Sterling Infrastructure Inc (STRL) 2011 Q3 法說會逐字稿

Greetings and welcome to the Sterling Construction Company third quarter 2011 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Elizabeth Brumley, Chief Accounting Officer for Sterling Construction. Thank you, Ms. Brumley, you may begin.

Good morning, ladies and gentlemen, I would like to welcome you to the Sterling Construction third quarter conference call. I'm joined by Pat Manning, our Chairman and Chief Executive Officer, and Brian Manning, our Executive VP of Business Development.

I would like to remind thank you this call may include certain statements that fall within the definition of forward-looking statements under the Private Securities Litigation Reform Act of 1995. Any such statements are subject to risks and uncertainties, including overall economic and market conditions, competitors, customers and suppliers, actions, weather conditions, and other risks identified in our filings with the SEC, which could cause our actual results to differ materially from those that are anticipated. Any such statements should be considered in light of these risks. Predictions that we may make at any time may not continue to reflect management's beliefs and we don't undertake to publicly update them.

With that, I wanted to first talk about the revenues. Those increased 34% from the comparable prior year quarter and 24% versus the second quarter of 2011 to $159 million. We experienced higher activity levels this quarter, particularly in Texas and Utah, as well as revenues in Arizona and California of $7 million from two of the companies that we acquired in August. And I wanted to add a comment. There are some disclosures in the footnotes to the financial statements in the Form 10-Q on those acquisitions and we've got some more details in terms of the revenues and profits from each.

The gross margin and the gross profit, while the gross profit has increased $14.8 million, the gross margin decreased to 9.3%. We experienced lower margins, which reflected the impact of ongoing competitive bidding pressures. In addition, several jobs in Texas were impacted by higher than anticipated job costs, and Pat is going to discuss this further in his remarks.

G&A costs are up $300,000 in the third quarter, as compared to the third quarter of 2010, but those included about $600,000 of acquisition and other legal costs. We've also had higher salaries, wages, and related benefits, primarily resulting from some added positions, and that was the case in the previous quarters this year. Operating income improved for the third quarter as compared to the 2010 third quarter, primarily because we had the increase in the gross profit.

Net income is substantially unchanged between the quarters. Most of that is being driven by the higher noncontrolling interest. The noncontrolling interest fluctuates based on the profitability of RLW's earnings primarily, and those are primarily the results from Utah. As those improved, you'll see a higher noncontrolling interest number, which represents the 20% share by others.

In terms of the balance sheet, we continue to have a very strong balance sheet with cash and short-term investments of $66.5 million in minimal debt. For the ninth months ended September 30th, we invested $3.9 million to acquire interest in Banicki and Myers, and that is net of $5.3 million of cash that was on their balance sheet on the date of the acquisition.

We also spent $20 million related to property and equipment, $4.4 million in the third quarter. With respect to our credit facility, we're pleased to announce that we amended our credit facility in November and extended the maturity date from October 31, 2012, to September 30, 2016. The facility was at $75 million. We have lowered the facility to $50 million, but we've got an accordion feature to increase it up to $100 million.

We think that, given the minimal borrowings we've had over the past few years, we think that will be a better fit for us long-term. Also wanted to point out that with respect to Road and Highway Builders where the noncontrolling owner has a put call, he exercised that put call during the quarter and so that will be settled at year-end. That's $8.2 million (inaudible-technical difficulty).

(Inaudible-technical difficulty), but certainly below what we anticipated.

Cost overruns have not historically been an issue for us, but they were during this quarter. I believe we have recognized the issues and taken the necessary steps to assure that the problems are rectified. Work is proceeding well on our $200 million joint venture in Austin on Highway 290, as well as our I-15 Corps project in Utah. We are recognizing revenue from both of the acquisitions that we made on August 1st. This increased revenue was 4.4% for the third quarter.

