Meadow Valley Corp. Q3 2008 Earnings Call Transcript

Meadow Valley Corp. (MVCO)

Q3 2008 Earnings Call

November 12, 2008 11:00 am ET

Executives

Bradley Larson – President and Chief Executive Officer

David D. Doty – Chief Financial Officer

Analysts

Robert Wiegand – New Salem Investment and Capital

John Ziegelman – Carpe Diem Capital Management

Ted Wagenknecht – DDJ Capital

Presentation

Operator

Welcome to the Meadow Valley Corporation 2008 third quarter conference call. (Operator Instructions). I would now like to turn the conference over to Bradley Larson, Chief Executive Officer.

Bradley Larson

Thank you, operator, and thank you all for joining Chief Financial Officer, David Doty, and me for Meadow Valley's 2008 third quarter results conference call. Please note that this conference call will include forward-looking statements. These statements are based on current expectations, estimates and projections about our business based in part on assumptions made by management.

These statements are not guarantees of future performance and actual results may differ materially. A more detailed discussion of these risks and uncertainties is contained in this morning's press release as well as Meadow Valley's various filings with the SEC, including our annual report filed on Form 10-K for the year-ended December 31, 2007 as amended. The statements made during this call are made only as of the date of the call, November 12, 2008 and we undertake no obligation to update these statements.

For the three months ended September 30, 2008, total revenue increased 10.8% to $60.8 million compared to $54.9 million for the third quarter of 2007. Construction services revenue increased 24.2% to $44.5 million compared to $35.9 million for the same period last year, driven by the scheduled progress on the higher value of construction projects in backlog at the beginning of this year's third quarter than last year.

Construction materials revenue decreased 14% to $16.1 million compared to $18.7 million for last year's third quarter, the result of continued weakness in residential construction in Meadow Valley's Phoenix, Arizona and Las Vegas, Nevada metropolitan areas. Construction materials testing revenue decreased 33.5% to $0.2 million for this year's third quarter compared to $0.3 million for the same period last year.

Gross margin for the third quarter of 2008, increased to 12.7% compared to 8% for the third quarter of 2007. Construction services gross margin was $7.8 million or 17.4% of construction services revenue compared to $3.3 million or 9.1% of construction services revenue for the same period last year. Construction services gross margin for this year's third quarter was positively affected by the settlement announced on September 9, 2008 of all claims on the completed Gooseberry project.

As a result of the settlement, gross margin for this year's third quarter included net claims proceeds received in excess of the amounts previously recorded as claims receivable of approximately $2.3 million. If you back that out, construction services gross margin was still a very respectable 12.3%, which reflects the quality of our estimating on those projects and the diligence of our project management personnel. Gross margin in our construction materials business decreased to 0.1% compared to 6% for the same period last year, primarily due to the decrease in revenue.

Net income after minority interest for the third quarter of 2008 increased 107.4% to $2.3 million or $0.43 per diluted share. This compares to net income after minority interest for the third quarter of 2007 of $1.1 million or $0.21 per diluted share. At September 30, 2008, Meadow Valley owned 2,645,212 shares or approximately 69% of the outstanding common stock of Ready Mix, Inc. Accordingly, Ready Mix Inc.'s operating results are consolidated in Meadow Valley's financial statements for financial reporting purposes.

Now for the nine months ended September 30, 2008, total revenue increased 14.1% to $178.2 million compared to $156.2 million for the first nine months of 2007. Construction services revenue increased 35.5% to $128.7 million compared to $94.9 million for the same period last year. Construction materials revenue decreased 19.6% to $48.7 million compared to $60.5 million for the same period last year. And construction materials testing revenue increased 15.3% to $0.9 million compared to $0.7 million for the same period last year.

Net income after minority interest for the nine months ended September 30, 2008, increased 87.2% to $4.7 million or $0.88 per diluted share. This compares to net income after minority interest of $2.5 million or $0.47 per diluted share for the nine months ended September 30, 2007.

