MVCO Meadow Valley (MM)

 

 

 

 

 

 

 

 

 

 

Operator

We have a question from the line of John Ziegelman with Carpe Diem Capital Management. Please proceed with your question.

John Ziegelman — Carpe Diem Capital Management-Analyst

Thank you. Hi, Brad. I missed the beginning of your comments but did read your press release. I have three questions. First in the proxy it’s 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 borrow that you need to as question number 1?

Question number 2 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 or 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? Thank you.

Brad Larson — Meadow Valley — CEO, President

Okay, John. Thanks for the questions. First question regarding the EBIT targets that are in the agreement, 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 able to comment on your question regarding the projection.

David Doty — Meadow Valley — CFO

Thank you, Brad. 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 — Analyst

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

David Doty — Meadow Valley — CFO

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 — Analyst

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

David Doty — Meadow Valley — CFO

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

John Ziegelman — Carpe Diem Capital Management — Analyst

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

David Doty — Meadow Valley — CFO

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 that we could have worked in a longer period that would provide any different results.

John Ziegelman — Carpe Diem Capital Management — Analyst

Okay.

Brad Larson — Meadow Valley — CEO, President

Okay. Lastly regarding the question on the two sets of projections, the reason — the primary reason that there were two sets of projections, one is you may not know, but we generally within the company perform projections for the coming year in the very end months 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 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 — Analyst

May I follow up?

Brad Larson — Meadow Valley — CEO, President

Sure.

John Ziegelman — Carpe Diem Capital Management — Analyst

I understand Ready Mix, you probably didn’t bake in what was happening to Ready Mix, you know, at the time those first projections were made, but services has 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. So it’s hard to see how a smaller sub that’s down against the bigger sub that’s up would contribute to the degree 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’ve 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.

Brad Larson — Meadow Valley — CEO, President

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 of not having won some projects and were 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 projects and use those margins as a guide for what the projects will be completed at.

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

John Ziegelman — Carpe Diem Capital Management — Analyst

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 significant — I mean the actuals and if you were to redo projections, would at least be marginally better, if not significantly better, than what the deal was priced off of?

Brad Larson — Meadow Valley — CEO, President

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 amount 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 these 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 which are all independents, so -

John Ziegelman — Carpe Diem Capital Management — Analyst

All right. I’m not going to take up any more time if I want to follow up on that, which I actually do, but I don’t know. Silence might be the better part of valor here. I’ll let other people ask questions.

Brad Larson — Meadow Valley — CEO, President

All right. Thanks, John.

Operator

(OPERATOR INSTRUCTIONS) we have a question from the line of [Ted Waggonet with DDJ]. Please proceed with your question.

Ted Waggonet — DDJ — Analyst

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

Brad Larson — Meadow Valley — CEO, President

Oh, the method is pretty clear, but I’ll let David go ahead and respond to that one.

David Doty — Meadow Valley — CFO

Thank you, Brad. They are separate between the companies. There is a special services fee charged through 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 Waggonet — DDJ — Analyst

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 — Meadow Valley — CFO

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 Waggonet — DDJ — Analyst

You’re talking about on Meadow Valley’s financial statements?

David Doty — Meadow Valley — CFO

Yes, that’s correct.

Ted Waggonet — DDJ — Analyst

Okay. 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 — Meadow Valley — CFO

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 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 —

Ted Waggonet — DDJ — Analyst

Is — go ahead. Sorry.

David Doty — Meadow Valley — CFO

We realize that— I’m sorry. 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 of time period after the special meeting provided there’s an affirmative vote that we could close relatively quickly after that.

Ted Waggonet — DDJ — Analyst

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

David Doty — Meadow Valley — CFO

That’s correct.

Ted Waggonet — DDJ — Analyst

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

David Doty — Meadow Valley — CFO

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 days to maybe a week. We’d like it and we are planning on it being that close.

Ted Waggonet — DDJ — Analyst

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

David Doty — Meadow Valley — CFO

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

Ted Waggonet — DDJ — Analyst

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 — Meadow Valley — CFO

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

Ted Waggonet — DDJ — Analyst

So if they’re not — they are unable to secure debt financing they still must fund somehow given that there’s no financing out?

David Doty — Meadow Valley — CFO

That’s my understanding.

Ted Waggonet — DDJ — Analyst

Okay. 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 that would be excellent. That’s all.

Operator

And we have a follow-up question from the line of John Ziegelman with Carpe Diem Capital Management. Please proceed with your question.

John Ziegelman — Carpe Diem Capital Management — Analyst

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 trying to do sources and uses for the transaction, proxy states that approximately $71 million required. If you look at your balance sheet, you got $42.9 million. We also are — 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 of one to three million. The proxy does say that Insight will be putting $42 million cap of equity in and then to answer the last question, there was a question the proxy states $29 million will be provided by debt — 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 1, will Insight — will they have the ability — I know you don’t know what they will do, but are they stopped or able to upstream some of the $42 million in cash in the form of a dividend, therefore, either reducing the requirement for $29 million of debt or just dividending 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 debt 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 overcapitalized in effect when you’re looking at the balance sheet and standing here as a shareholder, you’re looking at a very low multiple on projections that you have admitted if were done today are light and that this transaction looks like it could be pretty fully funded by the cash on the balance sheet?