We have received contracts on the two North Texas projects worth over $150 million and expect to start the early stages of construction in December. These are both two-year projects and suffered significant delays in the notice to proceed. We are glad to be able to finally begin construction. Backlog was up from last year at this time, but down from last quarter, and represents continued tight markets we are in, but also our resolve to bid only at margins which we consider appropriate to the risks and additive to net income. We were second or third on numerous TXDOT projects during the quarter.

We continue to move towards the booking of larger projects, both on our own and in joint ventures. For example, we are bidding a concrete road replacement job in early December in California with an engineer's estimate of $64 million. Our California subsidiary is exploring three other projects in southern California for the same type work valued at over $200 million. We have submitted proposals for pre-qualification to bid design-built project in California and in Colorado, and have been short-listed to propose on replacing a bridge using our ABC, Accelerated Bridge Construction, method in Minnesota.

We are also looking at a design build highway project in the Midwest. We were also selected as one of four contractors in the second quarter on a $60 million MATOC project in Hawaii, which we have been awarded our first contract for $6.9 million in September. So you see we are continuing to expand our reach and our ability to compete in markets where we see margin opportunities. With that, I'll turn it over to Brian.

Thank you, Pat. Federally, we continue to monitor and push for legislation. Lawmakers recently passed short-term extensions of both the Highway Bill and FAA funding that extends the surface transportation spending through March at current levels, and aviation funding through the end of January.

The Senate Committee on Environment and Public Works is meeting today to consider legislation to reauthorize the nation's service transportation systems. Leaders of this committee have begun working in a bipartisan fashion to draft MAP-21, introduced in the United States Senate on Monday, November 7th.

Some changes to safety will include reducing 90 transportation programs within the US Department of Transportation to 30; expanding the TIFIA loan program; and providing for expedited project delivery. Chairman Barbara Boxer is working to find offsets to keep the Bill deficit neutral.

The Bill does extend the current levels of funding and allows for inflation, but the finance committee will need to identify $12 billion in additional revenue to keep the highway trust fund (inaudible). While movement on this new Bill is important, a longer six-year Bill will allow projects that are longer in duration than two years to have visibility to funding instead of waiting on continuing resolutions.

In Texas, voters are taking infrastructure matters into their own hands. Just as Houston did in last November's election by passing Proposition 1 that aims to bring almost $12 billion over a 20-year period for road construction and drainage improvements. Texas voters passed a Constitutional Amendment yesterday that will allow the Texas Water Development Board to issue up to $6 billion in general obligation bonds.

Proceeds from these bonds will be used in a revolving loan program that political subdivisions such as cities, counties, and river authorities can apply for and access to fund water and wastewater infrastructures in their communities. I would like to reiterate, that while there are many opportunities in the markets that we serve, we are still experiencing a high degree of competition.

While we continue to defend our markets, our project pursuits have expanded to include Arizona, California through acquisition, and into Colorado and Minnesota through our Utah subsidiary. We have mentioned in previous calls opportunities on larger project pursuits. Some of these projects have been delayed as owners determine the ultimate funding sources.

The primary question is whether projects will be funded through availability payments through the owner or through the use of public/private partnerships. In total, we are tracking over $3.5 billion in large bid opportunities, in addition to our regular project pursuits. Now , we are glad to answer any questions that you may have.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions). Our first question is from (inaudible) with KeyBanc Capital Markets. Please go ahead.

Hey, guys. This is this [Sadrehan] for [Tahira]. First off, looking at the cost overruns that you mentioned in Texas, you said that you guys have corrected the issues going forward, could you just give a little more insight on that and maybe the impact on margins in the quarter?

I can give you a little insight. I don't know if I want to necessarily go into a lot of detail, but they were as a result of labor overruns, not material, and subcontracts and labor certainly affects the equipment costs. So those issues resolve around the typical problems we have with, you know, ground conditions, rock that is there in areas where we didn't anticipate, inspections differs from normal, so it's just a whole host of reasons, but I think they were going a bit under the radar and I believe that we've corrected those.

Okay. So we shouldn't expect that going forward. And then looking at your bookings and awards, you guys said in your press release and in the Q that they're about $55 million in the quarter, which is far less than what you guys have been doing over the last few quarters. Just wanted to kind of gauge what's going on there.

