as part of our overall risk
management strategy. These instruments are used to manage risk
related to changes in interest rates. Our portfolio of
derivative financial instruments consists of interest rate swap
agreements, which are used to convert variable interest rate
obligations to fixed interest rate obligations, thereby reducing
the exposure to increases in interest rates. Amounts paid or
received under interest rate swap agreements are accrued as
interest rates fluctuate, with the offset recorded in interest
expense.
An increase of 1% in the market rate of interest would have
increased our interest expense for the nine months ended
September 30, 2007 by approximately $6,000.
We apply SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, pursuant to which our
interest rate swaps have not been designated as hedging
instruments; therefore changes in fair value are recognized in
current earnings.
Because we derive no revenues from foreign countries and have no
obligations in foreign currency, we experience no direct foreign
currency exchange rate risk. However, prices of certain raw
materials, construction equipment and consumables, such as oil,
steel and cement, may be affected by currency fluctuations.
45
General
We are a leading heavy civil construction company that
specializes in the building, reconstruction and repair of
transportation and water infrastructure. Our transportation
infrastructure projects include highways, roads, bridges and
light rail, and our water infrastructure projects include water,
wastewater and storm drainage systems. We provide general
contracting services primarily to public sector clients
utilizing our own employees and equipment for activities,
including excavating, concrete and asphalt paving, installation
of large-diameter water and wastewater distribution systems,
construction of bridges and similar large structures,
construction of light rail infrastructure, concrete batch plant
operations, concrete crushing and aggregates and asphalt paving
operations. We perform the majority of the work required by our
contracts with our own crews, and generally engage
subcontractors only for ancillary services.
Our business was founded in 1955 and has a history of profitable
growth, which we have achieved by expanding both our service
profile and our market areas. This involves adding services,
such as our concrete operations, in order to capture a greater
percentage of available work in our current and potential
markets. It also involves strategically expanding our
operations, either by establishing a branch 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. We extended both our service
profile and our geographic market reach with our recent
acquisition of Road and Highway Builders, LLC, which we refer to
as RHB.
Recent
RHB Acquisition
On October 31, 2007, we completed the acquisition of
privately-owned RHB, which is headquartered in Reno, Nevada. RHB
is a heavy civil construction business focused on the
construction of roads and highways throughout the state of
Nevada. We paid $53 million, of which $1 million was
paid with 40,702 shares of our common stock, to acquire
approximately 91.67% of the equity interest in RHB and 100% of
the equity interests in Road and Highway Builders Inc., a Nevada
corporation. The remaining 8.33% interest in RHB is owned by
Mr. Richard Buenting, the chief executive officer of RHB,
who continues to run RHB as part of our senior management team.
Approximately $29.6 million of the RHB purchase price was funded
with available cash on hand and repayment of an amount
receivable, $1.0 million with the issuance of 40,702 shares of
our common stock to Mr. Buenting and the balance with funds
borrowed under our new $75 million revolving credit
facility.
RHBs largest customer is the Nevada Department of
Transportation, or NDOT, which is responsible for planning,
constructing, operating and maintaining the 5,400 miles of
highway and over 1,000 bridges that make up the state highway
system. RHB is focused on providing timely and profitable
execution of construction projects along with high-value
deployment of construction materials such as aggregates and
mixes for asphalt paving. RHB has concentrated its business in
suburban and rural highway and road system projects requiring
high-volume production and materials handling, and has not
historically pursued municipal work such as water or storm water
systems or high density urban projects. Since its founding in
1999, RHB has experienced profitable growth, capitalizing on
strong market conditions and solid long-term demographics in
Nevada.
For the nine months ended September 30, 2007, RHB generated
revenue, net income and EBITDA of $64.9 million,
$20.9 million and $21.5 million, respectively. This
high level of profitability in 2007 resulted from the
exceptional profitability of specific RHB projects, and we do
not expect this high level of profitability to be normal for RHB
going forward. We purchased RHB based on an assumed sustainable
trailing twelve month EBITDA of approximately $12 million
and with the expectation of further future growth. EBITDA is
defined as net income before net interest expense, income tax
expense, and depreciation and amortization, and before
RHBs other miscellaneous income. EBITDA is a non-GAAP
financial measure that we use for our internal budgeting
process, which excludes the effects of financing costs, income
taxes and non-cash depreciation and amortization. Although
EBITDA is a common alternative measure of performance used by
investors, financial analysts and rating agencies to assess
operating performance for companies in our
46
industry, it is not a substitute for other GAAP financial
measures such as net income or operating income as calculated
and presented in accordance with GAAP. Furthermore, we believe
that the non-GAAP EBITDA financial measure is useful to
investors in providing greater transparency to the information
used by management in its operational and investment decision
making. Our non-GAAP financial measures may be different from
such measures used by other companies. We urge you to review the
GAAP financial measures included in this prospectus and our
consolidated financial statements, including the notes thereto,
and the other financial information contained in this prospectus
and incorporated herein by reference, and to not rely on any
single financial measure to evaluate our business. A
reconciliation of RHBs net income to RHBs EBITDA for
the nine months ended September 30, 2007 is as follows (in
thousands):
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2007
|
|
|
Net income(1)
|
|
$
|
20,897
|
|
Depreciation and amortization
|
|
|
1,130
|
|
Interest and other expense (income), net
|
|
|
(491
|
)
|
Income tax (benefit) expense(1)
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
21,536
|
|
|
|
|
|
|
|
|
|
(1) |
|
RHBs income was taxed to its members, and therefore its
net income was equal to its income before income tax. |
Use of non-GAAP financial measures is subject to inherent
limitations because they do not include all the expenses that
must be included under GAAP and because they involve the
exercise of judgment of which charges should properly be
excluded from the non-GAAP financial measure. EBITDA has
material limitations as a performance measure because it
excludes (1) interest expense, which is a necessary element
of our costs and ability to generate revenues because we borrow
money to finance our operations, (2) depreciation, which is
a necessary element of our costs and ability to generate
revenues because we use capital assets, and (3) income
taxes, which we are required to pay. Management compensates for
these limitations by providing specific information regarding
the GAAP amounts excluded from EBITDA and by presenting
comparable GAAP measures more prominently in our disclosures.
As of September 30, 2007, RHB had a backlog of
approximately $127 million based on our methodology of
calculating backlog. See Selected Historical Financial and
Operating Data for information regarding our calculation
of backlog.
Rationale
for the RHB Acquisition
We acquired RHB for a number of reasons, including those listed
below:
Expansion into a Growing Western U.S. Infrastructure
Construction Markets. RHB provides us entry into an
attractive Nevada market, which we believe will continue to have
strong long-term demographic growth, driving the need for
infrastructure investment. RHBs Nevada business also
provides diversification and counterbalances factors affecting
our Texas markets such as weather, state and local government
funding shifts, and federal allocations of transportation
expenditures. In addition, Nevada is adjacent to a number of
additional growing western state markets.
Strong Management Team with a Shared Corporate
Culture. Mr. Buenting and his team of managers and
employees have been responsible for significant and profitable
growth at RHB. This success has been built on experience,
technical expertise, excellent customer relationships and a
strong work ethic. We believe these shared values will foster
effective integration and can serve as a platform for continued
growth and success in Nevada and adjacent markets.
Expansion of Our Service Lines into Aggregates and Asphalt
Paving Materials. RHB focuses on projects that have
high volumes of materials, such as aggregates and mixes for
asphalt paving. In Texas, we historically have not provided our
own materials, but rather have sourced them from other
suppliers. We
47
believe that RHBs expertise in aggregates and asphalt
paving operations add to our capabilities, and we anticipate
opportunities to apply them in Texas and other markets in
addition to Nevada.
Opportunities to Extend Our Municipal and Structural
Capabilities into Nevada. RHB does not currently pursue
municipal work such as construction of water, wastewater and
storm water systems. It also typically subcontracts structural
work such as bridges. We believe there are a number of
attractive opportunities to utilize our expertise with municipal
and structural work, both within RHBs current project
backlog and in future bid opportunities in RHBs markets.
RHBs Strong Financial Results and Immediate Accretion
to Our Earnings and Earnings Per Share. RHB has
produced strong historical profitability. We believe the
acquisition will be immediately accretive to our earnings and
our earnings per share.
