Greetings, and welcome to the Sterling Construction Company, Inc. Second Quarter 2012 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Elizabeth Brumley, Executive Vice President and CFO for Sterling Construction Company, Inc.. Ms. Brumley, you may begin.

Good morning, ladies and gentlemen, this is Liz Brumley. Welcome to Sterling Construction Company's Second Quarter 2012 Conference Call. I'm joined this morning by Joe Harper, Sr., President and Chief Operating Officer; and Brian Manning, Executive Vice President and Chief Business Development Officer. I would like to remind you that 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 actual results to differ materially from those 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 do not undertake to publicly update them. We are pleased to report this morning that revenues, gross margin and operating income for the 2012 second quarter improved over both the 2011 second quarter and the 2012 first quarter. Our new California and Arizona operations contributed $35.6 million in revenues in the quarter. We also saw higher revenues in Nevada. While we continue to see downward revisions to estimated gross profits from contracts in Texas, the impact on results was less than in previous quarters and was offset by improvements in estimated gross profit on contracts in Utah that were nearing completion. The decline in gross -- the increase in gross margins over the previous quarters to 9% versus the 10.6% in the second quarter of 2011 reflects the impacts of the challenges we experienced with the contracts in Texas. However, 9% is the marked improvement from the 3.4% gross margins in the fourth quarter of 2011 and the 1.9% gross margin in the first quarter of 2012. Diluted earnings per share was $0.15 for the quarter as compared to $0.25 for the 2011 second quarter. Earnings attributable to noncontrolling interest standards reduced diluted EPS by $0.17 net of the related tax impact in the 2012 second quarter as compared to a reduction by $0.08 in the 2011 second quarter. General and administrative expenses for the 2012, second quarter increased as a result of G&A associated with the newly acquired Banicki and Myers companies and as a result of higher professional fees. Results for the 2012 second quarter and the 6 months included $1.5 million and $2.7 million respectively for gains on disposals of property and equipment. Capital expenditures were $17.9 million in the first half of 2012, and we continue to expect capital expenditures for the full year to be higher than the $24 million in 2011. The increased sales and purchases of equipment in 2012 are results of efforts in Texas and other markets to ensure that we have rightsized and an efficient fleet. Our overall effective tax rate was impacted by $4.4 million of earnings allocated to noncontrolling interest holders. Excluding this impact, the overall effective tax rate was 23.1% for the second quarter, and reflects the impact of nontaxable interest income. Turning to our outlook for 2012. We continue to expect that 2012 revenues will be more than 25% higher than in 2011. This was also our expectation when we had our call to report the 2012 first quarter earnings. Backlog for June 30, 2012, remains strong at $782 million and includes $69 million in new contract awards since March 31. We currently estimate that about 1/2 of our $780 million in quarter-end backlog will be constructed during the remaining 6 months of 2012. However, based on the estimated gross margins and our backlog, we expect that our gross margins for 2012, the full year, to be lower than the 8% reported for 2011 full year. Although we've implemented changes to our internal controls to improve the process for estimating revenues and gross profit on our construction projects, there hasn't been adequate time to evaluate the effectiveness of these changes, and we're continuing to evaluate what, if any, additional changes should be made to address the material weakness reported in our 2011 annual report. Sterling continues to be in sound financial condition. Net working capital at quarter end totaled $69 million and includes $68.8 million of cash and short-term investments. Beginning with this quarter's report, net working capital reflects $21.8 million obligations to the noncontrolling interest standards attributable to the RLW put/call option. This put/call is exercisable beginning in the second quarter of 2013. Previously it was recorded as a long-term obligation. We had no outstanding borrowings into our credit facility at the end of the quarter, and our bonding capacity is based principally on the balance sheet strength and is available to support continued revenue growth. I will now turn the call over to our President and COO, Joe Harper, Sr.. Joe?