At September 30, 2008, Meadow Valley reported working capital of $28.5 million including cash, cash equivalents and restricted cash of $42.9 million. At December 31, 2007, working capital was $23 million including cash, cash equivalents, and restricted cash of $28.5 million. Shareholders' equity increased to $39.7 million at September 30, 2008 compared to $34.5 million at December 31, 2007.

The public works sector of the construction industry has continued to hold up pretty well during – despite the turmoil in the overall economy. We continue to see ample bidding opportunities and as evidenced by our backlog, we continue to win a fair amount of new business, although in the current year we are running below our annual norm in terms of win-rate.

Construction services backlog at September 30, 2008, increased 63.4% to $145.1 million compared to backlog of $88.8 million at September 30, 2007. We are fortunate that our current bonding limits of approximately $250 million in total, with a single project limit of approximately $100 million, allow us to bid on larger projects since larger projects typically attract fewer bidders due to the high bonding requirements. Still, it is apparent that competition is becoming increasingly fierce gauging from the number of bidders as well as evidence that the profit margins are tightening.

Our construction materials business continues to suffer from the weakness in housing in our geographic areas. The outlook for this business remains cloudy. In particular, as the President of Ready Mix Inc., Bob DeRuiter, mentioned on our Ready Mix, Inc. call last hour, the inventory of unsold homes remains high and conditions in the mortgage market remain unsettled. Additionally, we must remain alert to the possibility that scarce credit may affect demand for our Ready Mix products in the non-residential construction sector, which has held up extraordinarily well so far in this cycle.

Accordingly, as we look into the fourth quarter, we will continue to manage our costs closely while we try to take advantage of any opportunities that our operations might afford us to better position Ready Mix Inc. for the future.

As we announced on July 28, 2008, Meadow Valley has entered into a definitive merger agreement to be acquired by an affiliate of Insight Equity One, LP of Dallas, Texas. Under the agreement, all of the outstanding shares of Meadow Valley Corporation will be acquired for $11.25 per share in cash. In accordance with the merger agreement, the special committee of Meadow Valley's Board of Directors, with the assistance of its advisors, conducted a market test for 45 days by soliciting superior proposals from other parties.

The solicitation of proposals resulted in no superior proposals or alternative transactions. The transaction is subject to several closing conditions, including the approval of Meadow Valley stockholders. The company filed its preliminary proxy statement on Schedule 14A and other materials with the SEC on September 19, 2008, pursuant to the merger agreement. Following completion of the SEC's review of these filings, the company intends to file a definitive proxy statement and schedule a special meeting of shareholders to consider and vote on the merger agreement.

With that, operator, we're ready for the first question.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Robert Wiegand – New Salem Investment Management.

Robert Wiegand – New Salem Investment Management

Another great quarter with the services unit, some questions about the merger transaction, did you receive any bids at all from any other parties?

Bradley Larson

I'll let David go ahead and answer that question. He was the like the company spearhead with the special committee. So I’ll defer that question to David.

David Doty

We did receive interest through the solicitation period and we had a few bidders go into supplemental due diligence. And at the end of the period we did not have any final proposals that the special committee deemed to outweigh the current merger agreement.

Robert Wiegand – New Salem Investment Management

And are there any special hoops that need to be jumped through for the SEC to actually approve of the proxy and do you have any timeline for that?

David Doty

We are currently working through clearing comments with the Commission right now. I don’t – I’m not sure what you mean by special hoops. We are going through those items. I don’t think that there’s anything unusual or something that we would overly be concerned about. We are looking through those with the staff right now.

Robert Wiegand – New Salem Investment Management

And do you still see an end of the year or sometime in December closing for the transaction, assuming approval?

David Doty

That’s what we’re working towards. We’re hoping to clear these comments as soon as possible to get our special meeting scheduled.

Operator

Your next question comes from John Ziegelman – Carpe Diem Capital Management.

John Ziegelman – Carpe Diem Capital Management

I missed the beginning of your comments but did read your press release. I have three questions. First, in the proxy the it stated that there’s an EBIT test for both Ready Mix and Meadow, could you tell us, I probably could calculate this myself if I had the time. Could you tell us if the trailing 12 months for each of those entities exceeds the bar that you need to? That’s question number one.

