Sterling Infrastructure, Inc. (STRL) Q2 2015 Earnings Report, Transcript and Summary

Greetings. And welcome to the Sterling Construction Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I’d now like to turn the conference over to your host, Jennifer Maxwell, Director of Investor Relations. Thank you. You may now begin.

Thank you, Sheri. Good morning. On behalf of Sterling Construction, I welcome you to our second quarter ended June 30, 2015 investors call. I'm joined today with our CEO, Paul Varello; and our CFO, Kevan Blair. Today's conference call includes statements to fall within the definition of forward-looking statements under the Private Securities Litigation Reform Act. Such statements are subject to risks and uncertainties, including overall economic market conditions; competitor and customer actions or weather conditions; and other risks identified in the company's filings with the SEC, which could cause actual results to differ materially from those anticipated. Such statements should be considered in light of these risks. Any predictions by the company is not only a statement of the management's beliefs at the time the prediction is made, management's beliefs may change over time and the company does not undertake to publicly update those predictions. Now, I’ll turn the call over to Paul Varello, our Chief Executive Officer.

Thank you, Jennifer, and good morning, everybody. Before we begin our earnings report, I would like to take just a minute to explain why we push back our Q2 earnings release by eight hours and this call by one day. As many of you know, recently we made several changes in our financial team at both the subsidiary level and here at corporate. In California we added a new CFO and Regional Controller, in Texas, we added both the new CFO and a new Division Controller, and here at corporate, Kevan Blair, took over as CFO. The net results of those personal changes concurrent with the need to close the Q2 books meant that our financial team had to go through a very steep learning curve to the get the results completed on time. Our team and our auditors worked very hard to accomplish the many task required, but by last Friday, we felt that we needed one more day to get the numbers right. I want to offer my sincere apologies to everyone on this call and to all of our stakeholders for this delay and I want to show that we will not find ourselves in these circumstances again. Now, I would like to ask our CFO, Kevan Blair, to tell you about his background and then give you a summary of our financial results. Kevan, the floor is yours.

Thank you, Paul. I would like to start by giving you a short introduce of who I am and my involvement with Sterling Construction. I worked in the construction industry and various financial positions for 36 years, and in 2004, I became the CFO of Ralph L. Wadsworth Construction Company, now one of Sterling’s flagship companies. I continued to serve as CFO of Wadsworth until mid-2013, when Sterling asked me to serve as the Interim CFO for about six months until they fill the CFO vacancy. Subsequent to that, because of my years of heavy civil construction experience, Sterling asked me to continue serving at the corporate level as the Senior Vice President of Corporate Finance. Currently Sterling has asked me to serve as Interim CFO once again, while a search is underway for the permanent CFO, and thereafter, I will help facilitate the seamless transition to the new CFO. With that introduction, I would like to discuss our 2015 second quarter financial performance. Revenues for the 2015 second quarter were $177.4 million, as compared to $194.8 million for the second quarter of 2014. Gross profit in the 2015 second quarter was $9.1 million, as compared to $12.5 million for the second quarter of 2014. General and administrative expenses for the 2015 second quarter were $9.6 million, as compared to $9.5 million for the second quarter of 2014. However, management believes that the comparison of the second quarter of 2015’s results to the second quarter of 2014 are less meaningful than the comparison of the second quarter of 2015’s results to the first quarter of 2015, which better demonstrates our current operating trends, even when considering the typical seasonal fluctuations in construction activity that occur between the first two quarters of the year. Accordingly, using 2015 first and second quarter comparisons, and eliminating an out-of-period adjustment that occurred in the first quarter, revenues for the second quarter of 2015 were $177.4 million, as compared to $117.7 million in the first quarter of 2015, which represented a 51% increase. While first quarter revenues are typically lower than the second quarter due to seasonal factors, management views the substantial increase in revenues as a favorable trend, given the record rainfall that impacted the company’s Texas’ operations in the second. Gross profit of $9.1 million in the second quarter of 2015 was up from a reported gross loss of $6.8 million in the first quarter of 2015. Excluding a first quarter out-of-period adjustment made for certain projects that have been removed for this comparison, gross profit increased $13.2 million on a sequential quarterly basis. General and administrative expenses were 5.4% of revenues in the second quarter of 2015, compared to 7.5% in the first quarter, excluding non-recurring employee severance costs, most of which occurred in the first quarter. The operating loss for 2015 second quarter was $0.2 million, as compared to an operating loss of $16.7 million in the first quarter of 2015. The net loss attributable to Sterling common shareholders for the 2015 second quarter was $2.5 million, compared to a net loss of $17 million in the first quarter of 2015. The net loss per diluted share attributable to Sterling common shareholders for the 2015 second quarter was $0.13, compared to a net loss of $0.19 in the first quarter of 2015. Per share calculations in the 2015 second quarter included 19.3 million shares. Capital expenditures for the second quarter remained low at $2.1 million, increasing from $1.2 million in the first quarter of 2015. The run rate for capital expenditures through the first half of 2015 was well below 2014, when capital expenditures were $13.5 million for the full year, reflecting management’s tight control of capital spending and other cash items. Total contract backlog were $743 million at June 30, 2015, down slightly since March 31, 2015, and up 2.2% from the backlog at June 30, 2014. Total backlog at June 30, 2015, excluded $57 million of projects, where the company was the apparent low bidder that had not yet been awarded the contract. We estimate that the current average gross margin of backlog for projects awarded in 2015 is approximately 8%. Our 2015 second quarter working capital totaled $31.1 million, including $14.3 million of cash and cash equivalents, and we also had $1.3 million availability under the company’s asset-based credit facility. Sterling ended their 2015 second quarter with borrowings of $34.6 million under its credit facility and tangible net worth of $66.6 million. I will now turn the call back over to our CEO, Paul Varello.

