SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
[X]
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2004
[ ]
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number. 333-64745
PENHALL INTERNATIONAL CORP.
| ARIZONA (State or other jurisdiction of incorporation or organization) | 86-0634394 (I.R.S. Employer Identification Number) |
1801 PENHALL WAY, ANAHEIM, CA 92803
(Address of principal executive offices) (Zip Code)
(714) 772-6450
(Registrant’s telephone number, including area code)
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| CLASS AND TITLE OF CAPITAL STOCK | SHARES OUTSTANDING AS OF MAY 13, 2004 | |
| Common Stock, $.01 Par Value | 986,552 |
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X}
PENHALL INTERNATIONAL CORP.
INDEX
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| EXHIBIT 31.1 | ||||||||
| EXHIBIT 31.2 | ||||||||
| EXHIBIT 32.1 | ||||||||
| EXHIBIT 32.2 | ||||||||
2
Part 1. Financial Information
Item 1. Financial Statements
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, 2003 |
March 31, 2004 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 184,000 | $ | 415,000 | ||||
Receivables: |
||||||||
Contract and trade receivables |
29,105,000 | 27,283,000 | ||||||
Contract retentions due upon completion and acceptance of work |
4,105,000 | 4,171,000 | ||||||
| 33,210,000 | 31,454,000 | |||||||
Less allowance for doubtful receivables |
1,592,000 | 1,698,000 | ||||||
Net receivables |
31,618,000 | 29,756,000 | ||||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
1,704,000 | 1,753,000 | ||||||
Deferred tax assets |
3,363,000 | 3,363,000 | ||||||
Income taxes
receivable |
2,648,000 | 2,143,000 | ||||||
Inventories |
2,362,000 | 2,263,000 | ||||||
Prepaid expenses and other current assets |
3,638,000 | 1,415,000 | ||||||
Total current assets |
45,517,000 | 41,108,000 | ||||||
Property, plant and equipment, at cost: |
||||||||
Land |
5,004,000 | — | ||||||
Buildings and leasehold improvements |
8,793,000 | 1,243,000 | ||||||
Construction and other equipment |
117,860,000 | 114,922,000 | ||||||
| 131,657,000 | 116,165,000 | |||||||
Less accumulated depreciation and amortization |
78,256,000 | 79,158,000 | ||||||
Net property, plant and equipment |
53,401,000 | 37,007,000 | ||||||
Goodwill |
9,053,000 | 8,700,000 | ||||||
Debt issuance costs, net of accumulated amortization |
3,316,000 | 2,606,000 | ||||||
Other assets, net |
1,186,000 | 907,000 | ||||||
| $ | 112,473,000 | $ | 90,328,000 | |||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| June 30, 2003 |
March 31, 2004 |
|||||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
||||||||
Current liabilities: |
||||||||
Current installments of long-term debt |
$ | 2,551,000 | $ | 621,000 | ||||
Borrowings under revolving credit facility |
14,485,000 | — | ||||||
Trade accounts payable |
7,953,000 | 3,927,000 | ||||||
Accrued liabilities and income taxes payable |
10,809,000 | 8,635,000 | ||||||
Current portion of insurance reserves |
1,569,000 | 2,816,000 | ||||||
Current portion of deferred gain – sale-leaseback |
— | 133,000 | ||||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
831,000 | 1,149,000 | ||||||
Total current liabilities |
38,198,000 | 17,281,000 | ||||||
Long-term debt, excluding current installments |
359,000 | 30,000 | ||||||
Deferred gain – sale-leaseback |
— | 2,011,000 | ||||||
Long-term portion of insurance reserves |
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 $18,122,000 at June 30, 2003 and
March 31, 2004, respectively. Authorized, issued and outstanding 10,000 shares at June 30, 2003 and
March 31, 2004 |
16,744,000 | 18,122,000 | ||||||
Series A Preferred Stock, redemption value $19,737,000 and $21,767,000 at June 30, 2003 and March 31, 2004,
respectively. Authorized 25,000 shares; issued and outstanding 10,428 shares at June 30, 2003
and March 31, 2004 |
19,737,000 | 21,767,000 | ||||||
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 March 31, 2004 |
35,546,000 | 39,199,000 | ||||||
Common
stock, $.01 par value. Authorized 5,000,000 shares; issued 1,021,870 at June 30,
2003 and March 31, 2004 |
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 March 31, 2004 |
(336,000 | ) | (336,000 | ) | ||||
Accumulated deficit |
(113,246,000 | ) | (123,217,000 | ) | ||||
Total stockholders’ deficit |
(75,944,000 | ) | (82,262,000 | ) | ||||
Commitments and Contingencies |
||||||||
| $ | 112,473,000 | $ | 90,328,000 | |||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| THREE MONTH PERIODS | NINE MONTH PERIODS | |||||||||||||||
| ENDED MARCH 31, |
ENDED MARCH 31, |
|||||||||||||||
| 2003 |
2004 |
2003 |
2004 |
|||||||||||||
Revenues |
$ | 29,850,000 | $ | 31,368,000 | $ | 118,470,000 | $ | 116,767,000 | ||||||||
Cost of revenues |
25,416,000 | 26,163,000 | 94,306,000 | 90,606,000 | ||||||||||||
Gross profit |
4,434,000 | 5,205,000 | 24,164,000 | 26,161,000 | ||||||||||||
General and administrative expenses |
6,617,000 | 7,281,000 | 20,627,000 | 21,680,000 | ||||||||||||
Goodwill impairment |
— | 353,000 | — | 353,000 | ||||||||||||
Other operating income |
199,000 | 202,000 | 1,088,000 | 823,000 | ||||||||||||
Earnings (loss) from operations |
(1,984,000 | ) | (2,227,000 | ) | 4,625,000 | 4,951,000 | ||||||||||
Interest expense |
3,429,000 | 3,344,000 | 10,574,000 | 10,447,000 | ||||||||||||
Other income |
— | 33,000 | — | 839,000 | ||||||||||||
Loss before income taxes |
(5,413,000 | ) | (5,538,000 | ) | (5,949,000 | ) | (4,657,000 | ) | ||||||||
Income tax benefit |
(1,949,000 | ) | (2,082,000 | ) | (2,142,000 | ) | (1,747,000 | ) | ||||||||
Net loss |
(3,464,000 | ) | (3,456,000 | ) | (3,807,000 | ) | (2,910,000 | ) | ||||||||
Accretion of preferred stock to redemption value |