Question number two is really about process. In this market 45 days for the Go Shop seems a little tight. Can you give some color or insight why such a short period of time was offered?

And my third question is like the last questioner stated, you had a great quarter for services. I noted in the first proxy, I haven’t been through the second one yet, the amended one. I noted that there were two sets of management projections. And I meant to get the dates down, but the first one was substantially better than the second one.

My question to you is why two sets of management projections and the second part of that question is can you reconcile the difference between your trailing 12 month performance and what you projected in the future as that has significant relevance to the value of the company?

Bradley Larson

First question regarding the EBIT targets that are in the agreements; I’ll let David respond to those questions. I’ll also let David respond to the question regarding the 45 day period. Again I’m allowing David to answer these questions because he was the party dealing directly with the special committee, as I pretty much removed myself from that process.

And lastly then I’ll be able to comment then on your question regarding the projections.

David Doty

Both EBIT covenants as of September 30th, both companies are above the bar, as you said John. So we anticipate making those covenants.

John Ziegelman – Carpe Diem Capital Management

Can you give us a sense of how much above the bar you are?

David Doty

You know John I don’t have the Meadow Valley calculation handy. But I do have the Ready Mix trailing 12 month earnings before interest and taxes amount. As of September 30th is a loss of approximately $2.4 million.

John Ziegelman – Carpe Diem Capital Management

Wait Ready Mix is a loss of $2 point what?

David Doty

$2.4 million. The covenant is a loss of $4 million.

John Ziegelman – Carpe Diem Capital Management

Oh I’m sorry, I must have misread it, I thought it was a positive $4 million, my bad.

David Doty

And the 45 day question, John, it was negotiated as a part of the agreement. I can assure you the company negotiated for longer but we settled on 45 days. We felt it was appropriate and with the work that was done during the period I don’t know that there was anyone else that we could have contacted or we could have worked in a longer period that would provide any different results.

Bradley Larson

Lastly regarding the question on the two sets of projections, the reason that, the primary reason that there were two sets of projections, one, as you may not know, but we generally within the company perform projections for the coming year in the very end month of the year. So around right now November, December of 2007 we were preparing projections for 2008. Similar to what we’re doing now for 2009.

As we’ve progressed into the fiscal year and anyone who has been watching us closely can attest to this, that there were two primary things that accounted for revisions to the projections. One was that Ready Mix Inc.’s year was definitely not going to be anything like what it was expected to be.

And secondly, the amount of new contracts that we were winning at that point in time were certainly less than we had predicted, so we obviously update our margins or excuse me our projections based upon the pace at which we win new work and begin to fill the backlog. So those are the two primary reasons for having done the revisions to the projections.

John Ziegelman – Carpe Diem Capital Management

I understand Ready Mix – you probably didn’t, you probably didn’t bake in what was happening to Ready Mix at the time those first projections were made, but services is more than offset on the top line, the decline. And thinking back to past calls and past discussions we’ve had, services, at least in the last quarter and I believe the quarter before, were ahead of the percentage increase that we thought and I think generally the market thought.

And so it’s hard to see how a smaller sub that’s down against a bigger sub that’s up, would contribute to the degree of the change between the first projection and the second projection. And then you need to reconcile winning less contracts to what you’ve actually done now, don’t you because backlog is up. I don’t know about number of contracts, but backlog is up which I think is more relevant than the number of different projects. Your gross margins are significantly above what you projected.

And again I understand it was a negotiated process, but the value that this company is worth seems to be more than what Insight is paying. And I know we’ve said that we support the transaction and we have our reasons for that. But I’m just trying to understand how these projections came to be in a little more detail, and why they’re so significantly different and what you just said to me doesn’t really give me, maybe I’m just not getting it, but I’m not understanding why these two things that you just said would have the impact, the significant impact that they did?

