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Sterling Construction Company, Inc. (NASDAQ:STRL)

Q2 2008 Earnings Call Transcript

August 11, 2008 11:00 am ET

Executives

James Allen – SVP and CFO

Joe Harper – President and COO

Pat Manning – Chairman and CEO

Analysts

Richard Wesolowski – Sidoti & Company

Craig Bell – SMH Capital

Richard Paget – Morgan Joseph & Co. Inc.

John Rogers – D.A. Davidson & Co.

Mark Rogers – Gagnon Securities

Operator

Good day, everyone, and welcome to the Sterling Construction second quarter 2008 conference call. At this time, I would like to inform you that this conference call is being recorded and that all participants are currently in a listen-only mode. I will now turn the conference over to Mr. James Allen, Chief Financial Officer. Please go ahead, sir.

James Allen

Thank you, Christie. Good morning, ladies and gentlemen. This is Jim Allen; I am Chief Financial Officer of Sterling Construction Company, Inc. I would like to welcome you to this our conference call this morning to discuss the results of our second quarter of 2008 and the first six months of 2008, which we released this morning in our press release. I would also like to apologize for the confusion on the time of the conference call this morning. We are used to dealing in two time zones, previously before RHB that was Eastern and Central, with RHB that is now Pacific, Central and Eastern and we got a little confused, I will promise you it will not happen again.

I am joined today by Pat Manning, our Chairman and Chief Executive Officer, and Joe Harper, our President and Chief Operating Officer.

First I must 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, including our 2008 guidance 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. Accordingly, any such statements should be considered in light of these risks. Although we may give guidance about future results, this is only a statement of management’s beliefs at the time the statement is made. Predictions that we make may not continue to reflect the management’s beliefs, and we do not undertake to publicly update guidance.

Turning to the financial results, I am pleased to report that the company’s results for the second quarter and first six months of 2008 were much improved over the comparable periods of 2007. Revenues were $192 million in the first six months of 2008 including a $106.7 million in the second quarter, this represents a 37% and a 50% increase respectively over the comparable periods of 2007. Gross profit was 10.4% and 11% of revenues in the first six months and second quarter of 2008 respectively.

Operating income was $12.9 million in the first six months of 2008 including $8.2 million in the second quarter. This represents an increase of 49% and 55% respectively over the comparable periods in 2007. Net income was $8.3 million in the first six months of 2008 including $5.1 million in the second quarter versus $6.3 million and $5.3 million in the comparable six months and second quarter of 2007. Diluted earnings per share were $0.60 for the first six months of 2008 and $0.37 for the second quarter of 2008 as compared with the $0.54 and $0.32 for the first six months and second quarter of 2007. The respective increases of 11% and 16% for the six months and second quarter of 2008 over 2007 are after giving effect to the 16% increase in average diluted shares as a result of our public stock offering in December 2007. These results include those of Road and Highway Builders, LLC, our Nevada operations which we acquired on October 31, 2007.

Our effective tax rate was 33.6% for the second quarter 2008, which is approximately the same rate for the comparable period in 2007. The non-GAAP measurement of funds provided by operation was $18 million in the first six months of 2008 versus $14 million for the comparable period of 2007 and our principal investing and financial activities were $11 million of property and equipment additions and $5 million of net reductions of our credit facility for the first six months of 2008 respectively. At June 30, 2008 we had working capital of $85 million with a current ratio of 2.2 to 1. Borrowings of $60 million under our $75 million long-term credit facility and shareholders’ equity of $147 million all of which gives us the resources required for bonding, bidding and executing projects as we go forward.

Additional financial and business information may be found in our second quarter 2008 Form 10-Q which we filed with the SEC this morning.

I would now like to turn the call over to Joe Harper, our President and Chief Operating Officer to talk about operating results in more detail.

