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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

þ       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2005

OR

o      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number:      0-19450

STERLING CONSTRUCTION COMPANY, INC.


(Exact name of registrant as specified in its charter)
     
DELAWARE
  25-1655321
 
   
(State of Incorporation)
  (I.R.S. Employer Identification No.)

2751 CENTERVILLE ROAD SUITE 3131 WILMINGTON, DELAWARE
19803
(Address of principal executive offices)
(Zip Code)

(281) 821-9091


(Registrant’s telephone number, including area code)


(Former name, former address, and former fiscal year, if changed from last report)

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the Registrant is an accelerated filer (as described in Rule 12b-2 of the Exchange Act). Yes o No þ

     As of May 1, 2005, 7,717,342 shares of the Registrant’s Common Stock, $0.01 par value per share were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
None

 
 

 


PART I. FINANCIAL INFORMATION

         
Item 1. Financial Statements
       
 
    3  
 
    4  
 
    5  
 
    6  
 
       
 
       
 
       
 
       
 
       
 
       
 
       
 
       
 
       
 
       
 
     (a) Exhibits
       
 
       
 Certification of Patrick T. Manning, CEO.
 Certification of Maarten D. Hemsley, CFO.
 Certification of CEO and CFO - Section 906

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STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
                 
    March     December  
    31, 2005     31,  
    (Unaudited)     2004  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 1,005     $ 3,518  
Contracts receivable
    31,002       26,250  
Costs and estimated earnings in excess of billings
    5,756       5,884  
Trade accounts receivable, less allowance of $1,045 and $1,015, respectively
    4,145       2,361  
Inventories
    6,572       4,525  
Deferred tax asset
    3,947       3,986  
Other
    1,453       1,554  
 
           
Total current assets
    53,880       48,078  
Property and equipment, net
    23,020       21,227  
Goodwill
    12,863       12,863  
Deferred tax asset
    6,114       6,493  
Other assets
    781       883  
 
           
 
    19,758       20,239  
 
           
Total assets
  $ 96,658     $ 89,544  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
Current liabilities:
               
Accounts payable
    27,012       18,189  
Billings in excess of cost and estimated earnings
    7,088       4,477  
Short-term debt
    4,333       3,625  
Short-term debt, related parties
    2,139       3,593  
Current maturities of long term obligations
    156       149  
Other accrued expenses
    3,790       2,291  
 
           
Total current liabilities
    44,518       32,324  
Long-term obligations:
               
Long-term debt
    6,668       13,329  
Long-term debt, related parties
    7,921       7,755  
Other long-term obligations
    947       928  
 
           
 
    15,536       22,012  
 
               
Commitments and contingencies
               
Stockholders’ equity:
               
Preferred stock, par value $0.01 per share; authorized 1,000,000 shares, none issued Common stock, par value $0.01 per share; authorized 14,000,000 shares, 7,717,342 and 7,378,681 shares issued
    77       74  
Additional paid-in capital
    81,201       80,688  
Deferred compensation expense
    (108 )     (161 )
Accumulated deficit
    (44,565 )     (45,392 )
Treasury stock, at cost, 207 common shares
    (1 )     (1 )
 
           
Total stockholders’ equity
    36,604       35,208  
 
           
 
  $ 96,658     $ 89,544  
 
           

The accompanying notes are an integral part of these condensed consolidated financial statements

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STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
                 
    Three months     Three months  
    ended     ended  
    March 31, 2005     March 31, 2004  
Contract revenues
  $ 39,413     $ 25,586  
Distribution revenues
    6,536       6,723  
 
           
 
    45,949       32,309  
 
           
 
               
Cost of contract revenues earned
    36,056       22,908  
Cost of goods sold, including occupancy, buying and warehouse expenses
    5,563       5,776  
Selling and administrative expenses, net
    2,525       2,468  
Provision for doubtful accounts
    30       8  
Interest expense, net of interest income
    547       519  
 
           
 
    44,721       31,679  
 
               
Income before minority interest and income taxes
    1,228       630  
 
               
Minority interest
    0       167  
 
           
Income before income taxes
    1,228       463  
 
               
Income taxes:
               