Competitive
Strengths
We believe that our principal competitive strengths include:
Comprehensive Infrastructure Construction
Capabilities. We provide comprehensive construction
services to our customers, including concrete and asphalt
paving, concrete slip forming, installation of large-diameter
water and wastewater systems, construction of bridges and other
large structures, light rail infrastructure construction,
concrete batch plant operations, concrete crushing, and, with
the acquisition of RHB, aggregates and asphalt paving
operations. We perform the majority of the work required by our
contracts with our own crews and believe that our emphasis on
providing comprehensive construction services allows us to
capture additional profit margin and to more aggressively bid on
contracts compared to some competitors more reliant upon
subcontractors.
Long and Successful Track Record of Infrastructure
Construction. We have over 50 years of experience
in the construction industry. Over this period of time, we have
developed the processes and controls that allow us to provide
high-quality contracting services for building roads, highways,
bridges, light rail facilities and water, wastewater and storm
water infrastructure.
Leadership Position in Our Markets. We are an
established leader in our markets based on our longevity, our
management expertise and our reputation, as well as our in-depth
knowledge of construction conditions in our market areas. Our
scale of operations allows us to deploy and redeploy work crews,
materials and equipment across multiple projects and provides us
with advantages in competitive bidding environments.
Consistent History of Managing Construction Projects and
Contract Risk. Our significant experience and longevity
in our markets provides us with an understanding of the many
risks of infrastructure construction. We monitor and manage risk
throughout a contracts duration, including the bid
process, the pre-construction planning activities and the
construction process. In Texas, our project managers lead our
estimating process, and our senior management reviews all bid
proposals prior to submission, thereby increasing project
managers accountability and understanding of the financial
and operating risks and opportunities of our contracts. In
Nevada, the chief executive officer of RHB has been primarily
responsible for all aspects of the bidding and construction
process.
Track Record of Sourcing and Completing
Acquisitions. We believe that it is important to
augment our organic growth through selective acquisitions of
companies that meet our return on investment goals and strategic
objectives. In particular, we seek companies with talented
management teams in growth markets with a focus on
infrastructure construction services. Ideal candidates may also
provide the opportunity to cross-utilize complementary
construction capabilities. In 2002, we acquired the Kinsel Heavy
Highway construction business. In 2006, we completed the
acquisition of the assets of Rathole Drilling, Inc., a drill
shaft subcontracting operation. In 2007, we completed the RHB
acquisition.
Experienced Management Team and Skilled
Workforce. We believe our management team and employees
are key factors to our success. Our Chief Executive Officer and
our President each has over 30 years of industry
experience, our five senior managers have an average of over
25 years of industry experience, and our
48
15 senior project managers average over 15 years of
industry experience in the infrastructure construction market.
We expend significant resources to attract, retain and train our
employees.
Business
Strategy
Key features of our business strategy to create shareholder
value include:
Continue to Add Construction Capabilities. By adding
capabilities that augment our core construction competencies, we
are able to improve gross margin opportunities, more effectively
compete for contracts and compete for contracts that might not
otherwise be available to us. We continue to investigate
opportunities to augment our staff with employees or management
teams that would bring us additional service capabilities. We
also continue to explore opportunities for acquisitions, such as
RHB, which added to our construction materials capabilities.
Increase Our Market Leadership in Our Core
Markets. We have a strong presence in a number of
growing markets in Texas and Nevada. We intend to continue to
expand our presence in these markets, as well as complementary
adjacent markets. We believe our core markets are generally
experiencing strong growth in infrastructure spending caused by
factors such as an increasing population, robust demand for oil
and gas and for hard mineral resources, the need for new water
sources, flood and subsidence control activities and increased
federally-funded highway construction.
Apply Core Competencies Across Our Markets. We
intend to capitalize on opportunities to export our Texas
experience constructing bridges and water and sewer systems into
RHBs Nevada markets. Similarly, we believe RHBs
experience in aggregates and asphalt paving materials will open
new opportunities for us in our Texas markets.
Expand into Attractive New Markets and Selectively Pursue
Strategic Acquisitions. We will continue to seek to
identify attractive new markets and opportunities in select
western and southeastern U.S. markets. We seek markets with
strong demographic trends, growing new infrastructure
requirements and deferred maintenance spending on existing
infrastructure. We will also continue to assess opportunities to
extend our service capabilities and expand our markets through
acquisitions. With our strong financial position and publicly
traded common stock, we believe that we are an attractive
acquiror for heavy civil construction firms who have limited
opportunities to achieve liquidity with their business.
Position Our Business for Future Infrastructure
Spending. We believe there is a growing awareness of
the need to build, reconstruct and repair our countrys
infrastructure, including water, wastewater and storm drainage
systems and our transportation infrastructure such as bridges,
highways and mass transit systems. We will continue to seek to
build our expertise in the civil construction market for
transportation and water infrastructure, seek to develop new
capabilities to serve these markets, and seek to maintain our
human and capital resources to effectively meet demand.
Continue to Develop Our Employees. We believe that
our employees are a key to the successful implementation of our
business strategy. We plan to continue allocating significant
resources in order to attract and retain talented managers and
supervisory and field personnel.
Markets
and Customers
Market
Opportunity
We operate in the heavy civil construction segment for
infrastructure projects, specializing in transportation and
water infrastructure. Demand for this infrastructure depends on
a variety of factors, including overall population growth,
economic expansion and vitality of a market area, as well as
unique local topographical, structural and environmental issues.
For example, the City of Houston experiences flooding and
subsidence, which has led to various municipal mandates
requiring substantial new construction to reorganize and expand
the collection, treatment and distribution of water throughout
the area. 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.
49
Our geographic markets have experienced steady and significant
growth over the last 10 years. According to the 2006
census, as ranked by population, Texas is the second largest
state in the United States with 23.5 million people. The
population in Texas has grown by 12.7% since 2000, almost double
the 6.4% growth rate for the United States as a whole over the
same period. According to the 2006 census, Houston ranks as the
fourth largest city in the country, San Antonio as the
seventh largest, Dallas as the ninth largest and Austin as the
sixteenth largest. Nevada has undergone even more rapid growth,
with the states population expanding 24.9% since 2000 to
2.5 million in 2006. These rapidly growing population bases
continue to enhance the need for expanded transportation and
water infrastructure.
In addition to our core geographical markets, we operate in
large and growing construction sectors that have experienced
solid and sustained national growth over the past several years.
According to data from the U.S. Census Bureau, the annual
value of public construction
put-in-place
in the United States for transportation, highway, street and
water/wastewater infrastructure has grown at a 5.1% compound
annual growth rate since 2002 and was $137 billion in 2006,
the last year for which data are available. This includes 4.4%
annual growth in the $99 billion transportation,
construction and highway/street market and 7.2% growth in the
$38 billion water/wastewater market. McGraw-Hill, an
industry data source, projects that nationwide construction
spending on highways and bridges and environmental public works
(which include river/harbor improvements, sewers and water
supply systems) is expected to grow by 5% and 3%, respectively,
in 2008. Based on dollars spent for construction of highways and
bridges and for sewer systems in 2007, Texas was ranked third in
the nation in both categories by McGraw-Hill.
Our highway and bridge work is generally funded through federal
and state authorizations. The federal government enacted the
SAFETEA-LU bill, which authorized $286 billion for
transportation spending through 2009, an average 30% increase
from the prior spending bill. Of this total, TXDOT and NDOT were
originally allocated approximately $14.5 billion and
$1.3 billion, respectively. Actual SAFETEA-LU
appropriations have been somewhat reduced from the original
allocations. We are reliant upon TXDOT and NDOT contracts for a
significant portion of our revenues. Recent public statements by
TXDOT officials indicate potential TXDOT funding shortfalls and
reductions in spending. Transportation leaders have identified
$188 billion in needed construction projects to create an
acceptable transportation system in Texas by 2030. NDOT
expenditures totaled $740 million in 2006, and have had an
annual increase of 9.9% since 2001.
Our water and wastewater, underground utility, light transit and
non-highway paving work is generally funded by municipalities
and local authorities. The size and growth rates of these
markets is difficult to compute as a whole given the number of
municipalities, the differences in funding sources and
variations in local budgets. However, management estimates that
the municipal markets in which we could potentially do business
are in excess of $1 billion annually.
Our
Markets and Customers
For decades, we have concentrated our operations in Texas. We
are headquartered in Houston, and we serve the top markets in
Texas, including Houston, San Antonio,
Dallas/Fort Worth and Austin. With the RHB acquisition, we
have expanded our operations into Nevada.
Although we occasionally undertake contracts for private
customers, the vast majority of our contracts are for public
sector customers. In Texas, these customers include TXDOT,
county and municipal public works departments, the Metropolitan
Transit Authority of Harris County, Texas, or Metro, the Harris
County Toll Road Authority, regional transit authorities, port
authorities, school districts and municipal utility districts.