(1,023,000 | ) | (1,162,000 | ) | (3,011,000 | ) | (3,408,000 | ) | ||||||||
Accrual of cumulative dividends on preferred stock |
(1,084,000 | ) | (1,249,000 | ) | (3,191,000 | ) | (3,653,000 | ) | ||||||||
Net loss available to common stockholders |
$ | (5,571,000 | ) | $ | (5,867,000 | ) | $ | (10,009,000 | ) | $ | (9,971,000 | ) | ||||
Loss per share basic and diluted |
$ | (5.65 | ) | $ | (5.95 | ) | $ | (10.15 | ) | $ | (10.11 | ) | ||||
Weighted average number of shares outstanding basic and diluted |
986,552 | 986,552 | 986,358 | 986,552 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| NINE MONTH PERIODS | ||||||||
| ENDED MARCH 31, |
||||||||
| 2003 |
2004 |
|||||||
Cash flows provided by operating activities: |
||||||||
Net loss |
$ | (3,807,000 | ) | $ | (2,910,000 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
12,633,000 | 10,996,000 | ||||||
Amortization of debt issuance costs |
705,000 | 871,000 | ||||||
Provision
for doubtful receivables |
440,000 | 437,000 | ||||||
Gain on sale of assets |
(224,000 | ) | (1,248,000 | ) | ||||
Goodwill impairment |
— | 353,000 | ||||||
Changes in operating assets and liabilities: |
||||||||
Receivables |
5,717,000 | 1,425,000 | ||||||
Inventories,
prepaid expenses, other assets and income taxes receivable |
(326,000 | ) | 2,827,000 | |||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
873,000 | (49,000 | ) | |||||
Trade accounts payable, accrued liabilities, income taxes payable and
insurance reserves |
(7,097,000 | ) | (4,439,000 | ) | ||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
572,000 | 318,000 | ||||||
Net cash provided by operating activities |
9,486,000 | 8,581,000 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from sale of assets |
507,000 | 1,769,000 | ||||||
Proceeds from sale-leaseback |
— | 11,312,000 | ||||||
Capital expenditures |
(3,214,000 | ) | (4,012,000 | ) | ||||
Net cash provided by (used in) investing activities |
(2,707,000 | ) | 9,069,000 | |||||
Cash flows from financing activities: |
||||||||
Borrowings under long-term debt |
1,064,000 | 96,000 | ||||||
Repayments of long-term debt |
(7,648,000 | ) | (2,355,000 | ) | ||||
Borrowings under revolving credit facility |
57,710,000 | 164,198,000 | ||||||
Repayments of revolving credit facility |
(57,110,000 | ) | (178,683,000 | ) | ||||
Debt issuance costs |
(133,000 | ) | (161,000 | ) | ||||
Book overdraft |
(2,880,000 | ) | (514,000 | ) | ||||
Proceeds from issuance of common stock |
38,000 | — | ||||||
Repurchase of common stock and Series B Preferred Stock |
(35,000 | ) | — | |||||
Issuance of Series B Preferred Stock |
37,000 | — | ||||||
Net cash used in financing activities |
(8,957,000 | ) | (17,419,000 | ) | ||||
Net change in cash and cash equivalents |
(2,178,000 | ) | 231,000 | |||||
Cash and cash equivalents at beginning of period |
6,205,000 | 184,000 | ||||||
Cash and cash equivalents at end of period |
$ | 4,027,000 | $ | 415,000 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid (received) during the period for: |
||||||||
Income taxes, net |
$ | (1,532,000 | ) | $ | (2,252,000 | ) | ||
Interest |
$ | 12,890,000 | $ | 12,497,000 | ||||
Supplemental disclosure of noncash investing and financing activities: |
||||||||
Accretion of preferred stock to redemption value |
$ | 3,011,000 | $ | 3,408,000 | ||||
Accrual of cumulative dividends on preferred stock |
$ | 3,191,000 | $ | 3,653,000 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
6
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)
(1) Basis of Presentation
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 nine month period ended March 31, 2004 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. Certain June 30, 2003 balances have been reclassified to conform to the presentation used for March 31, 2004.
Loss Per Share
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 diluted securities. The dilutive effect of outstanding options is reflected in diluted loss per share by application of the treasury stock method. For the three and nine month periods ended March 31, 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 as the effect would have been anti-dilutive. For the three and nine month periods ended March 31, 2004, diluted loss per share is the same as basic loss per share as options to purchase 8,125 shares of common stock were not included in the computation of diluted loss per share as the effect would have been anti-dilutive.
Critical Accounting Policies and Estimates
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 Recognition on Long-Term Construction Contracts
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.
7
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2004
(Unaudited)
Stock-based Compensation
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 (loss) and net earnings (loss) 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 |
Nine months ended |
|||||||||||||||
| March 31, 2003 |
March 31, 2004 |
March 31, 2003 |
March 31, 2004 |
|||||||||||||
Net loss available to common stockholders as reported |
$ | (5,571,000 | ) | $ | (5,867,000 | ) | (10,009,000 | ) | $ | (9,971,000 | ) | |||||
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 |
$ | (5,000 | ) | $ | (1,000 | ) | $ | (16,000 | ) | $ | (7,000 | ) | ||||
Pro forma net loss available to common stockholders |
$ | (5,576,000 | ) | $ | (5,868,000 | ) | $ | (10,025,000 | ) | $ | (9,978,000 | ) | ||||
Basic and diluted loss per share as reported |
$ | (5.65 | ) | $ | (5.95 | ) | $ | (10.15 | ) | $ | (10.11 | ) | ||||
Pro forma basic and diluted loss per share |
$ | (5.65 | ) | $ | (5.95 | ) | $ | (10.16 | ) | $ | (10.11 | ) | ||||
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.