Joe Harper

Good morning everybody. This has been a good quarter from an operational sense in most of our markets. We had very high levels of resource utilization throughout Texas including our concrete crushing plants. Most of our contracts are ahead of schedule and our expectation is that we will have a high level of achievement over the incentives available.

We have experienced some operational challenges in the Dallas region where we have increased both backlog and resources at a very rapid rate. Over the last two quarters, we have increased personnel and associated resources by about 50%. Pat and I met with all managers involved and are confident that this issue is being addressed. In Nevada through the second quarter, all projects continued to progress on or ahead of schedule. Due to weather patterns in Northern Nevada and normal sequencing of construction, most of our asphalt plants were not in production in the first half.

Based on our internal forecasts, we believe the first half results positioned us well to achieve the midpoint of our full-year guidance issued last year. The normal fluctuations and estimated individual job profitability, the level of achievement of incentives on contracts, the weather conditions in all of our markets left us in good shape to hit or exceed the levels of profitability indicated in our initial full-year guidance, the volatility of the commodity markets did not. As indicated in our press release and more detailed in our 10-Q, we have been negatively impacted by upward pressure on commodity prices in fuel, steel, and oil for asphalt. Since the end of the first quarter, the price we pay for off-road diesel has increased from $3.82 to $4.69 a gallon or an impact of close to 23%.

Over the first half of this year, we have adjusted our gross profits on contracts in process downward by more than $2.7 million to reflect our current forecast. Fluctuations in pricing for petroleum products have presented new challenges. Just last week we received diesel fuel for a job in Houston priced at $3.74 a gallon lower than a few months ago. At this time we believe we have very conservative estimates in our estimated job costs for fuel.

For the first time in our fifty plus years of building contracts, a supplier has refused to deliver products for the price quoted at bid time. Supplier of (inaudible) steel informed us he would be unable to survive the negative financial impact of fulfilling his contract. We had few options available for availability or price and have negotiated an increase in price at a cost to the company of approximately $1 million on a contract which was 60% complete on June 30. About two weeks ago, some materials filed for bankruptcy. For those who may not be familiar with the situation, (inaudible) is a major player in several states out West, certainly including Nevada and Utah for the supply of oil used in the production of asphalt. Their bankruptcy has caused the wages [ph] on many projects in those states as contractors and the State DOTs determine what action to take. Mr. Buenting, our CEO along with the President of two of the largest asphalt paving contractors in Nevada attended a meeting with the Director of Nevada Department of Transportation to discuss the financial and operational challenges. The DOT expressed the willingness to cooperate with all the contractors and to give serious consideration to potential redesign whether to other asphalt products, concrete paving or some other combination.

At this time, it is too early to determine what solutions we will propose but we are confident that the outcome will not likely cause a material impact on future profitability. However the disruptions of continued production on two projects in Southern Nevada will have an impact on the timing of revenue recognition. In the guidance issued today, we have reduced the expected revenue and associated gross profit from these projects by approximately $25 million. It is important to realize that this will result in a deferral of revenue and gross profit, not a loss thereof. The disruption of the productivity in the two Nevada projects mentioned above will cause some under-utilization of certain plants and manpower in that region but we expect this to be a temporary situation. At this time, our resource schedules in Texas indicate full utilization through the end of the year with some availability showing up in the first quarter of 2009. We are very comfortable of visibility six to nine months out.

Before I pass this call to Pat to discuss backlog in our markets, I would like to emphasize a couple of things. Historically, we have not had to deal with dramatic price fluctuations and resulting bankruptcies of suppliers. We are taking steps to mitigate this possibility and believe it to be another manageable risk. I want to emphatically reiterate that had it not been for the sudden bankruptcy, our forecast indicated results for the full year very close to the midpoint of guidance. Pat?

