PENHALL INTERNATIONAL CORP - 10-Q Quarterly Report

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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

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


				June 30,		September 30,
				2003		2003

			ASSETS
Current assets:
	Cash and cash equivalents			$	184,000	$	50,000
	Receivables:
		Contract and trade receivables			29,105,000		34,087,000
		Contract retentions due upon completion and acceptance of work			4,105,000		4,448,000
		Income taxes			2,648,000		1,926,000

					35,858,000		40,461,000
		Less allowance for doubtful receivables			1,592,000		1,562,000

			Net receivables		34,266,000		38,899,000

	Costs and estimated earnings in excess of billings on uncompleted contracts				1,704,000		2,098,000
	Deferred tax assets				3,363,000		3,363,000
	Inventories				2,362,000		2,498,000
	Prepaid expenses and other current assets				3,638,000		2,127,000

			Total current assets		45,517,000		49,035,000

Property, plant and equipment, at cost:
	Land				5,004,000		5,004,000
	Buildings and leasehold improvements				8,793,000		8,801,000
	Construction and other equipment				117,860,000		118,235,000

					131,657,000		132,040,000
	Less accumulated depreciation and amortization				78,256,000		81,132,000

			Net property, plant and equipment		53,401,000		50,908,000
Goodwill, net of accumulated amortization					9,053,000		9,053,000
Debt issuance costs, net of accumulated amortization					3,316,000		3,176,000
Other assets, net					1,186,000		1,092,000

					112,473,000		113,264,000


					June 30,			September 30,
					2003			2003

		LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
	Current installments of long-term debt				$	2,551,000		$	2,487,000
	Trade accounts payable					7,953,000			7,901,000
	Accrued liabilities					12,378,000			10,864,000
	Billings in excess of costs and estimated earnings on uncompleted contracts					831,000			1,062,000

				Total current liabilities		23,713,000			22,314,000

Long-term debt, excluding current installments						14,844,000			16,536,000
Long-term portion of insurance reserve						5,158,000			5,158,000
Senior Notes						100,000,000			100,000,000
Deferred tax liabilities						8,221,000			8,221,000
Senior Exchangeable Preferred Stock, redemption value $16,744,000 and $17,193,000 at June 30, 2003 and September 30, 2003, respectively. Authorized, issued and outstanding 10,000 shares at June 30, 2003 and September 30, 2003						16,744,000			17,193,000
Series A Preferred Stock, redemption value $19,737,000 and $20,394,000 at June 30, 2003 and September 30, 2003, respectively. Authorized 25,000 shares; issued and outstanding 10,428 shares at June 30, 2003 and September 30, 2003						19,737,000			20,394,000

Stockholders’ deficit:
Series B Preferred Stock, par value $.01 per share. Authorized 50,000 shares; issued and outstanding 18,798 shares at June 30, 2003 and September 30, 2003						35,546,000			36,725,000
Common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 1,021,870 at June 30, 2003 and September 30, 2003						10,000			10,000
Additional paid-in capital						2,082,000			2,082,000
Treasury stock, at cost, 35,318 common shares at June 30, 2003 and September 30, 2003						(336,000	)		(336,000	)
Accumulated deficit						(113,246,000	)		(115,033,000	)

			Total stockholders’ deficit			(75,944,000	)		(76,552,000	)
Commitments and contingencies

					$	112,473,000		$	113,264,000


		THREE MONTH PERIODS
		ENDED SEPTEMBER 30,

		2002			2003

Revenues		$	46,576,000		$	47,524,000
Cost of revenues			36,095,000			36,379,000

	Gross profit		10,481,000			11,145,000
General and administrative expenses			7,278,000			6,951,000
Other operating income			492,000			189,000

	Earnings before interest expense and income taxes		3,695,000			4,383,000
Interest expense			3,598,000			3,579,000

	Earnings before income taxes		97,000			804,000
Income tax expense			35,000			306,000

Net earnings			62,000			498,000
Accretion of preferred stock to redemption value			(980,000	)		(1,106,000	)
Accrual of cumulative dividends on preferred stock			(1,038,000	)		(1,179,000	)

Net loss available to common stockholders		$	(1,956,000	)	$	(1,787,000	)

Loss per share basic and diluted		$	(1.98	)	$	(1.81	)
Weighted average number of shares outstanding basic and diluted			986,156			986,552


