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Note 9 - Acquisitions and Subsidiaries and Joint Ventures with Noncontrolling Owners' Interests
 9 Months Ended
Sep. 30, 2014
Noncontrolling Interest [Abstract]  
Noncontrolling Interest Disclosure [Text Block]
9.  
Acquisitions and Subsidiaries and Joint Ventures with Noncontrolling Owners’ Interests

In January 2012, Road and Highway Builders, LLC (“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% membership interest in RHB. These transactions allowed RHB to expand its operations in Nevada.

On February 1, 2012, the Company also agreed with Mr. Buenting to amend and restate the operating and management agreement for RHB.  The amended agreement provides 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 will 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 at September 30, 2013.  Based on the Company’s calculation, the trailing twelve months EBITDA times the multiple of 4.5 provided the higher result of the two methods.  As such, a pre-tax charge of $1.2 million, $0.8 million net of tax, was recorded for the periodic revaluation of Mr. Buenting’s noncontrolling interest during the three months ended September 30, 2013.  The total charge resulted in a net pre-tax charge of $1.9 million, $1.2 million net of tax, for the nine months ended September 30, 2013.

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 will 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’s 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 will 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 a 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 will 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.

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

   
September 30,
2014
   
December 31,
2013
 
Member’s interest subject to mandatory redemption
  $ 20,000     $ 20,000  
Undistributed earnings attributable to this interest
    6,037       3,989  
Earnings distributed
    (3,200 )     -  
     Total liability
  $ 22,837     $ 23,989  

Undistributed earnings increased by $0.5 million and $2.0 million for the three and nine months ended September 30, 2014, respectively, and were included in “Other operating income (expense), net” on the Company’s condensed consolidated statement of operations.  Distributions for the three and nine months ended September 30, 2014 were $2.0 million and $3.2 million, respectively.

On June 20, 2014, the Company sold to Mr. Buenting a 50% interest in RHB Inc.  RHB Inc. is currently an ancillary company that provides certain services for RHB LLC.  RHB Inc. is run as a cost center with a financial goal to break-even, and has an immaterial amount of assets.  The purchase price and the accounting effects of the total transaction were immaterial to the Company.

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 which is classified as a Level 3 fair value measurement.  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 exceeds $1.2 million for the seven months ended July 31, 2016.

On January 23, 2014, RLW, the former owner of JBC and the Company agreed to amend the above-mentioned earn-out agreement in order to reduce the Company’s currently recorded liability while providing the former owner, who at the time was the chief executive officer of JBC, a greater incentive to meet earnings benchmarks.  The amendment resulted in a reduction of $0.6 million in the Company’s earn-out liability, thereby reducing the total earn-out liability to $1.4 million on December 31, 2013.  As part of the amendment, a payment of $0.8 million was made during the first quarter of 2014. The amendment increases the total available earn-out from $5.0 million to $10.0 million if certain EBITDA benchmarks 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. This earn-out liability continues to be classified as a Level 3 fair value measurement and the unobservable inputs continue to be the forecasted EBITDA for the periods after the period being reported on through December 31, 2017.  The yearly excess forecasted EBITDA in our calculation at September 30, 2014 ranged from 0% to 22% of the minimum EBITDA benchmarks for the years 2014 through 2017.  The discounted present value of the additional purchase price was estimated to be $0.3 million as of September 30, 2014 which included a revaluation benefit of $0.3 million that was included in interest income on the condensed consolidated statement of operations.  The undiscounted earn-out liability at September 30, 2014 is estimated at $0.3 million and could increase by $9.0 million if EBITDA during the earn-out period increases $17.9 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 condensed consolidated balance sheets.

Changes in Noncontrolling Interests

The following table summarizes the changes in the obligation for noncontrolling owners’ interests in subsidiaries and joint ventures (amounts in thousands):

   
Nine Months Ended
September 30,
 
   
2014
   
2013
 
Balance, beginning of period
  $ 4,097     $ 20,046  
Net income attributable to noncontrolling interest included in liabilities
    -       1,687  
Net income attributable to noncontrolling interest included in equity
    3,238       1,563  
Change in fair value of RLW put/call
    -       (59 )
Change in fair value of RHB obligation
    -       1,875  
Distributions to noncontrolling interest owners
    (1,190 )     (2,735 )
RLW Put/Call Payout
    -       (509 )
Balance, end of period
  $ 6,145     $ 21,868  

The “noncontrolling owners’ interest in earnings of subsidiaries and joint ventures” for the nine months ended September 30, 2014, shown in the accompanying condensed consolidated statement of operations, was $3.2 million, which the Company includes in “Equity”, “Noncontrolling interests” in the accompanying condensed consolidated balance sheet.  There were no distributions and distributions of $1.2 million to certain noncontrolling interest members during the three and nine months ended September 30, 2014, respectively.