Bradley Larson

Well it is very easy to sit here in November and say one thing about projections that were made back in April. But when we were in April and we had gone quite a few months not having won some projects and we’re constantly pushing revenue of even the construction services business further to the right. And by that I mean further, later into the year because we hadn’t won a number of projects that we anticipated winning early in the year, it makes one feel less comfortable with their projections. And that’s how we felt back in April.

Furthermore you’ll recall that in our business there are significant risks on every single contract. And for us to predict in April how some of these projects were going to perform relative to their original estimates, the only basis that we can use that makes sense to us anyway, in performing projections is to use the estimated margins on the project. And use those margins as a guide for what the projects will be completed at.

Fortunately for us and again, in the call I give credit to our project management personnel, a number or our projects have greatly exceeded the original estimates in profit due to some of the things that our project personnel have done on the job. These are things that could not have been foreseen in April. So we've very lucky, we're very happy that we're able to state the results that we can today, but I can assure you those types of things could not have been foreseen in April.

John Ziegelman – Carpe Diem Capital Management

I understand. Every market out there is in turmoil, so making a projection in the midst of that, I understand how difficult that is, but I guess my follow-up is the following, now that you have a better view do you owe the shareholders of Meadow Valley, a crack at trying to improve the price, because the projections are – I mean the actuals – and if you were to redo projections, would it least be marginally better if not significantly better than what the deal was priced off of?

Bradley Larson

I don't feel I can even comment on that, because there was an extensive negotiating process that the special committee went through with Insight. If you read the history of the transaction, I think you can get a good flavor of the extensive effort that was put forth, not to say the least about the amount of time that was put forth.

I think all of you, including us, whether I'm wearing my company hat or whether I'm wearing my buyer hat, we were all kind of impatient with the length of time that this whole thing was taking, and I think that length of time should be a good indication of just how involved that the negotiations were. Because of that involvement, it's beyond me to say whether or not the valuation at that stage of the game was right or wrong. I believe it to be correct and it's backed up by both the financial advisor for the company, as well as the fairness opinion provided by Morgan Joseph, that's your all independent, so.

John Ziegelman – Carpe Diem Capital Management

I'm not going to take up any time. If I want to follow-up on that, which I actually do, but I don't know, but silence might be the better part of valor here. I'll let other people ask questions.

Operator

(Operator Instructions). Your next question comes from Ted Wagenknecht – DDJ Capital.

Ted Wagenknecht – DDJ Capital

How are you guys splitting admin expenses right now between the two entities? What's the method that you're using?

Bradley Larson

The method is pretty clear, but I'll let David go and respond to that one.

David Doty

They are separate between the companies. There is a special services fee charged to Ready Mix that is eliminated in the consolidation, so that's not even a factor, but all general and administrative expenses are charged appropriately to each company individually.

Ted Wagenknecht – DDJ Capital

I guess if you could just be a little bit more clear, for instance, clearly Brad occupies time in both entities. I'm not sure how that's contemplated to continue post this transaction should it go through. What is the net effect on the Ready Mix entity of the change after post-merger in admin expenses?

David Doty

The charge to Ready Mix for those types of charges, is $22,000 per month, but again, in the consolidation those inner company charges are eliminated.

Ted Wagenknecht – DDJ Capital

You're talking about on Meadow Valley's financial statement?

David Doty

Yes, that's correct.

Ted Wagenknecht – DDJ Capital

Now in terms of this merger agreement that John referenced earlier, on top of – I guess first, if you could just discuss any other covenants, conditions if you will, to close and how you sit with respect to those? That would be helpful.

David Doty

Well there's a number of covenants and conditions to close. I wasn't prepared to go through the list of them. We believe at this time that we will make the conditions to close and the covenants as required by the agreement, and we believe that we will make those conditions shortly after a meeting is held and we will be able to close the transaction by the end of the year.

We realize that the timing is such that the meeting might not be scheduled until December, so that timing is close to the end of the year, but we are working diligently now to make the conditions to close such that we can close as short a time period after the special meeting, provided there's an affirmative vote, that we could close relatively quickly after that.