Was there -- when we're looking at the Texas lightings data, it seemed like the summer lightings were a little bit slower than prior months. Wanted to see if that was the case or if it's anything around the margins or market share erosion? Just want to kind of gauge that a little bit.

Yes, it's always been lumpy for us. The level we're at now, we're still significantly over what we were last quarter at this time, and because we pick up, especially with the effort that we're putting forth to procure larger projects, if we pick up a $250 million or $300 million project in the next quarter it doesn't necessarily pretend to some great increase in revenue or something. These projects last three years and they have an award process and bidding process that always goes up and down.

Okay. All right, thanks, I'll go back in queue.

Thank you. Our next question is from the line of Rich Wesolowski with Sidoti & Company. Please go ahead.

Thank you. Good morning, everybody.

Good morning, Rich.

Good morning, Rich.

Good morning.

Pat, how many contracts were written down during the quarter?

I don't know if I'll go into that specifically, but there were a number of them. Some were written down, certainly where we had significant margins and then they've got written down to a less margin, which although the project might look good for the year, still affects us and because of percentage complete, it has gone to a further extent, so it affects the quarter poorly. Some were, in fact, written down to the loss, only minor losses, nothing major.

Are any of these at the very early stages of competition?

No. I would say most of them are well into the process.

Would you discuss a little more in-depth the two contract delays and what gives you the confidence that you will soon expect to begin work?

Well, in fact, they gave us notice to proceed and that's the one sheet of paper that we didn't have. You'll recall that we had -- they held up on giving us the contracts, then they finally gave us the contracts pending the sale of bonds, then we finally got signed contracts back, then they waited on the notice to proceed. They suffered significant penalties if they didn't give us the notice to proceed by, I believe the date was November 16th.

16th, yes.

So they gave it to us a few days before that within contract, and we do have that -- basically, that sheet of paper that allows us to go to work.

Were those two jobs specifically a drag on your utilization and margins, separate from the overruns and what you've been discussing?

Oh, certainly. You have to anticipate that we're going to gear up for sort of a major construction effort. I think in my comments I said both of those jobs are two-year projects, and the people that are necessary to build those, including I think we have a number of bridges, I think there were 23, but certainly a number of bridges, all those people you can't lay them off for a month or six weeks and then hope to hire them back. The crews are significantly important to can production, so yes, it did affect us.

Would you comment on the performance of your I-15 project?

Yes, that's going really well. There's been no hiccups in the production. We're set to switch traffic from the one side that we have been building over to the other side in December, and that's moving along well. Assuming we do that, we should be on target to complete on time, which will be December 31st of next year.

Great. Then lastly, in the recent past, you've stated that your markets would enable the Company to generate a typical 10% to 12% gross margin range in the future. Is that still a valid statement?

I believe, yes, in the future. We've had a difficult time trying to figure out when that future was actually going to occur and when markets would lighten up, and that is highly dependent on the Federal Highway Bill that Brian commented on.

But as it stands today, would you expect the jobs that you're putting into backlog (inaudible) execution hiccups that we saw this quarter would put you in that 10% to 12% range?

No, I believe the jobs in backlog are less than that range and unless they improve, no, at least in Texas -- in the work that we've picked up with the acquisition in Phoenix looks promising, the work in Utah certainly is still in excess of those margins, but Texas has certainly been challenged and California is really too new to tell.

Thank you very much.

Thanks, Rich.

Thank you.

Our next question is from the line of David Wells with Thompson Research Group. Please go ahead.

Hi, good morning, everyone.

Good morning.

Good morning, David.

Wanted to follow-up on a question earlier in terms of the contracts written down to a loss. Can you talk about the quality of the backlog that still remains, if that experience of seeing a number of contracts being down to a neutral to modestly negative position makes you reassess what you do have in backlog going forward?

No. That's a constant monthly or even weekly method that we do and look at projects and take either write-ups, and certainly some projects were written up during the quarter, and written down. So sometimes you have difficulty in recognizing how difficult the issue will be and how long it will take to you correct it. I think we've got that done and what is in backlog is representative of how the jobs should finish.

