Sterling Infrastructure, Inc. (STRL) Q4 2011 Earnings Report, Transcript and Summary

Greetings, and welcome to the Sterling Construction Company Fourth Quarter 2011 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Elizabeth Brumley, Chief Financial Officer of Sterling. Thank you. Ms. Brumley, you may begin.

Good morning, ladies and gentlemen, I'd like to welcome you to the Sterling Construction Fourth Quarter 2011 Conference Call. I'm joined today by Pat Manning, our Chairman and Chief Executive Officer; Joe Harper Sr., our President and Chief Operating Officer. In addition, Brian Manning, Executive VP of Business Development; and Maarten Hemsley, our Lead Director, are joining us on the call today to participate in the Q&A portion of this call. 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 Securities and Exchange Commission, 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. Results for the 2011 fourth quarter were impacted by 2 significant items. There was a pretax charge of $5.9 million due to revisions to previous estimates of revenues and costs on our construction projects. In addition, we had a pretax $67-million charge related to the impairment of goodwill. In our February 2012 press release, we announced that we expected an after-tax loss as a result of the revisions to previous estimates, and in addition, that we expected an impairment of goodwill would increase that loss. Net of taxes and noncontrolling interests, the charge related to the impairment of goodwill increased the net loss for the fourth quarter by $41.8 million or $2.55 per diluted share. Excluding the charge for impairment, for fourth quarter of 2011 we had an operating loss of $2 million, a net loss attributable to common stockholders of $1.8 million and a net loss per diluted share of $0.17. The goodwill impairment was identified in connection with our annual review for impairment and is based on a fair value analysis of the company. The company has only one reporting unit, which means that the evaluation of fair value is done for the company as a whole rather than for individual subsidiaries. Revenues for the 2011 fourth quarter declined by $24 million from the 2010 fourth quarter. As discussed further in our press release, revenues declined from construction projects in Texas and Utah. This decline was partially offset by $11.6 million in revenues attributable to our newly acquired Arizona and California operations. Gross profit and gross margins for the fourth quarter of 2011 declined substantially from fourth quarter 2010 levels due to net downward revisions of estimated revenues and gross margins on a number of construction projects, primarily in Texas. These revisions were the result of various factors affecting a number of contracts, some positively and some negatively. Just over half of the net charge is attributable to large revisions on 7 construction projects. Five of these were downward, and 2 were upward. The revisions were identified in connection with our normal review process. For those who haven't had a chance to digest our press release, the primary factors which impacted the fourth quarter of 2011 were on-site conditions that differed from those in the original bid; contract or project modifications creating unanticipated costs not covered by change orders; failure by our suppliers, subcontractors or customers to perform their obligations; shortages of skilled workers; delays to our customers in starting projects, which caused cost overruns on 2 large projects in Dallas; and delays in quickly identifying and taking measures to address issues which arose during production. While the risk of cost overruns and changes in estimated contract revenues are an inherent part of the construction business, we are making changes which will minimize their impact. Joe will be discussing these changes later in the call. In addition to the factors discussed above, which impact the profitability on individual projects, as many of you are well aware, the lack of a long-term, multiyear federal highway bill has adversely affected the levels of infrastructure capital expenditures in all of our markets, leading to significant pressures on gross margins. Turning to our outlook for 2012. We expect that 2012 revenues will be more than 25% higher than in 2011 as a result of several items: the strong backlog at the end of 2011 and contract awards since year end, the impact from a full year of operations for Banicki and Myers in Arizona and California. We also currently estimate almost $600 million of our $741 million in year-end backlog will be constructed in 2012. However, based on gross margins and our backlog, we expect our gross margins for 2012 to be lower than the 8% reported for 2011. We also anticipate that net income and diluted EPS for 2012 will be below the $5.9 million and $0.31 per share reported for 2011 after excluding the impact from the goodwill impairment. In addition to the operational issues in 2011, we determined that in some instances, the periodic revisions in estimates made by our operating personnel and the reviews of those estimates by management were not adequate or timely enough. And consequently, we determined that there was a material weakness in internal control at year end. Despite these challenges, Sterling is in sound financial condition. Working capital at year end totaled $97 million, including $61 million of cash and short-term investments. We had no outstanding borrowings under our credit facility, and our bonding facility is principally based on this balance sheet strength and is available to support continued revenue growth. And with that, I will turn it over to Joe Harper.