State income tax (benefit) expense
    (17 )     6  
Current income tax expense
    0       0  
Deferred income tax expense
    418       189  
 
           
Total income tax expense
    401       195  
 
           
 
               
Net income
  $ 827     $ 268  
 
           
 
               
Basic net income per share
  $ 0.11     $ 0.05  
 
           
Weighted average number of shares outstanding used in computing basic per share amounts
    7,389,499       5,172,458  
 
           
 
               
Diluted net income per share
  $ 0.09     $ 0.04  
 
           
Weighted average number of shares outstanding used in computing diluted per share amounts
    9,283,485       7,266,573  
 
           

The accompanying notes are an integral part of these condensed consolidated financial statements

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STERLING CONSTRUCTION COMPANY, INC. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
                 
    Three months     Three months  
    ended     ended  
    March 31, 2005     March 31, 2004  
Cash flows from operating activities:
               
Income from operations
  $ 827     $ 268  
Adjustments to reconcile income from operations to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    1,255       1,181  
Bad debt expense
    29       8  
(Gain) loss on sale of property and equipment
    (131 )     5  
Deferred tax expense
    418       189  
Deferred compensation expense
    53       215  
Minority interest in net earnings of subsidiary
          167  
Other changes in operating assets and liabilities:
               
Increase in accounts receivable
    (1,813 )     (2,184 )
Increase in contracts receivable
    (4,752 )     (55 )
Increase in inventories
    (2,047 )     (547 )
Decrease (increase) in costs and estimated earnings in excess of billings on uncompleted contracts
    128       (960 )
Decrease in prepaid expense and other assets
    189       147  
Increase in trade payables
    8,823       3,225  
Increase (decrease)in billings in excess of costs and estimated earnings on uncompleted contracts
    2,611       (2,229 )
Increase (decrease) in accrued compensation and other liabilities
    1,500       (264 )
 
           
Net cash provided by (used in) operating activities
    7,090       (834 )
Cash flows from investing activities:
               
Additions to property and equipment
    (3,000 )     (531 )
Proceeds from sale of property and equipment
    164       91  
 
           
Net cash used in investing activities
    (2,836 )     (440 )
Cash flows from financing activities:
               
Cumulative daily drawdowns - revolvers
    32,523       24,749  
Cumulative daily reductions - revolvers
    (38,477 )     (22,924 )
Repayments under long-term obligations
    (1,329 )     (723 )
Effect of SCPI reverse stock split
          (49 )
Issuance of common stock, pursuant to options
    516       325  
 
           
Net cash (used in) provided by financing activities:
    (6,767 )     1,378  
Net (decrease) increase in cash and cash equivalents
    (2,513 )     104  
Cash and cash equivalents at beginning of period
    3,518       2,765  
 
           
Cash and cash equivalents at end of period
  $ 1,005     $ 2,869  
 
           

The accompanying notes are an integral part of these condensed consolidated financial statements.

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STERLING CONSTRUCTION COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED)

1. Basis of Presentation

     The condensed consolidated financial statements included herein have been prepared by Sterling Construction Company, Inc. (“Sterling” or “the Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the Company’s financial position at March 31, 2005 and the results of operations and cash flows for the periods presented.

     The accompanying condensed consolidated financial statements include the accounts of subsidiaries in which the Company has a greater than 50% ownership interest, and all intercompany accounts and transactions have been eliminated in consolidation.

     Interim results may be subject to significant seasonal variations and the results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results to be expected for the full year.

     The Company reports two operating segments, the “Construction” segment, which consists of the operations of Sterling Houston Holdings (“SHH”), a heavy civil construction company based in Houston, Texas, and the “Distribution” segment, which consists of the operations of Steel City Products, Inc. (“SCPI”), a wholesale distributor of automotive accessories, non-food pet supplies and lawn and garden products, based in Pittsburgh, Pennsylvania.

2. Recent Accounting Pronouncement

     In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, “Inventory Costs – an amendment of ARB No. 43 (“SFAS No. 151”), which is the result of its efforts to converge United States accounting standards for inventories with International Accounting Standards. SFAS No. 151 required idle facility expenses, freight, handling costs and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe adoption of SFAS No. 151 will have an impact on its consolidated financial statements.