					THREE MONTH PERIODS
					ENDED SEPTEMBER 30,

					2002			2003

Cash flows from operating activities:
	Net earnings				$	62,000		$	498,000
	Adjustments to reconcile net earnings to net cash used in operating activities:
			Depreciation and amortization			4,343,000			3,926,000
			Amortization of debt issuance costs			234,000			289,000
			Provision for doubtful accounts			126,000			—
			Gain on sale of assets			(60,000	)		(58,000	)
			Changes in operating assets and liabilities:
				Receivables		(2,758,000	)		(4,633,000	)
				Inventories, prepaid expenses and other assets		(202,000	)		1,365,000
				Costs and estimated earnings in excess of billings on uncompleted contracts		(382,000	)		(394,000	)
				Trade accounts payable and accrued liabilities		(4,196,000	)		(3,414,000	)
				Billings in excess of costs and estimated earnings on uncompleted contracts		518,000			231,000

				Net cash used in operating activities		(2,315,000	)		(2,190,000	)

Cash flows from investing activities:
	Proceeds from sale of assets					135,000			116,000
	Capital expenditures					(1,975,000	)		(1,387,000	)

				Net cash used in investing activities		(1,840,000	)		(1,271,000	)

Cash flows from financing activities:
	Borrowings under long-term debt					18,830,000			69,678,000
	Repayments of long-term debt					(19,561,000	)		(68,050,000	)
	Debt issuance costs					(113,000	)		(149,000	)
	Book overdraft					902,000			1,848,000
	Repurchase of common stock and Series B preferred stock					(24,000	)		—

				Net cash provided by financing activities		34,000			3,327,000

				Net change in cash and cash equivalents		(4,121,000	)		(134,000	)
Cash and cash equivalents at beginning of period						6,205,000			184,000

Cash and cash equivalents at end of period					$	2,084,000		$	50,000

Supplemental disclosure of cash flow information:
		Cash paid during the period for:
				Income taxes	$	7,000		$	33,000

				Interest	$	6,280,000		$	6,248,000

Supplemental disclosure of noncash investing and financing activities:
		Accretion of preferred stock to redemption value			$	980,000		$	1,106,000

		Accrual of cumulative dividends on preferred stock			$	1,038,000		$	1,179,000

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)

Penhall International, Inc. (“PII”) was founded in 1957 and was incorporated in the state of California on April 19, 1988. On August 4, 1998, $100,000,000 of 12% Senior Notes (the Senior Notes) were sold by Penhall Acquisition Corp., an Arizona corporation formed by an unrelated third party (the Third Party) to effect the recapitalization of PII. As part of the recapitalization, a series of mergers (the Recapitalization Mergers) were consummated pursuant to which Phoenix Concrete Cutting, Inc., a wholly-owned subsidiary of PII, became the corporate parent of PII, the Third Party acquired a 62.5% interest in Phoenix Concrete Cutting, Inc. and Phoenix Concrete Cutting, Inc. became the successor obligor of the Senior Notes. Following the consummation of the Recapitalization Mergers, Phoenix Concrete Cutting, Inc. changed its name to Penhall International Corp., and PII changed its name to Penhall Rental Corp. Penhall Rental Corp. was dissolved and merged into Penhall International Corp. effective July 1, 2002.

Under accounting principles generally accepted in the United States of America, the Recapitalization Mergers were accounted for as a leveraged recapitalization transaction in a manner similar to a pooling-of-interests. Under this method, the transfer of controlling interest in PII to the Third-Party did not change the accounting basis of the assets and liabilities in PII’s separate stand-alone financial statements.

The accompanying unaudited condensed consolidated financial statements of Penhall International Corp. (“Penhall” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Results of operations for the three month period ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending June 30, 2004. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the Company’s audited consolidated financial statements and footnotes thereto included in the Form 10-K for the year ended June 30, 2003.

Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period plus the impact of assumed potential dilutive securities. The dilutive effect of outstanding options is reflected in diluted loss per share by application of the treasury stock method. For the three month period ended September 30, 2002 diluted loss per share is the same as basic loss per share as options to purchase 9,160 shares of common stock were not included in the computation of diluted loss per share for the three month period ended September 30, 2002 as the effect would have been anti-dilutive. During the three month period ended September 30, 2003, diluted loss per share is the same as basic loss per share as options to purchase 9,125 shares of common stock were not included in the computation of diluted loss per share for the three month period ended September 30, 2003 as the effect would have been anti-dilutive.