Pat Manning

Thanks Joe. Our markets continue to provide us with the ability to replace backlog. We added almost $30 million more in new projects this quarter than we worked off concurrent with a record quarter in revenue. This puts us at over $500 million in backlog for the first time in our history. With two recent wins last week, we added to that backlog and already have almost $300 million on hand for construction beginning 2009. As I mentioned last quarter, we see opportunities in various segments of our markets and they have added more backlog in Houston on the municipal side than in the State Highway. We are cautiously optimistic at both the State and Federal level for additional funding for TXDOT. The state is considering the immediate issuance of $1.5 billion in previously approved bonds and a legislature will consider in January of 2009 the approval of $5 billion of new bonds voted for into November of last year. At the Federal level, the legislation has been proposed in Congress to restore $8 billion in funding previously removed which would mean more than $800 million to Texas. This has the potential of restoring the highway fund back to its historical levels.

The Texas economy remains a bright spot in the entire nation. Harris County continues with plans to build and build over a $1 billion in total road work in 2009. We bid our first project over $200 million on Thursday to TXDOT and finished a competitive third. We submitted a price to the core of engineers two weeks ago and a design build bridge in San Antonio and are currently looking at five other design build projects both in Texas and Nevada. The North Texas toll road authority has two projects bidding in the next 30 days, one valued at approximately $100 million and the other valued at over $200 million. We are bidding road projects with the Department of Energy next week outside of Las Vegas and later in the month a $70 million highway project on I-80 in California not far from Reno. We continue to add potential clients and expand the geographies where we compete. We are beginning to explore the possibilities of joint venturing larger projects with some of our bigger competitors.

On a final note, RHB has performed better than expected in regards to both revenue and earnings. We congratulate Rich Buenting and his team and their commitment and continued hard work. With all the opportunities we see and with the anticipation of the TXDOT program returning to its former workload, we are on track to continue our growth in both earnings and revenues well into the future.

Now, if there are any questions, we would be happy to answer them.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Richard Wesolowski of Sidoti & Company.

Richard Wesolowski – Sidoti & Company

Thanks, good morning.

James Allen

Good morning Rich.

Pat Manning

Good morning.

Richard Wesolowski – Sidoti & Company

On the steel subject, aside from just the attractive price that I was assuming you would get from the supplier, I was also under the impression that they were providing firm quotes for a period into the future which helps you out on most of your bids, is that still the case?

Joe Harper

Yes, it is the case Rich, but the way the steel industry functions is through distributors, who as I understand are most of the time not able to get firm pricing from the mills. So, in this case, that order was placed with a supplier with whom we had done business for over 25 years. The change in steel price was so dramatic that we were convinced he would not survive it financially. He told us I can do it, I am bankrupt and we renegotiated with him.

Richard Wesolowski – Sidoti & Company

Okay. I look at that situation, I compare it to what looks to be a surprisingly strong bidding environment for these $100 million plus type of jobs, do you think you will have to shoulder more commodity risk in order to bid these out?

Joe Harper

Yes, we turned in on $220 million last week that had a very large steel component on it and we were able to obtain from a Texas steel manufacturer pricing that was firm but had escalators built into it. Now, that’s a pretty comfortable situation because we are able to weigh out our schedules and determine when we can take delivery of the steel and therefore build into our pricing those kinds of impacts. But because it was a 2.5 or a 3-year project, there was a lot of commodity risk in our perception and we put very comfortable pricing in there in our opinion.

Richard Wesolowski – Sidoti & Company

So, you are in the job so long as it goes on schedule you wouldn’t have any real commodity risk?

James Allen

Better believe in that.

Joe Harper

Yes, that’s correct.

Richard Wesolowski – Sidoti & Company

I was a little confused by the press release, were the less than satisfactory results on the Dallas projects connected with the steel or is that a separate issue?

Joe Harper

No, it was a separate issue Rich. You know, we expanded very, very rapidly up there and frankly we just didn’t put enough management oversight in place fast enough to recognize some production and build issues.

Richard Wesolowski – Sidoti & Company

Are you at liberty to put any sort of numbers around what that caused you in the quarter?