     In December 2004, the FASB issued FASB Statement No. 123(R), “Share-Based Payment”, (“SFAS 123(R)”), which is a revision of FASB Statement No. 123 “Accounting for Stock-Based Compensation”. SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and amends FASB Statement No. 95, “Statement of Cash Flows”. The Company is required to adopt SFAS No. 123(R) beginning January 1, 2006. Pro forma disclosure, as was allowed under APB 25 and SFAS No. 123, will no longer be an alternative. Additionally, SFAS No. 123(R) requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS No. 123(R) and for all subsequent stock options granted thereafter. Because the Company utilizes a fair value based method of accounting for stock-based compensation costs for all employee stock compensation awards granted, modified or settled since January 1, 2003 and will not have significant unvested awards from periods prior to January 1, 2003 outstanding at January 1, 2006, adoption of SFAS No. 123(R) is not expected to have a material impact on its financial statements.

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     In March 2005, the FASB issued FASB Interpretation No. 47 “Accounting for Conditional Asset Retirement Obligations” (FIN 47). Fin 47 clarifies that an entity must record a liability for “conditional” asset retirement obligation if the fair value of the obligation can be reasonably estimated. The provision must be adopted no later than the end of the fiscal year ending December 31, 2005. The Company does not expect adoption of FIN 47 to have a material impact on its financial position, results of operations or cash flows.

3. Critical Accounting Policies

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management’s estimates, judgments and assumptions are continually evaluated based on available information and experience; however actual amounts could differ from those estimates. The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

4 Property and Equipment

                 
    March 31, 2005        
(dollars in thousands)   (Unaudited)     December 31, 2004  
Construction equipment
  $ 28,410     $ 26,550  
Transportation equipment
    5,119       4,406  
Buildings
    1,488       1,488  
Leasehold improvements
    402       402  
Office furniture, warehouse equipment and vehicles.
    1,541       1,462  
Land
    182       182  
 
           
 
    37,142       34,490  
Less accumulated depreciation
    (14,122 )     (13,263 )
 
           
 
  $ 23,020     $ 21,227  
 
           

5. Goodwill

     The amounts recorded by the Company for goodwill are as follows (dollars in thousands):

                         
    Construction     Distribution        
    Segment     Segment     Total  
Balance, January 1, 2005
  $ 12,735     $ 128     $ 12,863  
Goodwill additions
                 
Impairment losses
                 
 
                 
Balance, March 31, 2005
  $ 12,735     $ 128     $ 12,863  
 
                 

     The Company performed impairment testing under the terms of SFAS No. 142 “Goodwill and Other Intangible Assets” for its two reporting segments in the fourth quarter of fiscal 2004. The analysis did not indicate impairment of the Company’s recorded goodwill for either segment.

6. Earnings Per Share

     Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per common share is computed giving effect to all potential dilutive common stock and warrants using the treasury stock method. The following table reconciles the numerators and denominators of the basic and

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diluted per common share computations for net income for the three months ended March 31, 2005 and March 31, 2004 (in thousands, except share and per share data):

                 
    Three months     Three months  
    ended     ended  
    March 31, 2005     March 31, 2004  
Numerator:
               
Net income
  $ 827     $ 268  
Add back interest on convertible debt, net of tax
          11  
 
           
Net income before interest on convertible debt
  $ 827     $ 279  
 
           
 
               
Denominator:
               
Weighted average common shares outstanding – basic
    7,389       5,172  
Shares for convertible debt
          224  
Shares for dilutive stock options and warrants
    1,894       1,871  
 
           
Weighted average common shares outstanding and assumed conversions – diluted
    9,283       7,267  
 
           
 
               
Basic income per common share:
  $ 0.11     $ 0.05  
Diluted income per common share:
  $ 0.09     $ 0.04  

7. Stock-Based Compensation

     The Company accounts for its stock based compensation under the provisions of SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure”, which amended SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method. The Company adopted SFAS No. 148 effective January 1, 2003 utilizing the prospective method for options granted after that date and uses a Black-Scholes option pricing model for calculations of the fair value of options granted after January 1, 2003.

