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Sterling Construction Company Inc Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: May 9, 2012 06:00PM
Sterling Construction Company Inc (STRL) filed Quarterly Report for the period ended 2012-03-31. Sterling Constr has a market cap of $155.6 million; its shares were traded at around $9.47 with a P/E ratio of 15.1 and P/S ratio of 0.3. Sterling Constr had an annual average earning growth of 3% over the past 10 years.
Highlight of Business Operations:In connection with the August 1, 2011, acquisition of J. Banicki Construction, Inc. (“JBC”) by 80% owned Ralph L. Wadsworth Construction Company, LLC (“RLW”), RLW agreed to additional purchase price payments of up to $5 million to be paid over a five-year period. The additional purchase price is in the form of an earn-out which is 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. This liability is included in other long-term liabilities in the accompanying condensed consolidated balance sheets.
Annual interest is accreted for the RLW Put/Call obligation based on the Company s borrowing rate under its Credit Facility plus two percent. Such accretion amounted to $248,000 and $212,000 for the three months ended March 31, 2012 and 2011 and is recorded in “Interest expense” in the accompanying condensed consolidated statement of operations. In addition, based on the estimated average of RLW s EBITDA for the calendar years 2010, 2011 and 2012 and the expected multiple, the estimated fair value of the RLW Put/Call was decreased by $463,000 during the three months ended March 31, 2012, and this change, net of tax of $162,000, has been reported as a charge to retained earnings.
We expect that revenues will increase more than 25% from 2011 to 2012 as a result of the higher backlog at the end of 2011 as compared to 2010, the impact of a full year of operations for JBC and Myers, both of which were acquired in August 2011, and contract awards of $194 million from January 1, 2012 through March 31, 2012. However, as discussed above, based on estimated gross margins in our current backlog, we expect our overall gross margins for 2012 to be lower than the 8.0% reported for 2011. As a result, we anticipate that our net income and diluted earnings per common share of stock attributable to Sterling common stockholders for the period from April 1, 2012 to December 31, 2012 will be comparable to the $5.9 million and $0.31 per share reported for the same period in 2011 (after excluding the $41.8 million and $2.55 per share impact of the goodwill impairment).
The increase in net income attributable to noncontrolling interest owners in the Current Quarter compared with the Prior Quarter is primarily related to net income attributable to the 20% noncontrolling interest owners in RLW, our 80% owned subsidiary. As discussed further in Note 8 to the condensed consolidated financial statements, the members of RLW, including the Company, agreed to amend their operating agreement effective January 1, 2012 to provide that any goodwill impairment, including the 2011 fourth quarter goodwill impairment, is not to be allocated to RLW for the purpose of calculating the distributions to be made to the RLW noncontrolling interest holders. This amendment resulted in an increase in the net income attributable to RLW s noncontrolling interests of $6,717,000 during the three months ended March 31, 2012. This increase is included in “Noncontrolling owners interests in earnings of subsidiaries and joint ventures” in the accompanying condensed consolidated statement of operations with an increase in the “Obligation for noncontrolling owners interests in subsidiaries and joint ventures” in the condensed consolidated balance sheet. This increase has a related tax impact of $2,351,000 which increased the tax benefit for the period.
deferred tax benefit of $3.0 million in the Current Quarter is primarily attributable to the $2.4 million tax impact of the additional earnings to noncontrolling interest owners of $6.7 million discussed in Note 8; deferred tax expense of $1.3 million in the Prior Quarter is primarily the result of recognizing accelerated depreciation methods used on equipment for tax purposes as compared to straight-line depreciation used for financial reporting purposes and amortizing goodwill for tax return purposes but not for financial reporting purposes.
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