Ted Wagenknecht – DDJ Capital

And in the terms of the timeline today is December 31st, is it? In the merger, of the expiration of the offer, if you will, is December 31st?

David Doty

That's correct.

Ted Wagenknecht – DDJ Capital

And you guys currently contemplate getting SEC approval and having the special meeting, obviously, before that time. What is the timeframe from an affirmative vote to close of the transaction in your best estimate?

David Doty

Well we would hope that we'd be in a position – we're working to be in a position that it would be from a couple of days to maybe a week. A week would seem likelier and we were planning on it being that close, or that soon I should say.

Ted Wagenknecht – DDJ Capital

And is Insight contemplating using that financing for a component of this acquisition?

David Doty

I don't think that I can comment on what they've been contemplating. They have commented in the proxy statement, and that's all that I can rely on. I'm not sure.

Ted Wagenknecht – DDJ Capital

I guess from, as a shareholder relying upon Insight's ability to close this transaction, the merger agreement stated speciously, I guess, that financing commitments had been received, but that was in a very different time in a very different market for credit financing than we are experiencing today. My question is what are you guys doing to ensure that any funds necessary to close the transaction are in fact there?

David Doty

Well I don't think that we can do anything to assure that. As I understand it, there isn't a financing contingency in the agreement and our expectations are that they will close the transaction accordingly.

Ted Wagenknecht – DDJ Capital

So if they are unable to secure their financing, they still must fund somehow given that there's no financing out?

David Doty

That's my understanding.

Ted Wagenknecht – DDJ Capital

I would also encourage I guess, just to support what John had said on the phone, sounded like a good idea. I'd love to get greater clarity on these in a filing instead of on one-off shareholder calls, so to the extent that you could provide that, that would be excellent. That's all.

Operator

Your next call is a follow-up question from John Ziegelman – Carpe Diem Capital Management.

John Ziegelman – Carpe Diem Capital Management

Brad, I have a new line of questions, so I'm not going to pursue the old one, but it does follow-up on what the last caller also asked. Back to the envelope, if I try and do a sources and uses for the transaction, proxy states that approximately $71 million required. If you look at your balance sheet, you've got $42.9 million, and I'm not sure if that includes the litigation settlement that you just received, but it's not material. You also have some potential for additional litigation proceeds. We're guessing at $1 million to $3 million.

The proxy does say that Insight will be putting $42 million Cap, of equity in, and then to answer his question, the proxy states $29 million will be provided by one of two debt people. If you add all that up you have significantly more than $71 million, so I have a couple of questions.

Number one, will they have the ability – I know you don't know what they will do, but are they as stocked are able to upstream some of the $42 million in cash in the form of a dividend; therefore, either reducing the requirement to $29 million of debt or just diveting themselves so their IRR looks good.

Secondly, you had said, and I hate to draw back to this time, but when we were pretty upset over the private placement that you had done, you and I had a conversation about all the different alternatives to get liquidity, and the statement that I believe you made to me was you really couldn’t use that because it would negatively affect your bonding capacity.

So we have a circular problem here. Will the debt financing of $29 million impact kind of prospectively your bonding capacity? And why is this deal so over capitalized? In effect when you’re looking at the balance sheet and standing here is a shareholder, you’re looking at a very low multiple on projections that you had admitted if were done today, are light and that transaction looks like it could be pretty fully funded by the cash on the balance sheet.

Bradley Larson

Let me take the first question, will Insight be a stock from dividends? Of course once they own the company, what they do with the cash will be their call, but they know –

John Ziegelman – Carpe Diem Capital Management

I know that, and again I wasn’t asking you to guess what they would do. What I was asking you, you guys have done your diligence on them you have seen and we have not, a full commitment letters and everything there. In those documents would be spelled out those abilities. Lenders typically don’t like to have sponsors take capital out. So I would assume there isn’t, but I would like a confirmation of that.

Bradley Larson

Well, what you assume is correct. Insight knows this business through their due diligence. They know it as well as we do I believe, and they know that in order to maintain bonding capacity, which has been the primary key for the private placement and for retaining cash and everything else, is to keep our working capital at such a level that it provides us the bonding capacity that we have in order to bid the jobs that we want to bid.

