Greetings, and welcome to the Sterling Construction Company First Quarter 2014 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brian Manning, Executive Vice President and Chief Business Development Officer. Thank you, Mr. Manning. You may begin.

Thank you, Rob. Good morning, and welcome to Sterling Construction's first quarter 2014 earnings conference call. I'm here today with our President and CEO, Peter MacKenna; and our Executive Vice President and Chief Financial Officer, Tom Wright. I'd 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 make at any time may not continue to reflect management's beliefs, and we do not undertake to publicly update them. The first quarter was characterized by significantly improved performance and, subsequent to the quarter end, a new bank covenant that provides clarity for investors on the company's path forward for raising equity. And now I will turn over the call to Tom Wright, our Chief Financial Officer, to discuss the quarter's financial results.

Thank you, Brian. I would like to discuss 2014 first quarter financial performance. Revenues for the 2014 first quarter were $134.5 million, which were 21.2% higher than the first quarter of 2013. The increase in revenues compared to the first quarter 2013 was due to an increase in the number of projects in process, largely in our Texas market. Gross margin for the 2014 first quarter increased to 5.8% of revenue compared to 1.2% in the first quarter of 2013 due to improved overall profitability of projects. Projects in the first quarter of 2013 were impacted by downward revisions on several large projects, particularly in the Texas market. General and administrative expenses in the 2014 first quarter decreased $1.1 million to $8.5 million or 6.3% of revenues from $9.6 million or 8.7% of revenues in the first quarter of 2013. This decrease is primarily due to a decline in employee benefit and other nonrecurring costs paid in the first quarter of 2013. These nonrecurring costs included investments made to enhance the leadership of our information systems management team, consulting fees related to process improvement initiatives and other similar investments aimed at improving our operational performance. Operating income for the 2014 first quarter was $0.4 million compared to an operating loss of $7.9 million in the first quarter of 2013. Operating income in its first quarter of 2014 included the benefit of $1 million due to the revaluation of a receivable previously written off in the fourth quarter of 2013. Net income attributable to Sterling common shareholders for the 2014 first quarter was $0.2 million compared to a net loss of $4.6 million in the first quarter of 2013. Net earnings per diluted share attributable to Sterling common shareholders for the 2014 first quarter was $0.01 per share compared to a…

Thanks, Tom, and good morning. In these short prepared remarks, I'd like to take a few minutes to address some of the issues and trends that we're seeing in our business and, of course, we'll be available to answer your specific questions in a few minutes. First and foremost, I want you to know how proud I am of the men and women of Sterling, not only as we implement our turnaround strategy, but also as we do so, remaining focused on providing a safe environment for our employees. For the first quarter of 2014, Sterling and its subsidiaries had a recordable lost time incident rate significantly below industry average. But a good statistic is no substitution for having no accidents. As I mentioned in the last quarter, we are rolling out our Sterling Safe and Sound program. Safe and Sound is designed to take our safety program to the next level, and I look forward to telling you more about it in the near future. As Tom described, our first quarter financial performance was a significant improvement over our performance at this time last year and over the fourth quarter of 2013. In spite of significant weather-related impacts during winter months, we were able to meet or exceed our expected project performance, especially here in Texas, and the efforts have paid off. I'm pleased to say that by the end of this week, all 3 of the large legacy projects that have had such an inordinate impact on our financial performance for the last year, will have achieved substantial completion and will be open to traffic. As a matter of fact, 2 of the projects opened to traffic yesterday. We continue to be encouraged by our level of order bookings and the margins associated with our newer projects. As…

Thank you, Peter. As we mentioned in the last call, the Federal Highway Bill, MAP-21, expires at the end of September, and we expect a series of continuing resolutions for the bill with similar funding levels until the new bill is approved. The administration's draft bill, the GROW AMERICA Act, was released earlier this month. The 4-year bill proposes a net 38% increase over current spending levels and will be in part funded by corporate tax reform. The bill also proposes to end the ban on tolling interstate highways, and this would allow the states to charge tolls as they choose. Both tax reform and tolling will certainly spark political debate and will extend the passage of the bill beyond the midterm elections. The addition of 32,000 workers to the construction workforce in April brings the industry's unemployment level to a 7-year low according to the Associated General Contractors of America. Sterling continues to pick up profitable work and enjoy a healthy $799 million backlog. As we substantially complete our large Texas projects this month, our recent wins in North Texas announced last week are great new opportunities for Sterling to demonstrate rigorous controls during project execution. Our project pipeline remains strong for diverse projects, opportunities in most of our geographies, and overall, we enjoy $6.4 billion in potential project pursuits over the remainder of 2014. We continue to collaborate among our subsidiaries for joint venture opportunities as in the case of our recent successful LAX pursuit, to leverage the strength of our combined capabilities for more project wins. And now, we welcome your questions.