Joe Harper

Total impact was around $2 million, about $1 million of that reflected in the June 30 numbers.

Richard Wesolowski – Sidoti & Company

Okay, and then you mentioned a quick shift to Dallas, can you talk about your labor resources, you spoke in the past about the potential to put some in Dallas away from Houston, is that happening or is there some alternative?

Pat Manning

We have sent one crew so far up to San Antonio because of how busy we were up there, we have not had to send any crews up to Dallas. We are currently looking for probably 8 to 10 people and a workforce of 280 plus.

Joe Harper

Yes Rich, we had some good things happen for us in the municipal markets in the Houston area. So the resources I was talking about last quarter on our call –

Richard Wesolowski – Sidoti & Company

It seems far less.

Joe Harper

That’s right.

Richard Wesolowski – Sidoti & Company

Great, thank you.

Operator

Your next question comes from the line of Craig Bell of SMH Capital.

Craig Bell – SMH Capital

I just wanted a follow-up on the issues you had in Dallas, as you said, you had incurred $10 million cost or $1 million of that in Q2, do you think that’s your total exposure on that or is it something that we should be concerned about going forward?

James Allen

I guess it will probably be a total exposure and we are hoping that that will be reduced as time goes on here in the next two quarters.

Craig Bell – SMH Capital

Okay, so it is not a situation where you got a fixed-price contract you got out of line on your cost and it is going to be a laundering issue until it is completed. It should be something that you can rectify just with better oversight, is that correct?

James Allen

Yes, that’s correct. We had some issues on yield, issues on concrete placement and those are correctable problems.

Craig Bell – SMH Capital

Okay, and how much more work on those projects do you have left?

Joe Harper

On those three specific projects, they are each in different phases of completion Craig. One is over 80, one is about 50, I don’t remember –

James Allen

I remember rather faintly.

Pat Manning

They are in various stages of completion but for instance where we have the yield problem on the concrete that was the job that was half done, so we have to go forward and we don’t typically have those problems in the Houston area and I believe they are corrected up there.

Craig Bell – SMH Capital

Okay, and then I guessed you touched on in your prepared remarks a little bit but I think outside of this issue with some materials, it certainly looks like you have a very strong environment out there I would have put you right at the upper end of your previous revenue guidance and obviously with what was seen bidding-wise the TXDOT in the last couple of months looks very encouraging, and then you said you had the two upcoming bids at NTTA, overall it certainly does not look like there is a whole lot of weakness in the Texas market, is that a fair assessment?

Pat Manning

Yes, I think that’s a fair assessment. You have listened to what I read off and we are seeing lots of opportunities and we like I said picked up two projects last week and up over $500 million in backlog and still bidding.

Craig Bell – SMH Capital

Okay and then one last question on the bidding, looking at some of the results from the TXDOT led in last week, I was both days there [ph], it sort of seemed like that there was a diversity on the contract between the larger and the smaller one, are you seeing more competition at the lower valued contracts because those ones seem to be going – in general it seemed like they were going for at or lower than the estimate out there whereas the larger contracts seem to be at or above on the estimated cost, is that something you are seeing out there maybe from more competition?

Pat Manning

Yes, I would say that’s typically the situation. The larger the contract the more vertical integration you need, the more binding capability, etc, so more equipment. So, it narrows the field of play and generally you see less competition and better pricing.

Joe Harper

I think we had 5 bidders on the $200 plus million and the rest of the jobs range from (inaudible).

Craig Bell – SMH Capital

Okay, great. Thanks a lot guys.

Pat Manning

Okay.

Operator

Your next question comes from the line of Richard Paget of Morgan Joseph & Co. Inc..

Richard Paget – Morgan Joseph & Co. Inc.

Good morning everyone.

Pat Manning

Good morning Rich.

Richard Paget – Morgan Joseph & Co. Inc.