Thanks, Liz. Good afternoon, everybody. We had some serious operational failures during the last couple of quarters in our Texas subsidiary. On many projects, our crews failed to meet productivity expectations, and our managers at all levels were slow to respond with corrective actions. In addition, we believe that in some cases, our estimated costs at bid time were too optimistic. As I have looked back and assessed what happened, I believe one factor was that our project managers and superintendents became demoralized as they worked hard to achieve challenging estimates. I believe that we failed to maintain our discipline in the bid process and did not adequately drive the need for attention to detail in the building of our projects. Rather than make excuses for these failures, let me explain some of the steps we have taken to right the ship. We added 3 new positions to the management of Texas Sterling, our largest subsidiary. We appointed Doug Clements as our Chief Executive Officer of Texas Sterling Construction, transferring him from Ralph L. Wadsworth. Doug has experience with a previous employer in correcting operating inefficiencies and promoting teamwork amongst the management group. Among his first initiatives will be improving operational performance, rightsizing and improving management of our equipment fleet, improving our review processes at bid time and adding focus to our safety program. Joe Harper Jr. was moved from the corporate team to become Chief Operating Officer at TSC. He is charged with returning management's focus to the importance of planning and attention to details in order to improve the financial results of each project. This will include implementation of a system to provide better and faster information feedback to our field managers, improving training of managers at all levels of the organization, as well as better updating of forecasts on project profitability. We promoted a General Superintendent from our Houston division, Richard Wiley [ph], to Vice President of Operations at TSC to be part of the operations team and improve resource utilization and efficiency in field operations. Richard has over 30 years' experience in the heavy civil business and has been a Sterling manager for approximately 22 years. These management changes were in process toward the end of December. And we are impressed by the impacts to date and the ability of these new team players to identify problem areas, make the necessary personnel changes and begin to rebuild morale across the organization. While I'm deeply disappointed with our quarterly results, I'm equally excited about our expectations of improvement from this new team. The financial impact of poor operational performance has put us in a loss position for the fourth quarter of 2011, our first loss quarter since the mid-1980s, as well as reducing margin and backlog. Some of the reductions in gross profit on projects were a result of difficult conditions in new geography with new owners like Corpus Christi, Texas; Baton Rouge, Louisiana; and the segmental bridge project in Montana. But most of the projects were neither different nor technically difficult. As a result of the write-downs, margin and backlog as of December 31, 2011, is somewhat lower than we reported for the entire year of 2011. As most of you are aware, our focus over the past several years has been to expand our business into new geography, primarily with acquisitions. Since our first sizable addition with Road and Highway Builders in Nevada, we have expanded operations in Utah, Arizona and California, with some projects under construction or in backlog in Hawaii, Montana, Louisiana and Idaho. Our focus for 2012 is to capitalize on these opportunities and concentrate on operational efficiencies to improve the gross profit line. Sterling's involvement in joint ventures has begun on a very positive note. RLW's participation in the I-15 core project in Salt Lake is continuing on schedule with better expected financial results -- better-than-expected financial results to date. TSC's joint venture in the Austin area with W.W. Webber is proceeding as expected, with completion scheduled for late 2013. Myers & Sons, LP, where we have a 50% interest, is working with our joint venture partner Shimmick Construction in preconstruction planning for our recent low bid in the Los Angeles area. Myers & Sons has a 30% interest on a $102-million project expected to require approximately 30 months to build out. It's taken a while to build the relationships with potential partners, but it's now beginning to pay off. I believe we have positioned ourselves well to take advantage of any return to normalization of our markets. We have executed the strategic plan we developed in 2006, adding profitable operations in the geographic regions we believe will provide the best opportunities through 2012 and beyond. Pat?