Thanks, Liz. As Pat mentioned in our last quarter quarterly conference call, we hope for significantly better results in the second quarter. And as Liz has just reported, we achieved good results from our operations. I'm pleased with the 9% gross margin for the second quarter, and the 31% increase in revenues over the second quarter of last year. Operations in Texas have improved, as a result of the changes that we have made, and the net related job downs -- job write-downs for the second quarter have declined substantially. I believe we'll return to normalcy in Texas by the end of the year. Operations in our other markets were never challenged as much as Texas and continue to run well. We are quite pleased with the recently acquired businesses on which we closed last August, and they continue to operate above our expectations, especially in light of the large projects both Myers and Banicki were awarded last year. They have added both revenue and bottom line this year. Backlog, while down for the second quarter was still up from year end, finishing at a healthy $782 million. We continue to be selective on those projects on which we submit and are trying to move our margins back up. We're a low bidder on $69 million this quarter. We are selectively pursuing new work in all our markets for the opportunity to be involved in large project ventures, especially here in Texas and in California, has never been greater. Because of our operations in a number of states, our 1,500-plus, full-time employees, our reputation for quality work and our financial and bonding position, we have numerous possibilities for proposing on work with many of the larger national companies. We recently enacted MAP-21 legislation fund for state DOTs at previous levels for the next 2 years and while we had hoped for an increase, this will at least give states a 2-year outlook that they can count on. In Texas, we will submit on the Grand Parkway being built in Houston at a joint venture on August 22 and will find out if we are successful on this project on September 27. Texas DOT estimate is $1.1 billion. We're also involved in joint ventures in Dallas, on our DART rail project and another on I-35. We are in the process of forming a JV on the PPP project for Highway 288 in Houston, for which early estimates are in the range of $1.8 billion. The first contract for Highway 290 in the Houston metropolitan area was in September. This is a $100 million piece of a $900 million project that will be hard bid in sections ranging from $80 million to $120 million. We're also bidding on an estimated $128 million project in Dallas in September. This amounts to over $5 billion worth of work, on which we will be involved in pursuits with varying percentage ownership interest between 15% and 30%. Brian Manning, our EVP of Business Development is joining us from California today, where he's visiting with a large general contractor to propose on the bridges and the first section of the high-speed rail project between Madeira and Fresno, California. There are 32 bridges on this first section. We work long and hard to position ourselves to take advantage of these design build opportunities, and hopefully, we will have some success in these efforts. One last note on our CEO search, we have made significant progress on hiring a new CEO and hope to make an announcement very soon. We certainly will have challenges for the remainder of the year, finishing some of our unprofitable work here in Texas, but we also have significant opportunities to procure work at higher margins and add good backlog for 2013 and beyond. With that, we'll welcome any questions.

[Operator Instructions] Our first question is from the line of Nick Coppola of Thompson Research.

Just in for -- looking for some further clarity on the revisions. How many new revisions were there this quarter, and how much were they?

I don't know that we've given -- well, we have given some specifics. There was -- in terms of number, we did see a number of new revisions. It wasn't at the tune that what we saw at year end, but there were still a number. I think the positive is that probably 5 projects, we saw some very favorable provisions. We saw -- and these are projects that were nearing completion. And then in Texas, we probably had about 10 to 12 projects where we had some revisions downward. There was only one of those projects where the revision was fairly significant, the rest were -- had an impact of maybe $200,000 to $300,000, $400,000 per project. So we're encouraged. I mean, although that's not what we want to see in the future, it has improved quite a bit from what we've seen in the fourth quarter of last year.

Were there projects that we talked about in the last couple of quarters continuing to be a drag? Were the same ones for the revised, or was it kind of new, different projects?

They were basically the same projects that we saw. San Antonio is one of our culprits, where we had some issues, and we made a -- we brought on a new Vice President of Operations in San Antonio division, so we've got some new leadership there, and I think that'll make a big difference. And then we did see some cheese [ph] on the Baton Rouge project, which I think we mentioned on previous calls. It was some of the same culprits.

Talking about the new leadership, I mean, the new leadership across the company that's -- that are announcing it, I guess, that's been in place for a couple of quarters now. Is there any kind of things that you can point to, any kind of tangible improvements that you can speak of? I mean, whether it's in the kind of in -- specifically about the bidding process or continuous feedback or anything like that?

Yes, Nick, this is Joe. The biggest changes in my view have been a renewed emphasis on the bidding effort. The review process for all proposals going in has been enhanced rather dramatically. There's been a much improved emphasis on safety, and the safety -- safety along with our meetings that go along with the safety program seem to be having a really positive impact on morale across the company. So I'm very pleased with what our team's been able to do in this short period.

Joe, I might mention as well the reporting systems where we're getting information on a more timely basis.

Okay.

