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Sterling Construction Company Inc Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: November 8, 2011 05:26PM
Sterling Construction Company Inc (STRL) filed Quarterly Report for the period ended 2011-09-30. Sterling Construction Company Inc has a market cap of $215.6 million; its shares were traded at around $13.11 with a P/E ratio of 13.1 and P/S ratio of 0.5. Sterling Construction Company Inc had an annual average earning growth of 14.3% over the past 10 years.
Highlight of Business Operations:On August 1, 2011, Ralph L. Wadsworth Construction Company, LLC (“RLW”), Sterling s majority owned subsidiary, purchased all of the outstanding shares of capital stock of J. Banicki Construction, Inc. (“JBC”). JBC is a heavy civil construction business located in Tempe, Arizona, that builds roads and highways in Arizona, primarily for municipalities. This acquisition expanded the geographic footprint of the Company into Arizona and JBC s capabilities in structural concrete utilities and paving as well as performing construction manager at risk type contracts complement the Company s current operations. RLW paid an initial purchase price for JBC of $7.6 million (net of a receivable from the seller determined subsequent to the acquisition date) which was funded by available cash and short-term investments of RLW and the Company. The purchase agreement provides for additional purchase price of up to $5 million to be paid over a five-year period. The additional purchase price is in the form of an earn-out which is calculated generally as 50% of the amount by which earnings before interest, taxes, depreciation and amortization (“EBITDA”) exceeds $2 million for each of the calendar years 2011 through 2015 and $1.2 million for the seven months ended July 31, 2016. The discounted present value of the additional purchase price was estimated to be $2.4 million as of August 1, 2011, the acquisition date, and this liability is included in other long-term liabilities in the accompanying condensed consolidated balance sheets.
On August 1, 2011, the Company purchased a 50% interest in Myers & Sons Construction, L.P. (“Myers”). Myers is a construction limited partnership located in California and was acquired in order to expand the geographic scope of the Company s operations into California. The Company paid a purchase price of $1.2 million, which was funded by available cash of the Company. The terms of the purchase include a buy-back option on August 1, 2016 and again on August 1, 2018 under which certain of the sellers have the option to repurchase the 50% limited partnership interests from the Company for an amount equal to 50% of 4.5 times the limited partnership s average annual trailing twenty-four months earnings before interest, taxes, depreciation and amortization.
The fair value of the noncontrolling interests was determined based on the negotiated price at which the Company purchased its 50% interest which was based in part on expectations of future earnings. Acquisition related costs of $99,000 are included in general and administrative expenses in the Company s consolidated statements of operations for the three and nine months ended September 30, 2011. The fair value of the financial assets acquired includes receivables with a fair value of $2.1 million, which are expected to be fully collectible.
Backlog is our estimate of the revenues that we expect to earn in future periods on our construction projects which are typically completed in 12 to 36 months. At September 30, 2011, our backlog was $672 million as compared to $720 million as of June 30, 2011 and $575 million at September 30, 2010. All of the contracts included in our backlog at September 30, 2011 have been officially awarded. Historically, subsequent non-awards of contracts or finalization of contract price have not materially affected our backlog, results of operations or financial condition. Backlog at September 30, 2011, includes $19.4 million applicable to consolidated joint ventures where we have a controlling interest, which is the entire amount of such joint ventures backlog, and $143 million where we have a noncontrolling interest, which represents our proportionate share of such joint ventures backlog. We were awarded or were the apparent low bidder on contracts of $55 million during the third quarter of 2011. Backlog decreased during the three months ended September 30, 2011 as a result of fewer contract awards won in our Texas and Utah markets. Backlog at September 30, 2011 includes $36 million attributable to two companies acquired during the three months ended September 30, 2011: J. Banicki Construction, Inc. (“JBC”) and Myers & Sons Construction, L.P. (“Myers”).
While gross profit increased during the three and nine months ended September 30, 2011 versus gross profit for the comparable 2010 periods, gross margins decreased from 10.9% during the three months ended September 30, 2010 to 9.3% for the three months ended September 30, 2011, and for the nine month period, the gross margin decreased from 10.5% in 2010 to 9.3% in 2011. Gross margins have been negatively impacted by the on-going competitive bidding pressures since 2008. In addition, Texas margins were impacted by higher than anticipated job costs and lower than expected activity levels resulting in under absorption of indirect costs. Results for jobs in our Nevada market were also impacted by the lower number of construction contracts. These decreases were partially offset by higher margins on jobs in our Utah market.
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