Acquisitions and Subsidiaries and Joint Ventures with Noncontrolling Owners' Interests

9 Months Ended

Sep. 30, 2011

Subsidiaries and Joint Ventures with Noncontrolling owners' interests

7.	Acquisitions and Subsidiaries and Joint Ventures with Noncontrolling Owners' Interests

On August 1, 2011, Ralph L. Wadsworth Construction Company, LLC (“RLW”), Sterling’s majority owned subsidiary, purchased all of the outstanding shares of capital stock of J. Banicki Construction, Inc. (“JBC”). JBC is a heavy civil construction business located in Tempe, Arizona, that builds roads and highways in Arizona, primarily for municipalities. This acquisition expanded the geographic footprint of the Company into Arizona and JBC’s capabilities in structural concrete utilities and paving as well as performing construction manager at risk type contracts complement the Company’s current operations. RLW paid an initial purchase price for JBC of $7.6 million (net of a receivable from the seller determined subsequent to the acquisition date) which was funded by available cash and short-term investments of RLW and the Company. The purchase agreement provides for additional purchase price of up to $5 million to be paid over a five-year period. The additional purchase price is in the form of an earn-out which is calculated generally as 50% of the amount by which earnings before interest, taxes, depreciation and amortization (“EBITDA”) exceeds $2 million for each of the calendar years 2011 through 2015 and $1.2 million for the seven months ended July 31, 2016. The discounted present value of the additional purchase price was estimated to be $2.4 million as of August 1, 2011, the acquisition date, and this liability is included in other long-term liabilities in the accompanying condensed consolidated balance sheets.

The following table summarizes the initial allocation of the purchase price for JBC (in thousands):

Assets acquired and liabilities assumed:
Current assets, including cash of $4,662	$	8,839
Current liabilities		(5,708	)
Working capital acquired		3,131
Property and equipment		2,018
Other		49
Total tangible net assets acquired at fair value		5,198
Goodwill		4,763
Total consideration		9,961
Fair value of earn-out		(2,370	)
Cash paid, net of $409 receivable from seller	$	7,591

Acquisition related costs of $328,000 are included in general and administrative expenses in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2011.

The fair value of the financial assets acquired includes receivables with a fair value of $3.8 million, which are deemed fully collectible.

On August 1, 2011, the Company purchased a 50% interest in Myers & Sons Construction, L.P. (“Myers”). Myers is a construction limited partnership located in California and was acquired in order to expand the geographic scope of the Company’s operations into California. The Company paid a purchase price of $1.2 million, which was funded by available cash of the Company. The terms of the purchase include a buy-back option on August 1, 2016 and again on August 1, 2018 under which certain of the sellers have the option to repurchase the 50% limited partnership interests from the Company for an amount equal to 50% of 4.5 times the limited partnership’s average annual trailing twenty-four months earnings before interest, taxes, depreciation and amortization.

The following table summarizes the initial allocation of the purchase price for Myers (in thousands):

Assets acquired and liabilities assumed:
Current assets, including cash of $654	$	3,208
Current liabilities		(2,464	)
Working capital acquired		744
Property and equipment		708
Debt due to noncontrolling interest owner		(500	)
Total tangible net assets acquired at fair value		952
Goodwill		1,502
Total consideration		2,454
Fair value of noncontrolling owners' interest in Myers		(1,227	)
Cash paid	$	1,227

The fair value of the noncontrolling interests was determined based on the negotiated price at which the Company purchased its 50% interest which was based in part on expectations of future earnings. Acquisition related costs of $99,000 are included in general and administrative expenses in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2011. The fair value of the financial assets acquired includes receivables with a fair value of $2.1 million, which are expected to be fully collectible.

See Note 8 regarding the determination that Myers’ is a variable interest entity and the resulting impact on the consolidated financial statements.

The purchase price allocation for both the JBC and Myers acquisitions has not been finalized due to the short time period between the acquisition date and the date of the financial statements. The nature and amount of any material adjustments ultimately made to the initial allocation of the purchase price will be disclosed when determined.

The amounts of JBC’s and Myers’ revenue and earnings included in the Company’s consolidated statements of operations and cash flows for the nine months ended September 30, 2011, and the revenue and earnings of the combined entity had the acquisition dates been January 1, 2011, or January 1, 2010, are (in thousands):

	Revenue		Net Income Attributable to Sterling Common Stockholders
JBC actual from 8/1/2011 – 9/30/2011	$	4,371	$	99
Myers actual from 8/1/2011 – 9/30/2011		3,515		52
Supplemental pro forma results of the Company, JBC, and Myers on a combined basis for 1/1/2011 – 9/30/2011 (unaudited)		401,187		7,550
Supplemental pro forma results of the Company, JBC, and Myers on a combined basis for 1/1/2010 – 12/31/2010 (unaudited)		475,906		19,878

On December 3, 2009, we completed the acquisition of an 80% interest in privately-owned RLW, a Utah limited liability company which is headquartered in Draper, Utah, near Salt Lake City. The noncontrolling interest owners of RLW have the right to put, or require the Company to buy, their remaining 20% interest in RLW, and concurrently, the Company has the right to require that the owners sell their 20% interest to the Company, in 2013. The purchase price in each case is 20% of the product of the simple average of RLW’s EBITDA (income before interest, taxes, depreciation and amortization) for the calendar years 2010, 2011 and 2012 times a multiple of a minimum of 4 and a maximum of 4.5.

On October 31, 2007, the Company purchased a 91.67% interest in RHB and all of the outstanding capital stock of RHB Inc, then an inactive Nevada corporation. The noncontrolling interest owner of RHB had the right to put, or require the Company to buy, his remaining 8.33% interest in the subsidiary and, concurrently, the Company had the right to require that the owner sell his 8.33% interest to the Company, in 2011. On March 17, 2011, the right to put/call the RHB noncontrolling interest was extended to anytime between that date and December 31, 2012. In addition the price was increased from $7.1 million to $8.2 million which settled $1.1 million of accrued amounts due to the noncontrolling interest owner under the October 31, 2007 purchase agreement. In September 2011, the noncontrolling owner exercised his right to put his remaining interest of 8.33% in RHB to the Company for $8.2 million. This transaction is expected to be completed in December 2011 under the terms of the agreement. Consequently, the liability is included with other current liabilities in the consolidated balance sheet.

The value of the puts held by the RLW noncontrolling interest owners is included in “Obligation for noncontrolling owners’ interests in subsidiaries and joint ventures” in the accompanying condensed consolidated balance sheets. See Note 12 to the consolidated financial statements in the 2010 Form 10-K for further information regarding the RLW and RHB acquisitions discussed above.

Changes in Obligation for Noncontrolling Interests

The following table summarizes the changes in the liability for noncontrolling owners' interests in subsidiaries and joint ventures (in thousands):

	Nine Months Ended September 30,
		2011			2010
Balance, beginning of period	$	28,724		$	23,887
Noncontrolling owners' interests in earnings of subsidiaries and joint ventures		5,919			3,136
Accretion of interest on Puts		636			877
Increase in price of RHB put/call		1,054			--
Distributions to noncontrolling interest owners		(6,185	)		(3,394	)
Balance, end of period	$	30,148		$	24,506

The balance as of September 30, 2011 includes $8.2 million attributable to the put exercised by the RHB noncontrolling interest owner reflected in current liabilities discussed above.