Thanks, Joe. I agree with Joe on the benefits of the management reorganization in Texas. The entire construction industry has been hit with an extremely long downturn, and in the fourth quarter, we had a number of problems in Texas. Although we found these problems in the normal course of our project reviews, we've instituted tighter controls on our project pre-assessments. We've added management oversight, which will add overhead, but the potential savings generated with operational efficiencies are significant. I think the steps that we have taken should position us well when the markets that we are in finally turn, and turn they will. Our banking and bonding relationships have been developed over a long period of time and remain strong, with more than enough capacity for the anticipated growth in 2012 of over 25%. Our balance sheet also remains strong, and the goodwill write-down had no effect on our tangible net equity. During 2011 we successfully completed 2 acquisitions and spread our geographical region to Arizona, Idaho and California. We won our first design-build project in Texas in a joint venture. We are shortlisted on a $225-million design-build project in California. A 38-mile section of the 180-mile Grand Parkway project encompassing Houston is proceeding towards bidding, and we are negotiating to align ourselves with one of the teams. Industry estimates indicate that this section of the project will cost over $800 million, and the state has determined that it will go design-build. We are on a team, in which we are a 33% partner, that has submitted a prequalification for bidding an $800-million design-build project in Dallas and a 20% partner in another $1 billion-plus design-build project also in Dallas that will soon be advertised. We set out last year to obtain bonding takeover work, and in fact, have completed or are working on 7 different projects all across the state. We have built our backlog from $660 million at the end of 2010 to $741 million at year end and have already added to that in the first quarter with a pickup of $102 million in announced projects of over $20 million and $42 million for a number of smaller projects. Included in our backlog at December 31, 2011, is our first major project win in the amount of $44 million in California for Road and Highway Builders of CA. We have transferred Anthony Colombo, one of our Executive VPs, to California to develop that market. We continue to see stiff competition in all of our markets, and although the margins and backlogs are down due to the write-downs and that severe competition, we are in a positive position to refocus our efforts and to performing at the level that we have in years past. And in order to do that we recognize that we need to raise margins at bid time. I think the changes we've made, we are once again in a position to move forward and recap the benefits -- reap, excuse me, the benefits of our expanded footprint in our numerous markets across the country. Now if there's any questions, we'd be happy to take them.

[Operator Instructions] Our first question comes from the line of Rich Wesolowski with Sidoti & Company.

Quarters like these prompt us to take a harder look and skeptical look at the recent awards. Joe, I'm assuming the discoveries of the project issues prompted management to pause on new bids and re-evaluate what types of risks you'd like to assume. When exactly did that occur?

Well, it was mid- to late December, Rich, by the time we realized what was going on. And you're right. We did go back and began focusing harder on both the preparation of the bids and the bid review process.

So you're fully comfortable with the awards that you've won, say, in 2012.

I believe that our cost estimates are solid.

Okay. I know this is probably a guess from your part, but how much of the $592 million in sales that you expect to recognize in 2012 from year-end backlog is impaired revenue from the 5 contracts that were written down in the fourth quarter?

Rich, I don't have that number available. I can probably get it back to you later today, but I don't have it.

Okay. Maybe alternatively, if you add back $5.9 million to the fourth quarter gross margin, you get to 8.6%. Is that a fair representation of the margin you would expect to book the next job?

I think it's a little bit high. It depends on the project, obviously. And we have bid work recently, double-digit numbers. We've bid work sort of mid-single-digit numbers. It all depends on our assessment of the risk involved with the project and the competition we're facing.

Okay. And then lastly, would anyone offer any timetable that you're shooting for regarding the search for a new CEO?

Rich, this is Maarten Hemsley. I'll just answer that as I'm heading up the search committee. We have already got some candidates identified, and the interview process will begin in -- will be beginning very shortly. So we hope within the next couple of months, you'll see us begin that process.

Well, Pat, if by chance this is your last call, it's too bad it ended on a bad note. But it was a good run.

Our next question comes from the line of Avi Fisher with BMO Capital Markets.

Can you elaborate a little bit on the 7 projects you talked about, specifically the 5 with losses? I'd like to know if you can give us a sense of when they were bid or how much longer they are to complete, if any of them are now unprofitable.

Some of them are now unprofitable, and so we would have recognized the full amount of the loss in 2011. And they were bid -- the projects -- and I also probably need to give some caution. As we called out 7 projects that they were -- there's obviously more than 7 projects that impacted the write-down. That's just a portion of it. So they were bid at different times, and they are in different stages. Some of them were near the end of the project, and then others are continuing on.

And do we have a sense of when they will be through the pipeline? Will they flow through all of 2012, the first half of 2012?