In Nevada, RHBs primary public sector customer has been
NDOT.
Our largest revenue customer is TXDOT. In 2006, contracts with
TXDOT represented 67% of our revenues, and other public sector
revenue generated in Texas represented 33% of our revenues. In
2006, contracts with NDOT represented 90% of RHBs
revenues, and other public sector revenue generated in Nevada
represented 10% of RHBs revenues. In both Texas and
Nevada, we provide services to these customers exclusively
pursuant to contracts awarded through competitive bidding
processes.
50
In Texas, our municipal customers in 2006 included the City of
Houston (12% of our 2006 revenues) and Harris County, Texas (5%
of our 2006 revenues). We have also completed the construction
of certain infrastructure for new light rail systems in Houston,
Dallas and Galveston. We anticipate that revenues obtained from
the City of Houston will continue to increase due to the
metropolitan areas steady gain in population through
migration of new residents and annexation of surrounding
communities. In both Texas and Nevada, we provide services to
our municipal customers exclusively pursuant to contracts
awarded through competitive bidding processes.
Competition
Our competitors are companies that we bid against for
construction contracts. We estimate that Texas Sterling has
approximately 150 competitors in the Texas markets that we
primarily serve, and they include large national and regional
construction companies as well as many smaller contractors. In
Nevada, we estimate that RHBs construction business has
approximately 10 competitors in the markets that it primarily
serves, and they include both large national and regional
construction companies as well as smaller contractors.
Historically, the construction business has not typically
required large amounts of capital, 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 equipment fleet, our
financial strength, surety bonding capacity and
prequalification, our knowledge of local markets and conditions,
and our project management and estimating abilities. 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
effectively and favorably in the markets in which we operate on
the basis of the foregoing factors.
We are unable to determine the size of many competitors because
they are privately owned, but we believe that we are one of the
larger participants in our Texas markets and one of the largest
contractors in Houston engaged in municipal civil construction
work. In Nevada, we believe that RHB is a leading asphalt paving
contractor in suburban and rural highway projects. We believe
that being one of the largest firms in the Houston municipal
civil construction market provides us with several advantages,
including greater flexibility to manage our backlog in order to
schedule and deploy our workforce and equipment resources more
efficiently; more cost-effective purchasing of materials,
insurance and bonds; the ability to provide a broader range of
services that otherwise would be provided through
subcontractors; and the availability of substantially more
capital and resources to dedicate to each of our contracts.
Because we own and maintain most of the equipment required for
our Texas contracts and have the experienced workforce to handle
many types of municipal 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
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
much more vertically-integrated, or they specialize in certain
types of projects such as construction over water. However, such
competitors, particularly in Texas, often have the disadvantage
of temporarily using a local workforce to complete each of their
state highway contracts. In contrast, we permanently employ the
workers who perform our state highway contracts in Texas,
although we do rely on a temporary, unionized workforce for
performance of a portion of our state highway contracts in
Nevada. For the nine months ended September 30, 2007, state
highway work accounted for 69% of our consolidated revenues,
compared with 67% in 2006 and 39% in 2005. During the same
period, state highway work accounted for 97% of RHBs
revenues, compared with 90% in 2006 and 96% in 2005.
Backlog
Backlog is our estimate of the billings that we expect to make
in future periods on our construction contracts. We add the
revenue value of new contracts to our backlog, typically when we
are the low bidder on a public sector contract and management
determines that there are no apparent impediments to award of
the contract. As construction on our contracts progresses, we
increase or decrease backlog to take account of changes in
estimated quantities under fixed unit price contracts, as well
as to reflect changed conditions,
51
change orders and other variations from initially anticipated
contract revenues and costs, including completion penalties and
bonuses. We subtract from backlog the amounts we bill on
contracts.
As of September 30, 2007, our backlog was approximately
$367 million, and RHB had backlog of approximately
$127 million, based on our methodology for calculating
backlog. At September 30, 2007, we included approximately
$12 million of contracts in backlog on which we were the
apparent low bidder and expected to be awarded the contracts,
but as of that date, those contracts had not been officially
awarded. Historically, subsequent non-awards of such low bids
have not materially affected our backlog or financial condition.
Substantially all of the contracts in our backlog may be
canceled at the election of the customer; however, neither our
backlog nor our results of operations have been materially
adversely affected by contract cancellations or modifications in
the past. See ContractsContract Management
Process.
Contracts
Types
of Contracts
We provide our services by using traditional general contracting
arrangements, which are predominantly fixed unit price contracts
awarded based on the lowest bid. A small amount of our revenues
is produced under change orders or emergency contracts arranged
on a cost plus basis.
Fixed unit price contracts are generally used in
competitively-bid public civil construction contracts and, to a
lesser degree, building construction contracts. Contractors
under fixed unit price contracts are generally committed to
provide all of the resources required to complete a contract for
a fixed price per unit. Fixed unit price contracts generally
transfer more risk to the contractor but offer the opportunity,
under favorable circumstances, for greater profits. These
contracts are generally subject to a negotiated change order,
frequently due to a difference in site conditions from those
anticipated when the bid is placed. Typically, one change order
is issued upon completion of a contract to account for all of
the quantity deviations from the original contract that were
made during the construction process. Some contracts provide for
penalties if the contract is not completed on time, or
incentives if it is completed ahead of schedule.
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 and through meetings with other participants
in the construction industry. After determining which contracts
are available, we decide which contracts to pursue based on such
factors as the relevant skills required, 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 certain contracts, we are sometimes
required to complete a prequalification process with the
applicable agency or customer. Some customers, such as TXDOT and
NDOT, require yearly prequalification, and other customers have
experience requirements specific to the contract. The
prequalification process generally limits bidders to those
companies with 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 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, each of our original bids is based on
the contract customers estimates of the quantities needed
to complete a contract; if the quantities ultimately needed are
different, our backlog
52
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 positive
than the assumptions in our bid, contract profitability can
improve.
The estimating process for our contracts in Texas 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 two to six weeks performing a detailed review of the
plans and specifications, summarize the various types of work
involved and related estimated quantities, determine the
contract duration and schedule and highlight 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, with the typical
contract containing 50 to 400 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 managements perception of the degree of difficulty of
the contract, the current competitive climate and the size and
makeup of our backlog. Our project managers are intimately
involved throughout the estimating and construction process so
that contract issues, and risks relating thereto, can be
understood and addressed on a timely basis.
Historically, the contracting process for RHBs contracts
in Nevada has been primarily the responsibility of the chief
executive officer of the company. He has reviewed all of the
plans and specifications for a proposed project, estimated the
costs to complete the project and the risks involved, added in
an appropriate profit level, and, based on all of that
information, determined whether to submit a bid on a project. As
part of our process for integrating RHB into our overall
operations, we anticipate that the process used to bid on
contracts in Nevada will substantially conform to the process
used in Texas as described above.
To manage risks of changes in material prices and subcontracting
costs used in tendering bids for construction contracts, we
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
respective contracts that we are awarded for which quotations
have been provided.
Substantially all of our contracts are entered into with
governmental entities and are generally awarded to the lowest
bidder after a solicitation of bids by the project owner.
Requests for proposals or negotiated contracts with public or
private customers are generally awarded based on a combination
of technical capability and price, taking into consideration
factors such as contract schedule and prior experience. In
either case, bidders must post a bid bond for generally 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.
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 (at a minimum on a monthly basis)
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 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 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
53
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 such 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 customers
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 almost all of the construction
contracts that we undertake. We complete the majority of our
contracts with our own resources, and we typically subcontract
specialized activities such as traffic control, electrical
systems, signage and trucking. 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 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 many 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.
Insurance
and Bonding
All of our buildings and equipment are covered by insurance,
which our management believes to be adequate. In addition, we
maintain general liability and excess liability insurance, all
in amounts consistent with our risk of loss and industry
practice. We self-insure our workers compensation claims
subject to stop-loss insurance coverage.
As a normal part of the construction business, we generally are
required to provide various types of surety and payment bonds
that provide an additional measure of security for our
performance under public sector contracts. Typically, a bidder
for a contract must post a bid bond generally for 5% to 10% of
the amount bid, and on winning the bid, must post a performance
and payment bond for 100% of the contract amount. Upon
completion of a contract, before receiving final payment on the
contract, a contractor must post a maintenance bond for
generally 1% of the contract amount for one to two years. Our
ability to obtain surety bonds depends upon our capitalization,
working capital, aggregate contract size, past performance,
management expertise and external factors, including the
capacity of the overall surety market. Surety companies consider
such factors in light of the amount of our backlog that we have
currently bonded and their current underwriting standards, which
may change from time to time. As is customary, we have agreed to
indemnify our bonding company for all losses incurred by it in
connection with bonds that are issued, and we have granted our
bonding company a security interest in certain assets as
collateral for such obligation.