And then just one last question for me. I heard you talking about the new highway bill in your opening remarks, but is there really enough visibility for states to plan long-term projects here? Does it really move the needle for you guys?

No, I don't think it does, really, Nick. I mean, I wish I could say, yes, that'll break the banks with us and all that, but I don't think that's what's going to happen. The projects and the time they're conceptualized or the time they start build is a good or longer. And then the average duration on the larger highway projects is 2-years plus. So I don't think a 2-year build does very much good at all. It does solidify that there will be funding at least at that level and I think that's a real plus.

I would agree with you there, Joe, as well. A longer bill would be more beneficial, but we do have some visibility, and we are not operating under continuing resolutions. So we've got $39.7 billion in 2013 and $40.3 billion in '14 that we know. And then the states can plan around that based on what they know that they have and then look for alternative means for funding other projects.

Our next question is from the line of Saagar Parikh with KeyBanc Capital Markets.

This is for Saagar on for Tahira. My first question was really on -- is going build on MAP-21 also, where -- I know your commentary in the press release and in the Q was qualitatively positive that 2013 is going to be a better year than 2012. And I know you went through about -- in your commentary about California and other markets that are stronger. Could you kind of just walk us through if MAP-21 is net-net neutral to net slightly positive, what really makes you incrementally comfortable that 2013 is going to be a much better year for the company?

2013 we're projecting that, that's going to be better, but that it's going to be largely driven by resolving some of the issues that we've had on some of our projects in Texas. So we've seen so many write-downs over the last few quarters, and we would expect 2013 not to be impacted the way the 2012 and the last half of 2011 were impacted with our better bidding process.

This is Pat Manning. Plus, I think the other answer to that is that, with the volume of work that's coming out, especially here in Texas, I think it'll start using up capacity for contractors, whether we're fortunate enough to be low bidder or not, and that will allow us to get -- should allow us to get better margins.

Okay, perfect. And then one follow-up on the project revisions downwards and upwards. Then I've been doing some quick math here, but Liz, you mentioned 10 to 12 projects, potentially in Texas where you guys have downward revisions that -- and you said $300,000 to $400,000 per project was the revision. Wouldn't that put the revisions for the quarter much higher than what they were last quarter? Because I think last quarter, it was $2.4 million after-tax, and then with that, we haven't -- we didn't really talk too much about what the positive revision on the Utah projects were. Just wanted to get more color on -- if you could provide anything more on that.

In -- yes, some of those revisions are going to be a little bit lower, but in Utah, one project in particular had fairly significant revision, and so it's substantially offset. I mean, net-net, we ended up basically at 0, in terms of the impacts on the quarter. So we were very encouraged by that. We also had some positive revisions in some of the other regions that follows, a downward revision here and there. The most part it was Texas and Utah that were kind of offsetting each other.

We had positive revisions here in Texas, too.

Yes, we did.

I mean, when we talk about revisions, realize that with 60-plus contracts in operation, pretty much all the time, there are revisions to virtually every project, every quarter certainly, and likely, every month. So revisions that don't hit the scope and radar may be included in the numbers that Liz has given you. But I -- what I saw in the second quarter was pretty large mitigation on the total dollar impact of write-downs and some very positive impacts from write-ups, netting out to the numbers that you saw.

So pretty much in 2011 or 2010, pretty much any other quarter on a normal environment, you guys always have these sort of revisions, but they're just part of the normal business.

Yes.

And say, they're lower, typically -- I mean, the downward revisions, we would typically expect those to be lower than what we see.

Yes, that definitely makes sense. And then one final question, I'll go back in queue. Related to pricing that's falling into backlog now versus what was flowing into backlog last year and the past few years, any improvement there? And then if not, what makes you comfortable -- or what are you seeing out there that can really help pricing improvement in the marketplace?

I think on hard-bid projects, we have not seen any significant or margin availability change, I don't think in the last 9 months or 1 year. The volume of work is increasing, and I think the opportunities come from the large projects, where we had 1 or 2 in the pipeline a year ago. Today, there are 4 to 6 projects that we expect to be participating in the very near future.

[Operator Instructions] Our next question is from the line of Rich Wesolowski, Sidoti & Company.

It looked like I-15 contributed a lot more profit but not a lot higher margin than would be recorded recently. Was that a big factor in the gains from Utah?