I think you guys did a good job outlining why you lowered guidance but I was just kind of curious about the range, the old range kind of had a spread of about $0.14 but the newer one is a bit wider at $0.25, so I wondered what are the kind of key uncertainties which are out there right now that caused you to kind of widen this guidance as we have moved along in the year?

Joe Harper

Rich, it took us a while to sort of understand why the numbers played out that way ourselves, at least for me. There are several issues that go into it but as we dropped revenue lines, we have impacts on fixed costs so we end up where the more dramatic central impact on margin and with the visibility for only a six-month period really gets harder than on a longer range. The other impact or another impact is the comfort level of achieving incentives and that impact again on a shorter six-month period of total operations versus a longer period. So, what you are seeing in the low end there are pretty conservative numbers in terms of percent of incentives likely to be picked up. We have one incentive on our Dallas project that is $1 million and that is a drop-dead day. So, it’s not so much a day it is either achieve it and collect $1 million or has not achieved it and do not. So again when that was included or not included in a 12-month period it had a way lesser impact than what you are seeing in the six months.

Richard Paget – Morgan Joseph & Co. Inc.

Okay. Then, any updates on the Houston MicroRail [ph] project?

Pat Manning

Only to the extent that they say they are continuing to move forward but we have not seen what the plan is and they have not published that yet.

Richard Paget – Morgan Joseph & Co. Inc.

Okay, thanks. I will get back in queue.

Operator

(Operator instructions) your next question comes from the line of John Rogers of D.A. Davidson & Co.

John Rogers – D.A. Davidson & Co.

Hi, good morning.

Pat Manning

Good morning John.

John Rogers – D.A. Davidson & Co.

Could you just give me a little more clarification on the steel or its immaterial [ph] impact. The $25 million is a risk here, are you assuming that is pushed out in 2009?

Joe Harper

Yes, that’s exactly what we did John and there is frankly some guess work in that. It is very unclear how soon we will make our own decision for what we would like to propose to the DOT and then there will be a negotiating period I am sure concerning the price of products that we liked to put in place instead, etc, etc. So, I think what we have put out there is again on the conservative side for anticipation, what we’ll get achieved in ’08 versus ’09 but I think it is important to realize that it is not gone, it is only a question of timing or recognition.

John Rogers – D.A. Davidson & Co.

Joe, we have to pay market per deal (inaudible) how big an earnings risk is that?

Pat Manning

We don’t believe at this point John that that will be an issue. Again, it’s not just a single contract with us, with the State of Nevada, it is multiple contractors who are being affected on long-term projects as well as other states and the degree of – they went down for $2.5 billion loss on the oil, 3.2 [ph]. So, it’s not just a local thing or Texas or Nevada might not consider it, they have assured us that they will work with us.

Joe Harper

John I would rather not quantify it. Just in the last two weeks, we have seen a diminishment in that number of about 20% and we don’t believe we are going to build a product that was quoted. Based on the meeting that Mr. Buenting had with the director along with other contractors, there was a very high level of comfort not only on Rich’s part but on the other officers of our competitors that redesign would be a readily acceptable outcome and from the State side, in order to move these projects forward, they are going to need to do that. Some materials not only were $3 billion plus in the future market but apparently they were not acquiring products throughout the year. So, they are paying – don’t have the inventory they would need to be able to supply, it is just not going to happen.

John Rogers – D.A. Davidson & Co.

Secondly Joe, could you update us on acquisition activity, what you are looking at –

Pat Manning

Yes, we are continuing to move along in that vein and like we have said all along we are trying to do one every 12 to 18 months, so that requires that we look at several in kind of the areas that we have talked about and continue conversations. So, that’s proceeding along as we would like to see it.

Joe Harper

We have got three potentials in the pipeline right now John, one of whom I am pretty hopeful on at least.

John Rogers – D.A. Davidson & Co.

Right, thank you.