The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to long-term construction contracts, accounts receivable, goodwill, long-lived assets, self-insurance, contingencies and litigation. The Company bases its estimates on current information, historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recognition of revenue that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affects its more significant judgments and estimates used in the preparation of its consolidated financial statements:

Revenue from construction operations is recorded using the percentage-of-completion method of accounting. The Company has two types of contracts. The first type of contract is fixed unit in which the percentage of completion is determined based on the units completed as a percentage of estimated total units. The second type of contract is lump sum in which percentage of completion is determined based on costs to date as compared to total estimated costs at completion. If estimated total costs on any contract indicate a loss, the Company provides currently for the total loss anticipated on the contract. For long-term contracts, which extend beyond fiscal year ends, revisions in cost and profit estimates during the course of the work are reflected in the accounting period in which facts requiring the revision become known. All remaining revenue and costs are recognized as work is performed.

The Company observes the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) by continuing to apply the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). The Company applies the intrinsic value method as outlined in APB No. 25 and related interpretations in accounting for stock options and share units granted under these programs. Under the intrinsic value method, no compensation expense is recognized if the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of the grant. Accordingly, no compensation cost has been recognized on options granted to employees. SFAS No. 123 requires that the Company provide pro forma information regarding net earnings and net earnings per common share as if compensation cost for the Company’s stock option programs had been determined in accordance with the fair value method prescribed therein. The Company adopted the disclosure portion of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” requiring quarterly SFAS No. 123 pro forma disclosure.

Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company’s basic and diluted net loss available to common stockholders per share would have been adjusted to the pro forma amounts as indicated below:


	Three Months Ended
	September 30,

	2002			2003

Net loss available to common stockholders as reported	$	(1,956,000	)	$	(1,787,000	)
Add:
Stock-based compensation expense included in reported net loss available to common stockholders, net of related tax effects	$	—		$	—
Deduct:
Total stock-based compensation expense determined under the fair value method for all awards, net of tax effects	$	(6,000	)	$	(4,000	)
Pro forma net loss available to common stockholders	$	(1,962,000	)	$	(1,791,000	)
Basic and diluted loss per share as reported	$	(1.98	)	$	(1.81	)
Pro forma basic and diluted loss per share	$	(1.99	)	$	(1.82	)

At the grant date, the weighted average fair value of options granted was $58.51, this was determined using the Black-Scholes option pricing model with the following assumptions used for calculation: risk-free interest rate of 4.7%, volatility of 3.1%, dividend rate of 0% and an expected life of 10 years.

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards (SFAS) No. 141, “Business Combinations” and No. 142 “Goodwill and Other Intangible Assets.” SFAS requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001, clarifies the recognition of intangible assets separately from goodwill and requires that unallocated negative goodwill be written off immediately as an extraordinary gain. SFAS No. 142, which was effective for fiscal years beginning after December 15, 2001, requires that ratable amortization of goodwill be replaced with periodic tests of goodwill impairment and that intangible assets, other than goodwill, which have determinable useful lives, be amortized over their useful lives. The Company adopted these accounting standards effective July 1, 2002. As of December 31, 2002, we completed the transitional impairment analysis under SFAS No. 142, no indicated impairment of goodwill was identified. We performed our annual impairment test as of June 30, 2003, no indicated impairment was identified. There were no adjustments to identifiable intangible assets’ useful lives or recorded balances as a result of the adoption of SFAS No. 142. We will perform an annual impairment test as of each June 30, thereafter. We will perform an earlier impairment analysis if a triggering event occurs that warrants such analysis. No goodwill expense was recorded during the three month periods ended September 30, 2002 and 2003.

In May 2003, the FASB issued Statement 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” Statement 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. Statement No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Statement No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of a nonpublic entity for which this statement is effective for fiscal periods beginning December 15, 2003, (the Company’s fiscal 2005). We do not expect the adoption of this pronouncement to have a material impact on our financial position, results of its operations or liquidity.

The Company has a balance due to Bruckmann, Rosser, Sherrill & Co., Inc. (BRS) of $150,000 as of September 30, 2003. The balance due as of June 30, 2003 was $75,000.

There are various lawsuits and claims pending against and claims being pursued by the Company and its subsidiaries arising out of the normal course of business. It is management’s present opinion, based in part upon the advice of legal counsel, that the outcome of these proceedings will not have a material effect on the Company’s consolidated financial statements taken as a whole.

The following consolidating financial information is presented for purposes of complying with the reporting requirements of the Guarantor Subsidiaries, (Penhall Rental Corp. and Penhall Company). Effective July 1, 2002, Penhall Rental was merged into Penhall International Corp. Separate financial statements and other disclosures with respect to the Guarantor Subsidiaries are not presented because the Company believes that such financial statements and other information would not provide additional information that is material to investors.