Employees
As of December 1, 2007, we had approximately 1,200
employees, including 15 project managers and over 50
superintendents who manage over 120 fully-equipped crews in our
construction business. Of such employees, approximately 740 were
located in our Houston headquarters and 10 in our Reno office,
with most
54
of the others being field personnel. Of our employees, 72, all
of whom are in Nevada, are union members represented by three
unions.
Our business is dependent upon a readily available supply of
management, supervisory and field personnel. Substantially all
of our employees who work on our contracts in Texas are a
permanent part of our workforce, and we generally do not rely on
temporary employees to complete these contracts. In contrast,
many of our employees who work on our contracts in Nevada are
temporary employees. In the past, we have been able to attract
sufficient numbers of personnel to support the growth of our
operations. Although we do not anticipate any shortage of labor
in the near term, we may not be able to continue to attract and
retain sufficient employees at all levels due to changes in
immigration enforcement practices or compliance standards or for
other reasons.
We conduct extensive safety training programs, which has 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.
Properties
We own our headquarters office building in Houston, Texas, which
is located on a seven acre parcel of land on which our Texas
equipment repair center is also located. We also own land in
Dallas and San Antonio on which we plan to construct
regional offices and repair facilities. Pending completion of
these regional offices, we lease office facilities in these
locations. In order to complete most contracts in Texas, we
lease small parcels of real estate near the site of a contract
job site to store materials, locate equipment, conduct concrete
crushing and pugging operations, and provide offices for the
contracting customer, its representatives and our employees.
For our Nevada operations, we lease office space in Reno,
Nevada, and we have an office and repair facilities located on a
forty-five acre parcel of land in Lovelock, Nevada. RHB also has
a quarry lease in Carson City, Nevada. Unlike in Texas where we
acquire aggregates from third-party suppliers, in Nevada, RHB
sources and produces its own aggregates, whether from the
Lovelock quarry or from other sources near job sites where it
enters into short-term leases to acquire the aggregates
necessary for the job. In order to complete most contracts in
Nevada, 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.
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,
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
55
penalties for non-compliance and others, such as the federal
Comprehensive Environmental Response, Compensation and Liability
Act, or CERCLA, impose strict, retroactive, joint and several
liability upon persons responsible for releases of hazardous
substances.
CERCLA and comparable state laws impose liability, without
regard to fault or the legality of the original conduct, on
certain classes of persons that contributed to the release of a
hazardous substance into the environment. These
persons include the owner or operator of the site where the
release occurred and companies that disposed or arranged for the
disposal of the hazardous substances found at the site. Under
CERCLA, these persons may be subject to joint and several
liability for the costs of cleaning up the hazardous substances
that have been released into the environment, for damages to
natural resources and for the costs of certain health studies.
CERCLA also authorizes the federal Environmental Protection
Agency, or EPA, and, in some instances, third parties, to act in
response to threats to the public health or the environment and
to seek to recover from the responsible classes of persons the
costs they incur.
Solid wastes, which may include hazardous wastes, are subject to
the requirements of the Federal Solid Waste Disposal Act, the
federal Resource Conservation and Recovery Act, referred to as
RCRA, and comparable state statutes. Although we do not generate
solid waste, we occasionally dispose of solid waste on behalf of
customers. From time to time, the EPA considers the adoption of
stricter disposal standards for non-hazardous wastes. Moreover,
it is possible that additional wastes will in the future be
designated as hazardous wastes. Hazardous wastes are
subject to more rigorous and costly disposal requirements than
are non-hazardous wastes.
Legal
Proceedings
We are, and may in the future be involved as, a party to various
legal proceedings, which are incidental to the ordinary course
of business. We regularly analyze current information 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 to have a material adverse impact on our
consolidated results of operations, financial position or cash
flows.
56
The following table sets forth the names and ages of each of our
current directors and executive officers and the positions they
held as of December 1, 2007:
|
|
|
|
|
|
|
Name
|
|
Position
|
|
Age
|
Patrick T. Manning
|
|
Chairman of the Board of Directors and Chief Executive Officer
|
|
|
61
|
|
Joseph P. Harper, Sr.
|
|
President, Chief Operating Officer and Treasurer and a Director
|
|
|
61
|
|
James H. Allen, Jr.
|
|
Senior Vice President and Chief Financial Officer
|
|
|
66
|
|
Roger M. Barzun.
|
|
Senior Vice President, Secretary and General Counsel
|
|
|
66
|
|
Richard H. Buenting
|
|
Chief Executive Officer of Road and Highway Builders, LLC
|
|
|
39
|
|
John D. Abernathy.
|
|
Director
|
|
|
70
|
|
Robert W. Frickel
|
|
Director
|
|
|
63
|
|
Donald P. Fusilli, Jr.
|
|
Director
|
|
|
56
|
|
Maarten D. Hemsley
|
|
Director
|
|
|
58
|
|
Christopher H. B. Mills
|
|
Director
|
|
|
55
|
|
Milton L. Scott
|
|
Director
|
|
|
51
|
|
David R. A. Steadman
|
|
Director
|
|
|
70
|
|
Patrick T. Manning. Mr. Manning joined the
predecessor of Texas Sterling Construction Co., our Texas
construction subsidiary, which along with its predecessors we
refer to as TSC, in 1971 and led its move from Detroit, Michigan
into the Houston market in 1978. He has been TSCs
President and Chief Executive Officer since 1998 and our
Chairman of the Board of Directors and Chief Executive Officer
since July 2001. Mr. Manning has served on a variety of
construction industry committees, including the Gulf Coast
Trenchless Association and the Houston Contractors
Association, where he served as a member of the board of
directors and as President from 1987 to 1993. He attended
Michigan State University from 1969 to 1972.
Joseph P. Harper, Sr. Mr. Harper has been
employed by TSC since 1972. He was Chief Financial Officer of
TSC for approximately 25 years until August 2004, when he
became Treasurer of TSC. In addition to his financial
responsibilities, Mr. Harper has performed both estimating
and project management functions. Mr. Harper has been a
director and our President and Chief Operating Officer since
July 2001, and in May 2006 was elected our Treasurer.
Mr. Harper is a certified public accountant.
James H. Allen, Jr. Mr. Allen became our Chief
Financial Officer in July 2007. He spent approximately
30 years with Arthur Andersen & Co., including
19 years as an audit and business advisory partner and as
head of the firms Houston office construction industry
practice. After being retired for several years, he became chief
financial officer of a process chemical manufacturer and served
in that position for over three years prior to joining our
company. Mr. Allen is a certified public accountant.
Roger M. Barzun. Mr. Barzun has been our Vice
President, Secretary and General Counsel since August 1991, was
elected a Senior Vice President from May 1994 until July 2001
and again in March 2006. Mr. Barzun has been a lawyer since
1968 and is a member of the bar of New York and Massachusetts.
Mr. Barzun also serves as general counsel to other
corporations from time to time on a part-time basis.
Richard H. Buenting. Mr. Buenting joined
Sterling in October 2007 upon the acquisition of RHB. He
currently serves as Chief Executive Officer of RHB, a position
he has held since founding that company in 1999. Previously,
Mr. Buenting served in a number of roles, including Vice
President and Project Manager for Granite Construction, a
publicly traded civil construction firm. While at Granite,
Mr. Buenting worked in the California and Nevada markets.
John D. Abernathy. Mr. Abernathy was Chief
Operating Officer of Patton Boggs LLP, a Washington D.C. law
firm, from January 1995 through May 2004 when he retired. He is
also a director of Par Pharmaceutical Companies, Inc., an
NYSE-listed company that manufactures generic and specialty
drugs, and Neuro-Hitech, Inc., a development-stage drug company.
Mr. Abernathy is a certified public accountant. In December
2005, Mr. Abernathy was elected Lead Director by the
independent members of our board of directors.
Robert W. Frickel. Mr. Frickel is the founder
and President of R.W. Frickel Company, P.C., a public
accounting firm that provides audit, tax and consulting services
primarily to companies in the construction industry. Prior to
the founding of R.W. Frickel Company in 1974, Mr. Frickel
was employed by Ernst & Ernst. Mr. Frickel is a
certified public accountant.