[Operator Instructions] Our first question comes from the line of Tahira Afzal of KeyBanc.

The first question is as you've moved up and you migrate regionally to north of Texas, can you comment on the bidder's profile in terms of what you're seeing there versus what you've been dealing with in your more traditional areas? And I would love to learn a bit more about the integrated project execution approach, how it's being received in Texas, it seems it's been received well, and maybe you can give us a little more color on what that incorporates.

Let me start with that piece first, Tahira. As we mentioned on some of the prior calls, the company deployed a lot of our West Coast and Utah assets to North Texas to finish some of these legacy jobs, and it is the -- the offshoot of that in terms of this integrated project performance that allowed us to bid these new jobs that we got last week. And we can't do any of those things without having that integrated IT backbone that allows us to pretty much talk across the organization in a language we all understand. I think it's been received extremely well. We have corporate resources in terms of directors of construction that report direct -- right to me, and we have the operating units now. We've got -- are communicating much more than they ever have before. And frankly, Tahira, this is the whole value proposition in doing an acquisition, right? I mean, you want to be able to move those extraordinary resources around the organization and take full advantage of them. So this is the great opportunity. This is the project that we never would have bid by ourselves in Texas. It was something that really required the experience from the West Coast and from Utah and Nevada, frankly, as well. In terms of the bidding profile, it's a public bid. If I remember right, we were low by 2% to the next bidder, so that's good. And on a job like that in North Texas, I would say the quality of the competition is much better because there are more complex projects, so there's less -- less immature bidding, let's just put it that way. And I think, in general, we're seeing the tide rising, I think the margins are starting to recover across the board. There are still pockets of very tight competition, in particular in Utah and Nevada, but I think, overall, the tide is rising.

Tahira, specifically to the Texas bid, in looking at the results and the competition that bid on it, the traditional Texas bidders that we go up normally on a project of that size, but we didn't see that collection of contractors. We saw more infusion from the West Coast and some of the international contractors on that, so it was a little bit different. But it -- we also have the local advantage, so we've got that knowledge and the local advantage of being on site. So that helped, as well.

Got it. Okay. That was helpful. And I guess my second question is, Brian, you talked a bit about the valid macro drivers on a couple of data points coming in September on -- in terms of the bill and some tax reforms and those that would be [ph] needed. You seem to be moving to a sort of shorter duration work, which is great, but I would love to get a sense that if you do not -- if you do see some of these things extended past the midterm elections, do you continue to see enough visibility in backlog, i.e. maybe ending the year at least backlog flat, slightly up, even without these data points going through?

I think we do have the visibility, especially because a lot of the projects are shorter duration. Certainly, the administration does need to respond, and we expect them to respond under continuing resolutions to get to that point. It's politically unpalatable to not fund a program as big as this. There would be too much of a public outcry. So we expect continuing resolutions until a new bill is crafted, and that's our expectation and we'll continue to operate under that premise.

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

A couple of things. I guess first of all, Peter, the margins in your current backlog now with these low margin projects running off, is it right up in that high single-digit target that you've been looking for?

That's a fair statement, John. We're trying to get away from giving real detailed numbers because I think there's a commercial impact to it. But yes, that's very much a fair statement.

Okay. And then just for clarification, the $71 million in low bids that you had at the end of the quarter, does that include the work that you then subsequently announced that you were awarded?

No. No. Any low bid that's over the threshold we'll announce in a press release, but that $799 million backlog is work that's already been -- had the contracts executed. The $71 million is work that just hasn't hit the backlog numbers yet because we haven't had a signed contract. So I mean, if we had a signed contract, instantly you'd have to look at a backlog number in the $870 million range.

Okay. So the work that you announced...

It would be additive to the -- John, it will be additive to that $71 million because it's technically not under contract. But you know about it because we made an announcement. Those numbers are not in our backlog number.

Okay. So I guess I'm just trying to get to -- so in the second quarter, you've already been low-bidder booked $130 million worth of work? Based on these announcements?