Thanks, Kevan. I am happy to report that we were very much on track with our recovery plan. While we had a net loss of $2.5 million this quarter, we made substantial progress toward improving overall performance. In addition, the second half of this year is on track with positive net earnings. During this past quarter, we accomplished several key objectives that have laid the foundation for our improved performance and return to sustainable profitability and growth. Our first key objective was to complete our new debt financing. That transaction was completed on May 29th. The next step in our capital plan is to reduce debt and the resultant interest expense by monetizing certain non-strategic assets. In August, we will complete the sale of two such assets, $7.3 million receivable and $2.4 million parcel of vacant rent. The $9.7 million in cash that we received on these two transactions will be used to pay down debt and to meet any current working capital needs. Going forward, we plan to monetize other non-strategic assets including real estate, surplus materials and underutilize construction equipment to further reduce debt. Our second key objective was to improve our bidding performance by employing a far more disciplined estimating strategy, focused on project size, complexity and competitive advantage. The results to date have been very positive. During the second quarter, we won 28% of the projects that we did. And more importantly, we won those projects with better margins, averaging approximately 8%. Our third objective was to improve our operating performance of strengthening our project management teams and our contract administration process. I’m pleased to report that we’ve made great progress on both of those objectives. During Q2, we added senior project management personnel, particularly in Texas as well as operations personnel and administration personnel. And we stepped up our project administration efforts. In fact, during Q2, we reached verbal agreement on two significant claims in Texas for a total of more than $800,000. We expect to post the earnings in those claims in this quarter of Q3 after written agreements are in hand. Our new operation seems to be making great progress and improving performance. Our backlog was slightly down this past quarter but we expect it to remain at above the same level through the rest of this year. However, we anticipate that our average margin and backlog will increase to 7% or more by the end of this year as we burn off older, low margin projects and we place them with new projects at higher margins. Our full year revenue maybe slightly down from 2014 but our return to profitability in the second half of this year will be the more significant indicator of the success of our turnaround. To be clear, we are far more focused on bottomline profitability than on topline growth. As we build a more stable and predictable level of performance, we will once again grow both the topline and the bottomline. But for now, we’re staying focused on the bottomline. Taking the broader view of this business, we anticipate continued strong spending on infrastructure projects at the state and local levels, particularly in the states where we performed the majority of our work. Those states include Texas, California, Utah, Nevada, Arizona, Hawaii and Colorado. Unfortunately, we have not seen much forward movement on infrastructure legislation at the federal level. While the senate did manage to pass the bipartisan multi-year highway bill called the DRIVE Act, the House had other ideas and no compromise was reached before the August recess. On the positive side, federal legislators did manage to extend once again the Highway Trust Fund for another 90-day period. Of course, that’s not the first time that our federal government has kicked that can down the road. In fact, in the last six years, the fund has been extended more than 30 times. With the many crushing issues likely to face our legislators before the end of this calendar year, we are not confident of any multi-year legislation is likely in the near term. We hope that we are wrong because America definitely needs to grasp its pertaining infrastructure. And it maybe one of the few things that all of our representatives agree on. In summary, I’m confident that Sterling is on the right path to profitability and is poised to a sustained growth. Thanks. We’ll now be happy to take your questions.