We haven't given anything there. I think our best indication is that we're not going to see margins above the 8% range for 2012.

And we also said that, I think, Liz, $592 million of the $740 million would be completed next year.

Yes.

Right. But I guess I'm curious just about these 5 projects specifically, when they are scheduled to complete because they have a way of skewing, obviously, the overall margins.

Right.

And regarding the bidding issues, is it a -- I'm trying to sort of drill down. Is it -- were the estimates on materials off, on labor productivity off? Or was it somewhere else?

It was all -- it was some...

Go ahead, Joe. We had a number of issues. I'll let Joe elaborate.

Yes. It was almost exclusively productivity issues. So that impacts both labor and equipment costs.

And when you get to the project level and productivity, is it that the estimates were too aggressive relative to normal productivity? Or are -- is there a deficiency with the project management?

I think we had a little bit of both. We had optimism get built into the bid process. So in a very difficult market where your win rate is substantially below normal, some of our estimators increased productivity to levels that turned out were not achievable, at least the way we built the projects. We also had some projects where the A team wasn't there and the B team didn't perform the way we would have liked.

And where would the A team have been?

We've got 80-plus projects in backlog at year end. So it was a busy year for us.

Right. That's -- yes, bookings are on. And are you getting good productivity out of the A team, at least?

Oh yes, and I don't mean that to be A -- just one team, I'm just -- that was a euphemism.

I understand. But within your -- every company has A, B and C teams. Are you getting good productivity out of your A teams?

Yes, I believe we are.

You had mentioned -- Pat had mentioned adding overhead. I wonder if you can elaborate on how much we should expect that...

We haven't filed our -- I'm going to step in here, Pat. We haven't filed our 10-K yet, but I think you'll find some good details in the MD&A discussion that'll help give some indicators on overhead. So at this point, we are not going to comment on that.

One other quick question. Rich kind of touched on this, but how is pricing today relative to 2011?

We see glimmers of hope. We see here in Texas the difference between second and third bidders being relatively high, in the 8%, 10% 12% range, but are still seeing in a majority of the cases someone taking it extremely cheap. That's usually a precursor of things turning better, but it's on a -- sort of a day-by-day basis.

Our next question is from the line of Tahira Afzal with KeyBanc.

I guess my first question is in regards to one of the things you mentioned as being a reason for cost going up, and that's labor shortages. And you said you have pockets where skilled labor wasn't available. Could you sort of provide color on that? And are you going to be keeping away from those areas? Or are you sort of adjusting up in your bids some kind of labor inflation, given Texas is seeing pretty healthy economy relative to the rest of the states?

Joe, you want to answer that?

Yes, this is Joe. We think that's several projects down in Corpus Christi, Texas. And our expectation of local available workforce there proved to be a little optimistic, so we ended up bringing crews from other divisions in Texas. And probably the biggest one was the Baton Rouge, Louisiana project. We anticipated bringing 1 or 2 crews from our Texas operation over there and building out local teams. And we struggle still today trying to find a local workforce that is both skilled and willing to work the way we need them to work. So those are the 2 biggest cases.

Is it difficult to get crews from out of state like Texas? Because I -- when I look at that, I'm actually seeing pockets of material weakness still. Is that just a very difficult thing to do legally?

Well, in Texas, first, our wage rates are among the lowest in the country. And second, the oil and gas field operations are running at full tilt. So while I can't say it with certainty, I suspect strongly that a lot of the heavy civil workforce has been on good work in the oilfield businesses. And as a result, we have had a little squeeze of labor availability.

Got it. And the second question is in regards to seeing more PPPs, et cetera. I know that's been a healthy trend in Texas to have private investors participate. How is that trend looking in terms of your booking prospects going forward? And in other terms -- in terms of how the projects are done and the milestones, et cetera, are those showing any different to those of the traditional projects you've done, let's say, several years back?

This is Brian. The model is quite a bit different. But with the lack of funding nationally, more and more agencies are embracing it. The PPP model in Texas, the Grand Parkway, as Pat mentioned, is going design-build. They were pursuing that along a dual track, if you will, but ultimately decided to go to design-build. So we do not have in our backlog any PPP. Getting to your risk-sharing question, there are certain things that are put on a PPP team such as right-of-way risk and environmental risk. And typically, you try and have the concessionaire accept that risk and not bring it down to the construction joint venture level. So that's how they differ. And there is more risk involved with the PPP. The trend is going more and more towards public-private partnership, and we are very aware of the risks involved in entering in one of those projects.