Yes, add the 2 together. So...

Yes. You'd have to add those 2 together, sure. That wouldn't be a wrong thing to say. Of course, there are other low bids that we haven't announced under the reporting threshold. Yes. That's right.

Okay. Okay. Good. I just want to make sure I've gotten about that right. And then in terms of the -- your debt outstanding right now with those projects completed in the proceeds of the offering, where are you in cash position?

Yes. Well, we don't disclose the current day debt or the cash position, John. I mean, the numbers that we're reporting are March 31 figures.

Okay. But Tom, there wasn't a substantial increase in debt to finish off those projects in the last 45 days?

Yes. I...

Yes, I think, John, we're a little uncomfortable giving that level of detail in the mid-quarter, but it's safe to say that the proceeds of the equity offering went against the line. I mean, that's quite clear. And we had these 3 large projects, which had to be driven towards conclusion, but that was not the majority of the work executed in the quarter.

Okay. I just want to -- but based on your plan, debt levels should be then -- or in cash flow should be positive from here on out through the year?

Well, I think historically the first half of the year is a time of using cash and the second half would be the cash gets released. Because in the first quarter, we're collecting from the fourth quarter, right? So in the first and second quarter, we're collecting during the winter operations, and in the fall, we're collecting during spring and summer. So yes, I think it's safe to say that the first half of the year is a draw on cash, second half of the year, the cash gets releases.

[Operator Instructions] The next question is from the line of Matthew Paul, Sidoti & Company.

Just a couple of questions here. Given the absence of the breakdown in the gross margin, I was wondering if you could just address the most recent work won during the quarter, and how that gross margin compares to the backlog we discussed on the fourth quarter call?

Well, the gross margin on the first quarter was 5.8% of revenue. The new work we're -- so here's the thing, Matt. The pursuit -- the strategy of pursuing some of this alternative delivery work, in particular, these CMAR jobs, creates a backlog that does not necessarily reflect what we're ultimately going to deliver. So we're a little reluctant to share the details of that, and also, what we've come to understand, there's some competitive issues with giving some of that information out. I think it's fair to say that it is accretive, it's not dilutive. It compares very favorably. The hard bid jobs, the core business, I think, we've been getting very good margins. We're happy with that. We're starting to be able to carry nice contingencies in them, as well. So as I mentioned, I think, earlier, I do think the tide is rising. I think the marketplace is recovering. We're seeing bids that are a little more rational, and we're getting paid commensurate with the risks we're taking. I think everyone would love to see the margins go up even further, and hopefully, the trajectory that we're seeing continues. So a long-winded answer, Matt. I hope I answered your question.

Yes, that was great. Also, with the substantial completion of the Texas projects, could we address maybe as a metric to measure duration of projects in the backlog, if there's an average or something, and how that compares from this time last year?

Well, I don't think I want to get into the burn-off rate, but our strategy has been to pursue smaller projects, between $10 million and $20 million, which have 12 to 18 months' duration, and the vast majority of the work in the backlog is work like that. So I think if you wanted to go back and try to extrapolate out our order book, it could give you a better sense. This $65 million job that we got last week has, if I remember right, a 40-month duration, which is more typical of large projects. So as we pursue larger projects, you'll see the durations of the backlog extend, which ultimately is where we're trying to go, but our strategy in the midterm is to continue these small projects with short durations.

Okay. And last question, given the growth in the backlog and the expected revenue increase in 2014, is it fair to still expect a 6% general and administrative, or could we expect a little bit of leverage to be gained on that line item?

It's possible we could see leverage. I think as -- the 6% figure was a general target based on the revenues that we had been experiencing. I think as we grow in revenue that -- we'll get leverage on the SG&A.

Our next question comes from the line of George Walsh with Gilford Securities.

Your working capital improved during the quarter from about $8.6 million to the $25 million. Could you just describe some of that improvement there? I guess there are a couple of line items that contributed a fair amount.

Yes, I think the first quarter reflects improvement in all aspects of our business. The -- we had -- improved the revenues over the first quarter last year, improved profitability. I think all of the metrics showed improvement. Is there a specific line item that you want to ask about?

Well, I guess the things on the current asset side were the costs and estimated earnings in excess of billings and were the receivables from the equity in the joint ventures.