Goodwill
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. As a result of industry conditions, we determined that there were indicators of impairment to the carrying value of goodwill. During the third quarter of fiscal 2004, we performed a review of the value of our goodwill in accordance with SFAS 142. Based on our review, we recorded a charge of $353,000 to write-down the value of goodwill for a reporting unit. See Note 6 for further discussion.
New Accounting Pronouncements
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 to all other financial instruments that exist as of the beginning of the first interim financial reporting 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 after December 15, 2003, (the Company’s fiscal 2005). The Company has determined that upon adoption of Statement 150, accretion recorded related to the Senior Exchangeable Preferred Stock and the Series A Preferred Stock will be treated as interest expense in the Company’s consolidated statements of operations and cash flows.
In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which codifies, revises, and rescinds certain sections of SAB No. 101, “Revenue Recognition,” in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material effect on our financial position or results from operations.
8
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2004
(Unaudited)
(2) Related Party
The Company has a balance due to Bruckmann, Rosser, Sherrill & Co., Inc. (BRS) of $300,000 as of March 31, 2004. The balance due as of June 30, 2003 was $75,000.
(3) Commitments and Contingencies
Litigation
The Company has an employment related legal matter pending settlement subject to final approval by the court. As of March 31, 2004, the Company has accrued $250,000 related to this matter.
There are various additional 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.
(4) Sale-leaseback
On December 3, 2003, the Company consummated an agreement for the sale-and-leaseback of our 11 owned properties (the “Real Estate”). The buyer, CRICPENHALL LLC is owned by Prudential Real Estate Companies Account Partnership II, LP and Prudential Real Estate Companies Fund II LP. These are two investment funds, sponsored by Prudential Real Estate Investors. Prudential Real Estate Investors is a business unit of Prudential Investment Management, Inc., a wholly-owned subsidiary of Prudential Financial Inc. Penhall sold the Real Estate for net proceeds of $11.3 million and immediately entered into eleven 20 year leases with annual lease payments. Penhall also has four 5-year options to extend the lease at the then current fair market value. The gain on sale of $2.2 million will be amortized over the initial term of the leases of 20 years. Through March 31, 2004, the Company has amortized $44,000 of the gain and recorded $403,000 of rent expense under the leaseback. During the third quarter the Company reduced the gain on sale by $470,000 upon determination of additional costs related to the sale. The resulting change to amortization of the gain on sale is not material.
Future minimum lease payments under these 20 year leases as of March 31, 2004 are as follows:
2004 |
$ | 1,224,000 | ||
2005 |
1,224,000 | |||
2006 |
1,224,000 | |||
2007 |
1,224,000 | |||
2008 |
1,224,000 | |||
Thereafter |
22,283,000 | |||
| $ | 28,403,000 | |||
(5) Goodwill Impairment
During the three and nine month periods ended March 31, 2003, the Company recorded no impairment charges in accordance with SFAS No. 142. During the three and nine month periods ended March 31, 2004, the Company recorded $353,000 of impairment charges in accordance with SFAS No. 142.
As part of its quarterly review of financial results in the third quarter of fiscal 2004, the Company noted indicators that the carrying value of its goodwill may be impaired and performed an impairment test. The impairment test was performed because of the economic downturn affecting the Company’s operations and revenue forecasts. The Company determined that the continued decline in market conditions within the Company’s industry was an indication of goodwill impairment. Accordingly, the Company evaluated the recoverability of its goodwill in accordance with SFAS No. 142.
Under the first step of the SFAS No. 142 test, we determined the fair value of the reporting units based on cash flow utilizing a multiple of the three year average EBIDTA to calculate the fair value. Based on the first step analysis, the Company determined that the carrying amount of two reporting units was in excess of the fair value. As such, the Company was required to perform the second step analysis on the two reporting units that failed the first step test to determine the amount of the impairment loss. The Company then performed a preliminary second step analysis in connection with the impairment and determined that an impairment charge of $353,000 was necessary for one of the reporting units. The charge of $353,000 represents all of the goodwill for this reporting unit. Additional impairment losses may occur if the decline in market conditions continues.