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

First of all, I guess for Liz, in terms of the losses from the unconsolidated subsidiaries, how much of that was goodwill impairment?

Well, we didn't have losses. I'm not sure. I think you may have misunderstood. The losses were not from unconsolidated subsidiaries.

Okay. So the negative minority interest, the $4.8 million, there was no goodwill impairment in that.

No, there was. That is the -- that charge is related to ownership interest by our noncontrolling owners. So maybe I misunderstood your question. There is a portion that is attributable to the noncontrolling interest.

Can you tell us how much of that -- in other words, what would be the minority interest line without the goodwill impairment?

We haven't disclosed that. But I think the easiest way to back into it would be if you -- our typical tax rate is going to be around 35%. So you'll find that there's going to be a portion that's different. In addition, when you see that the 10-K come out, there'll be a rate reconciliation for taxes, and it'll disclose some portions of the write-down that was not -- where we didn't get a tax benefit. So I'm happy to walk you through that when we get our 10-K filed and help you put those pieces together.

Okay. But the subsidiaries where you've got minority interest, they're still profitable, I guess, is the heart of my question. And they're hitting your expectations.

Yes, that's absolutely true. It impacted various subsidiaries, but it was simply a function of an allocation of the write-down. It was not because we attributed the write-down to a particular subsidiary. The goodwill impairment was done on the whole company basis. That's how the number was calculated. So there wasn't anything that went to this subsidiary or that subsidiary, other than through simply an allocation.

Okay. And in terms of the $625-million-plus in revenue that you're looking at for 2012 -- Joe, you kind of touched on this, but what portion of that revenue is being completed at 0 margins?

You're right. I mean, that question came up, John, or one very similar to it. I don't think I can quantify that for you accurately enough. Again, once the K is out, I'd be happy to circle back with you on that.

Okay. But is it a substantial portion of it?

John, I don't know that we're going to give those kind of details, but we can -- we are giving a blended margin for next year. But I think that's about the best we can do at this point.

Okay. Well, let me approach it this way. You said that you don't expect margins above 8% for the whole year. But are you also saying that you don't expect 8% or better margins for every quarter of next year? I was just trying to think about how much of this difficult work runs off and...

We're not giving it on a quarterly basis and...

Right. But any comment that you might have on -- I mean, are we looking at substantial losses first part of the year and then hopefully getting better? Or is it just going to be difficult all the way through?

Well, typically, you will see lower margins in the first quarter and sometimes in the fourth quarter, depending on the stage of the projects and have some weather impacts going on in the first quarter. So you might see lower margins then.

Right. But because of the project timing or the difficult projects that you have now, I mean, any confidence that we're actually going to get these completed this year?

Well, certainly in some cases, we're going to see a lot of them completed this year.

I'm pretty confident, John, we're going to have all them washed through by the end of the fourth quarter. The project sizes were sort of all over the board, and smaller projects obviously are going to get done quicker. So you might make some assumptions on earlier quarters having more of a negative impact.

Okay. And, Joe -- or I don't know, Pat or Brian or whoever, you guys have made a pretty big push over the last couple of years to move up in terms of project sizes and do more complicated projects where, I think, in theory, there would have been fewer bidders. As you look at it now, as -- are you seeing that bifurcation in the market? I mean more -- I don't know whether it's just margins or profit opportunities with the large projects versus the small projects?

John, this is Brian. I think typically when you do get to those larger projects, you've got a higher risk profile as well. And then they warrant the higher margins on them. We are seeing many projects in excess of $1 billion that would necessitate joint ventures. And as such, we are with very substantial partners, and we're able to spread that risk among the joint venture partners as well and learn from each other. So that's a positive thing. But we are seeing a trend toward some of these larger projects. Now on these larger projects, there's still opportunities that if we're not successful, we can come back at them and end up doing subcontract work because the project sizes are so large that it'll take many contractors to complete them. I think we are seeing compression in the margins on even the $1-billion projects from what they were 2, 3, 5 years ago, but they're still far in excess of what we're able to get on typical build work.