You may have noticed that we announced today a significant increase in the single project limit. So that is all critical to this business moving forward, and so I would find it highly unlikely that Insight would do anything different than what management has been doing in terms of trying to maintain the engine of this company fine tuned, and that engine is bonding capacity.

And so working capital is key to that. So that’s how I would respond to question number one. With regards to question number two, in terms of we couldn’t use debt. Of course in this transaction not only are they putting up debt, they’re also putting up a significant amount of equity.

And that is another component that is making the bonding company feel comfortable enough that this transaction will still meet the parameters that need to be met in order for us to continue to pursue the type of work that we want to do moving forward.

John Ziegelman – Carpe Diem Capital Management

So I’m a little unclear. Are you saying that their loan documents do prohibit them from up streaming capital?

Bradley Larson

Well again, I can’t even comment on the loan documents. I haven’t seen them. Even if I had seen them, what we’ve disclosed is what is essential to be disclosed. But the only assurance that I can give to you and the assurance that I’ve been given is that this business runs on bonding capacity, and nothing that can be done in terms of its financial structure, its capital structure, its level of debt can be done.

Anything that is done to harm bonding capacity is a step backwards, and that would make no sense for us as management, or a private equity company going forward to do anything that would be detrimental to bonding capacity.

John Ziegelman – Carpe Diem Capital Management

I’m not sure you answered my question, but I’ll yield.

Bradley Larson

I’m sorry I didn’t answer it.

Operator

We have a follow up question from Ted Wagenknecht – DDJ Capital.

Ted Wagenknecht – DDJ Capital

Did the special committee negotiate a maximum working capital amount such that, what looks like to be above normal cash balances today will not all accrue to the buying entity?

Bradley Larson

That was not part of the agreement.

Ted Wagenknecht – DDJ Capital

Why, given what looked like, I’m sure you guys had better insight as to the settlements that have been recently announced. Why was that not the case?

Bradley Larson

The ongoing cash balance of the company have always been used in its working capital computation as it relates to bonding, and that has never been contemplated. That’s always been our primary intention and use for cash and working capital.

Ted Wagenknecht – DDJ Capital

I guess put another way, is there a minimum required working capital number in the transaction documents?

Bradley Larson

I don’t believe that there is a minimum working capital in the covenant. I would need to review the agreement to validate that, but I don’t believe there is.

Ted Wagenknecht – DDJ Capital

So essentially then, the company could dividend out all of its cash to shareholders before this deal closes?

Bradley Larson

I don’t believe that can happen.

Ted Wagenknecht – DDJ Capital

So then there must be some kind of –

Bradley Larson

I don’t believe the agreement allows a dividend.

Ted Wagenknecht – DDJ Capital

I guess I’m unclear. I mean, if there’s no minimum working capital required by the transaction documents, why wouldn’t the company and shareholders seek to maximize value by removing excess working capital from the entity pre closing of these transaction documents?

Bradley Larson

Well first of all, I don’t think there’s anything that you would consider to be called excess working capital. Working capital as I commented earlier, at December 31st was about $25 million. Today we’re sitting with working capital I think at around $28 million. So while working capital has increased and it appears I think, when you look at the balance sheet, and you see that massive cash amount of $43 million, you’re thinking wow there’s all this excess stuff sitting up there.

But in terms of working capital, we’ve not increased working capital materially more then we were sitting at at December 31st. And remember, that working capital is what is contributing to the increased bonding capacity which we hope will result in capturing more work – without it we can’t even bid on the work.

Ted Wagenknecht – DDJ Capital

What was the minimum bonding capacity required by the transaction documents?

Bradley Larson

$250 million aggregate program and I think it was $75 million as a single project limit.

Ted Wagenknecht – DDJ Capital

And I’m sorry $75 million as a single project limit?

Bradley Larson

Yes.

Ted Wagenknecht – DDJ Capital

And today you announced that your capacity had gone to what and what respectively, aggregate and single?