The condensed consolidating financial information presents condensed financial statements as of June 30, 2003 and September 30, 2003 and for the three month periods ended September 30, 2002 and 2003 of:

(a)

Penhall International Corp. on a parent company only basis (“Parent”) (carrying its investments in the subsidiaries under the equity method),

(c)

elimination entries necessary to consolidate the parent company and its subsidiaries, and


							JUNE 30, 2003

				PENHALL
				INTERNATIONAL			PENHALL
				CORP.			COMPANY		ELIMINATIONS			CONSOLIDATED

Assets
	Current assets:
		Receivables, net		$	2,648,000		$	31,618,000	$	—		$	34,266,000
		Inventories			—			2,362,000		—			2,362,000
		Costs and estimated earnings in excess of billings on uncompleted contracts			—			1,704,000		—			1,704,000
		Other current assets			271,000			7,066,000		(152,000	)		7,185,000

			Total current assets		2,919,000			42,750,000		(152,000	)		45,517,000
	Net property, plant and equipment				8,798,000			44,603,000		—			53,401,000
	Intercompany assets				—			19,398,000		(19,398,000	)		—
	Other assets, net				2,051,000			11,504,000		—			13,555,000
	Investment in subsidiaries				70,399,000			—		(70,399,000	)		—

				$	84,167,000		$	118,255,000	$	(89,949,000	)	$	112,473,000

Liabilities and Stockholders’ Equity (Deficit):

	Current installments of long-term debt			$	3,000		$	2,548,000	$	—		$	2,551,000
	Trade accounts payable				9,000			8,096,000		(152,000	)		7,953,000
	Accrued liabilities				4,931,000			7,447,000		—			12,378,000
	Billings in excess of costs and estimated earnings on uncompleted contracts				—			831,000		—			831,000
	Intercompany liabilities				19,398,000			—		(19,398,000	)		—

			Total current liabilities		24,341,000			18,922,000		(19,550,000	)		23,713,000
	Long-term debt, excluding current installments				180,000			14,664,000		—			14,844,000
	Long-term portion of insurance reserves				—			5,158,000		—			5,158,000
	Senior notes				100,000,000			—		—			100,000,000
	Deferred tax liabilities				(891,000	)		9,112,000		—			8,221,000
	Senior Exchangeable Preferred stock				16,744,000			—		—			16,744,000
	Series A Preferred stock				19,737,000			—		—			19,737,000
	Stockholders’ equity (deficit)				(75,944,000	)		70,399,000		(70,399,000	)		(75,944,000	)

				$	84,167,000		$	118,255,000	$	(89,949,000	)	$	112,473,000


							SEPTEMBER 30, 2003

				PENHALL
				INTERNATIONAL			PENHALL
				CORP.			COMPANY		ELIMINATIONS			CONSOLIDATED

Assets
	Current assets:
		Receivables, net		$	1,926,000		$	36,973,000	$	—		$	38,899,000
		Inventories			—			2,498,000		—			2,498,000
		Costs and estimated earnings in excess of billings on uncompleted contracts			—			2,098,000		—			2,098,000
		Other current assets			60,000			5,480,000		—			5,540,000

			Total current assets		1,986,000			47,049,000		—			49,035,000
	Net property, plant and equipment				8,735,000			42,173,000		—			50,908,000
	Intercompany assets				—			22,322,000		(22,322,000	)		—
	Other assets, net				1,886,000			11,435,000		—			13,321,000
	Investment in subsidiaries				72,146,000			—		(72,146,000	)		—

				$	84,753,000		$	122,979,000	$	(94,468,000	)	$	113,264,000

Liabilities and Stockholders’ Equity (Deficit):

	Current installments of long-term debt			$	4,000		$	2,483,000	$	—		$	2,487,000
	Trade accounts payable				—			7,901,000		—			7,901,000
	Accrued liabilities				2,105,000			8,759,000		—			10,864,000
	Billings in excess of costs and estimated earnings on uncompleted contracts				—			1,062,000		—			1,062,000
	Intercompany liabilities				22,322,000			—		(22,322,000	)		—