     The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation prior to January 1, 2003 (dollars in thousands, except per share data).

                 
    Three months     Thee months  
    ended     ended  
    March 31, 2005     March 31, 2004  
Net income, as reported
  $ 827     $ 268  
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects
    53       215  
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
    (44 )     (21 )
 
           
Pro forma net income
  $ 836     $ 462  
Basic and diluted net income per share:
               
Basic, as reported
  $ 0.11     $ 0.05  
Diluted, as reported
  $ 0.09     $ 0.04  
Pro forma, basic
  $ 0.11     $ 0.09  
Pro forma, diluted
  $ 0.09     $ 0.06  

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8. Segment Information

     Each of the Construction Segment and the Distribution Segment is managed by its own decision makers and comprises different customers, suppliers and employees. The operating profitability of the Construction Segment is reviewed by its Treasurer, Joseph P. Harper, who is also the Company’s President and Chief Operating Officer. To determine the financial needs of the Distribution Segment, Terry Allan, Chief Executive Officer of SCPI and Maarten Hemsley, the Company’s Chief Financial Officer, review the segment’s operating profitability and working capital needs to allocate financial resources. Allocation of resources among the Company’s operating segments is determined by Messrs. Harper and Hemsley. (dollars in thousands)

                                 
Three months ended 3/31/2005                           Consolidated  
Segments   Construction     Distribution     Corporate     Total  
Revenues
  $ 39,413     $ 6,536           $ 45,949  
 
                               
Operating profit (loss)
    1,621       397       (243 )   $ 1,775  
Interest income (expense), net
    102       (72 )     (577 )   $ (547 )
 
                             
Pre-tax income
                          $ 1,228  
 
                             
 
                               
Segment assets
  $ 62,448     $ 11,960     $ 22,250     $ 96,658  
                                 
Three months ended 3/31/2004                           Consolidated  
Segments   Construction     Distribution     Corporate     Total  
Revenues
  $ 25,586     $ 6,723           $ 32,309  
 
                               
Operating profit (loss)
    1,249       340       (440 )   $ 1,149  
Interest expense, net
    (42 )     (24 )     (453 )   $ (519 )
Minority interest
                    (167 )   $ (167 )
 
                             
Pre-tax income
                          $ 463  
 
                             
 
                               
Segment assets
  $ 54,588     $ 10,653     $ 13,097     $ 78,388  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company operates primarily as a heavy civil construction company through its subsidiary Sterling Houston Holdings in Houston, Texas under the trade name “Texas Sterling Construction” (“SHH” or the “Construction Segment”). The Company’s distribution business is conducted in Pittsburgh, Pennsylvania under the name “Steel City Products” (“SCPI” or the “Distribution Segment”).

Forward Looking Statements

     From time to time the information provided by the Company or statements made by its employees may fall within the definition of “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. In particular, statements contained in this Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which

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are not historical facts (including, but not limited to, statements concerning anticipated sales, contracts, EBITDA and profit levels, customers, backlog and cash flows) are forward-looking statements. Any such statements are subject to risks and uncertainties, including overall economic and market conditions, competitors’ and customers’ actions, weather conditions and other risks identified in the Company’s filings with the Securities and Exchange Commission, any of which could cause actual results to differ materially from those anticipated. Accordingly, such statements should be considered in light of these risks. The Company’s actual future results may differ significantly from those stated in any forward-looking statements due to the factors discussed above, as well as the accuracy of the Company’s internal estimates of revenue and expense levels. These factors and others are discussed from time to time in the Company’s Securities and Exchange Commission filings. Any prediction by the Company of future financial results or other events is only a statement of management’s belief at the time the prediction is made. There can be no assurance that any prediction once made will continue thereafter to reflect management’s belief, and the Company does not undertake to update predictions.