9
(7) Unaudited Condensed Consolidating Financial Information
The following unaudited 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 March 31, 2004 and for the three and nine month periods ended March 31, 2003 and 2004 of:
| (a) | Penhall International Corp. on a parent company only basis (“Parent”) (carrying its investments in the subsidiaries under the equity method), | |||
| (b) | the Guarantor Subsidiaries, | |||
| (c) | elimination entries necessary to consolidate the parent company and its subsidiaries, and | |||
| (d) | the Company on a consolidated basis. | |||
10
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2004
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
| 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 subsidiary |
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 | ||||||||
Borrowings under revolving credit facility |
— | 14,485,000 | — | 14,485,000 | ||||||||||||
Trade accounts payable |
9,000 | 8,096,000 | (152,000 | ) | 7,953,000 | |||||||||||
Accrued liabilities and income taxes payable |
4,931,000 | 5,878,000 | — | 10,809,000 | ||||||||||||
Current portion of insurance reserves |
— | 1,569,000 | — | 1,569,000 | ||||||||||||
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 | 33,407,000 | (19,550,000 | ) | 38,198,000 | |||||||||||
Long-term debt, excluding current installments |
180,000 | 179,000 | — | 359,000 | ||||||||||||
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 | ||||||||
11
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
MARCH 31, 2004
(Unaudited)
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
| MARCH 31, 2004 |
||||||||||||||||
| Penhall | ||||||||||||||||
| International | Penhall | |||||||||||||||
| Corp. |
Company |
Eliminations |
Consolidated |
|||||||||||||
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Receivables, net |
$ | — | $ | 29,756,000 | $ | — | $ | 29,756,000 | ||||||||
Inventories |
— | 2,263,000 | — | 2,263,000 | ||||||||||||
Costs and estimated earnings in excess
of billings on uncompleted contracts |
— | 1,753,000 | — | 1,753,000 | ||||||||||||
Other current assets |
2,182,000 | 5,154,000 | — | 7,336,000 | ||||||||||||
Total current assets |
2,182,000 | 38,926,000 | — | 41,108,000 | ||||||||||||
Net property, plant and equipment |
31,000 | 36,976,000 | — | 37,007,000 | ||||||||||||
Intercompany assets |
— | 14,190,000 | (14,190,000 | ) | — | |||||||||||
Other assets, net |
1,554,000 | 10,659,000 | — | 12,213,000 | ||||||||||||
Investment in subsidiary |
71,598,000 | — | (71,598,000 | ) | — | |||||||||||
| $ | 75,365,000 | $ | 100,751,000 | $ | (85,788,000 | ) | $ | 90,328,000 | ||||||||
Liabilities and Stockholders’ Equity (Deficit) |
||||||||||||||||
Current installments of long-term debt |
$ | — | $ | 621,000 | $ | — | $ | 621,000 | ||||||||
Trade accounts payable |
4,000 | 3,923,000 | — | 3,927,000 | ||||||||||||
Accrued liabilities and income taxes
payable |
2,291,000 | 6,344,000 | — | 8,635,000 | ||||||||||||
Current portion of insurance reserves |
— | 2,816,000 | — | 2,816,000 | ||||||||||||
Current portion of deferred gain – sale-leaseback |
133,000 | — | — | 133,000 | ||||||||||||
Billings in excess of costs and estimated
earnings on uncompleted contracts |
— | 1,149,000 | — | 1,149,000 | ||||||||||||
Intercompany liabilities |
14,190,000 | — | (14,190,000 | ) | — | |||||||||||
Total current liabilities |
16,618,000 | 14,853,000 | (14,190,000 | ) | 17,281,000 | |||||||||||
Long-term debt, excluding current
installments |
— | 30,000 | — | 30,000 | ||||||||||||
Deferred gain – sale-leaseback |
2,011,000 | — | — | 2,011,000 | ||||||||||||
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 |
18,122,000 | — | — | 18,122,000 | ||||||||||||
Series A Preferred Stock |
21,767,000 | — | — | 21,767,000 | ||||||||||||
Stockholders’ equity (deficit) |
(82,262,000 | ) | 71,598,000 | (71,598,000 | ) | (82,262,000 | ) | |||||||||
| $ | 75,365,000 | $ | 100,751,000 | $ | (85,788,000 | ) | $ | 90,328,000 | ||||||||
12
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2004
(Unaudited)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
| THREE MONTH PERIOD ENDED MARCH 31, 2003 |
||||||||||||||||
| Penhall | ||||||||||||||||
| International | Penhall | |||||||||||||||
| Corp. |
Company |
Eliminations |
Consolidated |
|||||||||||||
Revenues |
$ | 2,187,000 | $ | 29,850,000 | $ | (2,187,000 | ) | $ | 29,850,000 | |||||||
Cost of revenues |
— | 25,416,000 | — | 25,416,000 | ||||||||||||
Gross profit |
2,187,000 | 4,434,000 | (2,187,000 | ) | 4,434,000 | |||||||||||
General and administrative expenses |
183,000 | 6,830,000 | (396,000 | ) | 6,617,000 | |||||||||||
Royalties |
— | 1,791,000 | (1,791,000 | ) | — | |||||||||||
Other operating income, net |
12,000 | 187,000 | — | 199,000 | ||||||||||||
Equity in loss of subsidiary |
(2,558,000 | ) | — | 2,558,000 | — | |||||||||||
Loss from operations |
(542,000 | ) | (4,000,000 | ) | 2,558,000 | (1,984,000 | ) | |||||||||
Interest expense |
3,377,000 | 52,000 | — | 3,429,000 | ||||||||||||
Loss before income taxes |
(3,919,000 | ) | (4,052,000 | ) | 2,558,000 | (5,413,000 | ) | |||||||||
Income tax benefit |
(455,000 | ) | (1,494,000 | ) | — | (1,949,000 | ) | |||||||||
Net loss |
$ | (3,464,000 | ) | $ | (2,558,000 | ) | $ | 2,558,000 | $ | (3,464,000 | ) | |||||
13
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2004
(Unaudited)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