Thank you. [Operator Instructions] Our first question comes from Tahira Afzal from KeyBanc.

Hey Paul and Kevan, congratulations on the strong quarter.

Thank you, Tahira.

Thank you.

Can you folks -- this is tough to do sometimes but any chance you can quantify maybe the weather impact in Texas on operating income in the second quarter?

No. I was probably more surprised than anybody about the success we had. When I circled back to understand that better, we had saved some what we call rainy day work. We entered torrential rain but the rainy day work allowed us to continue to generate revenue and do work without the impact you might have thought through that period. So that along with a lot of good work at the other units allowed the general revenue or the complete revenue, combined revenue to manage to go well through the business. As a yardstick, typically Q1 versus Q2, we have about 35% increase in revenue normally. So having a 51% increase in net revenue Q1 to Q2, really did mean that things happening and we’re very pleased with that.

Got it. Okay, Paul. I got lots of question but I will ask one more and hop into the queue and respect my other peers in the call. But I guess, the second question I really had, were your margins essentially than claim in the second quarter, there were no sort of one-time claims. It seems the claims were more third quarter onwards. And this is really good execution?

Yeah. It was claim. You’re right. In fact, I got to say I worked my penny off trying to get that $800 to $1000 claims in Q2 but our accountant said still we got to sign agreement from the client. We’re not going to allow that. So we slipped it. It will be a Q3 event but $800,000 would have given the $0.04 better on the return and I wish I had it. So without it, we’ve got $0.13 loss. With it, I would have had $0.09 loss. But yes, we have no extraordinary run-off gains in the second quarter. It’s just normal run rate. Third quarter will be a combination of very good quarter. We’re about halfway through it. And those gains I must get in the second quarter.

Got it. Thanks a lot. And I’ll hop back in the queue, Paul.

Thank you, Tahira.

Thank you. Our next question comes from William Bremer from Maxim Group.

Good morning Paul.

Good morning Bill.

Can you give us a sense of how much longer you feel it’s going to take to work off the legacy backlog so that we could start seeing the incremental positive going forward?

Yes. Something we’ve been looking at our work-in progress report gives us very good forecast on it. We work down about 60% of the backlog we started with at the beginning of the year. We’ll have 60% of it gone, leaving 40% dribble and over into ‘16 and it -- we will accept by about June and July of ‘16. So if you do that declining trend, it is I call it, we will be done with that lower margin stuff by December next year. And it will contribute about 40% and still have about 40% of the backlog sitting there at the end of the year.

Very nice. Thank you. And secondly, what is the company’s long-term strategy dealing with the non-core interest that are currently there?