Liquidity and Capital Resources

     At SHH, the level of working capital varies principally as a result of changes in the levels of cost and estimated earnings in excess of billings, of billings in excess of cost and estimated earnings, of customer receivables and contract retentions and creditor liabilities, and of the use of the revolving line of credit to finance operations and capital expenditures

     At SCPI, the level of working capital needs varies primarily with the amounts of inventory carried, the size and timeliness of payment of receivables from customers and the amount of credit extended by suppliers, all of which can fluctuate seasonally. SCPI’s working capital needs not financed by supplier credit have been financed from cash flow and borrowings under its line of credit.

Financing

     The following is a summary of the Company’s long-term debt and lines of credit and should be read in conjunction with Footnote 5 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K:

                 
    March 31,     December 31,  
(in thousands)   2005     2004  
Line of credit with a commercial financial corporation under a revolving credit line, maturing May 2007, secured by the equipment at SHH, interest payable monthly at the lender’s prime rate, subject to achievement of certain financial targets (5.75% and 5.25%, at March 31, 2005 and December 31, 2004, respectively)
  $ 6,668     $ 13,329  
 
               
Line of credit with a commercial financial corporation under a revolving credit line, maturing May 2006, secured by the receivables, inventory and other assets of SCPI, interest payable monthly at the lender’s prime rate plus 1%, (6.75% and 6.25%, at March 31, 2005 and December 31, 2004, respectively)
  $ 4,333     $ 3,625  
 
               
Management/director notes, maturing December 2009, interest at 12% payable quarterly, along with quarterly principal payments. Principal payments were deferred until June 2005, due to an agreement with NASCIT (see below)
  $ 9,683     $ 9,693  

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    March 31,     December 31,  
(in thousands)   2005     2004  
NASCIT note, maturing December 2009, principal and interest at 12% payable quarterly beginning March 31, 2005. Pursuant to an agreement with management/director noteholders (above), and through NASCIT’s exercise of its warrants providing proceeds to the Company of approximately $484,000, NASCIT will receive payment of its entire note in June 2005.
  $ 377     $ 1,405  
 
               
Short-term related party note, interest payable monthly at 12%, paid in three installments, January and February, 2005
        $ 250  
 
               
Mortgage on SHH headquarters, maturing June 2016, principal and interest (at 7.75%) payable monthly
  $ 832     $ 843  
 
               
Mortgage on SHH land and facilities, maturing May 2008, principal and interest (at 9.3%) payable monthly
  $ 162     $ 175  
 
               
Capital leases for equipment at SCPI, maturities from December 2005 to December 2009
  $ 109     $ 58  
 
           
 
               
Total
  $ 22,164     $ 29,379  
Less current maturities
    ($6,628 )     ($6,243 )
 
           
Long-term debt
  $ 15,536     $ 23,136  
 
           

Cash Flows

                 
    March 31,     March 31,  
(in thousands)   2005     2004  
Cash and cash equivalents
  $ 1,005     $ 2,869  
Net cash provided by (used in):
               
Operating activities
    7,090       (834 )
Investing activities
    (2,836 )     (440 )
Financing activities
    (6,767 )     1,378  
 
               
Capital expenditures
    (3,000 )     (531 )
 
               
Working capital
    9,362       12,948  

     For the quarter ended March 31, 2005, the Company’s consolidated operations provided cash of $7.1 million, due to higher levels of trade payables and billings in excess of costs and estimated earnings on uncompleted contracts. This was offset by higher levels of contract receivables and accounts receivable and inventories. At the Construction Segment, higher revenues in the first quarter led to an increase in contract receivables. At Distribution, trade receivables were higher due to dating on orders placed at the annual trade show, and there were increases in inventories due to anticipated price increases. In the prior year period, operations used $834,000 in cash, principally reflecting increases in contracts and accounts receivable, inventories, and costs and estimated earnings in excess of billings on uncompleted contracts.

     In the quarter ended March 31, 2005, cash used in investing activities increased by $2.4 million compared with the prior year period, due to higher capital expenditures for construction equipment reflecting the Segment’s enlarged contract backlog.

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     Cash used in financing activities was approximately $6.8 million in the first quarter due principally to borrowings under SHH’s revolving line of credit being $6.7 million lower at quarter-end than at the beginning of the quarter. This reflected the timing of accounts payable, which were $8.8 million higher than at the start of the period.