| THREE MONTH PERIOD ENDED MARCH 31, 2004 |
||||||||||||||||
| Penhall | ||||||||||||||||
| International | Penhall | |||||||||||||||
| Corp. |
Company |
Eliminations |
Consolidated |
|||||||||||||
Revenues |
$ | 1,100,000 | $ | 31,368,000 | $ | (1,100,000 | ) | $ | 31,368,000 | |||||||
Cost of revenues |
— | 26,163,000 | — | 26,163,000 | ||||||||||||
Gross profit |
1,100,000 | 5,205,000 | (1,100,000 | ) | 5,205,000 | |||||||||||
General and administrative expenses |
413,000 | 7,265,000 | (397,000 | ) | 7,281,000 | |||||||||||
Royalties |
— | 703,000 | (703,000 | ) | — | |||||||||||
Goodwill impairment |
— | 353,000 | — | 353,000 | ||||||||||||
Other operating income, net |
— | 202,000 | — | 202,000 | ||||||||||||
Equity in earnings of subsidiary |
(1,922,000 | ) | — | 1,922,000 | — | |||||||||||
Loss from operations |
(1,235,000 | ) | (2,914,000 | ) | 1,922,000 | (2,227,000 | ) | |||||||||
Interest expense |
3,158,000 | 186,000 | — | 3,344,000 | ||||||||||||
Other income |
33,000 | — | — | 33,000 | ||||||||||||
Loss before income taxes |
(4,360,000 | ) | (3,100,000 | ) | 1,922,000 | (5,538,000 | ) | |||||||||
Income tax expense (benefit) |
(904,000 | ) | (1,178,000 | ) | — | (2,082,000 | ) | |||||||||
Net loss |
$ | (3,456,000 | ) | $ | (1,922,000 | ) | $ | 1,922,000 | $ | (3,456,000 | ) | |||||
14
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2004
(Unaudited)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
| NINE MONTH PERIOD ENDED MARCH 31, 2003 |
||||||||||||||||
| Penhall | ||||||||||||||||
| International | Penhall | |||||||||||||||
| Corp. |
Company |
Eliminations |
Consolidated |
|||||||||||||
Revenues |
$ | 8,294,000 | $ | 118,470,000 | $ | (8,294,000 | ) | $ | 118,470,000 | |||||||
Cost of revenues |
— | 94,306,000 | — | 94,306,000 | ||||||||||||
Gross profit |
8,294,000 | 24,164,000 | (8,294,000 | ) | 24,164,000 | |||||||||||
General and administrative expenses |
567,000 | 21,246,000 | (1,186,000 | ) | 20,627,000 | |||||||||||
Royalties |
— | 7,108,000 | (7,108,000 | ) | — | |||||||||||
Other operating income, net |
13,000 | 1,075,000 | — | 1,088,000 | ||||||||||||
Equity in earnings of subsidiary |
(2,131,000 | ) | — | 2,131,000 | — | |||||||||||
Earnings (loss) from operations |
5,609,000 | (3,115,000 | ) | 2,131,000 | 4,625,000 | |||||||||||
Interest expense |
10,360,000 | 214,000 | — | 10,574,000 | ||||||||||||
Loss before income taxes |
(4,751,000 | ) | (3,329,000 | ) | 2,131,000 | (5,949,000 | ) | |||||||||
Income tax benefit |
(944,000 | ) | (1,198,000 | ) | — | (2,142,000 | ) | |||||||||
Net loss |
$ | (3,807,000 | ) | $ | (2,131,000 | ) | $ | 2,131,000 | $ | (3,807,000 | ) | |||||
15
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2004
(Unaudited)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
| NINE MONTH PERIOD ENDED MARCH 31, 2004 |
||||||||||||||||
| Penhall | ||||||||||||||||
| International | Penhall | |||||||||||||||
| Corp. |
Company |
Eliminations |
Consolidated |
|||||||||||||
Revenues |
$ | 3,805,000 | $ | 116,767,000 | $ | (3,805,000 | ) | $ | 116,767,000 | |||||||
Cost of revenues |
— | 90,606,000 | — | 90,606,000 | ||||||||||||
Gross profit |
3,805,000 | 26,161,000 | (3,805,000 | ) | 26,161,000 | |||||||||||
General and administrative expenses |
861,000 | 22,008,000 | (1,189,000 | ) | 21,680,000 | |||||||||||
Royalties |
— | 2,616,000 | (2,616,000 | ) | — | |||||||||||
Goodwill impairment |
— | 353,000 | — | 353,000 | ||||||||||||
Other operating income, net |
— | 823,000 | — | 823,000 | ||||||||||||
Equity in earnings of subsidiary |
1,199,000 | — | (1,199,000 | ) | — | |||||||||||
Earnings from operations |
4,143,000 | 2,007,000 | (1,199,000 | ) | 4,951,000 | |||||||||||
Interest expense |
9,579,000 | 868,000 | — | 10,447,000 | ||||||||||||
Other income |
44,000 | 795,000 | — | 839,000 | ||||||||||||
Earnings (loss) before income taxes |
(5,392,000 | ) | 1,934,000 | (1,199,000 | ) | (4,657,000 | ) | |||||||||
Income tax expense (benefit) |
(2,482,000 | ) | 735,000 | — | (1,747,000 | ) | ||||||||||
Net loss |
$ | (2,910,000 | ) | $ | 1,199,000 | $ | (1,199,000 | ) | $ | (2,910,000 | ) | |||||
16
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2004
(Unaudited)
UNUAIDTED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
| NINE MONTH PERIOD ENDED MARCH 31, 2003 |
||||||||||||||||||||
| Penhall | Penhall | |||||||||||||||||||
| International | Rental | Penhall | ||||||||||||||||||
| Corp. |
Corp. |
Company |
Eliminations |
Consolidated |
||||||||||||||||
Net cash provided by (used in) operating activities |
$ | (4,486,000 | ) | $ | — | $ | 13,972,000 | $ | — | $ | 9,486,000 | |||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Proceeds from sale of assets |
— | — | 507,000 | — | 507,000 | |||||||||||||||
Capital expenditures |
— | — | (3,214,000 | ) | — | (3,214,000 | ) | |||||||||||||
Cash from Penhall Rental merger |
6,143,000 | (6,143,000 | ) | — | — | — | ||||||||||||||
Net cash provided by
(used in) investing
activities |
6,143,000 | (6,143,000 | ) | (2,707,000 | ) | — | (2,707,000 | ) | ||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Due to (from) affiliates |
6,361,000 | — | (6,361,000 | ) | — | — | ||||||||||||||
Borrowings under long-term debt |
— | — | 1,064,000 | — | 1,064.000 | |||||||||||||||
Repayments of long-term debt |
(4,563,000 | ) | — | (3,085,000 | ) | — | (7,648,000 | ) | ||||||||||||
Borrowings under revolving credit facility |