Well, those joint ventures are performing well. Those are great leaders and it’s successful enterprise. I think long term we will look at that business model and figure out the best way to keep it going. But we wanted to be in collaboration with the 50% owners that the other 50% owners to make sure that we are all on the same page. But I will say that long term we are working better and better together to collaborate than we perhaps had in the past.

Very nice to hear. My final question is, did you just give us a sense of a long-term strategy of the company for the underlying water project?

Yes. In both Texas where recently a $6 billion water bill was -- recently I think six months ago was passed for both stone control and water treatment that Texas is starting to really spend some meaningful money not only on roads but on water project. In California, clearly, that’s a market, that is going to have to focus more and more on water and they already is. We are positioning ourselves in California for water treatment projects. We won a couple this year and we are trying to grow that business. At least right now, it’s got better margins than the road business and we see that as a growth opportunity. It may include as we get healthier some strategic acquisitions bill to help us have a stronger to hold and not do at all organically. But I think in Texas and in the western states, we got lot of problems in this country in spite of the spring, when I call we had a lot of problems in the other direction. But generally speaking, we are going to see more and more opportunities for water projects and stronger margins and we want to be well-positioned. So part of our strategy is to get there over the next six months with more and more projects bidding in that sector.

Good to hear. Thank you.

Thank you. Our next question comes from John Rogers from D.A. Davidson.

Hi. Good morning.

Hi, John.

Couple of things. First of all, what’s the margin in the backlog now?

Above -- between we kind of -- it’s moving from a low 6s at the beginning of the year to 7 at the end. I think with nothing more than that, it’s in the mid-6s to slightly better than that now. So it’s moving as the blend move, so does the margin. So it’s going to move from low-6s, 6.1 to 7 or better by the end of this year. And my guess is, it’s over 6.5 right now.

Okay. Thank you. And Paul, is there a notable difference between the margins that you’re getting on work in Texas versus California and the rest of the west?

No, there is a notable difference, but it’s less geographic than it is the type of work. Roads and highways, still draws a lot of competitors and it has the lower end of the margins scale in the 6% to 8% range. The other work is north of that. And so it will always be that way, but it is less geographic. Houston -- I am sorry Texas is a very competitive road building business, but there is just a ton of work and we are finding that our batting average in Texas, we announced poor jobs in the last month of over -- collectively over a $100 million, all in Texas, all in really good margins, all of them road jobs I think there. So yes, Texas is competitive. But if you pick the jobs and you did it smart, you can make good money, better margins than we had been historically getting.

Okay. And as you look at larger projects, I mean there is -- are you staying out of that market now and kind of back to the -- I guess what had in the bread and butter 25 and the smaller type projects?

Yes. Well, I define our sweet spot in terms of project size as greater than 10 million and less than 80 million or 90 million. We have been joined -- mentioned our projects above $90 million. We do that with our various units But generally I would say I like the -- if you thought about the midpoint of the sweet spot, it’s probably the $50 million, $60 million job. And I don’t particularly want to ties into jobs much over a $100 million to $125 million even in JVs. I think that those are little beyond our current capability, although we are moving more and more. I want to build confidence in the $50 million to $60 million jobs first. But a lot of $10 million, you track other competitors who are often not public companies and don’t carry the same need for somewhat higher margins to cover operating cost. So generally, we want to start with -- you don’t want to -- we don’t want to have a lot of work we did under $10 million. We will do it where we have some unique value add, but generally speaking, the jobs above that and below 80 is our sweet spot.

Okay. And lastly, I appreciate you guys efforts and success on the claims, what else is left out standing there?

Over $30 million in what we -- we’re finally called, I decided on a new definition by the way. You got something call the change order, which is where you identify change in scope between you and the client. We come to an agreement on its impact and they pay it. The second thing is equitable settlement, which isn’t a claim, it’s a thread of a claim, but it’s where we and the client agree that we have a difference and we want to equitably settle it, but it happens often at the end of the job, they true up the last of the exercises. We have a ton of equitable settlement. And then on top of that, let me get really nasty and we said that go to hell. We then sometimes file the claim. We don’t have many of those, but we got one in the neighborhood of about $28 million going on right now getting ready to be filed.