     The decrease of $3.5 million in the level of working capital at the end of the first quarter, compared with such level at the end of the prior year period is primarily the result of the lower level of borrowings under SHH’s available line of credit at the end of the quarter.

Inflation

     Management does not believe that inflation has had a material negative impact on the Company’s operations or financial results during recent years. However, increases in oil prices may have an adverse effect on the Construction Segment and recent fluctuations in the price of steel have affected the prices at which the Construction Segment has bid certain contracts, and potential gross profits on contracts. Inflation may also affect prices of products purchased by the Distribution Segment and the prices which it can charge to its customers. In times of increasing inflation, SCPI may increase inventory levels of affected items to help protect its gross margin. This occurred to some degree in the first quarter of 2005.

Risk Factors

     SHH measures its performance within the construction industry through the bidding process and the number, size and expected profitability of contracts obtained throughout the year. The Company is subject to various risks and uncertainties. Many factors affect the bidding climate, including, but not limited to, fluctuations in the Texas economy, the amount of local, state and federal government funds available for infrastructure upgrade and new construction, as well as the number of bidders in the market and the prices at which they are prepared to bid, which are in turn affected by such bidders’ profitability and contract backlogs. Factors outside the bidding climate include: (a) weather conditions, such as precipitation and temperature, which can result in significant variability in quarterly revenues and earnings, particularly in the first and fourth quarters; (b) the availability of bonding, the absence of which would adversely affect the Company’s ability to obtain new contracts (although the level of SHH’s bonding capacity has not constrained its business in many years); (c) the price of oil products; (d) the price and availability of steel, cement and other construction materials (including, for example, recent market shortages of aggregates and cement), which can significantly fluctuate and impact operating expense; (e) the availability of heavy construction equipment, and (f) the availability of qualified field and supervisory personnel.

     The distribution industry has been adversely affected by suppliers that offer products directly to retailers, sidestepping the need for a distributor. SCPI has been able to maintain its presence in the distribution industry by offering new product lines and by competing through product selection, distribution services, order fill rates, short turnaround times and breadth of merchandise offered, but it may not be able to continue to do so.

Material Changes in Financial Condition

     At March 31, 2005, there had been no material changes in the Company’s financial condition since December 31, 2004, as discussed in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

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Results of Operations

Three months ended March 31, 2005 compared with three months ended March 31, 2004

     The Company reported consolidated revenues of $45.9 million, a 42% increase compared with the first quarter of fiscal 2004. The Company measures its performance at the operating profit level and the levels of Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), among other factors. EBITDA for the first quarter was $3.0 million, an increase of approximately $0.9 million from fiscal 2004. Results for the Construction Segment and the Distribution Segment are discussed below.

                 
Consolidated results (in thousands):   March 31, 2005     March 31, 2004  
Revenues
  $ 45,949     $ 32,309  
Operating profit
    1,776       1,149  
Net income
  $ 827     $ 268  
Add back:
               
Taxes
    401       195  
Interest
    547       519  
Depreciation and amortization
    1,255       1,181  
EBITDA
  $ 3,030     $ 2,163  

Construction

     Contract revenues in the first quarter of fiscal 2005 increased compared with the same period in fiscal 2004 by approximately 54%. In the current year, more projects were in progress. In addition, despite higher than average rainfall in January and February, the weather position improved significantly in March so that weather had less of an adverse impact than in the prior year.

     Construction Segment gross profit for the quarter was $3.4 million, or 8.5% of contract revenues, compared with gross profit in the first quarter last year of $2.7 million, or 10.5% of contract revenues. Certain contracts in progress during the current year period were bid at lower margins in 2003 and 2004 when there was an aggressive bidding climate, and there were losses in the first quarter this year on some small contracts in the Dallas/Fort Worth market.

     Operating profit at the Construction Segment increased by approximately $372,000 principally due to the higher revenues and related gross profits in the first quarter of the current year.

Distribution

     The sales decrease of $187,000 at the Distribution Segment was due primarily to lower sales of winter products such as antifreeze, ice melters and show shovels, as the winter in Distribution’s primary markets was unseasonably mild.

