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Note 2 - Acquisitions and Subsidiaries and Joint Ventures with Noncontrolling Owners' Interests
 12 Months Ended
Dec. 31, 2013
Noncontrolling Interest [Abstract]  
Noncontrolling Interest Disclosure [Text Block]
2.
Acquisitions and Subsidiaries and Joint Ventures with Noncontrolling Owners’ Interests

In January 2012, RHB, a wholly owned subsidiary, assumed six construction contracts with $25.0 million of unearned revenues from Aggregate Industries―SWR, Inc. (“AI”), an unrelated third party.  In addition, Aggregate South West Holdings, LLC (“ASWH”) and RHB Properties, LLC (“RHBP”), newly formed entities owned by Richard Buenting, the President and Chief Executive Officer of RHB, acquired construction related machinery and equipment and land with quarries from AI.  AI entered into a two-year non-compete agreement with respect to Utah, Idaho and Montana as well as certain areas of Nevada.  On April 27, 2012, RHB merged with ASWH and acquired RHBP.  In exchange, RHB granted Mr. Buenting a 50% member interest in RHB.  These transactions allowed RHB to expand its operations in Nevada.

These transactions were accounted for as a business combination.  In December 2012, the Company finalized its valuation of the assets acquired, the membership interest granted and the tax related impact of the transaction.  The purchase price for the transaction was $9.8 million for the assets acquired net of a contract liability.  In addition, the Company recorded a credit of $233,000 to “Additional paid in capital” resulting from the excess of the post-merger member capital over the Company’s book value of the 50% investment in RHB issued to Mr. Buenting.  As a result of the merger, an additional difference between the Company’s tax basis related to RHB and its book basis was created.  Accordingly, the Company recorded an additional deferred tax liability of $360,000 with an offset to goodwill.

Revenues and earnings related to the contracts assumed and the acquired companies for 2012 were $26.1 million and $152,000, respectively.  In connection with this transaction, AI did not agree to provide us with historical information related to the earnings from the acquired operations except for information related to the specific contracts being assumed.  Furthermore, we determined that such information was not needed in order to evaluate the transaction based on our knowledge of the assets acquired and the Nevada road and highway construction market.  Therefore, we are not able to present pro forma financial information as if the transactions had occurred on January 1, 2011.

The Company also agreed with Mr. Buenting to amend and restate the operating and management agreements for RHB.  The amended agreements provide that the Company is the Manager of RHB and retains full, exclusive and complete power, authority and discretion to manage, supervise, operate and control RHB; therefore, the Company consolidates RHB with its other subsidiaries.  Under the amendments, the Company will provide RHB with access to a $5 million line of credit.  The Company also entered into a buy/sell and management agreement with Mr. Buenting.  Under this agreement, the Company or Mr. Buenting may annually elect to make offers to buy the other owner’s 50% interest in RHB and sell their 50% interest in RHB at a price which they specify.  Upon receipt of the offers, the other owner must elect either to sell their interest or purchase the interest from the owner making the offers.  The agreement also requires that the Company acquire Mr. Buenting’s interest in the event of his termination without cause, death, or disability.  To the extent that the redemption value under the buy/sell and management agreement exceeds the initial valuation of Mr. Buenting’s noncontrolling interest, the Company records a charge to retained earnings, or in the absence of retained earnings, additional paid-in capital (“APIC”).  Any related benefit as a result of a lower valuation of Mr. Buenting’s noncontrolling interest compared to previous valuations shall be offset to retained earnings up to the amounts previously charged to retained earnings. The calculation used in the buy/sell and management agreement is the higher of the trailing twelve months of earnings before interest, taxes and depreciation and amortization (“EBITDA”) times a multiple of 4.5 or the orderly liquidation value of RHB.  The valuation of the orderly liquidation value is classified as a Level 2 fair value measurement.  These values have been updated based on recent sales and dispositions of assets and liabilities to obtain a current estimate of the orderly liquidation value.  Based on the Company’s calculation on December 31, 2013, the trailing twelve months EBITDA times the multiple of 4.5 provided the higher result of the two methods.  As such, the total charge resulted in a net pre-tax charge of $1.9 million and $2.5 million, for the periods ending December 31, 2013 and 2012, respectively.