Okay. So I'm going to guess a part of it is then -- is that strategy to go after those because it sounds like you've got more of the problems in your traditional core projects. And I guess I'm just wondering, I mean, are you better off chasing the small regional projects or trying to go after these larger projects which will be more volatile? But I don't know if they offer a better return over time.

I think they offer a better return on the one hand. On the other hand, these small regional projects have always been a portion of the work that we do and have typically provided us with decent margins that you've seen in the past. We have to wait until that market returns, but I think it'll always be part of our market. But yes, we are transitioning to the focus on larger projects where we believe the margins are better.

Okay. And then just last question. Were any of the difficulties in your water work? Or -- my impression was that, that market had been pretty slow for a while. So I'm assuming there wasn't a lot of work there, but...

No, you're right. There isn't a lot of work there. And that specifically wasn't where our difficulties were.

Okay. And, Pat, are there opportunities for water projects in '12 and '13 sort of on your planning horizon?

John, Brian again. There are some that we're looking at, but the majority is going to be in the transportation arena.

Okay. Okay. And I guess, sorry, last question. Any other markets that you're looking at? I mean, you've expanded quite a bit throughout the last -- I know in the past, sometimes when you've hit tough spots, you've gone further afield. But -- or is now the sense that you pull back into your historical cores?

I don't know that we're pulling back, but we have a 25% projection of growth revenues this year with our core businesses and the acquisitions that we made last year. So I think we're going to focus on their profitable operations.

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

So I wanted to ask what specifically you've done to improve the estimating process. I heard some earlier comments and I wonder if you could drill down on what has been done, what you can do and what it looks like to I guess do a better job on that.

Joe?

It's mostly just driving into each of the folks who do our estimating. A lot of our project managers are involved in the estimating process, and it's refocusing them on real expectations for productivity. Typically, if we ask a foreman of -- either one of our own or one of our competitors how much pipe can you get in or whatever productivity issue, they tend to remember their best days and forget about the days where things went amiss. And it takes real discipline to focus on: These are what we have averaged. This is the way we have historically built. These are the numbers that need to be in our estimates.

Okay. And then I understand the goodwill write-down was for the entire company, but what were the components of the value there? Can you give me any guidance on what that was?

The components will change depending on which things you feel are more indicative of value at that time, and so typically, you'll look at a range of components. And so we consider the market cap with a premium. We look at a discounted cash flow model. And then we also looked at industry multiples. And we weighted those and came up with what we thought the evaluation was. Another driver on the goodwill impairment is how you value the tangible assets of the company. And so when those tangible assets are valued fairly high, then that doesn't leave much left to allocate to goodwill and so sometimes that can increase the amount of your goodwill write-down.

That's helpful. And then you also, in the press release, mentioned 2 projects being delayed in Dallas. I wanted to ask, have those started yet? If not, when and kind of what was the cause of the delay?

Yes. They've both started and we are actively working and pursuing them now. The cause of the delay was owner financing, and it just complicates the ability for us to put labor and crews in the right places at the right times and the key people so that we can perfect on those jobs. But they are both started now.

Okay. Kind of a similar question. I saw the news release about the Bay Bridge Toll Plaza and how, I think, Caltrans didn't award within, I guess, the period that they were supposed to. What happened there?

We had a subcontractor that, given the opportunity, refused to honor his price. And we couldn't hold it to him and he was a significant subcontractor. So Caltrans, if they can't award in the time specified in the bid, gives you the option of opting out. So we did that, and we will rebid it here in the next month or so.

Okay. Interesting. And last question. As far as the weakness and internal controls that you mentioned earlier, is there any more detail you can give me there on what that looks like and what's being done to, I guess, control better in the future?

Well, it's going to -- it will take some time to cure those weaknesses. But basically, it was part of the estimating process. And what we discovered was that there were enough instances where our procedures that we are supposed to be performing were not being done either adequately or on a timely basis. And so what we'll need to do is a combination of just looking over people's shoulders to make sure that these procedures are performed timely and adequately, and then I anticipate that we're going to be adding some procedures on top of what we've been doing historically. That -- you've got to implement those things, and then you have to let a few quarters go by in order to allow management to test it. So I could very easily see that we wouldn't be able to report that the material weakness had been remediated and if that remediation was validated until maybe even to year end.