			Total current liabilities		24,431,000			20,205,000		(22,322,000	)		22,314,000
	Long-term debt, excluding current installments				178,000			16,358,000		—			16,536,000
	Long-term portion of insurance reserves				—			5,158,000		—			5,158,000
	Senior notes				100,000,000			—		—			100,000,000
	Deferred tax liabilities				(891,000	)		9,112,000		—			8,221,000
	Senior Exchangeable Preferred stock				17,193,000			—		—			17,193,000
	Series A Preferred stock				20,394,000			—		—			20,394,000
	Stockholders’ equity (deficit)				(76,552,000	)		72,146,000		(72,146,000	)		(76,552,000	)

				$	84,753,000		$	122,979,000	$	(94,468,000	)	$	113,264,000


			THREE MONTH PERIOD ENDED SEPTEMBER 30, 2002

			Penhall
			International			Penhall
			Corp.			Company		Eliminations			Consolidated

Revenues			$	3,193,000		$	46,576,000	$	(3,193,000	)	$	46,576,000
Cost of revenues				—			36,095,000		—			36,095,000

		Gross profit		3,193,000			10,481,000		(3,193,000	)		10,481,000
General and administrative expenses				191,000			7,480,000		(393,000	)		7,278,000
Royalties				—			2,800,000		(2,800,000	)		—
Other operating income, net				8,000			484,000		—			492,000
Equity in earnings of subsidiary				365,000			—		(365,000	)		—

	Earnings before interest expense and income taxes			3,375,000			685,000		(365,000	)		3,695,000
Interest expense				3,521,000			77,000		—			3,598,000

		Earnings (loss) before income taxes		(146,000	)		608,000		(365,000	)		97,000
Income tax expense (benefit)				(208,000	)		243,000		—			35,000

Net earnings			$	62,000		$	365,000	$	(365,000	)	$	62,000


			THREE MONTH PERIOD ENDED SEPTEMBER 30, 2003

			Penhall
			International			Penhall
			Corp.			Company		Eliminations			Consolidated

Revenues			$	1,460,000		$	47,524,000	$	(1,460,000	)	$	47,524,000
Cost of revenues				—			36,379,000		—			36,379,000

		Gross profit		1,460,000			11,145,000		(1,460,000	)		11,145,000
General and administrative expenses				192,000			7,154,000		(395,000	)		6,951,000
Royalties				—			1,065,000		(1,065,000	)		—
Other operating income, net				—			189,000		—			189,000
Equity in earnings of subsidiary				1,747,000			—		(1,747,000	)		—

	Earnings before interest expense and income taxes			3,015,000			3,115,000		(1,747,000	)		4,383,000
Interest expense				3,194,000			385,000		—			3,579,000

		Earnings (loss) before income taxes		(179,000	)		2,730,000		(1,747,000	)		804,000
Income tax expense (benefit)				(677,000	)		983,000		—			306,000

Net earnings			$	498,000		$	1,747,000	$	(1,747,000	)	$	498,000


			THREE MONTH PERIOD ENDED SEPTEMBER 30, 2002

			Penhall			Penhall
			International			Rental			Penhall
			Corp.			Corp.			Company			Eliminations		Consolidated

Net cash used in operating activities			$	(1,475,000	)	$	—		$	(840,000	)	$	—	$	(2,315,000	)

Cash flows from investing activities:
	Proceeds from sale of assets			—			—			135,000					135,000
	Capital expenditures			—			—			(1,975,000	)		—		(1,975,000	)
	Cash acquired from Penhall Rental			6,143,000			(6,143,000	)		—			—		—

		Net cash provided by (used in) investing activities		6,143,000			(6,143,000	)		(1,840,000	)		—		(1,840,000	)

Cash flows from financing activities:
	Due to (from) affiliates			(1,347,000	)		—			1,347,000			—		—
	Borrowings under long-term debt			17,820,000			—			1,010,000			—		18,830,000
	Repayments of long-term debt			(18,996,000	)		—			(565,000	)		—		(19,561,000	)
	Debt issuance costs			(104,000	)					(9,000	)				(113,000	)
	Book overdraft			—			—			902,000			—		902,000
	Repurchase of common stock and Series B preferred stock			(24,000	)		—			—			—		(24,000	)

		Net cash provided by (used in) financing activities		(2,651,000	)		—			2,685,000			—		34,000

		Net change in cash and cash
		equivalents		2,017,000			(6,143,000	)		5,000			—		(4,121,000	)
Cash and cash equivalents at beginning of period				—			6,143,000			62,000			—		6,205,000

Cash and cash equivalents at end of period			$	2,017,000		$	—		$	67,000		$	—	$	2,084,000