57
Donald P. Fusilli, Jr. Mr. Fusilli is an
independent consultant. From May 1973 until September 2006,
Mr. Fusilli served in a variety of capacities at Michael
Baker Corporation, a public company listed on the American Stock
Exchange that provides a variety of professional engineering
services spanning the complete life cycle of infrastructure and
managed asset projects. Mr. Fusilli joined Michael Baker
Corporation as an engineer and over the course of his career
rose to president and chief executive officer in April 2001.
Since September 2006, Mr. Fusilli has been an independent
consultant providing strategic planning, marketing development
and operations management services. Mr. Fusilli is a
director of RTI International Metals, Inc., an NYSE-listed
company that is a leading U.S. producer of titanium mill
products and fabricated metal components. He holds a Civil
Engineering degree from Villanova University, a Juris Doctor
degree from Duquesne University School of Law and attended the
Advanced Management Program at the Harvard Business School.
Maarten D. Hemsley. Mr. Hemsley served as our
President and Chief Operating Officer from 1988 until 2001, and
as Chief Financial Officer from 1998 until August 2007. From
January 2001 to May 2002, Mr. Hemsley was also a consultant
to, and thereafter has been an employee of, JO Hambro Capital
Management Limited, which is part of JO Hambro Capital
Management Group Limited, or JOHCMG, an investment management
company based in the United Kingdom. Mr. Hemsley has served
since 2001 as Fund Manager of JOHCMGs
Leisure & Media Venture Capital Trust, plc, and since
February 2005, as Senior Fund Manager of its Trident
Private Equity II LLP investment fund. Mr. Hemsley is
a director of Tech/Ops Sevcon, Inc., a U.S. public company
that manufactures electronic controls for electric vehicles and
other equipment, and of a number of privately-held companies in
the United Kingdom. Mr. Hemsley is a Fellow of the
Institute of Chartered Accountants in England and Wales.
Christopher H. B. Mills. Mr. Mills is a
director of JOHCMG. Prior to founding JOHCMG in 1993,
Mr. Mills was employed by Montagu Investment Management and
its successor company, Invesco MIM, as an investment manager and
director, from 1975 to 1993. He is the Chief Executive of North
Atlantic Smaller Companies Investment Trust plc, which is a part
of JOHCMG and is a 4.48% holder of our common stock.
Mr. Mills is a director of four U.S. public companies:
Lesco, Inc., which manufactures and sells fertilizer and lawn
products; NetBank, Inc., a financial holding company that
operates a family of businesses focused primarily on consumer
and small business banking as well as conforming mortgage
lending; W-H Energy Services, Inc., which is in the oilfield
services industry; and SunLink Healthcare Systems, Inc., a
non-urban community healthcare provider for seven hospitals and
related businesses in four states in the Southwest and Midwest.
Mr. Mills also serves as a director of a number of public
and private companies outside of the U.S. in which JOHCMG
funds have investments.
Milton L. Scott. Mr. Scott is currently
chairman and chief executive officer of the Togas Group, a
strategic advisory and services company in supply chain
management, transportation and logistics, and integrated supply.
He was previously associated with Complete Energy Holdings, LLC,
a company of which he was Managing Director until January 2006
and which he co-founded in January 2004 to acquire, own and
operate power generation assets in the United States. From March
2003 to January 2004, Mr. Scott was a Managing Director of
The StoneCap Group, an entity formed to acquire, own and operate
power generation assets. From October 1999 to November 2002,
Mr. Scott served as Executive Vice President and Chief
Administrative Officer at Dynegy Inc., a public company that was
a market leader in power distribution, marketing and trading of
gas, power and other commodities, midstream services and
electric distribution. From July 1977 to October 1999,
Mr. Scott was with the Houston office of Arthur Andersen
LLP, a public accounting firm, where he served as partner in
charge of the Southwest Region Technology and Communications
practice. Mr. Scott is currently the lead director and
chairman of the audit committee of W-H Energy Services, an
NYSE-listed company that is in the oilfield services industry.
David R. A. Steadman. Mr. Steadman is President
of Atlantic Management Associates, Inc., a management services
and investment group. An engineer by profession, he served as
Vice President of the Raytheon Company from 1980 until 1987
where he was responsible for commercial telecommunications and
data systems businesses in addition to setting up a corporate
venture capital portfolio. Subsequent to that time and until
1989, Mr. Steadman was Chairman and Chief Executive Officer
of GCA Corporation, a manufacturer of semiconductor production
equipment. Mr. Steadman serves as a director of Aavid
Thermal Technologies, Inc., a provider of thermal management
solutions for the electronics industry, a privately-held
company. Mr. Steadman also serves as Chairman of Tech/Ops
Sevcon, Inc., a public company that manufactures electronic
controls for electric vehicles and other equipment.
Mr. Steadman is a Visiting Lecturer in Business
Administration at the Darden School of the University of
Virginia.
58
The following table sets forth information regarding the
beneficial ownership of our common stock at December 5,
2007, for:
|
|
|
|
|
each person known by us to own beneficially more than 5% of our
outstanding common stock;
|
|
|
|
each of our executive officers named above in
Management;
|
|
|
|
each of our directors; and
|
|
|
|
all of our executive officers and directors as a group.
|
Beneficial ownership is determined in accordance with the rules
of the SEC and includes sole or shared voting or investment
power with respect to securities. Except as indicated by
footnote, and subject to applicable community property laws, the
persons named in the table below have sole voting and investment
power with respect to all shares of common stock shown as
beneficially owned by them, and their address is 20810 Fernbush
Lane, Houston, Texas 77073. The percentage of beneficial
ownership is based on 11,162,942 shares of common stock
outstanding at December 5, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
Shares
|
|
|
Total
|
|
|
|
|
|
|
Common
|
|
|
Subject to
|
|
|
Beneficial
|
|
|
Percent of
|
|
Name of Beneficial Owner
|
|
Stock Owned
|
|
|
Purchase*
|
|
|
Ownership
|
|
|
Class
|
|
|
Patrick T. Manning
|
|
|
132,500
|
|
|
|
65,120
|
|
|
|
197,620
|
|
|
|
1.8
|
%
|
Joseph P. Harper, Sr. (1)
|
|
|
560,141
|
|
|
|
172,574
|
|
|
|
732,715
|
|
|
|
6.5
|
%
|
James H. Allen, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roger M. Barzun
|
|
|
22,161
|
|
|
|
3,710
|
|
|
|
25,871
|
|
|
|
|
|
Richard H. Buenting (2)
|
|
|
40,702
|
|
|
|
|
|
|
|
40,702
|
|
|
|
|
|
John D. Abernathy (3)
|
|
|
29,801
|
|
|
|
27,166
|
|
|
|
56,967
|
|
|
|
|
|
Robert W. Frickel (3)
|
|
|
64,805
|
|
|
|
17,000
|
|
|
|
81,805
|
|
|
|
|
|
Donald P. Fusilli, Jr. (3)
|
|
|
1,598
|
|
|
|
|
|
|
|
1,598
|
|
|
|
|
|
Maarten D. Hemsley
|
|
|
191,924
|
|
|
|
88,400
|
|
|
|
280,324
|
|
|
|
2.5
|
%
|
Christopher H. B. Mills (3)(4)
|
|
|
514,805
|
|
|
|
5,000
|
|
|
|
519,805
|
|
|
|
4.7
|
%
|
Milton L. Scott(3)
|
|
|
2,805
|
|
|
|
|
|
|
|
2,805
|
|
|
|
|
|
David R. A. Steadman (3)
|
|
|
16,805
|
|
|
|
5,000
|
|
|
|
21,805
|
|
|
|
|
|
Dreman Value Management, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harborside Financial Center
Plaza 10, Suite 800
Jersey City, New Jersey 07311 (5)
|
|
|
934,183
|
|
|
|
|
|
|
|
934,183
|
|
|
|
8.4
|
%
|
All directors and executive officers as a group
(12 persons) (6)
|
|
|
1,573,047
|
|
|
|
383,970
|
|
|
|
1,957,017
|
|
|
|
17.0
|
%
|
|
|
|
* |
|
These are shares that the person, entity or group could acquire
within 60 days of November 16, 2007. |
|
|
|
Represents beneficial ownership of less than one percent (1%). |
|
(1) |
|
This number includes 8,000 shares held by Mr. Harper
as custodian for his grandchildren. |
|
(2) |
|
Mr. Buenting also owns an 8.33% equity interest in Road and
Highway Builders, LLC. |
59
|
|
|
(3) |
|
This number includes, or in the case of Mr. Fusilli
consists entirely of, 1,598 shares subject to restrictions
that expire on the day preceding the 2008 Annual Meeting of
Stockholders, but earlier if the director dies or becomes
disabled or if there is a change in control of the Company. The
shares are forfeited before the expiration of the restrictions
if the director ceases to be a director other than because of
his death or disability. |
|
(4) |
|
According to a Form 13G/A (Amendment No. 3) filed
with the SEC on February 6, 2007, each of North Atlantic
Smaller Companies Investment Trust plc, Mr. Mills and North
Atlantic Value Management LLC claims shared voting and
investment power over these shares. This number consists of the
500,000 shares owned by NASCIT; 5,000 shares owned by
Mr. Mills personally over which he claims sole voting and
investment power; and 1,598 shares owned by Mr. Mills
that are subject to the same restrictions as are described in
footnote (3), above. |
|
(5) |
|
According to a Form 13G filed with the SEC on
February 14, 2007, Dreman Value Management, LLC is an
investment adviser with sole voting and dispositive power over
these shares. |
|
(6) |
|
See the footnotes above for a description of certain of the
shares included in this total. |
60
SHARES
ELIGIBLE FOR FUTURE SALE
We cannot predict the effect, if any, that sales of shares or
the availability of shares for sale will have on the market
price of our common stock prevailing from time to time.