Okay. So I assume then if it’s filed, that’s settlement out in the 2016 and beyond?

Yes. We might one of these courthouse stair settlements. If you file, there is a chance that it could get settled outside of court, because remember they want it out of court. It doesn’t span out and it takes longer. But yes, John, that could be a fourth quarter event or it could slide into '16.

Okay. Great. Thank you very much.

You are welcome.

Thank you. Our next question comes from [Zaheer Hussain] [ph] from PWS Financial. Hi. Paul, if you could talk a little bit about, you started the new bidding structure and finding with you did higher and the run rate of 28% with higher margin products with the projects, but could you talk about what you’ve seen in terms of your competitors bidding, has that changed at all seeing how you’re bidding?

Thanks [Hamid] [ph] for the question, I said this I think in the last quarter, one of the things that happened these guys, our competitors were bidding more desperately in the second quarter. The wins I talked about where you’re averaging better margins were really third quarter wins on a claim that the 8% number, they were really second but mostly third quarter wins, that’s in the month of July. For example, most of those came, some of them were late June. But in earlier times, our competitors were more desperate for whatever reasons. And because these are public bids, you can see them, you see exactly what they did, they were bidding numbers we couldn’t. If they handed us the job for that money, for that price we couldn’t have made the profit. And I don’t think the competitor move that much more about it. They were just more desperate to keep their equipment and their people govern and their backlog up. We shared let’s hold back for them become desperate. And I think right now I am seeing that strategy pay off. What’s happening with our competitors is their bowls are now full or their plates are now full with work and so they are bidding less aggressively. And we are all allowing margins to come up in these third quarter bids and even dribbling into the first half of the fourth quarter. We will see continued increases in margins as people start building up their backlog with adequate work frankly and lower margins that we want. So holding back is turning out to be an important part of our strategy if you will be working well. Great. And could you also -- maybe I missed it, but could you provide a little bit more color on why there was a huge drop we had expected in the quarter?

I was going to tell you how proud I was. So we said a loss. I think to put a number on, it’s $2.5 million. I guess everything is relative. Relative to the first quarter, it’s sort of explaining the patient is still bleeding but far less than he was hemorrhaging in quarter one and that would have probably put our losses and have a $0.13 more or like $0.09. But I think you got to look at it as the trend coming up out of the ditch. We are halfway through Q3 and already seeing that we are well on our way to what I say is the second half earnings positive. But beyond that, what would you say, Kevan?

Yes. I think especially as you look at some of the analyst projections, a little bit over the board we had one analyst that has the projection of $0.18 loss, one that had $0.03, I think the average is probably $0.11 or $0.12. So I think we felt pretty good in house. We kind of -- while things could always be better, we are kind of high-fiving each other for the good job that we did.

And so, I think, I will expect some responsibility. I’ve been trying to report on each calls that our second quarter would be near breakeven but not breakeven. Well, near breakeven is in the eye that the whole $2.5 million or $0.14 doesn’t feel to some people like near breakeven and I expect responsibility for that. But I was trying to get in that neighborhood maybe a little better. It could have been $0.09 million to $0.13, but I never though it’s going to be much better than that. But it’s a fair question. Thank you. Okay. And…

Ask me -- ask it again in Q3, I’ll promise we could. Last question and this, I mean, risk weighted, you are having that 8% gross margin on the backlog of new project wins? But do you have an idea when we have about this negligible core, but when do you think you’ll hit closer to 10% or even cross 10%?