			THREE MONTH PERIOD ENDED SEPTEMBER 30, 2003

			Penhall
			International			Penhall
			Corp.			Company			Eliminations			Consolidated

Net cash provided by (used in) operating activities			$	(2,895,000	)	$	705,000		$	—		$	(2,190,000	)

Cash flows from investing activities:
	Proceeds from sale of assets			—			116,000			—			116,000
	Capital expenditures			—			(1,387,000	)		—			(1,387,000	)

		Net cash used in investing activities		—			(1,271,000	)		—			(1,271,000	)

Cash flows from financing activities:
	Due to (from) affiliates			2,924,000			(2,924,000	)		—			—
	Borrowings under long-term debt			—			69,678,000			—			69,678,000
	Repayments of long-term debt			(1,000	)		(68,049,000	)		—			(68,050,000	)
	Debt issuance costs			—			(149,000	)		—			(149,000	)
	Book overdraft			(152,000	)		1,848,000			152,000			1,848,000

		Net cash provided by financing activities		2,771,000			404,000			152,000			3,327,000

		Net change in cash and cash equivalents		(124,000	)		(162,000	)		152,000			(134,000	)
Cash and cash equivalents at beginning of period				152,000			184,000			(152,000	)		184,000

Cash and cash equivalents at end of period			$	28,000		$	22,000		$	—		$	50,000

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

The following discussion of the results of operations and financial condition of Penhall International Corp. (Penhall) should be read in conjunction with the unaudited condensed consolidated financial statements and footnotes thereto included in this quarterly report on Form 10-Q and the Company’s audited consolidated financial statements and footnotes thereto included in the annual report on Form 10-K, filed with the Securities and Exchange Commission.

Penhall was founded in 1957 in Anaheim, California with one piece of equipment, and today is one of the largest Operated Equipment Rental Services companies in the United States. Penhall differentiates itself from other equipment rental companies by providing specialized services in connection with infrastructure projects through renting equipment along with skilled operators to serve customers in the construction, industrial, manufacturing, governmental and residential markets. In addition, Penhall complements its Operated Equipment Rental Services with fixed-price contracts, which serve to market its operated equipment rental services business and increase utilization of its operated equipment rental fleet. Penhall provides its services from thirty eight locations in seventeen states, with a presence in some of the fastest growing states in terms of construction spending and population growth.

The operated equipment rental industry is a specialized niche of the highly fragmented United States equipment rental industry, in which there are approximately 17,000 companies. Penhall has taken advantage of consolidation opportunities by acquiring small companies in targeted markets as well as by establishing new offices in those markets. Since 1998, Penhall has effected eight strategic acquisitions, including:

Daley Concrete Cutting, a South Carolina-based division of U.S. Rentals acquired in October 1998,

Lipscomb Concrete Cutting, a North Carolina-based company acquired in November 1998,

Prospect Drilling and Sawing, a Minnesota-based company acquired in June 1999,

Advance Concrete Sawing and Drilling, Inc., a California-based company acquired in September 2000,

During the same period, Penhall established operations in six new markets by opening offices in Dallas, Richmond, Fresno, Buffalo, Reno and Seattle.

Penhall derives its revenues primarily from services provided for infrastructure related jobs. Penhall’s Operated Equipment Rental Services are complemented by long-term fixed-price contracts. Penhall’s revenues are derived from highway-related projects, building-related projects, airport, residential and other projects. The following table shows the breakdown of the components of revenue for the periods indicated:

Revenue growth is influenced by infrastructure change, including new construction, modification and regulatory changes. Penhall’s revenues are also impacted positively after the occurrence of natural disasters, such as the 1989 and 1994 earthquakes in Northern and Southern California. Other factors that influence Penhall’s operations are demand for operated rental equipment, the amount and quality of equipment available for rent, rental rates and general economic conditions. Historically, revenues have been seasonal, as weather conditions in the spring and summer months result in stronger performance in the first and fourth fiscal quarters than in the second and third fiscal quarters.

The principal components of Penhall’s operating costs include the cost of labor, equipment rental fleet maintenance costs including parts and service, equipment rental fleet depreciation, insurance and other direct operating costs. Given the varied, and in some cases specialized, nature of its rental equipment, Penhall utilizes a range of periods over which it depreciates its equipment on a straight-line basis. On average, Penhall depreciates its equipment over an estimated useful life of six years with a 10% residual value.