Nevertheless, sales of significant amounts of our common stock
in the public market, or the perception that those sales may
occur, could adversely affect prevailing market prices and
impair our future ability to raise capital through the sale of
our equity at a time and price we deem appropriate.
Upon the completion of this offering and assuming no exercise of
outstanding warrants or options, we will have 12,762,942 shares
(or in the event the underwriters over-allotment option is
exercised in full, 13,002,942 shares) of our common stock
outstanding. Of these shares, 9,510,748 shares (or in the event
the underwriters over-allotment option is exercised in
full, 9,750,748 shares) will be freely tradable without
restriction, except for any shares of our common stock purchased
in this offering by our affiliates, as that term is
defined in Rule 144 under the Securities Act, which would
be subject to the limitations and restrictions described below.
The remaining 3,252,194 shares of our common stock to be
outstanding upon completion of this offering are deemed
restricted securities, as that term is defined under
Rule 144 of the Securities Act, are held by affiliates and
must be sold in compliance with Rule 144 or are subject to
the lock-up
agreements described in Underwriting. Securities
that are restricted or held by affiliates may be sold in the
U.S. public market only if registered or if they qualify
for an exemption from registration under the provisions of
Rule 144 or Rule 144(k) under the Securities Act,
which rules are described below. Of the 3,252,194 shares of
our common stock that are deemed restricted and that will be
outstanding upon completion of this offering,
2,216,398 shares would qualify for exemption under
Rule 144(k) and 1,035,796 shares would qualify for
exemption under Rule 144.
Rule 144
In general, under Rule 144 as currently in effect, a
person, or persons whose shares must be aggregated, who has
beneficially owned restricted shares of our common stock for at
least one year is entitled to sell within any three-month period
a number of shares that does not exceed the greater of the
following:
|
|
|
|
|
one percent of the number of shares of common stock then
outstanding, which will equal approximately 127,629 shares
(or, in the event the underwriters over-allotment option
is exercised in full, 130,029 shares) immediately after
this offering, or
|
|
|
|
the average weekly trading volume of our common stock on the
Nasdaq during the four calendar weeks preceding the date of
filing of a notice on Form 144 with respect to the sale.
|
Sales under Rule 144 are also generally subject to certain
manner of sale provisions and notice requirements and to the
availability of current public information about us.
Rule 144(k)
Under Rule 144(k), a person, or persons whose shares must
be aggregated, who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale
and who has beneficially owned the shares proposed to be sold
for at least two years would be entitled to sell the shares
under Rule 144(k) without complying with the manner of
sale, public information, volume limitations or notice or public
information requirements of Rule 144. Therefore, unless
otherwise restricted, the shares eligible for sale under
Rule 144(k) may be sold immediately upon the completion of
this offering.
Amendments
to Rule 144
On November 15, 2007, the SEC adopted amendments to
Rule 144. These amendments will, among other things, reduce
the holding period for resales of restricted securities of
reporting companies from one year to six months where the issuer
has been a reporting company for at least 90 days and
eliminate most requirements under Rule 144 for resales of
restricted securities by persons who are not (and have not been
within the three months preceding the resale) affiliates of the
issuer, except for the current information requirement. These
amendments, which are set forth in a final rule issued by the
SEC on December 6, 2007, will be effective on
February 15, 2008.
Lock-Up
Agreements
For a description of the
90-day
lock-up
agreements with the underwriter that restrict sales of shares by
us and by certain of our executive officers and directors, see
UnderwritingLock-Up
Agreements.
61
Subject to the terms and conditions set forth in the
underwriting agreement, the underwriter named below has agreed
to purchase, and we have agreed to sell to such underwriter, the
number of shares of common stock set forth opposite its name
below:
|
|
|
|
|
Underwriter
|
|
Number of Shares
|
|
D.A. Davidson & Co.
|
|
|
1,600,000
|
|
The underwriter is offering the shares of common stock subject
to its acceptance of the shares from us. The underwriting
agreement provides that the obligation of the underwriter to
purchase the shares of common stock offered by this prospectus
is subject to the satisfaction of the conditions contained in
the underwriting agreement. The underwriter must purchase all of
the shares of common stock offered hereby if any of the shares
are purchased, except for the shares covered by the
over-allotment option described below, unless and until the
option is exercised.
The underwriter has advised us that it proposes to offer the
shares of common stock directly to the public at the public
offering price set forth on the cover page of this prospectus,
and to dealers at the public offering price less a selling
concession not in excess of $0.60 per share. The
underwriter also may allow, and dealers may reallow, a
concession not in excess of $0.10 per share to brokers and
dealers. After the offering, the underwriter may change the
offering price and other selling terms. Our common stock is
offered subject to receipt and acceptance thereof by the
underwriter and to the other conditions set forth in the
underwriting agreement, including the right to reject orders in
whole or in part. We and the underwriter will determine the
offering price of our common stock through negotiation. This
price will not necessarily reflect the price at which investors
in the market will be willing to buy and sell our shares
following this offering.
Over-Allotment
Option
We have granted the underwriter an option to purchase up to
240,000 additional shares of our common stock at the public
offering price less the underwriting discount. The underwriter
may exercise this option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of
the shares of common stock offered by this prospectus. The
underwriter may exercise this option, in whole or in part, at
any time and from time to time for 30 days from the date of
the underwriting agreement. To the extent that the underwriter
exercises this option, the underwriter will be committed, as
long as the conditions of the underwriting agreement are
satisfied, to purchase the shares of common stock, and we will
be obligated to sell the shares of common stock to the
underwriter. If purchased, the additional shares will be sold by
the underwriter on the same terms as those on which the other
shares are sold. We will pay the expenses associated with the
exercise of this option.
Underwriting
Discount and Offering Expenses
The following table shows the per share and total public
offering price, underwriting discount to be paid to the
underwriter, and the net proceeds to us before expenses. This
information is presented assuming both no exercise and full
exercise by the underwriter of its over-allotment option.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Without
|
|
|
With
|
|
|
|
|
|
|
Over-
|
|
|
Over-
|
|
|
|
|
|
|
Allotment
|
|
|
Allotment
|
|
|
|
Per Share
|
|
|
Exercise
|
|
|
Exercise
|
|
|
Public offering price
|
|
$
|
20.00
|
|
|
$
|
32,000,000
|
|
|
$
|
36,800,000
|
|
Underwriting discount payable by us
|
|
$
|
1.00
|
|
|
$
|
1,600,000
|
|
|
$
|
1,840,000
|
|
Proceeds, before expenses, to us
|
|
$
|
19.00
|
|
|
$
|
30,400,000
|
|
|
$
|
34,960,000
|
|
In addition to the underwriting fees described above, we have
agreed to pay the underwriter a
non-accountable
expense allowance of $100,000. Including this amount, we
estimate that the expenses of this offering payable by us,
exclusive of the underwriting discount, will be approximately
$775,000.
62
Stabilizing
Transactions
In connection with the offering, the underwriter may purchase
and sell our common stock in the open market. These transactions
may include over-allotment and stabilizing transactions,
syndicate covering transactions and penalty bids.
|
|
|
|
|
Over-allotment transactions involve sales by the underwriter of
shares in excess of the number of shares the underwriter is
obligated to purchase, which creates a syndicate short position.