57,710,000 | — | — | — | 57,710,000 | |||||||||||||||
Repayments of long-term debt |
(57,110,000 | ) | — | — | — | (57,110,000 | ) | |||||||||||||
Debt issuance costs |
(104,000 | ) | — | (29,000 | ) | — | (133,000 | ) | ||||||||||||
Book overdraft |
— | — | (2,880,000 | ) | — | (2,880,000 | ) | |||||||||||||
Proceeds from issuance of common stock |
38,000 | — | — | — | 38,000 | |||||||||||||||
Repurchase of common stock and Series B
Preferred Stock |
(35,000 | ) | — | — | — | (35,000 | ) | |||||||||||||
Issuance of Series B Preferred Stock |
37,000 | — | — | — | 37,000 | |||||||||||||||
Net cash provided by
(used in) financing
activities |
2,334,000 | — | (11,291,000 | ) | — | (8,957,000 | ) | |||||||||||||
Net change in cash
and cash equivalents |
3,991,000 | (6,143,000 | ) | (26,000 | ) | — | (2,178,000 | ) | ||||||||||||
Cash and cash equivalents at beginning of period |
— | 6,143,000 | 62,000 | — | 6,205,000 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 3,991,000 | $ | — | $ | 36,000 | $ | — | $ | 4,027,000 | ||||||||||
17
PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2004
(Unaudited)
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
| NINE MONTH PERIOD ENDED MARCH 31, 2004 |
||||||||||||||||
| Penhall | ||||||||||||||||
| International | Penhall | |||||||||||||||
| Corp. |
Company |
Eliminations |
Consolidated |
|||||||||||||
Net cash provided by operating activities |
$ | (5,911,000 | ) | $ | 14,492,000 | $ | — | $ | 8,581,000 | |||||||
Cash flows from investing activities: |
||||||||||||||||
Proceeds from sale of assets |
— | 1,769,000 | — | 1,769,000 | ||||||||||||
Proceeds from sale-leaseback |
11,312,000 | — | — | 11,312,000 | ||||||||||||
Capital expenditures |
— | (4,012,000 | ) | — | (4,012,000 | ) | ||||||||||
Net cash provided by (used in)
investing activities |
11,312,000 | (2,243,000 | ) | — | 9,069,000 | |||||||||||
Cash flows from financing activities: |
||||||||||||||||
Due to (from) affiliates |
(5,208,000 | ) | 5,208,000 | — | — | |||||||||||
Borrowings under long-term debt |
— | 96,000 | — | 96,000 | ||||||||||||
Repayments of long-term debt |
(183,000 | ) | (2,172,000 | ) | — | (2,355,000 | ) | |||||||||
Borrowings under revolving credit facility |
— | 164,198,000 | — | 164,198,000 | ||||||||||||
Repayments of revolving credit facility |
— | (178,683,000 | ) | — | (178,683,000 | ) | ||||||||||
Debt issuance costs |
— | (161,000 | ) | — | (161,000 | ) | ||||||||||
Book overdraft |
(152,000 | ) | (514,000 | ) | 152,000 | (514,000 | ) | |||||||||
Net cash used in financing activities |
(5,543,000 | ) | (12,028,000 | ) | 152,000 | (17,419,000 | ) | |||||||||
Net change in cash and cash
equivalents |
(142,000 | ) | 221,000 | 152,000 | 231,000 | |||||||||||
Cash and cash equivalents at beginning of period |
152,000 | 184,000 | (152,000 | ) | 184,000 | |||||||||||
Cash and cash equivalents at end of period |
$ | 10,000 | $ | 405,000 | $ | — | $ | 415,000 | ||||||||
18
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.
General
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:
| 1. | HSI, a Minnesota-based firm acquired in April 1998, | |||
| 2. | Daley Concrete Cutting, a South Carolina-based division of U.S. Rentals acquired in October 1998, | |||
| 3. | Lipscomb Concrete Cutting, a North Carolina-based company acquired in November 1998, | |||
| 4. | Prospect Drilling and Sawing, a Minnesota-based company acquired in June 1999, | |||
| 5. | Advance Concrete Sawing and Drilling, Inc., a California-based company acquired in September 2000, | |||
| 6. | H&P Sawing and Drilling, a Missouri-based company acquired in March 2001, | |||
| 7. | Bob Mack Company, a California-based company acquired in March 2002, and | |||
| 8. | Arizona Curb Cut Company, an Arizona based company in April 2002. | |||
During the same period, Penhall established operations in six new markets by opening offices 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:
| THREE MONTH PERIODS ENDED MARCH 31, |
NINE MONTH PERIODS ENDED MARCH 31, |
|||||||||||||||||||||||||||||||
| 2003 |
2004 |
2003 |
2004 |
|||||||||||||||||||||||||||||
| % of | % of | % of | % of | |||||||||||||||||||||||||||||
| $ |
Total |
$ |
Total |
$ |
Total |
$ |
Total |
|||||||||||||||||||||||||
| (Dollars in Thousands) | (Dollars in Thousands) | |||||||||||||||||||||||||||||||
Operated Equipment: |
||||||||||||||||||||||||||||||||
Rental Services |
$ | 23,232 | 77.8 | % | $ | 23,200 | 74.0 | % | $ | 86,744 | 73.2 | % | $ | 82,151 | 70.4 | % | ||||||||||||||||
Contract Services (1) |
6,618 | 22.2 | % | 8,168 | 26.0 | % | 31,726 | 26.8 | % | 34,616 | 29.6 | % | ||||||||||||||||||||
Total Revenues |
$ | 29,850 | 100.0 | % | $ | 31,368 | 100.0 | % | $ | 118,470 | 100.0 | % | $ | 116,767 | 100.0 | % | ||||||||||||||||
| (1) | Contract services revenues exclude services performed by the operated equipment rental divisions on long-term contracts. |
19
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Revenue growth is influenced by infrastructure change, including new construction, modification and 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 including rent. As a result of the sale-leaseback, the Company expects operating expenses to increase approximately $1.0 million per year due to the incremental increase of rent expense compared to depreciation expense. 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.