Three Months Ended September 30, 2003 Compared to Three months Ended September 30, 2002

Revenues. Revenues for the Three months ended September 30, 2003 (“Interim 2004”) were $47.5 million, an increase of $0.9 million or 2.0% from the three months ended September 30, 2002 (“Interim 2003”). Increased revenues in Interim 2004 were primarily a result of an increase of $3.3 million or 27.4% in Contract Services in Interim 2004, offset by a $2.4 million or 7.0% decrease in Operated Equipment Rental Services. The increase in Contract Services during Interim 2004 has reduced the Contract Services backlog at Interim 2004 by $3.3 compared to Interim 2002. The increase in Contract Services during Interim 2004 is due to timing set by our customers and is not necessarily indicative of a trend.

Gross Profit. Gross profit totaled $11.1 million in Interim 2004, an increase of $0.7 million or 6.3% from Interim 2003. Gross profit as a percentage of revenues increased from 22.5% in Interim 2003 to 23.5% in Interim 2004. The increase in gross profit from Interim 2003 to Interim 2004 is primarily attributable to significant profits on a large Contract Services project during Interim 2004 and some losses recognized on projects during Interim 2003.

Penhall operated through 38 locations in 17 states at both Interim 2004 and 2003. At September 30, 2003, Penhall’s operated rental fleet consisted of 706 units compared to 760 at September 30, 2002, a decrease of 7.1%.

General and Administrative Expenses. General and administrative expenses were $7.0 million in Interim 2004 compared to $7.3 million in Interim 2003. As a percent of revenues, general and administrative expenses were 14.6% in Interim 2004 compared to 15.6% in Interim 2003. The decrease in general and administrative expenses during Interim 2004 is primarily attributable to decreases of $0.2 million in payroll and related expenses, $0.1 decrease in bad debt expense and $0.1 million in insurance expense.

Interest Expense. Interest expense was $3.6 million in Interim 2004 compared to interest expense of $3.6 million in Interim 2003. The slight decrease in interest expense is attributable to decreased borrowing during Interim 2004 offset by an increase in interest rate during Interim 2004.

Income Tax Expense. The Company recorded an income tax expense $0.3 million, or 38% of earnings before income taxes in Interim 2004, compared to an income tax expense of $0.04 million, or 36% of earnings before income taxes in Interim 2003. The increase in the income tax expense is attributable to higher earnings before income tax in Interim 2004.

It is anticipated that the Company’s principal uses of liquidity will be to fund working capital, meet debt service requirements and finance the Company’s strategy of pursuing strategic acquisitions and expanding through internal growth. The Company’s principal sources of liquidity are expected to be cash flow from operations and borrowings under the New Credit Facility (“The New Credit”). The New Credit is a $50 million, three year asset based borrowing facility, consisting of a revolving credit facility (“New Revolver”) of up to $50 million with a $25 million sub-facility for letters of credit. Availability under the revolver portion of The New Credit would be limited to a borrowing base consisting of (i) up to 85% of the net amount of the Company’s eligible trade accounts receivable, (ii) up to the lesser of (a) 100% of the net book value of the Company’s eligible inventory and eligible equipment or (b) 85% of the appraised net orderly liquidation value of Company’s eligible inventory and equipment, and (iii) up to 50% of the appraised forced liquidation value of the Company’s owned real estate. In addition, borrowings under The New Credit are subject to certain financial covenants that include capital expenditure limits, utilization rate ratio, minimum interest coverage ratio, maximum leverage ratio and a minimum borrowing availability limit. The indebtedness of the Company under The New Credit is secured by a first priority perfected security interest in all of the inventory, accounts, equipment, fixtures, cash, and other assets of the Company. As of September 30, 2003, total borrowing unused and available under The New Credit was $20.7 million.

Cash used in operating activities decreased to $2.2 million in Interim 2004 from $2.3 million in Interim 2003, a decrease of $ 0.1 million. Net earnings increased $0.4 million from $0.1 million in Interim 2003 to $0.5 million in Interim 2004. In Interim 2004, the Company’s net earnings and depreciation plus a decrease in inventories, prepaid expenses and other assets offset by an increase in accounts receivable and a decrease in trade accounts payable and accrued liabilities resulted in $2.2 million in net cash used by operating activities. The use of cash in operating activities during Interim 2003 is primarily the result of the Company’s net

earnings plus depreciation less an increase in receivables and decrease in accounts payable and accrued liabilities.

Net cash used in investing activities decreased $0.6 million to $1.3 million in Interim 2004 from $1.8 million in Interim 2003. The reduction in net cash used in investing activities is attributable to a decrease in capital expenditures of $0.6 million.