Wow, yeah, I -- now you’re getting into some early crazy stuff, but I’d love to get there by the end of ’16, but I have no basis for saying that expect we are going to continuously help far up we can push margins. We certainly believe by the end of this year we’ll be in the backlog at 7%. I do tell you, I said this dozen times before that whatever you did and win, for example, I’ve said that the 8% margin that we have won was what we did for. There is also opportunities went through operating this jobs that, if you got a good project management, good project administration and good execution, we are going to make another couple of percent over above that what you did by running the job, right, and change ordering where necessary and that can add a couple of percent. So you might already be there on the jobs, you did at 8%, but that means our project management teams have to do their job and execute well. I’m confident that they will do well, whether we can get the 4% or 2% more is yet to be decided, but we could on the jobs we’ve started at 8%, we could add another couple of percent. No matter we did, we did 6% and we have another couple administrative jobs right. Sheri?

Our next question comes from Tahira Afzal from KeyBanc.

Hi, Paul. I actually agree with you, I thought it was a pretty good quarter given what all my few pairs have done in Texas. So, I guess, the first follow-up question I had, if I’m trying to model in G&A for the full year it’s 5.5%, it assumes that you’re running below the -- roughly below the 4 -- the 5% zone in the second half of the year? So would love to get a little more color if you meant 5.5% for the full year or the second half of the year?

Kevan, we did have some extraordinary hits in the first half that price skewed, remember what you’ve got on that, run rate is more like.

We believe that the run rate on the G&A will be pretty consistent with the first half of the year if you take out some of the extraordinary items.

Yeah. But I think the right way to look at that, you’re right, you are exactly check, Tahira, I think the better way to look at in second half of the year, we’re probably going to where we kind of level down on these one-off cost that hit the SG&A. We should probably be in that neighborhood for the second half of the year.

Got it. And would be fair to say then as you move into a cleaner year have less one-off items could you be at 5% into 2016 even on a flattish revenue outlook or would that ….

Its possible for a different reason than you might think or maybe you’ve got it. I don’t think I can cover lot more of the cost side, but I can sure improve the revenue side and you recall that G&A expressed as a percentage of revenue. As revenue goes up, that percentage goes down, if you can keep your cost inline and not add a bunch of SG&A. So, yes, I think that’s possible work on improved revenue in 2016 and from further cost cutting in the actual dollars SG&A in the base number.

Got it. And this might be more questions for Kevan, maybe but tax rate going forward, I know you have some nice pluses to offset again. How should we be thinking about that as you enter second half of the year and move back into a profit growth outlook?

We have -- as you can see by looking at the financials we have a pretty good size NOL on the books and so…

Okay.

… our other than minimal state taxes, the federal tax would be -- tax expense will be minimal as we become profitable and even to those NOLs.

And I think the order of magnitude the NOLs is north of $70 million.

Yeah. Yeah. Pretty sizable NOL that...

So it will take awhile to work that off. I’m looking for the day when I work that off and when I start making the profit next quarter, we’re going to report to you both with NOLs, because that’s the real number.

Right.

But also to not hide behind the NOLs, we’re going to give you an approximate answer as if we’re paying taxes, so that we get a burden more normalized kind of number just so we’re being as straight forwards as we can be on how we express those numbers.

Got it. Okay. And if I look at your non-controlling interest, how should I think about it, it’s been, should I think about last two years that we’ve seen 2.5 per annum and 4.5 per annum, are those the bookings to think about going forward?

I think going forward, we’ll probably see as we become even more profitable especially in those 50% on companies. We’ll probably see higher distributions. Right now the distributions have been limited due to some cash flow issues to tax distributions that apply to those two entities that, we would like to increase those distributions appropriately based on the JV agreements that we have with those 50% owners.

Okay. And how should I think about interest rate, Kevan, as you go into 2016 and looks like you guys have made gains from the ground and selling off asset, able to be retiring some debt. Could you be entering 2016 where the minimals do fill the debt and especially, as you do see some recoveries on the $28 million, could you even have a next gas filtration by probably 2016?

Let me jump in a little bit and explain that my strategy as this month have pull down to raise about $9.5 million on those two transactions and the pay down that debt. As we go forward, there are other strategic assets as I mentioned that probably raised another $6 million by year end, maybe a little more which we’ll pay down debt with. And then I’d like to talk more about the traditional seasonal cash generation that what it might do for us.