No, it was actually a project -- I think, these are projects, and then there was that 3 or 4 projects that went along with it.

How was I-15 performing?

I mean, Pat --

It's really moving along very well. We anticipate likely being finished sometime in November or December, and everything is pointing to the fact that margins will be at what we estimated or better.

Great. You mentioned, I think, it was Liz, that 2013 would be better, because you wouldn't have the write-downs. But I'm curious if you view today's backlog and revenue as running at temporarily high rates, driven by the company's strategy of making profit, in part, through volume? Or rather, do you expect to increase sales in backlog in 2013 and beyond?

That's a good question, Rich. I mean, we have what I consider to be a little bit of outperformance coming out of California right now. That's going to be hard for them to match next year, is my view, but I really think we're going to see upticks in the Nevada operation and Texas. So I think '13 is going to be flat to up, and I think margin expectations, with my fingers crossed a little bit, similar to what you're looking at right now, maybe, up, okay.

Right, which should put your earnings up substantially from where they are in 2012?

I didn't say that.

Well, I will. One of your competitors suggested that TXDOT was going to spend a lot more money next year than they are this last year. Is that your outlook as well?

Well, they are, but that's in part because of all these large projects they're doing. They're doing the Grand Parkway that Joe mentioned, which is $1.1 billion. We got $900 million on 290, plus they're bidding various in sundry other projects that will add to that volume.

Okay. Would you elaborate a little bit, anyone, if Maarten's on the call perhaps on the pending CEO change? It sounded from your comments, and this is my interpretation that you would've -- have expected this to be completed by now.

I don't think Maarten's on the call. I'll answer it, just saying that I think we're very close. It's a process that we want to be 100% sure of. And then when you get the candidate picked, you can negotiate a number of things. So while we're a little behind, I think you'll be pleased with the choice.

Very good. And lastly, Liz, would you remind us why the revaluation of the noncontrolling interest put/call bypasses net income but is included in EPS?

Just laughing because we scratch our heads -- the reason -- it's a charge directly to retained earnings. It has to do with the fact that it's a revaluation of an equity-type instrument. And that's impacting our ownership interest, and so it's just one of those anomalies in the accounting world.

Isn't it something analogous to items put in comprehensive income, where they bypass the income, they're charged against equity, and they don't hit EPS? It's kind of screwy.

It is kind of is screwy, but no, it's more, to me, analogous to where -- if you have a subsidiary that issue additional stock or something like that. The gain or loss typically is going through a pick[ph]. So to me, it's like that, where you've got changes in equity at your subsidiary level and those don't -- those don't hit your income statement or other comprehensive income, that they're direct hit to equity, that they -- they are supposed to be in your EPS calculations.

Yes, I'm sure they are. You just kind of shrug your shoulders and wonder why.

Okay. I know it's something that's hard. There's no way for you to forecast that. It's just one of those things.

Our next question is from the line of John Rogers of D.A. Davidson.

A couple of things. Just back to the margin comment. Liz, you indicated margins -- gross margins would be below 2011 levels, but it sounds like lower than what we saw in this current quarter. And I'm just trying to sort of reconcile that with improving market conditions and presumably higher volume levels. And then I have another question.

I mean, John, we're basing that on where we stand in terms of our backlog margins at this point. I mean, obviously, you could have other upward revisions from projects or downward, if it could cause that number to be different. And so it's really a function of where margins are in the backlog sits today. This quarter experienced -- heavily impacted by what was going on in Utah, and we're not factoring into that forecast huge [ph] upticks and gross margins on projects in the future.

John, remember, a lot of the volume in Q2 and continually into 3 and a lesser extent, in 4, are projects that turned out to be lost jobs, where we are building work with 0 margin.

Sure. Okay. So it's just alluding some of what's there. And then just on the sale of excess equipment, are you through that, or is there more to be sold? I mean, it seems like a lot of equipment have been sold over the last 6 months or --

I think as that continues through the next 2 quarters, maybe not quite at that pace, but particularly in Texas, but also some in Nevada. We have excess equipment, given current backlog expectations. And the decision has been made to not carry that, so I think you'll see us continuing next 2 quarters' disposals.

Okay. And then in terms of the big project opportunities that you talked about, I mean, out in California, as well as in Texas. The -- your role in those projects, I mean, I'm guessing from what I'm reading about some of the very large contractors coming into those markets that it would be similar to type role that you have on the I-15?