On December 30, 2013, the Company and Mr. Buenting revised the Second Amended and Restated Operating Agreement entered into on April 27, 2012 and their Management Agreement entered into on February 1, 2012. The Third Amended and Restated Operating Agreement and the amended Management Agreement eliminated the buy/sell option and instead included the obligation for the Company to purchase Mr. Buenting’s interest upon his death or permanent disability for $20 million or $18 million, respectively. In the event of Mr. Buenting’s death or permanent disability, his estate representative, trustee or designee shall become the selling representative and sell his 50% interest to the Company. In order to fund the purchase of Mr. Buenting’s interest, the Company has purchased term life insurance with a payout of $20 million in the event of Mr. Buenting death. The Company will be the beneficiary and will also pay the premiums related to this life insurance contract. The life insurance proceeds of $20 million shall be used as full payment for Mr. Buenting’s interest in the occurrence of his death. In the event of Mr. Buenting’s permanent disability, the $18 million payment will be made by using the Company’s available cash on hand, and/or to the extent necessary, the Company’s line of credit. No other transfer of Member’s interest is permitted other than to the selling representative in the event of Mr. Buenting’s death or permanent disability.  In the event that Mr. Buenting resigns or is terminated without cause (i.e., termination other than through permanent disability or death) RHB shall be dissolved unless both members agree otherwise.  The amended agreements were entered into in order to eliminate the earnings per share volatility caused by the buy/sell option.

The amended agreements resulted in an obligation that the Company is certain to incur, either through Mr. Buenting’s permanent disability or death for Mr. Buenting’s 50% members interest; therefore, the Company has classified the noncontrolling interest as mandatorily redeemable and has recorded a liability in “Member’s interest subject to mandatory redemption” on the consolidated balance sheet.  The liability consists of the following (in thousands):

   
Years Ended December 31,
 
   
2013
   
2012
 
Member’s interest subject to mandatory redemption
  $ 20,000     $ -  
Undistributed earnings attributable to this interest
    3,989       -  
     Total liability
  $ 23,989     $ -  

At September 30, 2013, the total Obligation for noncontrolling owners’ interests in subsidiaries and joint ventures was $17.8 million which included $14.1 million as the fair value in the noncontrolling interest and $3.7 million in undistributed earnings.  During the fourth quarter of 2013, the Company made a final entry of $5.9 million to adjust the member’s interest to its final payout value of $20.0 million.  The adjustment was made to APIC as there was a retained deficit on the Company’s consolidated balance sheet.  Undistributed earnings increased by $344,000 during the fourth quarter.

In connection with the August 1, 2011, acquisition of J. Banicki Construction, Inc. (“JBC”) by Ralph L. Wadsworth Construction Company, LLC (“RLW”), RLW agreed to additional purchase price payments 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 is classified as a Level 3 fair value measurement and will be made to a related party as the former owner is the Chief Executive Officer.  In making this valuation, the unobservable input consisted of forecasted EBITDA for the periods after the period being reported on through July 31, 2016.  The additional purchase price is calculated generally as 50% of the amount by which EBITDA exceeds $2.0 million for each of the calendar years 2011 through 2015 and $1.2 million for the seven months ended July 31, 2016.

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
    9  
Total tangible net assets acquired at fair value
    5,158  
Goodwill
    4,803  
Total consideration
    9,961  
Fair value of earn-out
    (2,370 )
Cash paid, net of $409 receivable from seller
  $ 7,591  

The purchase price allocation has been finalized, and our analysis of the assets acquired indicates that there are no material separately identifiable intangible assets. The goodwill attributable to the acquisition is deductible for tax purposes over 15 years.

Acquisition related costs of $328,000 are included in direct costs of acquisitions in the Company’s consolidated statements of operations for the twelve months ended December 31, 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 January 23, 2014, RLW, JBC and the Company agreed to amend the above mentioned earn-out agreement.  The amendment reduced the amount of the current earn-out liability to $1.4 million from $2.0 million that was recorded in the third quarter of 2013; however it increases the total available earn-out to $10.0 million if certain EBITDA thresholds are met. The amendment extends the earn-out period through December 31, 2017 and reduces the benchmark EBITDA for 2014 and 2015 to $1.5 million and increases it to $2.0 million in 2016 and 2017. The yearly excess forecasted EBITDA in our calculation ranged from 0% to 36.8% of the minimum EBITDA threshold for the years 2014 through 2017.  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 $1.4 million as of December 31, 2013.  The undiscounted earn-out liability as of December 31, 2013 is estimated at $1.5 million and could increase by $8.5 million if EBITDA during the earn-out period increases $17.0 million or more and could decrease by the full amount of the liability for the year if EBITDA does not exceed the minimum threshold for that year. Each year is considered a discrete earnings period and future losses by JBC, if any, would not reduce the Company’s liability in years in which JBC has exceeded its earnings benchmark.  Any significant increase or decrease in actual EBITDA compared to the forecasted amounts would result in a significantly higher or lower fair value measurement of the additional purchase price.  This liability is included in other long-term liabilities on the accompanying consolidated balance sheets.

On August 1, 2011, the Company purchased a 50% limited partner interest in 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 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
  $ 3,207  
Current liabilities
    (2,464 )
Working capital acquired
    743  
Property and equipment
    708  
Debt due to noncontrolling interest owner
    (500 )
Total tangible net assets acquired at fair value
    951  
Goodwill
    1,502  
Total consideration
    2,453  
Fair value of noncontrolling owners’ interest in Myers
    (1,226 )
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.  The purchase price allocation has been finalized, and our analysis of the assets acquired indicates that there are no material separately identifiable intangible assets. The goodwill attributable to the acquisition is deductible for tax purposes over 15 years.