Operator

Your next question comes from the line of Mark Rogers from Gagnon Securities.

Mark Rogers – Gagnon Securities

Hi guys, good morning.

James Allen

Good morning Mark.

Mark Rogers – Gagnon Securities

A very broad-brush question on municipality, just wondering how you guys are looking at municipal budgets going forward and what’s changed, I guess you could say in the first half of the year?

James Allen

We have picked up about $200 million in new work in the first half as opposed to what we have typically seen where that’s been running 65% to 75% state highway and 25% to 35% municipal, that was closer to 65% municipal with 35% state highway. I don’t believe that will be typical moving forward but we take advantage of the markets that we see, where we see them.

Joe Harper

This is Joe, Mark. San Antonio has spent, I would say, has led contracts in the range of $60 million to $80 million out of a $700 million bond issue. So, we are very positive about the San Antonio markets. Houston, both the city and Harris County, revenue stream is holding up high and in the five-year plan they are showing continued growth in spending and we have no reason to question that. Dallas has availability of household barns in excess of $600 million but we have seen nothing and it has been over years since those barns hit the market. So, we expect a program to begin in Dallas soon but frankly we haven’t built any work for the city of Dallas for two or three years so it would be a plus for us but we are not real zeroed on it.

Mark Rogers – Gagnon Securities

So, as far as municipals being able to shoulder some of the cost involved in the cost fluctuations and bankruptcies you guys have seen, do you see that being a problem or what do you see going forward?

Pat Manning

I think that typical municipal project is not near as large as a state highway project, so we have not seen any difficulty in them either pulling jobs from the marketplace or not issuing work orders.

Mark Rogers – Gagnon Securities

Okay. So it is more of a state problem than it is municipal?

Joe Harper

Going forward in my expectation at least would be that the mix of highway versus municipal, we might see municipal taking a little bigger piece in the first quarter or so of next year, you would expect to return to sort of what we have been running the last year or so with 65% to 70% of our business being on the highway side.

Mark Rogers – Gagnon Securities

Great, thanks a lot guys. Best of luck.

Pat Manning

Thank you.

Operator

(Operator instructions) Your next question is a follow-up from the line of Richard Wesolowski of Sidoti & Company.

Richard Wesolowski – Sidoti & Company

Thanks a lot. You guys have talked in the recent past about the possibility of hedging the fuel costs, does the expected change in the 2008 numbers accelerate that effort?

Joe Harper

Yes and no Rich. We are sort of struggling with that a little bit. We have board approval to go ahead with that and Jim and I spent quite a while of time on it. But the timing of putting those hedges in place is little bit of an issue, we were at the very peak of the market when the board said okay, go ahead guys, I was of course very reluctant to jump in, we are continuing to look at it and I would expect we will be doing some hedging within the next six months or so.

Richard Wesolowski – Sidoti & Company

Okay. Can you give some perspective on how many of the Dallas tow-away [ph] jobs have been left and how many of those you have been on?

Pat Manning

Let’s say, we did three so far, maybe four. We have got one of them, there is two more coming out within the next month and then quite frankly I am not sure how many after that.

Richard Wesolowski – Sidoti & Company

Okay.

Joe Harper

We have been on all of them Rich. We were second on one, we were third on two, and we have got one. So, we have been very competitive on all.

Richard Wesolowski – Sidoti & Company

Okay. What’s the latest market sentiment for those in the industry and the prospect of the governor actually selling the big slug of debt next year?

Joe Harper

See the only thing I can do is tell you what we hear from the AGC and I have several officers who serve in various capacities with the AGC so we think we are pretty well connected there. The AGC (inaudible) guys are telling us that the governor is going to be reluctant but they believe the legislature has the headcount to override veto if that is what they have to do. So, I think the pressure on the governor not only from the industry and from a lot of the citizens’ groups but from the legislature is going to be really high. I am very, very confident that is going to happen but politics is politics.