The short position may be either a covered short position or a
naked short position. In a covered short position, the number of
shares over-allotted by the underwriter is not greater than the
number of shares that it may purchase under the over-allotment
option. In a naked short position, the number of shares involved
is greater than the number of shares in the over-allotment
option. The underwriter may close out any short position by
exercising its over-allotment option
and/or
purchasing shares in the open market.
|
|
|
|
Stabilizing transactions consist of bids or purchases of our
common stock made to prevent or retard a decline in the market
price of our common stock.
|
|
|
|
Syndicate covering transactions involve purchases of our common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In
determining the source of shares to close out the short
position, the underwriter will consider, among other things, the
price of shares available for purchase in the open market
compared to the price at which it may purchase shares through
the over-allotment option. If an underwriter sells more shares
than could be covered by the over-allotment option (i.e., a
naked short position), the position can only be closed out by
buying shares in the open market. A naked short position is more
likely to be created if an underwriter is concerned that there
could be downward pressure on the price of the common stock in
the open market after pricing that could adversely affect
investors who purchase shares in this offering.
|
|
|
|
Penalty bids permit the underwriter to reclaim a selling
concession from a selling group member when the common stock
originally sold by the member is purchased in a stabilizing or
syndicate covering transaction to cover syndicate short
positions.
|
These activities may stabilize, maintain or otherwise affect the
market price of our common stock, which may be greater than the
price that might otherwise prevail in the open market. These
activities, if commenced, may be discontinued at any time. These
transactions may be effected on the Nasdaq, in the
over-the-counter market or otherwise. Neither we nor the
underwriter makes any representation or prediction as to the
effect that the transactions described above may have on the
market price of the shares.
Discretionary
Accounts
The underwriter has informed us that it does not intend to
confirm sales of shares of our common stock being offered to
accounts over which it exercises discretionary authority.
Lock-Up
Agreements
We and certain of our executive officers and directors have
agreed with the underwriter that, during the period ending
90 days after the date of this prospectus, which we refer
to as the restricted period, none of us will, without the prior
consent of the underwriter, directly or indirectly, offer, sell
or otherwise dispose of any shares of common stock or any
securities which may be converted into or exchanged or exercised
for any such shares of common stock, or enter into any swap or
other arrangement that transfers to another person, in whole or
in part, any of the economic consequences of ownership of our
common stock. The restricted period is subject to a limited
extension in certain circumstances if shares of our common stock
are not actively traded securities, as defined in
Rule 101(c)(1) of Regulation M under the Exchange Act.
63
The foregoing restrictions do not apply to:
|
|
|
|
|
the sale by us of shares of common stock to the underwriter;
|
|
|
|
the issuance by us of shares of common stock pursuant to, or the
grant of options under, our existing stock option plan or
outstanding warrants;
|
|
|
|
the sale of shares of common stock pursuant to existing
Rule 10b5-1
trading plans implemented by certain of our executive officers;
|
|
|
|
the sale of shares of common stock acquired in the public market
after the closing of this offering; or
|
|
|
|
transfers of shares of common stock or securities convertible
into or exercisable or exchangeable for common stock by any of
the persons subject to a
lock-up
agreement (a) as bona fide gift or gifts, (b) by will
or intestacy or (c) to any affiliate or member of such
persons immediate family or a trust created for the direct
or indirect benefit of such person or the immediate family
thereof; provided that, in any such case the transferee
or transferees shall execute and deliver to the underwriter,
before such transfer, an agreement to be bound by the
restrictions on transfer described above.
|
In addition, during the restricted period, subject to certain
exceptions, we have also agreed not to file any registration
statement for the registration of any shares of common stock or
any securities convertible into or exercisable or exchangeable
for common stock without the prior written consent of the
underwriter.
Indemnification
We will indemnify the underwriter against certain liabilities,
including liabilities under the Securities Act. If we are unable
to provide this indemnification, we will contribute to payments
that the underwriter may be required to make in respect of those
liabilities.
Other
Relationships
In 2006, we engaged the underwriter to provide financial
advisory services to us in connection with potential financial
and strategic opportunities, including mergers, acquisitions,
divestitures and capital raising transactions. In accordance
with this engagement, we paid the underwriter $1,000,000 in
connection with our acquisition of RHB. The underwriter and its
affiliates may in the future provide various investment banking
and other financial advisory services for us and our affiliates,
for which services they may in the future receive customary
fees. The underwriter has advised us that, except as
specifically contemplated in the underwriting agreement, it owes
no fiduciary or other duties to us in connection with this
offering, and it has agreements and relationships with, and owes
duties to, third parties, including potential purchasers of the
securities in this offering, that may create actual, potential
or apparent conflicts of interest between the underwriter and us.
64
The validity of the shares of common stock offered in this
prospectus will be passed upon for us by Andrews Kurth LLP,
Houston, Texas. The underwriter has been represented by Stoel
Rives LLP, Seattle, Washington.
The consolidated financial statements of Sterling Construction
Company, Inc. as of December 31, 2006 and 2005 and for the
three years in the period ended December 31, 2006, and
managements assessment of the effectiveness of internal
control over financial reporting as of December 31, 2006
either included or incorporated by reference in this prospectus
and elsewhere in the registration statement have been audited by
Grant Thornton LLP, independent registered public accountants,
as indicated in their reports with respect thereto, and are
included or incorporated by reference herein in reliance upon
the authority of said firm as experts in giving said reports.
The audited financial statements of Road and Highway Builders,
LLC as of and for the years ended December 31, 2006 and
2005 have been included in this prospectus in reliance on the
report of McGladrey & Pullen, LLP, an independent
auditor, given on the authority of said firm as experts in
auditing and accounting.
WHERE
YOU CAN FIND MORE INFORMATION
We are subject to the reporting requirements of the Exchange Act
and file reports, proxy statements and other information with
the SEC. We have filed with the SEC a registration statement to
register the common stock offered by this prospectus. This
prospectus, which forms part of the registration statement, does
not contain all of the information included in the registration
statement. For further information about us and the common stock
offered in this prospectus, you should refer to the registration
statement and its exhibits. You may read and copy the
registration statement and any other document that we file with
the SEC at the SECs Public Reference Room,
100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at
1-800-SEC-0330
for further information on the operation of the Public Reference
Room. In addition, the SEC maintains a web site that contains
registration statements, reports, proxy statements and other
information regarding registrants, such as us. The address of
the web site is www.sec.gov.
The SEC allows us to incorporate by reference the
information that we file with the SEC, which means that we can
disclose information to you by referring to those documents. The
information incorporated by reference is an important part of
this prospectus, and information we file later with the SEC will
automatically update this information. We are incorporating by
reference in this prospectus the following documents filed with
the SEC under the Exchange Act (other than any portions of the
respective filings that were furnished pursuant to
Item 2.02 or 7.01 of Current Reports on
Form 8-K
or other applicable SEC rules):
|
|
|
|
|
Annual Report on
Form 10-K
for the year ended December 31, 2006;
|
|
|
|
Quarterly Reports on
Form 10-Q
for the periods ended March 31, 2007, June 30, 2007
and September 30, 2007;
|
|
|
|
Current Reports on
Form 8-K,
as filed with the SEC on January 17, 2007, March 19,
2007, August 10, 2007, November 1, 2007 (as amended),
November 13, 2007 and November 26, 2007; and
|
|
|
|
The description of our common stock contained in our
registration statement on Form 8A, filed on
January 11, 2006, including any amendment or report
updating the description.
|
65
Any statements made in a document incorporated by reference in
this prospectus are deemed to be modified or superseded for
purposes of this prospectus to the extent that a statement in
this prospectus or in any other subsequently filed document,
which is also incorporated by reference, modifies or supersedes
the statement. Any statement made in this prospectus is deemed
to be modified or superseded to the extent a statement in any
subsequently filed document, which is incorporated by reference
in this prospectus, modifies or supersedes such statement. Any
statement so modified or superseded will not be deemed, except
as so modified or superseded, to constitute a part of this
prospectus.
The information relating to us contained in this prospectus
should be read together with the information in the documents
incorporated by reference. In addition, certain information,
including financial information, contained in this prospectus or
incorporated by reference in this prospectus should be read in
conjunction with documents we have filed with the SEC.
In addition, we incorporate by reference all documents that we
will file with the SEC in the future under Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act until the termination of
this offering. We refer to these documents, and the documents
listed above, in this prospectus as incorporated
documents.