Then I guess I'm trying to understand the execution issues, if you will, in Texas. And given the increased geographic expanse of the business and now being in several new markets, I guess the concern that I have is, is this an issue where management's attention is being focused on the acquisition front and your business is outside of your core markets and some things slip through the cracks or is this more just a function of a couple of project-specific issues? Any thoughts around that would be helpful, too.

David, this is Brian. On that, as we grow, we do export talent to those other subsidiaries and try to grow more people internally, so typically we will have a younger project management force that we're bringing up through the ranks, if you will, and we're refocusing our attention on those project managers and some of the project managers we've sent off to get other design build experience, for example, we are bringing back to Texas to have them work on some of those projects. So it's an ongoing process, as Pat mentioned, and one that we're looking for continuous improvement on.

Okay, that's helpful. And then lastly, how should we think about the tax rate for the rest of the year here?

I think the best way to look at the tax rate is we did not have a lot of noise going through in the third quarter, so that's helpful. What you need to be careful of is that noncontrolling interest is pre-taxed, so really the best way to take your pre-tax income and subtract out the noncontrolling interest, and then use about a 35% to 36% rate. So whatever you're forecasting for noncontrolling, just keep that in mind, that that doesn't have any tax impact in it.

That's helpful. Thank you much.

Thank you. (Operator Instructions). And our next question is from the line of John Rogers with D.A. Davidson. Please go ahead.

Couple of things. First of all, in terms of the I-15 project, last year in the fourth quarter, there was a substantial adjustment or true-up. It looks like you booked a lot of profits there. Whereas this year, it's been more of a consistent contributor. Is it your sense that for the rest of the project into 2013 it should be more consistent? I know that you don't control it.

Yes. Pretty much that's (inaudible) who decides when to recognize profits on that project since we're a minority player in the job. It is going very well. We're hopeful that they will recognize more profits, but we still have a long way to go obviously.

At the end of September, we were around 50%, 55% complete, and it looks like by year-end, weather could change this, but we could be around 75% complete. So it's quite possible that you'll have more visibility into where we're going to end up on the project and that could impact the fourth quarter results.

Okay, good.

You do have to be careful though because there's always the timing of when winter sets in.

Sure, sure. Okay. The other question I had is I was just looking through the Q real quickly and I don't know whether this is for Brian or whoever, but you provide some commentary on the markets and mentions state spending relative to your different end markets. If I look at some of the numbers you've given here for Nevada, Utah, Arizona, Houston, San Antonio, all of the numbers show pretty substantial declines and spending into 2012 and 2013. Is that just because the work isn't funded out that far and that's the way the budgets are set up? Or do you really expect that to sort of runoff?

I know in San Antonio, we hesitated on disclosing those numbers. In my sense, they do put out a five-year forecast, but my sense was that a five-year forecast was based on what had already been funded, because you could just see it tail off tremendously after a year or two.

Right.

And so I was thinking that this isn't really that realistic. I think looking at the 2012 is probably more indicative. For some of the other state information, that is not the case. I'm using information that's five-year data and it isn't restricted to just what's been funded. And so we have seen some declines I think in what they're forecasting for Utah and Nevada. I think that's a fair statement.

I think a lot of it depends on whether they enact this Federal Highway Bill and what happens with it and when they do it.

Okay. But at this point, coming in at the close of 2011, bidding is going to start for 2012 pretty quick. Is it your sense that the markets are going to shrink for bid activity in 2012?

I don't think that that's our sense of it, that they'll always try and find different funding mechanisms, and we, to a large degree, point to some of the alternative methods of funding these things, and a lot more rhetoric on public/private partnerships, so we should see some significant projects, which I mentioned in my commentary, coming over the next several months.

Yes, it's conceivable, John, you could see a expandable marketplace but it will -- if it does, it appears that it will be through alternative delivery methods as opposed to the normal way that they have done things.