Brad Larson — Meadow Valley — CEO, President

Okay. Let me take the first question. Will Insight be stopped from dividends? Of course, once they own the company, what they do with the cash will be their call.

John Ziegelman — Carpe Diem Capital Management-Analyst

I know that and again, I wasn’t asking you to guess what they would do. You guys had done your diligence on them. You have seen and we have not the full commitment letters and everything there. In that — 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.

Brad Larson — Meadow Valley — CEO, President

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 are in order to bid the jobs that we want to bid and 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 I would — that’s how I would respond to question number 1. With regards to question number 2, in terms of we couldn’t use debt, of course, in this transaction not only are they putting up debt, but 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 — Analyst

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

Brad Larson — Meadow Valley — CEO, President

Well, again I can’t even comment on the loan documents. I haven’t seen them. Even if I had seen them, you know, we’re — what we 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 backward and that would make no sense for us as management or the private equity company going forward to do anything that would be detrimental to bonding capacity.

John Ziegelman — Carpe Diem Capital Management — Analyst

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

Brad Larson — Meadow Valley — CEO, President

Okay. I’m sorry I didn’t answer it.

Operator

And we have a follow-up question from the line of Ted Waggonet with DDJ. Please proceed with your question.

Ted Waggonet — DDJ — Analyst

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

David Doty — Meadow Valley — CFO

That was not part of the agreement.

Ted Waggonet — DDJ — Analyst

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

David Doty — Meadow Valley — CFO

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 Waggonet — DDJ — Analyst

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

David Doty — Meadow Valley — CFO

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

Ted Waggonet — DDJ — Analyst

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

David Doty — Meadow Valley — CFO

I don’t believe that can happen.

Ted Waggonet — DDJ — Analyst

So then —

David Doty — Meadow Valley — CFO

I don’t believe the agreement allows a dividend.

Ted Waggonet — DDJ — Analyst

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 shareholder seek to maximize value by removing excess working capital from the entity preclosing of these transaction documents?

Brad Larson — Meadow Valley — CEO, President

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 than 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 Waggonet — DDJ — Analyst

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

Brad Larson — Meadow Valley — CEO, President

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

Ted Waggonet — DDJ — Analyst

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

Brad Larson — Meadow Valley — CEO, President

Yes.

Ted Waggonet — DDJ — Analyst

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

Brad Larson — Meadow Valley — CEO, President

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 Waggonet — DDJ — Analyst

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 work capital can be brought down to the bonding capacity limits set forth in the agreement so that shareholders who are selling this can benefit from that?

Brad Larson — Meadow Valley — CEO, President

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 Waggonet — DDJ — Analyst

And just out of curiosity —

Brad Larson — Meadow Valley — CEO, President

There’s fees involved if that happens.

Ted Waggonet — DDJ — Analyst

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

Brad Larson — Meadow Valley — CEO, President

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

Ted Waggonet — DDJ — Analyst

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

Brad Larson — Meadow Valley — CEO, President

No. It’s probably close to where it was at December 31st of last year, which we said was —

Ted Waggonet — DDJ — Analyst

About $25 million.

Brad Larson — Meadow Valley — CEO, President

$23 million, yeah.

Ted Waggonet — DDJ — Analyst

Okay. So there’s—you guys have about $5 million more of working capital today than you did at December year-end?

Brad Larson — Meadow Valley — CEO, President

Right.

Ted Waggonet — DDJ — Analyst

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

Brad Larson — Meadow Valley — CEO, President

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

Ted Waggonet — DDJ — Analyst

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

Brad Larson — Meadow Valley — CEO, President

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

Ted Waggonet — DDJ — Analyst

Fair enough. Thank you.

Brad Larson — Meadow Valley — CEO, President

Okay.

Operator

And we have a follow-up question from the line of John Ziegelman with Carpe Diem Investment Management. Please proceed with your question.

John Ziegelman — Carpe Diem Capital Management — Analyst

Hi, sorry. I guess this is more of a statement than a question, but it looks to me there’s good news/bad news here on the working capital issue. Again if you’d 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 go away theoretically these guys could close the deal anyway and albeit with a little less working capital but to the last caller’s point, it’s odds 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 of cash in the company. So from my perspective these guys are most definitely going to want to close this deal. And again that was a statement, so there’s no need for a reply.

Brad Larson — Meadow Valley — CEO, President

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, gentlemen, this $17 million in excess and billings in excess of cost which is what they say they are, they’re costs. I mean they’re coming.

Operator

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

Brad Larson — Meadow Valley — CEO, President

Thank you, operator, and 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 final disclosure 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.