You may request, without charge, a copy of any incorporated
document (excluding exhibits, unless we have specifically
incorporated an exhibit in an incorporated document) by writing
or telephoning us at our principal executive offices at the
following address:
Sterling Construction Company, Inc.
Attention: Controller
20810 Fernbush Lane
Houston, Texas 77073
(281) 821-9091
67
INDEX
TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
Audited Financial Statements of Sterling Construction
Company, Inc.:
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
|
|
Unaudited Interim Financial Statements of Sterling
Construction Company, Inc.:
|
|
|
|
|
|
|
|
F-35
|
|
|
|
|
F-36
|
|
|
|
|
F-37
|
|
|
|
|
F-38
|
|
|
|
|
F-39
|
|
|
|
|
|
|
Audited Financial Statements of Road and Highway Builders,
LLC:
|
|
|
|
|
|
|
|
F-46
|
|
|
|
|
F-47
|
|
|
|
|
F-48
|
|
|
|
|
F-49
|
|
|
|
|
F-50
|
|
|
|
|
F-51
|
|
|
|
|
|
|
Unaudited Interim Financial Statements of Road and Highway
Builders, LLC:
|
|
|
|
|
|
|
|
F-55
|
|
|
|
|
F-56
|
|
|
|
|
F-57
|
|
|
|
|
F-58
|
|
|
|
|
F-59
|
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Sterling Construction Company, Inc.
We have audited the accompanying consolidated balance sheets of
Sterling Construction Company, Inc. (a Delaware
corporation) and subsidiaries as of December 31, 2006 and
2005, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2006. These
financial statements are the responsibility of the
Companys 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, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2006 in conformity with
accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to the consolidated financial
statements, the Company adopted Statement of Financial
Accounting Standards No. 123(R), Share-Based
Payment, on a modified prospective basis as of
January 1, 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Sterling Construction Company, Inc. and
subsidiaries internal control over financial reporting as
of December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated March 14, 2007, not
separately included herein, expressed an unqualified opinion on
managements assessment of the effectiveness of internal
control over financial reporting and an unqualified opinion on
the effectiveness of internal control over financial reporting.
Houston, Texas
March 14, 2007
F-2
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
December 31, 2006 and 2005
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28,466
|
|
|
$
|
22,267
|
|
Short-term investments
|
|
|
26,169
|
|
|
|
|
|
Accounts receivable, other
|
|
|
276
|
|
|
|
|
|
Contracts receivable
|
|
|
42,805
|
|
|
|
34,912
|
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
|
|
3,157
|
|
|
|
2,199
|
|
Inventories
|
|
|
965
|
|
|
|
|
|
Deferred tax asset
|
|
|
4,297
|
|
|
|
4,224
|
|
Assets of discontinued operations held for sale
|
|
|
|
|
|
|
8,969
|
|
Note receivable, current
|
|
|
300
|
|
|
|
|
|
Other
|
|
|
973
|
|
|
|
1,056
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
107,408
|
|
|
|
73,627
|
|
Property and equipment, net
|
|
|
46,617
|
|
|
|
27,271
|
|
Goodwill
|
|
|
12,735
|
|
|
|
12,735
|
|
Deferred tax asset, net
|
|
|
|
|
|
|
4,288
|
|
Note receivable, long term
|
|
|
325
|
|
|
|
|
|
Other assets
|
|
|
687
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,747
|
|
|
|
17,557
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
167,772
|
|
|
$
|
118,455
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
17,373
|
|
|
$
|
20,416
|
|
Billings in excess of cost and estimated earnings on uncompleted
contracts
|
|
|
21,536
|
|
|
|
13,635
|
|
Short-term debt, related parties
|
|
|
|
|
|
|
8,449
|
|
Current maturities of long term obligations
|
|
|
123
|
|
|
|
123
|
|
Liabilities of discontinued operations held for sale
|
|
|
|
|
|
|
8,385
|
|
Other accrued expenses
|
|
|
5,502
|
|
|
|
4,265
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
44,534
|
|
|
|
55,273
|
|
Long-term obligations:
|
|
|
|
|
|
|
|
|
Long-term debt, net of current maturities
|
|
|
30,659
|
|
|
|
14,570
|
|
Deferred tax liability, net
|
|
|
1,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,247
|
|
|
|
14,570
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01 per share; authorized
1,000,000 shares, none issued
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share; authorized
14,000,000 shares, 10,875,438 and 8,165,123 shares
issued
|
|
|
109
|
|
|
|
82
|
|
Additional paid in capital
|
|
|
114,630
|
|
|
|
82,822
|
|
Accumulated deficit
|
|
|
(23,748
|
)
|
|
|
(34,292
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
90,991
|
|
|
|
48,612
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
167,772
|
|
|
$
|
118,455
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
F-3
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
December 31, 2006, 2005 and 2004
(Amounts in thousands, except share and per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
$
|
249,348
|
|
|
$
|
219,439
|
|
|
$
|
132,478
|
|
Cost of revenues
|
|
|
220,801
|
|
|
|
195,683
|
|
|
|
119,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
28,547
|
|
|
|
23,756
|
|
|
|
13,261
|
|
General and administrative expenses
|
|
|
10,825
|
|
|
|
9,375
|
|
|
|
7,692
|
|
Other income (loss)
|
|
|
276
|
|
|
|
284
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
17,998
|
|
|
|
14,665
|
|
|
|
5,565
|
|
Interest income
|
|
|
1,426
|
|
|
|
150
|
|
|
|
9
|
|
Interest expense
|
|
|
220
|
|
|
|
1,486
|
|
|
|
1,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before minority interest and
income taxes
|
|
|
19,204
|
|
|
|
13,329
|
|
|
|
4,109
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
19,204
|
|
|
|
13,329
|
|
|
|
3,147
|
|
Income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
310
|
|
|
|
257
|
|
|
|
169
|
|
Deferred
|
|
|
6,256
|
|
|
|
2,531
|
|
|
|
(2,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
|
6,566
|
|
|
|
2,788
|
|
|
|
(2,134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
12,638
|
|
|
|
10,541
|
|
|
|
5,281
|
|
Income from discontinued operations, including gain on disposal
of $121, net of income taxes of $308, $313 and $216
|
|
|
682
|
|
|
|
559
|
|
|
|
372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,320
|
|
|
$
|
11,100
|
|
|
$
|
5,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
1.19
|
|
|
$
|
1.36
|
|
|
$
|
0.99
|
|
Net income from discontinued operations
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.25
|
|
|
$
|
1.43
|
|
|
$
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used in computing
basic per share amounts
|
|
|
10,582,730
|
|
|
|
7,775,476
|
|
|
|
5,342,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
1.08
|
|
|
$
|
1.11
|
|
|
$
|
0.75
|
|
Net income from discontinued operations
|
|
$
|
0.06
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.14
|
|
|
$
|
1.16
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used in computing
diluted per share amounts
|
|
|
11,714,310
|
|
|
|
9,537,923
|
|
|
|
7,027,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
F-4
STERLING
CONSTRUCTION COMPANY, INC. & SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS EQUITY
For the years ended December 31, 2006, 2005 and 2004
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stock
|
|
|
Total
|
|
|
Balance at December 31, 2003
|
|
|
5,140
|
|
|
$
|
51
|
|
|
$
|
67,631
|
|
|
$
|
(51,045
|
)
|
|
$
|
(1
|
)
|
|
$
|
16,636
|
|
Stock issued upon option exercise
|
|
|
220
|
|
|
|
2
|
|
|
|
403
|
|
|
|
|
|
|
|
|
|
|
|
405
|
|
Stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
|
381
|
|
Conversion of debt to stock
|
|
|
450
|
|
|
|
5
|
|
|
|
1,714
|
|
|
|
|
|
|
|
|
|
|
|
1,719
|
|
Shares issued upon settlement of Put
|
|
|
1,569
|
|
|
|
16
|
|
|
|
8,051
|
|
|
|
|
|
|
|
|
|
|
|
8,067
|
|
Purchase of minority interest of SCPL
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
Reduction of valuation allowance deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
2,396
|
|
|
|
|
|
|
|
|
|
|
|
2,396
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,653
|
|
|
|
|
|
|
|
5,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
7,379
|
|
|
|
74
|
|
|
|
80,527
|
|
|
|
(45,392
|
)
|
|
|
(1
|
)
|
|
|
35,208
|
|
Stock issued upon option exercise
|
|
|
786
|
&n |