Okay. I know that's what we're all hoping for, I was just trying to reconcile that with these comments.

Yes, it's certainly the case that they're forecasting lower spending levels, and that -- I think we've discussed that in the past.

Yes, okay. And then lastly, over the last year or two, you guys have made a push I think into generally larger projects, $50 million, $100 million and larger. Is it your experience so far that margins on that work, and I know it's framed by what's going on in the whole market, but margins on the larger projects, are they better or worse than the smaller projects as you've gotten into these?

On the larger projects, they're better based on the risk that you face, so you look at those risks, and we've done quite a bit in addressing risks with right-of-way, environmental, and different things that could come our way. So you've got those open risks, which are opportunities for profit, and could translate into profit if you don't encounter them, but, in general, they are higher.

Okay. And it's worked out that way for you, even with the lags and --?

Yes. You take a very conservative approach to them. You have contingencies built into the projects in order to handle the risks.

Okay, great. Thank you very much.

Thank you, John.

Thank you. Our next question is once again from Rich Wesolowski with Sidoti. Please go ahead.

Thanks again. Pat, getting back to the answer you gave that the work you're putting into backlog today on average would not enable you to get to that typical 10% to 12% margin range. If I look at this quarter, you did 9.3%,with execution hiccups like taking you down from that range. Given that the third quarter revenue is derived from projects that are won in the second half of 2010 and early half of 2011, are we to assume that the work you're putting in backlog today is expected to be less profitable from that of six to 12 months ago? I mean, has the market turned worse since then?

I'm just trying to -- the 9.3% is obviously an average of our entire marketplace, so it's been worse in Texas, it's been better in Utah. You know, we're picking up, finding work which has higher margins than our typical construction projects. We haven't seen much work come out of Houston, so that's driven prices down here, but we're seeing signs of less bidders, so it's a continued mixed bag that we review on each job and try and get a handle on where the market it is and how much we can market up and so forth. But I would say that certainly they have trended down this year, much to our surprise.

But the 9.3%, if I'm correct, is not quite representative of the has been margin considering that there was a very A-typical execution hiccup from some of your work this quarter. Is that correct?

A-typical? I mean, yes, again, we would have -- if we wouldn't have had the margin hiccups here in Texas, that margin would have been higher. You know, whether it's going to be in the future, even without the hiccups, I can't tell.

Right. No, I understand the contracting business, you have plus, you have minuses, it's a portfolio projects, but given that you actually called these out, which we don't typically see Sterling do, I just interpreted that this was an abnormal amount of execution write-downs for the Company.

Well, it was and that's why I did call it out, and I thought that was important to note and that we have corrected those situations. That doesn't mean that we're going to be 12% next quarter because still, again, like you say, a number of projects, we're hopeful that the execution in Texas is better, though.

Right. And then lastly, if I take your second quarter backlog and I add the $55 million in awards stated on the release, add $36 million from Banicki, and then take out the September quarter revenue, I come up about $20 million shy of your current backlog. What am I missing?

Yeah, some of what you're missing there, Rich, which we haven't disclosed separately, but for Banicki, they get these job order contracts and that increases the revenue amount, and so that's kind of handled separately from the role of the backlog.

So Banicki has work that is not included in backlog or they were in backlog since you bought them?

It was not reflected in the award number, so you would probably add another $11 million related to the job order.

Okay. Thank you.

Does that help?

Yes, it does, I appreciate it.

In addition, there were a few million in revenues that are for services that are performed for the joint ventures, so they're handled a little bit differently. We don't book those into our backlog number because it's simply, you know, personnel that we're lending to a job and we may get profit on those.

Okay. So between those two --?

And Rich, the comments on the job orders contracts is that they are for certain dollar amounts, but they're let in smaller contracts, kind of like a MATOC, if you will. So as we get those awards that build up to the total amount of the job order contract, we add those to backlog.

Great. Thanks again.

Thank you.

Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to management for any closing comments.

We appreciate your attention. We'll talk to you again next quarter. Thank you, everybody.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your line at this time. Thank you for your participation.