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

Does the company expect to be profitable in the first quarter?

As guidance [ph], Richard, I think we can't do that any more that we've released in the press release.

Okay. Does the performance on the I-15 contract that sounds pretty good represent any upside to the loose earnings forecast for '12? Or is that already anticipated in your call for lower earnings?

Well, we -- our earnings forecast for 2012 is based on our current estimate of what the profitability is on our jobs in backlog as of year end. And so obviously, there can be some revisions to estimates as the project progresses during the year. And so it's quite possible that margins on that job could increase or decrease throughout the year, and that would end up with a difference by year end.

Great. What is the company's CapEx budget for '12? And how much of that is maintenance capital?

Rich, we'll give some guidance on that in the 10-K. But at this point, we're not going to comment. But if you look at our MD&A section for liquidity and...

Is there a reason why you wouldn't give it here if it's coming out in the K?

No. The reason why is we haven't filed the 10-K yet. And so we didn't put the information in our press release. We were focused on trying to explain the write-downs. And so our legal counsel has cautioned us not to go beyond on the press release's material information. Apologies, Rich. We'd love to...

No, not at all. Just curious. Lastly...

I think what we have in 10-K, I think, will be helpful.

Great. And then lastly, with 3 board members on the panel, I'd ask whether we can expect the company to expand its share repurchase program with the stock at $9, and whether the company would consider borrowing money explicitly to buy back stock.

Joe?

Rich, we were authorized to the tune of $10 million, and we utilized about $3.6 million of that. So as Treasurer, we've got clear clearance to go ahead and repurchase as we think it's good to do. Second part of the question, to borrow money to repurchase shares, because our cash position is so strong, I can't -- I haven't thought about that. I don't...

I just posed it that way in case that you needed that cash for bonding purposes or working capital. It wouldn't seem so, but...

There's still room there to have more-than-adequate bonding capacity. Actually, at our size, bonding is driven more by tangible net worth than it is the working capital line.

Our next question is from the line of Tahira Afzal with KeyBanc.

I guess this is a bit of a tricky question. But I know that there are a couple of your peers that trade publicity and they've been sort of reporting more profitable quarters in Texas on the transportation side. What do you think the key differences might be between some of your peers who are still profitable and yours in terms of your operational standing right now? Maybe a couple of key differences, perhaps quarries, equipment. I don't know what it is, but anything that would be of help.

Sure. This is Pat Manning by the way. I'm not sure what peers you are talking about. Most of the competitors that I talk to in Texas are suffering from the same issues that we are suffering for, and the margins have been depressed. And if you're talking about potentially Granite, I haven't seen how they've done, but they are involved in pretty much the megaprojects and in aggregates. So I'm not -- I just -- I'm not sure who you're speaking of, but our market has been extremely challenging.

Would James Construction be competing in the same areas?

James is a competitor, and the projects they picked up were all in close proximity to a quarry that they acquired in conjunction with those projects. So they likely had some cost advantages on us.

Got it. And the quarry, essentially your aggregate -- the pricing of the aggregate might be different to that, and that might have been a key difference?

It may have been. And I heard that they had said that, that was a major reason why they were able to acquire that backlog.

Our next question is from the line of Avi Fisher with BMO.

Yes, sorry, just a quick follow-up. I didn't catch -- I don't know if you'll give it -- the depreciation and amortization, the cutbacks and the cash flow from operations in the quarter.

We didn't disclose that, but that will be of course in the 10-K.

When do you expect the 10-K to be filed?

It should be filed on the due date, which is tomorrow.

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

Towards -- for earnings in 2012, will you be generating cash given the timing of your projects?

A trick way to try and get the answer to all the other questions we wouldn't answer.

It's cash flow from operations. I think that's fair to say.

Well, I guess -- and maybe this will be in the K, but your D&A cost, I mean, should be similar to what we saw in '12 and tax rates.

I think we'll all pass on that question. I'll let you investigate that in the 10-K.

We have no further questions in queue at this time. I'd like to turn the floor back over to management for closing remarks.

We appreciate all your time. We look forward to talking to you next quarter. Thank you.

Thanks, everybody.

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