Pat Manning

The one thing that I think everybody recognizes in Texas is that there is a need and you saw that when the voters passed the $5 billion bond issue and the most recent article that I read, they are suggesting that Texas will have somewhere between $10 billion and $17 billion overage in the total state coffers. It is hard to say that we can’t fund the state highway program.

Richard Wesolowski – Sidoti & Company

Do you think that the money is sold and the budget has the chance to getting up to where it was in FY ’06 and FY ’07?

Pat Manning

Yes, I think it may even get stronger. Certainly there is potential.

Joe Harper

But the number we are seeing, the other question mark there is $800 million to $900 million for the reinstatement of the Federal money and indications are that Washington is strong on that but there is $800 million to $900 million tick up for Texas if they reinstate that piece when you add the sale of the bonds which I think is north of ’06, ’07.

Richard Wesolowski – Sidoti & Company

Okay. This quarter looks like the most work you have ever booked to presumably be as up to date on the competitive environment as you could be. You mentioned that the competition of course is small, is greater for smaller jobs but how much tougher is the competition regardless of the size of the jobs versus say a year ago?

James Allen

It would be sort of harder to look back and see, the only thing we see is sort of like month-to-month fluctuations. But on the municipal side, the margins have been improving. We have picked up a couple of nice jobs here recently in the $18 [ph] million one $8 million or $9 million. The market again looks fairly good right there but again it is kind of the same thing for everybody, it is a restart utilization so as contractors are busy, the jobs are tougher, they did less numbers and as they begin to come out of work, they tend to bid higher. So, we have been fortunate of late and I know that specifically answers your questions.

Richard Wesolowski – Sidoti & Company

Yes, this is actually what I was looking for. Then finally has (inaudible) completed many projects on California?

Joe Harper

Road and Highway Builders has never worked in California. We have bid three prime [ph] now in California all of them in to close proximity to either Reno or Carson and we expect to continue to do that where we are relatively in Geography Rich.

Richard Wesolowski – Sidoti & Company

Right, thanks again.

Pat Manning

You are welcome.

Operator

Your next question is a follow-up from the line of Richard Paget of Morgan Joseph & Co. Inc..

Richard Paget – Morgan Joseph & Co. Inc.

The last couple of quarters G&A was running about $3.5 million, is that a good run rate to think about going forward?

James Allen

It is pretty good. I expect to see some increase as we increase in volume but certainly it does not vary directly with volume. I started to look at the procedure also, so I think you will see it run 3.5% or 4% at most.

Richard Paget – Morgan Joseph & Co. Inc.

Okay, that’s it from me.

Operator

Your next question is a follow-up from the line of Craig Bell of SMH Capital.

Craig Bell – SMH Capital

Just wanted a clarification on something you said earlier in regard to some material bankruptcy, you had said that if that had not occurred you would have reached the midpoint of your guidance, you were talking about your previous guidance, and does that go for the revenue and the EPS guidance as well?

James Allen

Yes. I think I was talking about a midrange, it was hard to say exactly – yes, we were generally on target meeting our guidance –

Craig Bell – SMH Capital

Looking at obviously the $25 million when you get to the revenue side, I was curious if that was the impact on earnings as well since you had these other items that you listed out impacting the guidance.

James Allen

Certainly not the impact of earnings itself. Obviously gross profit on that $25 million is only somewhere in the neighborhood of $2.5 million to $3 million or so. So, if we don’t get that this year obviously and then you look at these other items, you have been very much on target for midpoint of our original guidance.

Joe Harper

Yes, Craig I think what would have happened is we update the revenue line and margin will pull back less than a point and we would still be there on an EPS basis.

Craig Bell – SMH Capital

Okay, great. Thank you.

Operator

There are no further questions. I will now turn the conference back to management.

James Allen

Thank you everyone, we appreciate your time. Look forward talking to you next quarter.

Operator

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

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