When you take in the consideration our seasonality, of course, we have the busy season that starts about May and goes through most of October. So during that period of time, new projects ramp up, existing projects have heavy construction cost. So we have a need of forecast, the receivables raise, the payable increase during that period of time. And then as we get into the November, December, January, February season and constructions slows down, the receivable collections accelerate, the payables are lower. And so we’ll generate more cash during that period of time and that will be the opportune time to pay down our loan, reduce our interest expense. I know that will happen, the cycle will happen again in ‘16 of course.

But generally speaking, I don’t need to point that we’re getting a 12% interest rate on that GAAP. So our objective is to pay that down. We have an opportunity of course. We have both the revolver and the term part of that note, that’s $36 million. We intend to pay down our revolver all the way and we’re on track to paying down our term note in accordance with our agreement. I’ll tell you about year end, we well have made a substantial dent in the revolver side of that maybe down to zero. So having it there because it’s important for us to have it as we go into spring and start needing more working capital. We’ll also start accruing more cash on hands and maybe not pull on the revolver again because of that rather on attractive interest rate.

Right. That makes sense. And last question for you Paul. I know you are rightly not counting on the transportation bills, but let say hypothetically it goes forward. Which of your businesses and region would benefit? I mean Texas seems like it’s a wise regardless in the sense. Will the benefit be more outside of Texas or do you think it would have even within Texas?

It will help within Texas. Texas had two ways of projects that they said we’re “shove already.” They had the Texas projects where they can afford the bills with or without support of a highly cost fund or federal government matching funds. And then they had a second wave of projects that if they had more funding support through the Highway Trust Fund than they would come into play. So I’d see Texas and frankly all of our state stepping up their investment rather dramatically. And yes not only in the rails but there are these railroads and it is transportation bill is broader than just roads, highways and bridges. It does includes railroads. It includes other forms of transportation so -- wherein almost all of those markets both geographically and tax incurring. And we think it will be gigantic task for us, mostly with the multi-year situation, instead of this spoon-fed 19 days at a time extension. By the way, bill rate which hasn’t changed in 10 to 15 years. The other thing that causing of course some of the delay, we had we fully increase but we absolutely needed. And so well I’m a little doubtful on federal committee ability do that it will happen. It will be gigantic benefit for our business particularly store.

Thank you folks very much and congratulations on the quarter.

Thank you. Our next question comes from [indiscernible] a Private Investors. Paul can you hear me?

Yes. Budd, is it? Yeah, [Budd] [ph]. Thanks.

Yeah. Let’s say you pass… [Indiscernible] five years ago, so well the huge profit that bank hit [Technical Difficulty] would come in margin. Is that gross profit to revenue or is that the definition of margin?

Yes. Okay. And then last question on this non concerning over [Technical Difficulty] it is already exploiting that a little bit what that rate was?

Yeah. That was beyond my peg rates. I’ll turn it over to my CFO, [Budd] [ph]. Thank you.

We have two business units one in California and one in Nevada, that on 50% of the controlling interest of the companies. So, at the end of the day when financial statements were completed, these 50% owners get 50% of the net income that they had generated. Dose that answer your question? Yes. It shows up in a different place than that?

Yeah. at the end of the -- if you look at the P&L for example, if you look down at the bottom at the P&L there is just before net income there is a reduction for non-controlling owner interest that what we see that on the P&L. Okay. And then I think that how much they getting -- I think it is 50% of net income?

They get 50% of the net income after taxes. It is our -- you will see our net loss, then you’ll see a non-controlling owners interest and earnings of subsidiaries as per deduction they get which is 50%. Okay. Thank you very much.

You’re welcome.

Thank you. Our next question comes from William Bremer of Maxim Group.

Hi, gentlemen. Just one follow-up and I hope that you could provide some color. We believe transformational in the industry right now is the fact that the P3 is a stepped in her. And I was hoping you could give some color on what has dramatically changes in your industry and how that’s affecting your business?