     Gross profit for Distribution was $973,000, or 14.9% of sales, compared with gross profit in the prior year of $947,000, or 14.1% of sales. The increase was due to a higher margin product mix, and to lower sales of lower margin winter products.

     The Distribution Segment reported an operating profit of $397,000 in the first quarter, compared with an operating profit of $340,000 in the first quarter of the prior year. The increase of $57,000 was primarily related to the higher gross margins.

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Corporate

     Operating expenses at the corporate level decreased by approximately $197,000 due primarily to an expense of $207,000 in the prior year related to variable option expense for option grants after June 2000 and before adoption of SFAS 123 in January 2003. In March 2004, the Company discontinued variable option plans.

Company Website

     The Company maintains a website at www.sterlingconstructionco.com. The Company makes available free of charge on or through its website, access to its latest Annual Report on Form 10-K, recent Quarterly Reports on Form 10-Q, any amendments to those filings, recent press releases, its Code of Ethics and Audit Committee Charter, together with other filings related to shareholdings.

Item 3. Qualitative and Quantitative Disclosure about Market Risk

     The Company is exposed to certain market risks from transactions that are entered into during the normal course of business. Sterling’s primary market risk exposure is related to changes in interest rates. The Company manages its interest rate risk by balancing in part its exposure to fixed and variable interest rates while attempting to minimize its interest costs.

     Financial derivatives are used as part of the overall risk management strategy. These instruments are used to manage risk related to changes in interest rates. The Company’s portfolio of derivative financial instruments consists of interest rate swap agreements, which are used to convert variable interest rate obligations to fixed interest rate obligations, thereby reducing the exposure to increases in interest rates. Amounts paid or received under interest rate swap agreements are accrued as interest rates fluctuate with the offset recorded in interest expense.

     An increase of 1% in the market rate of interest would have increased the Company’s interest expense for the three months ended March 31, 2005 by approximately $11,000.

     The Company applies SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities pursuant to which the Company’s interest rate swaps have not been designated as hedging instruments; therefore changes in fair value are recognized in current earnings.

     Because the Company derives no revenues from foreign countries and has no obligations in foreign currency, it experiences no direct foreign currency exchange rate risk. However, prices of certain raw materials and consumables, such as oil and steel, may be affected by currency fluctuations.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains “disclosure controls and procedures”, as that phrase is defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the Company’s reports, filed pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer, its President and its Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management

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necessarily is required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

     The Company’s Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer, respectively) have evaluated the effectiveness of the Company’s “disclosure controls and procedures” as of March 31, 2005. Based on their evaluation, except as noted below, the principal executive officer and principal financial officer concluded that the Company’s controls and procedures are effective.

Changes in Internal Controls

     Subsequent to the issuance of the Company’s financial statement for the quarter ended September 30, 2004, the Company’s management determined that borrowings under the SCPI Revolver should have been classified as short-term in the consolidated balance sheets. Management has implemented a formal loan review process and has established a control to ensure that debt is properly classified in the financial statements.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

     There are no material legal proceedings outstanding against the Company.

Item 2. Changes in Securities and Use of Proceeds

     None

Item 3. Defaults upon Senior Securities

     None

Item 4. Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of security holders during the quarter for which this report is filed.

Item 5. Other Information

     None

Item 6. Exhibits

(a) Exhibits

     *31.1 Certification of Patrick T. Manning, Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)

     *31.2 Certification of Maarten D. Hemsley, Chief Financial Officer, pursuant to Exchange Act Rule 13a-14(a)

     *32.0 Certification of Patrick T. Manning, Chief Executive Officer and Maarten D. Hemsley, Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)


*   filed herewith

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SIGNATURES

     Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

     
  STERLING CONSTRUCTION COMPANY, INC.
         
Date: May 12, 2005
  By:   /s/ Patrick T. Manning
    Patrick T. Manning
    Chief Executive Officer
 
       
Date: May 12, 2005
  By:   /s/ Maarten D. Hemsley
    Maarten D. Hemsley
    Chief Financial Officer

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