Management estimates that the Company’s annual capital expenditures will be approximately $7.0 million for fiscal 2004.

Net cash provided by financing activities in Interim 2004 was $3.3 million as compared to $34,000 in Interim 2003. In Interim 2004 and Interim 2003 the Company’s financing activities are primarily a result of borrowings and repayments of long-term debt and a book overdraft.

Historically, the Company has funded its working capital requirements, capital expenditures and other needs principally from operating cash flows. As a result of the recapitalization in 1998, however, the Company has substantial indebtedness and debt service obligations. As of September 30, 2003, the Company and its subsidiaries had approximately $119.0 million of total indebtedness outstanding (including the Notes) plus outstanding letters of credit of $13.1 million and a stockholders’ deficit of approximately $76.5 million. As of September 30, 2003, approximately $20.7 million of additional borrowing was available under the Company’s New Credit Facility.

The Company is exposed to interest rate changes primarily as a result of its notes payable, including Senior Notes, Term Loan and Revolving Loan used to maintain liquidity and fund capital expenditures and expansion of the Company’s operations. The Company’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower it’s overall borrowing costs. To achieve its objectives the Company borrows primarily at fixed rates and has the ability to choose interest rates under the Term Loan and Revolving Loan. The Company does not enter into derivative or interest rate transactions for speculative purposes.

The table below presents the principal amounts of debt, weighted average interest rates, fair values and other items required by the year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes as of September 30, 2003.


	Years Ended June 30,

																						Fair
	2004			2005			2006			2007			2008			Thereafter			Total			Value

	(In thousands)
Fixed rate debt	$	2,465		$	168		$	11		$	100,005		$	5		$	161		$	102,815		$	81,315	(2)
Average interest rate		2.63	%		3.42	%		5.75	%		12.00	%		10.00	%		10.00	%		11.76	%		14.87	%
Variable rate LIBOR debt (1)	$	0		$	0		$	16,208		$	0		$	0		$	0		$	16,208		$	16,208
Weighted average current interest rate (1)																							4.62	%

We maintain disclosure controls and procedures that are designed to ensure (1) that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms, and (2) that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In September 2003, under the supervision and review of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective in alerting them in a timely manner to material information regarding the Company that is required to be included in our periodic reports to the SEC. In addition, there have been no significant changes in our internal controls or in other factors that could significantly affect those controls since our September 2003 evaluation. We cannot assure you, however, that our system of disclosure controls and procedures will always achieve its stated goals under all future conditions, no matter how remote.

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


CLASS AND TITLE OF CAPITAL STOCK		SHARES OUTSTANDING AS OF NOVEMBER 12, 2003

Common Stock, $.01 Par Value		986,552


Part I. Financial Information
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
Part II — Other Information
SIGNATURES
EXHIBIT INDEX
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


			THREE MONTH PERIODS ENDED SEPTEMBER 30,

			2002					2003

					% of					% of
			$		Total			$		Total

			(Dollars in Thousands)
Operated Equipment Rental:
	Services		$	34,375		73.8	%	$	31,984		67.3	%
	Contract Services (1)			12,201		26.2	%		15,540		32.7	%

		Total Revenues	$	46,576		100.0	%	$	47,524		100.0	%


Date: November 12, 2003		Penhall International Corp. /s/ John T. Sawyer

		John T. Sawyer Chairman of the Board, President and
		Chief Executive Officer

		/s/ Jeffrey E. Platt

		Jeffrey E. Platt Vice President-Finance and Chief Financial Officer

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents


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


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


ARIZONA (State or other jurisdiction of incorporation or organization)		86-0634394 (I.R.S. Employer Identification Number)


SUMMARY CASH FLOW DATA (000's) FOR THE THREE MONTHS ENDED SEPTEMBER 30,	2002			2003

Cash and cash equivalents	$	2,084		$	50
Net cash provided by (used in):
Operating activities		(2,315	)		(2,190	)
Investing activities		(1,840	)		(1,271	)
Financing activities		34			3,327
Capital expenditures		(1,975	)		(1,387	)

(1)		The Company has different interest rate options for its variable rate debt.

(2)		The fair value of fixed rate debt was determined based on current rates offered for the debt instruments.


Exhibit Number			Item Caption

	31	.1	Certification of Chief Executive Officer
	31	.2	Certification of Chief Financial Officer
	32	.1	Certification of Chief Executive Officer
	32	.2	Certification of Chief Financial Officer