Bill, the P3s, I can’t say we have a big piece of our business in P3, they’re surely evolving now and becoming more and more popular in part, because the public sector’s lack of ability to fund everything that they’ve got going on in the private sector’s willingness to do that. It shows itself important in things like toll roads. To a degree, we haven’t quite seen the evolution beyond toll roads, but it could go into a privately owned wastewater treatment projects where privately owned treatment plant builds in municipality on a per gallon treated with some other metric. That is certainly a direction it could go. If one thing said the public sector can’t fund all of the necessary projects, particularly infrastructure projects. I will tell you that we are seeing more and more tolls roads though really down to our sort of sweet spot throughout all of the business. And it’s been interesting because we Americans have gotten comfortable without toll roads and now that a few of them were in there, we like their convenience. We don’t see remind us much that they cost us money when we could run that decide a public owned or state federal highway, but during certain times that toll roads within down the road. So we do see more of that will come in. It’s as competitive but to be clear those owners are even more fixated on earnings and on control of capital spending. And so they aren’t exactly a kick walk when we’re working with them, they may be equally or even more difficult to work with.

Okay. Great. Thanks for the color, Paul.

Thank you. Our next question comes from John Rogers from D.A. Davidson.

Hi. Just a follow-up. In terms of the $7.3 million on the receivable in the sale of land, what sort of gains would you book on those?

Kevan, you can handle that.

Yes. I can, yes. With the final negotiation not quite taken place within Q3, I can’t tell you that the effect on the Q3 P&L will be the offset of those transactions will be negligible. So I think gains, there won’t be a big loss when we met the Q1.

Kevan, there will be $9.7 million.

There will be $9.7 million of cash generated.

Thank you.

Yes.

Okay. And so on the receivable, do you take a charge on that to selling?

Yes. As stated in the 10-Q, of course it did say it’s specifically set factoring. So there will be a charge on that. And then of course if we’re selling a piece of property, then of course you compare the sale price and the book value and doing offset there, yes.

Okay. And is there any factoring that you’re looking at?

No. In fact, it’s one in post falls. In post fall right away with the only long-term receivable that the company has ever had. And so we’re in an effort to get in line with our other contract receivables, that’s one of the main reasons why we are trying to transfer that one into cash.

And just to be clear monetizing right now there is going strategic assets and that receivable which I don’t think any of us think it’s non-strategic, it was helpful and it was nice having that cash flow. But right now paying down that debt is more important to me. It did invest flexibility to have a revolver that we can go up and down on seasonally. It’s important for us this was a consistent flow. While I made a lot of sense, it couldn’t help us when we had these surges that need potential of strength and then surpluses in the fall.

Sure. Okay. And then the post falls and it was related to a, I guess, shopping center development or something you’re putting in that area, it was something if I remember?

Yes. It was a new freeway interchange to enter the city post falls where almost zero commercial development had already occurred. And so when they created that exchange a million of dollars of development began to be installed and build in that area. The reason why it is long-term was because the sales tax revenue generated from that built up of commercial activity paid for the project.

But, it is an interesting question John, for Scott here, I said. So we were building shopping centers and he said no, we both have real road interchange with bridges and paving and everything else, but the payment from the phases through the development of the commercial property that didn’t sell out from that accessibility of the new interchange. So that’s how we got back to the shopping center connection.

The state of Idaho, this is quite a bit and this particular fund, they called the star fund which has performed other projects within the state of Idaho.

Okay. Great. Thank you for the clarity.

Thank you. At this time, I will turn the call back over to Paul Varello for closing comments.

Thank you, Sheri. We would like to encourage anyone with follow-on questions to contact our Investor Relations team from the equity group, the schedule or follow-up call with us. Their contact information can be found on the bottom of our press release. I’d like to thank everyone for joining us today on the call. And we look forward to reporting our progress to you in the future. Thank you very much.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.