Yes, essentially those reflect increased activity, the receivables and equity from joint ventures. There was a specific job that was a very good job for us. We didn't give the details on it, it was under the threshold, but it's an increase in activity. So there's -- we do not have the receivables from that, from that job, which we've subsequently collected. This is at the end of the third -- first quarter. So I think that on the current asset side, what you see is an increase in business activity, which has helped our position.

Okay. And what's the outlook on the working cap going forward during the year?

While we don't provide specific working capital guidance for the year, but we -- I think all of the metrics that you see are in the process of improving. I mean, as Peter mentioned, the problem jobs that have been weighing us down are now substantially complete. So that's actually a big contributor to where we're at, and I think the outlook is positive. I mean, we haven't put specific working capital guidance out.

Okay. How important is your working cap in terms of bidding on projects? Is that probably what's affecting the duration? You're deciding to go with shorter duration projects versus longer?

No. The decision to look at shorter duration projects is really driven by what we're seeing in the marketplace in terms of both availability and quality of labor. Brian mentioned that the construction unemployment number's at a 7-year low, and particularly, in Texas, it's acute because we're competing in the same labor pool as the oil and gas guys are competing. And secondly, as we roll out new controls to make sure that project execution is being properly managed, we needed to look at smaller projects that are slightly easier to manage. It's sort of changing the engines in mid-flight. And as that comes into fruition, as those things are fine-tuned and deployed fully and fully implemented by the organization, you'll see us chase larger projects. So it wasn't driven so much by working capital or balance sheet strategy, it was business strategy in terms of what we wanted to pursue.

The next question is a follow-up from the line of John Rogers with D.A. Davidson.

Just one follow-up. I know that Peter, in the past, you'd talked about maybe some excess assets that you might be able to sell off. Where are you in that program? Are you still looking at it, and are there significant opportunities this year?

We -- the answer is yes. We sold off $2 million worth of excess equipment that was redundant that was actually part of the program we had in place in the fall, and we sold them at the auction at CONEXPO, which was always our plan. We're also selling off some of the aggregate inventory that we had here in Texas. It was accumulated for a project that we were not successful in getting, and now, we're selling it off and, actually, it's a nice little business that we have. There was some real estate that was acquired for strategic purposes, particularly here in Houston, that we're looking to divest ourselves of and Brian is handling that. That's probably it in terms of the significant liquidity raising items that we're looking at. We're looking at them also in terms of the P&L impact, so we don't want to dispose of something that might have a negative P&L impact, as well. So that continues -- particularly the real estate, I see no purpose in hanging onto it and we'll certainly shed that stuff off. I think there might be 1 or 2 or more equipment disposals as the year goes on, as well.

Okay. And just 2 other quick things from a modeling perspective. I guess taxes, do you have sufficient credits to offset any expense this year, is that a fair statement?

Yes. That's fair.

Okay. And can you give us a sense at all of how much of a contribution proportionally you expect out of the partially consolidated JVs this year? I'm dealing with the non...

Yes. That's a...

Yes, I don't think we want to get to that level of detail, John. That's a...

The next question comes from the line of John Gibbons, Odin Equity.

I think it's a question for Tom. I just want to make sure I heard correctly that included in operating income was $1 million of recovery of a receivable that had been written off. Was that -- did I hear that correctly?

Yes, it was a revaluation. Yes.

And was that a 2013 write-off?

Right. It was the written off in the -- within the 2013 fourth quarter charges.

Okay. And is that it? I mean, since that's kind of a nice surprise. Are there any more nice surprises in there because this was sort of unusual?

There's no other surprises in the first quarter, and this was unusual, that's why we called it out separately.

Okay. So I mean, actually, you didn't have any operating income x that, is that correct?

We always have some operating income. There's -- we always have some other operating income. There's asphalt sales that we do, and we have other things that kind of go in and out of that line. But the material number in that line is the $1 million revaluation of the receivable.

The next question comes from -- a follow-up from the line of George Walsh of Gilford Securities.

Just the property and equipment line in the balance sheet decreased about $4.2 million during the quarter, was that the sale that you mentioned of some assets?

Yes, yes. Yes, effectively, the depreciation's around $4 million, and we sold equipment that Peter talked about and then we had $2 million of CapEx. So I mean, it is just -- that resulted in a net decline.

At this time, for closing comments, I'll turn the floor back over to Mr. Peter MacKenna.

Well, thank you, all, for joining us on our first quarter conference call. We look forward to reporting to you next. It will be a little bit longer gap. I guess it's beginning of August when we report the second quarter. Until then, thank you very much.

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