Bradley Larson

Excuse me, let me backtrack. The agreement says, $200 million aggregate program, $75 million single project. Today we’re sitting at $250 million total and $100 million single project.

Ted Wagenknecht – DDJ Capital

And so with these increases above that which is required by the agreement, don’t you think that there’s an argument to be made that working capital can be brought down to the bonding capacity limits set forth in the agreement so that shareholders who are selling these can benefit from that?

Bradley Larson

No, because I think that those bonding limits that were set in the agreement were set low enough so that the covenant would not run the risk of being violated. We would not have wanted to establish such high bonding limits as a covenant and run the risk of scuttling the transaction.

Ted Wagenknecht – DDJ Capital

And just out of curiosity what was the –

Bradley Larson

There would be some fees involved if that happened.

Ted Wagenknecht – DDJ Capital

And what was the working capital amount last year in the September quarter? I apologize. I don’t have my balance sheets in front of me.

Bradley Larson

And I don’t have that in front of me either.

Ted Wagenknecht – DDJ Capital

But you contend that it is probably around the same levels that it is today?

Bradley Larson

No it’s probably close to where it was at December 31t of last year, which we said, was –

Ted Wagenknecht – DDJ Capital

About $25 million

Bradley Larson

$23 million, yes.

Ted Wagenknecht – DDJ Capital

So you guys have about $5 million more of working capital today then you did at December year-end?

Bradley Larson

Right.

Ted Wagenknecht – DDJ Capital

And just as one last question, you mentioned the cash balances of $40 and change million. What was the offset in the liability section to make your working capital net out to the $28?

Bradley Larson

Well the biggest offsets were the billings and excess of cost, which represented about $6 million, and then accounts payable went up by about $3 million.

Ted Wagenknecht – DDJ Capital

And can you refresh me how billings in excess of cost work through your statements?

Bradley Larson

Usually those billings in excess of costs are created when, depending on how the project is scheduled to be billed and typically often we’re fortunate on some jobs to where we are able to generate cash revenue on a job faster then we are expending cash cost and so oftentimes these excess billings that show up in current liabilities are just cost that we’ve not yet incurred.

We’ve collected the money, or we’ve not yet incurred – we’ve billed it but we’ve not yet incurred the cost, that’s why it’s a liability because it’s anticipated that we will be spending that money as the projects get further into their completion cycle.

Ted Wagenknecht – DDJ Capital

Fair enough, thank you.

Operator

We have a follow up question from John Ziegelman – Carpe Diem Capital Management.

John Ziegelman – Carpe Diem Capital Management

I guess this is more of a statement then a question, but it looks to me there’s good news bad news here on the working capital issue. Again if you take what was in the proxy and on your balance sheet that was just disclosed, you’ve got about $44, $42 to $45 million of excess sources of capital over the $71 million required, which means either the $29 million of debt financing, if it was to away, theoretically these guys could close the deal anyway, albeit with a little bit less working capital.

But to the last caller's point, it’s odd to me that the excess is almost exactly the $42 million that Insight is putting into the deal. And not only are they getting a, what looks like to us somewhere around three or less EBITDA multiple on the construction business, they are putting up $42 million, which is offset by $42 million cash in the company. So from my perspective these guys are most definitely going want to close this deal. And again that was a statement so there’s no need for a reply.

Bradley Larson

There will not be one. The only thing I would say is, I’ll make a statement on this end. I think it is dangerous for anyone to disregard the current liabilities. Fortunately, where we find ourselves in the cycle of work, it has boosted cash balances, but gentleman, this $17 million in excess in billings and excess of cost are just what they say they are, they’re cost and they’re coming.

Operator

And there are no further questions at this time; I’ll turn the call back over to you.

Bradley Larson

Thank everyone for joining us. We appreciate your questions, your interest and we look forward to hopefully here in the very near term, providing you with the final disclosed documents in the form of the definitive proxy and we will hopefully see or hear from you sometime between now and when we hold the special shareholders meeting. Thank you very much.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.

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