Results of Operations
Nine Months Ended March 31, 2004 Compared to Nine months Ended March 31, 2003
Revenues. Revenues for the nine months ended March 31, 2004 (“Interim 2004”) were $116.8 million; a decrease of $1.7 million or 1.4% compared to the nine months ended March 31, 2003 (“Interim 2003”). The decrease in revenues in Interim 2004 were primarily a result of an increase of $2.9 million or 9.1% in Contract Services, offset by a $4.6 million or 5.3% decrease in Operated Equipment Rental Services. The decrease in total revenues is attributable to a continuing weakness in the non-residential construction market and uncertainty in government spending.
Gross Profit. Gross profit totaled $26.2 million in Interim 2004, an increase of $2.0 million or 8.3% from Interim 2003. Gross profit as a percentage of revenues increased from 20.4% in Interim 2003 to 22.4% in Interim 2004. The increase in gross profit from Interim 2003 to Interim 2004 is primarily attributable to significant profits from a major project and the successful settlement of an outstanding claim.
General and Administrative Expenses. General and administrative expenses were $21.7 million in Interim 2004 compared to $20.6 million in Interim 2003. As a percent of revenues, general and administrative expenses were 18.6% in Interim 2004 compared to 17.4% in Interim 2003. The increase in general and administrative expenses of $1.1 million in Interim 2004 is primarily attributable to an increase of $1.3 million in incentive compensation and $0.3 million in outside professional service, partially offset by decreases of $0.4 million in salary and associated taxes, $0.3 million in depreciation, and $0.1 million in communication expense.
Interest Expense. Interest expense was $10.4 million in Interim 2004 and $10.6 million in Interim 2003. Although interest expenses attributable to borrowings diminished in 2004, this was partially offset by higher letter of credit expenses.
Other Income. Other income increased by $0.8 million from Interim 2003 to Interim 2004. This increase is primarily attributable to the sale of an FCC license that was no longer used by the Company.
Income Tax Benefit. The Company recorded an income tax benefit of $1.7 million, or 37.5% of loss before income taxes in Interim 2004, compared to an income tax benefit of $2.1 million, or 36% of loss before income taxes in Interim 2003.
Three months Ended March 31, 2004 Compared to Three months Ended March 31, 2003
Revenues. Revenues for the three months ended March 31, 2004 (“Interim 2004”) were $31.4 million, an increase of $1.5 million or 5.1% over the three months ended March 31, 2003 (“Interim 2003”). Revenue from contract services increased by $1.6 million or 23.4% in Interim 2004 while operated equipment rental services revenues were flat from year to year. The increase in revenues is attributable to higher contract revenues in the Southwest region.
Gross Profit. Gross profit totaled $5.2 million in Interim 2004, an increase of $0.8 million or 17.4% from Interim 2003. Gross profit as a percentage of revenues increased to 16.6% in Interim 2004 from 14.9% in Interim 2003. The increase in gross profit is primarily attributable to significant profits from a major project.
General and Administrative Expenses. General and administrative expenses were $7.3 million in Interim 2004 compared to $6.6 million in Interim 2003, an increase of $0.7 million or 10.0%. As a percent of revenues, general and administrative expenses were 23.2% in Interim 2004 compared to 22.2% in Interim 2003. The increase in general and administrative expenses is primarily attributable to increases of $0.3 million in accounting and legal expenses, $0.2 million in bad debt expense, and $0.3 million in rent expense, partial offset by a $0.1 million decrease in incentive compensation.
Interest Expense. Interest expense was $3.3 million in Interim 2004 compared to $3.4 million in Interim 2003. The lower interest expenses is attributable to lower borrowings in Interim 2004, partially offset by higher letter of credit expenses.
Income Tax Benefit. The Company had income tax benefit of $2.1 million in Interim 2004 or 38% of loss before taxes compared to an income tax benefit of $1.9 million, or 36.0% of loss before income taxes in Interim 2003.
Liquidity and Capital Resources
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 is 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 the Company’s eligible inventory and equipment, and (iii) up to 50% of the appraised forced liquidation value of the Company’s owned real estate.
The provisions of The New Credit facility allow the lender, in its reasonable credit judgment, to assess additional reserves against the borrowing base calculation. The Company reviewed the New Credit and determined that the associated lockbox agreement satisfied the requirements for consideration of EITF Issue No. 95-22, “Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that include both a Subjective Acceleration Clause and a Lock-Box Arrangement” (“EITF 95-22”). Further, we reviewed the terms and conditions of the New Credit with the intention of determining whether there are any subjective
20
acceleration clauses as defined in FAS 78, “Classification of Obligations that are Callable by the Creditor.” In reading the agreement and discussing the terms and conditions with our lender, it did not appear that there were any subjective acceleration clauses that fit directly into the definition provided in FAS 78. However, upon further analysis of the terms of The New Credit, there were certain provisions noted that could potentially be interpreted as a subjective acceleration clause. As a result, the Company has classified borrowings under The New Credit facility as a short-term obligation. The additional reserves may result in an overadvance borrowing position that could require an accelerated repayment of the overadvance. Since the inception of this New Credit facility, the lender has not applied any additional reserves to the borrowing base calculation. Management’s understanding of this provision after consultation with the lender, is that the lender, in its reasonable credit judgment, can assess additional reserves to the borrowing base calculation to account for changes in the nature of the Company’s business that alters the underlying value of the collateral. The Company does not anticipate any changes in its business practices that would result in any material adjustments to the borrowing base calculation. However, management cannot be certain that additional reserves will not be assessed by the lender to the borrowing base calculation. 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 March 31, 2004, total borrowing unused and available under The New Credit was $28.7 million.