I think that's correct. We -- with the projects being in excess of $1 billion, you typically have a larger contractor in the case of the Grand Parkway that would be Hewittt and Granite, who are our partners on that particular project. So they're accustomed to the risks involved in these larger projects and our percentage of those projects are lower, but higher than you may have seen on the I-15 core project.

Okay. I mean, just given -- I mean, you've got the entire Sterling definitely involved. And then how should we think about the -- both the risk and kind of the margin opportunities on the large projects, versus particularly what Sterling has done historically. I mean, I know your margins are below where they have been, and it sounds like, Joe, from your comments, it's going take a little while to get them back up, but as you pursuit the larger projects, there's obviously a lot more dollars that are -- do you expect margins to be potentially back up above that 10% level -- low teens level that you've strived for in the past?

Yes, in our hard-bid markets, I would not expect to see margins above 10%, John, like, probably a few points below that. But as you -- as the mix changes, of the volumes being generated through larger projects, I mean, larger projects, they're substantial double-digit numbers, and we heard this from virtually every partner we have discussed -- potential partners that we have discussions with. So what that blend looks like makes it a little tougher for us and you guys, I guess, on the one hand. On the other hand, I think on a combined basis, I'm pretty optimistic.

Those larger projects would include those alternative delivery. And yes, there's typically a higher risk profile on there. So it warrants a higher reward.

Okay. And lastly, there's some very large water projects planned and starting to be built in Texas, are you chasing those opportunities or --

We are looking at all water opportunities and there are several, as you mentioned in Texas that are right along the lines of our business. Some of the lines that are cross-country lines, if you will, we are typically not as competitive in those, but they do have our attention.

And is -- Brian, is there significant water business in your backlog now?

There is not -- as a percentage, there is not a significant percentage of water, but we do still maintain those utility crews that would be able to react to some of the larger projects, so it is not a stretch for us to have a large project come along, and then we still got the superintendents and the expertise, project management to pursue them.

Okay. And then just last thing, I promise. Outside of the markets that you've mentioned, Utah, California, Arizona, Texas, any other regions or states that you've got your eye on or project opportunities?

I think with the geographic footprint that we have right now and some of the smaller acquisitions that we've done, we are taking an approach of participating with local firms in order to grow that business. So to say that we're looking at billion-dollar opportunities in other states, other than the ones that we mentioned, is probably not realistic, but certainly possible, with these subsidiaries that are recent acquisitions. So we will participate with these relationships that we've developed. And if there's opportunities in other states, we'll certainly look at them, but none other than the ones mentioned or the states mentioned, where we've got the very large opportunity.

Our next question is from the line of Nick Coppola of Thompson Research.

Just a couple of follow-ups. As you look at your states, are you seeing any improvement in private construction? Any res or non-res?

Repeat that question.

Are you seeing any improvement in private markets? I guess, the idea being that it would, I guess, improve the competitive environment for the public work that you do.

Oh, yes, I think that we're starting to see a lot of that in Texas. I remarked to somebody the other day that I drive 15 miles from my house into work, for the last 3 years, I haven't seen anything going on. And now I'm seeing strip centers going up, a little office building here, now there's starting to be activities.

The developers are also concerned that they're running out of backlog of new homes, so we're starting to see new development, which is the first step in recovery.

Would you say that's true across the states where you have a presence? Or is there maybe -- maybe Texas is there and some other spots, or-has their own spot there [ph]?

I think that it's definitely better than others. I think Arizona is still significantly challenged. Nevada is challenged for new home building and for that recovery to start, but, I mean, typically, it starts in one place and then spreads across the company.

Yes, we're in a lot of process activity out in Utah right now, Nick.

Okay. That's helpful. And just my last question, do you think, looking at the new Highway Bill, is TIFIA going to have any significant impact? Do you have any read whether or not DOTs will realize that piece of legislation?

I think they typically do look at the TIFIA loans and utilize that in some of the larger projects, where they'll apply for those grants, if you will, and have that as a tool. We're also seeing bonding -- positive reaction to bonds and selling bonds for certain toll projects in particular.

There are no further questions at. [Audio Gap] comment.

We appreciate all your time. Look forward to talking to you next quarter. Thank you, everyone.

Thanks, guys.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.