Acquisition related costs of $128,000 are included in direct costs of acquisitions in the Company’s consolidated statements of operations for the year ended December 31, 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.

Refer to Note 3 regarding the determination that Myers’ is a variable interest entity and the resulting impact on the consolidated financial statements.

In connection with the December 3, 2009 acquisition of RLW, the noncontrolling interest owners of RLW, who are related and also its executive management, had the right to require the Company to buy their remaining 20.0% interest in RLW in 2013, and concurrently, the Company had the right to require those owners to sell their 20.0% interest to the Company by July 2013 (the “RLW put/call”). The purchase price in each case was 20% of the product of the simple average of RLW’s EBITDA for the calendar years 2010, 2011 and 2012 times a multiple of a minimum of 4 and a maximum of 4.5.

Annual interest was accreted for the RLW put/call obligation based on the Company’s borrowing rate under its Credit Facility plus two percent. Such accretion amounted to $993,000, and $881,000 for the years ended December 31, 2012 and 2011, respectively, and is recorded in “Interest expense” in the accompanying consolidated statement of operations.  In addition, based on the estimated average of RLW’s EBITDA for the calendar years 2010, 2011 and 2012 and the expected multiple, the estimated fair value of the RLW put/call was increased by approximately $3.8 million and $1.3 million during the years ended December 31, 2012 and 2011, respectively, and this change, net of tax of $1.3 million and $0.5 million, respectively, was reported as a charge to retained earnings.

Under the agreement with the noncontrolling interest owners of RLW, the Company purchased the 20% interest in RLW on December 31, 2012 subject to a final determination of RLW’s EBITDA for the period from January 1, 2010 through December 31, 2012.  A payment of $23.1 million was made on December 31, 2012, and the Company made a final payment of $509,000 in April 2013.  In addition, $2.3 million of undistributed earnings was also paid in April 2013.

Changes in noncontrolling interests

The following table summarizes the changes in the noncontrolling owners’ interests in subsidiaries and consolidated joint ventures for the years ended December 31, 2011 through 2013 (in thousands):

   
Years Ended December 31,
 
   
2013
   
2012
   
2011
 
Balance, beginning of period
  $ 20,046     $ 18,375     $ 28,724  
Net income attributable to noncontrolling interest included in liabilities
    2,024       16,941       935  
Net income attributable to noncontrolling interest included in equity
    1,879       1,068       261  
Accretion of interest on puts
    -       993       881  
Change in fair value of RLW put/call
    (59 )     3,797       1,268  
Change in fair value of RHB put/call
    1,875       2,473       1,054  
Change due to the RHB amendment
    (18,103 )     -       -  
Acquisition by Sterling of RHB noncontrolling interest
    -       -       (8,205 )
Noncontrolling interest associated with Myers acquisition
    -       -       1,227  
Issuance of noncontrolling interest in RHB in exchange for net assets of acquired companies
    -       9,767       -  
Distributions to noncontrolling interests owners
    (3,056 )     (10,185 )     (7,809 )
Acquisition of RLW noncontrolling interest
    (509 )     (23,144 )     -  
Other
    -       (39 )     39  
Balance, end of period
  $ 4,097     $ 20,046     $ 18,375  

Noncontrolling owners’ interest in earnings of subsidiaries and joint ventures for the year ended December 31, 2013 shown in the accompanying consolidated statement of operations of $3.9 million includes income of $2.0 million attributable to noncontrolling interest owners which the Company includes in liabilities and $1.9 million which the Company includes in equity.  Of the $2.0 million included in liabilities, $68,000 of net loss is reflected in “Current obligations for noncontrolling owners’ interests in subsidiaries and joint ventures,” and $2.1 million of net income has been reclassified from “Obligations for noncontrolling owners’ interests in subsidiaries and joint ventures” to “Member’s interest subject to mandatory redemption” in the accompanying consolidated balance sheet. The remaining $1.9 million is attributable to noncontrolling interest owners which the Company includes in equity and is reflected in equity in “Noncontrolling interests” in the accompanying consolidated balance sheet.

In 2012, the Company agreed to amend RLW’s operating agreement effective January 1, 2012 to provide that any goodwill impairment, including the 2011 fourth quarter goodwill impairment, is not to be allocated to RLW for the purpose of calculating the distributions to be made to the RLW noncontrolling interest owners. This amendment resulted in an increase in the net income attributable to RLW’s noncontrolling interests of $6.7 million during the year ended December 31, 2012.  This increase is included in “Noncontrolling owners’ interests in earnings of subsidiaries and joint ventures” in the accompanying consolidated statement of operations with an increase in the “Current obligation for noncontrolling owners’ interests in subsidiaries and joint ventures” in the consolidated balance sheet.  This increase has a related tax impacted of $2.4 million which increased the tax benefit for the period.