| SUMMARY CASH FLOW DATA (000’s) FOR THE NINE MONTHS ENDED March 31, |
2003 |
2004 |
||||||
Cash and cash equivalents |
$ | 4,027 | $ | 415 | ||||
Net cash provided by (used in): |
||||||||
Operating activities |
9,486 | 8,581 | ||||||
Investing activities |
(2,707 | ) | 9,069 | |||||
Financing activities |
(8,957 | ) | (17,419 | ) | ||||
Capital expenditures |
(3,214 | ) | (4,012 | ) | ||||
Cash provided by operating activities netted $8.6 million in Interim 2004. Net loss decreased $0.9 million from a $3.8 million loss in Interim 2003 to a $2.9 million loss in Interim 2004. In Interim 2004, the Company’s net loss, gain on sale of assets and trade accounts payable, accrued liabilities, income taxes payable and insurance reserves are offset by depreciation and amortization plus receivables, inventories, prepaid expenses, other assets and income taxes receivable and costs and estimated earnings in excess of billings on uncompleted contracts which resulted in net cash provided by operating activities. In Interim 2003, the Company’s net loss plus trade accounts payable, accrued liabilities, income taxes and insurance reserves were offset by depreciation and amortization and receivables which resulted in $9.5 million in net cash provided from operating activities.
Net cash provided by investing activities was $9.1 million in Interim 2004, compared to net cash used in investing activities of $2.7 million in Interim 2003. Although capital expenditures remained relatively consistent rising from $3.2 million in Interim 2003 to $4.0 million in 2004, proceeds from sale of assets rose to $13.1 million in Interim 2004 from $0.5 million in Interim 2003. The increase of $12.6 million in Interim 2004 is primarily attributable to the disposal of an unused FCC license for $0.8 million and the sale and the leaseback of the Company’s 11 owned properties, which netted the Company $11.3 million.
Management estimates that the Company’s annual capital expenditures will be approximately $6.0 million for fiscal 2004.
Net cash used in financing activities in Interim 2004 was $17.4 million as compared to a use of $9.0 million in Interim 2003. In Interim 2003 and Interim 2004, the Company’s financing activities are primarily a result of borrowings and repayments of 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 March 31, 2004, the Company and its subsidiaries had approximately $100.7 million of total indebtedness outstanding (including the Notes) plus outstanding letters of credit of $13.7 million and a stockholders’ deficit of approximately $82.3 million. The Company additionally has mandatorily redeemable preferred stock with maturity dates of February 1, 2007 and August 1, 2007; the estimated future obligations are approximately $24.4 million and $33.6 million respectively. As of March 31, 2004, approximately $28.7 million of additional borrowing was available under the Company’s New Credit Facility (as defined).
Sale-leaseback
On December 3, 2003, the Company consummated an agreement for the sale-and-leaseback of our 11 owned properties (the “Real Estate”). The buyer, CRICPENHALL LLC is owned by Prudential Real Estate Companies Account Partnership II, LP and Prudential Real Estate Companies Fund II LP. These are two investment funds, sponsored by Prudential Real Estate Investors. Prudential Real Estate Investors is a business unit of Prudential Investment Management, Inc., a wholly-owned subsidiary of Prudential Financial Inc. Penhall sold the Real Estate for $12.0 million and immediately entered into eleven 20 year leases with annual lease payments. Penhall also has four 5-year options to extend the lease at the then current fair market value. The gain on sale of $2.2 million will be amortized over the initial term of the leases of 20 years. Through March 31, 2004, the Company has amortized $44,000 of the gain. See Note 4 to the unaudited condensed consolidated financial statements.
New Accounting Pronouncement
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). The Company has determined that upon adoption of Statement 150, accretion recorded related to the Senior Exchangeable Preferred Stock and the Series A Preferred Stock will be treated as interest expense in the Company’s consolidated statements of operations and cash flows.
In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which codifies, revises, and rescinds certain sections of SAB No. 101, “Revenue Recognition,” in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material effect on our financial position or results from operations.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
The Company is exposed to interest rate changes primarily as a result of its notes payable, including Senior Notes and The New Credit 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 its overall borrowing costs. 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 March 31, 2004.
| Years Ended June 30, |
||||||||||||||||||||||||||||||||
| Fair | ||||||||||||||||||||||||||||||||
| 2004 |
2005 |
2006 |
2007 |
2008 |
Thereafter |
Total |
Value |
|||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
Fixed rate debt |
$ | 429 | $ | 202 | $ | 20 | $ | 100,000 | $ | 0 | $ | 0 | $ | 100,651 | $ | 96,152 | (1) | |||||||||||||||
Average interest rate |
2.21 | % | 3.09 | % | 2.21 | % | 12.00 | % | 0 | % | 0 | % | 11.94 | % | 12.57 | % | ||||||||||||||||
| (1) | The fair value of fixed rate debt was determined based on current rates offered for the debt instrument. |
Item 4. Controls and Procedures
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 March 2004, 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 March 2004 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.
Part II — Other Information
Items 1-5 are not applicable
Item 6. Exhibits and Reports on Form 8-K
| (a) | Exhibits |
| Number |
||
31.1
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated May 17, 2004* | |
31.2
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated May 17, 2004* | |
32.1
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated May 17, 2004* | |
32.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated May 17, 2004* | |
| * filed herewith |
| (b) | Reports on Form 8-K |
On December 5, 2003, we filed a Current Report on Form 8-K relating to a sale-leaseback transaction that occurred on December 3, 2003.
22
SIGNATURES
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.
| Penhall International Corp. | ||
Date: May 17, 2004
|
/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 |
23
EXHIBIT INDEX
| Number |
Description |
|
31.1
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated May 17, 2004* | |
31.2
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated May 17, 2004* | |
32.1
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated May 17, 2004* | |
32.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated May 17, 2004* | |
| * filed herewith |