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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

ý

 

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

 

For the quarterly period ended December 31, 2004

 

Commission File Number. 333-64745

 

PENHALL INTERNATIONAL CORP.

(Exact Name of registrant as specified in its charter)

 

ARIZONA

 

86-0634394

(State or other jurisdiction of incorporation or organization)

 

(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
FEBRUARY 14, 2005

 

 

 

Common Stock, $.01 Par Value

 

986,552

 

Indicate by check mark whether the registrant (1) 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  ý  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  ý

 

 



 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

June 30, 2004

 

December 31, 2004

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,076,000

 

$

44,000

 

Receivables:

 

 

 

 

 

Contract and trade receivables

 

30,386,000

 

29,511,000

 

Contract retentions due upon completion and acceptance of work

 

4,361,000

 

4,901,000

 

 

 

34,747,000

 

34,412,000

 

Less allowance for doubtful receivables

 

1,317,000

 

1,161,000

 

Net receivables

 

33,430,000

 

33,251,000

 

 

 

 

 

 

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

2,957,000

 

2,341,000

 

Deferred tax assets

 

2,034,000

 

2,034,000

 

Inventories

 

2,171,000

 

2,101,000

 

Prepaid expenses and other current assets

 

2,198,000

 

2,614,000

 

Total current assets

 

43,866,000

 

42,385,000

 

 

 

 

 

 

 

Plant and equipment, at cost:

 

 

 

 

 

Leasehold improvements

 

1,302,000

 

1,324,000

 

Construction and other equipment

 

115,998,000

 

120,082,000

 

 

 

117,300,000

 

121,406,000

 

Less accumulated depreciation

 

81,260,000

 

85,225,000

 

Net plant and equipment

 

36,040,000

 

36,181,000

 

 

 

 

 

 

 

Goodwill

 

6,371,000

 

6,371,000

 

Debt issuance costs, net of accumulated amortization

 

2,313,000

 

1,731,000

 

Other assets, net

 

817,000

 

661,000

 

 

 

$

89,407,000

 

$

87,329,000

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

Continued

 

2



 

 

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

June 30, 2004

 

December 31, 2004

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current installments of long-term debt

 

$

882,000

 

$

493,000

 

Borrowings under revolving credit facility

 

 

3,000

 

Trade accounts payable

 

5,664,000

 

4,240,000

 

Accrued liabilities and taxes payable

 

12,857,000

 

12,108,000

 

Current portion of insurance reserves

 

2,698,000

 

1,738,000

 

Current portion of deferred gain - sale-leaseback

 

109,000

 

109,000

 

Billing in excess of costs and estimated earnings on uncompleted contracts

 

1,526,000

 

1,386,000

 

Total current liabilities

 

23,736,000

 

20,077,000

 

 

 

 

 

 

 

Long-term debt, excluding current installments

 

113,000

 

7,000

 

Long-term portion of deferred gain - sale-leaseback

 

2,015,000

 

1,960,000

 

Long-term portion of insurance reserves

 

4,878,000

 

5,903,000

 

Senior notes

 

100,000,000

 

100,000,000

 

Deferred tax liabilities

 

3,771,000

 

3,771,000

 

Senior Exchangeable Preferred stock, par value $.01 per share, redemption value $18,602,000 and $19,613,000 at June 30, 2004 and December 31, 2004, respectively. Authorized, issued and outstanding 10,000 shares

 

18,602,000

 

19,613,000

 

 

 

 

 

 

 

Series A Preferred stock, par value $.01 per share, redemption value $22,484,000 and $24,007,000 at June 30, 2004 and December 31, 2004, respectively. Authorized 25,000 shares; issued and outstanding 10,428 shares

 

22,484,000

 

24,007,000

 

 

 

 

 

 

 

Series B Preferred stock subject to put option, 7,688 shares outstanding at June 30, 2004 and December 31, 2004

 

7,688,000

 

7,688,000

 

 

 

 

 

 

 

Common stock subject to put option, 324,858 shares outstanding at June 30, 2004 and December 31, 2004

 

325,000

 

325,000

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

Series B Preferred stock, par value $.01 per share. Authorized 50,000 shares; issued and outstanding 11,110 shares at June 30, 2004 and December 31, 2004

 

11,282,000

 

11,282,000

 

Common stock, par value $.01 per share. Authorized 5,000,000 shares; issued and outstanding 697,012 at June 30, 2004 and December 31, 2004

 

7,000

 

7,000

 

Additional paid-in capital

 

1,760,000

 

1,760,000

 

Treasury stock, at cost, 35,318 common shares at June 30, 2004 and December 31, 2004

 

(336,000

)

(336,000

)

Accumulated deficit

 

(106,918,000

)

(108,735,000

)

Total stockholders’ deficit

 

(94,205,000

)

(96,022,000

)

Commitments and contingencies

 

 

 

 

 

 

 

$

89,407,000

 

$

87,329,000

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

3



 

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

THREE MONTH PERIODS
ENDED DECEMBER 31,

 

SIX MONTH PERIODS
ENDED DECEMBER 31,

 

 

 

2003

 

2004

 

2003

 

2004

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

37,875,000

 

$

38,390,000

 

$

85,399,000

 

$

91,209,000

 

Cost of revenues

 

27,966,000

 

29,671,000

 

64,220,000

 

68,262,000

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

9,909,000

 

8,719,000

 

21,179,000

 

22,947,000

 

General and administrative expenses

 

7,448,000

 

7,205,000

 

14,399,000

 

15,320,000

 

Other operating income

 

334,000

 

262,000

 

398,000

 

319,000

 

 

 

 

 

 

 

 

 

 

 

Earnings from operations

 

2,795,000

 

1,776,000

 

7,178,000

 

7,946,000

 

Interest expense

 

3,524,000

 

3,318,000

 

7,103,000

 

6,786,000

 

Interest expense – preferred stock

 

 

1,286,000

 

 

2,534,000

 

Other income

 

806,000

 

28,000

 

806,000

 

55,000

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) before income taxes

 

77,000

 

(2,800,000

)

881,000

 

(1,319,000

)

Income tax expense (benefit)

 

29,000

 

(594,000

)

335,000

 

498,000

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

48,000

 

(2,206,000

)

546,000

 

(1,817,000

)

Accretion of preferred stock to redemption value

 

(1,140,000

)

 

(2,246,000

)

 

Accrual of cumulative dividends on preferred stock

 

(1,224,000

)

(1,394,000

)

(2,403,000

)

(2,742,000

)

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common stockholders

 

$

(2,316,000

)

$

(3,600,000

)

$

(4,103,000

)

$

(4,559,000

)

 

 

 

 

 

 

 

 

 

 

Loss per share basic and diluted

 

$

(2.35

)

$

(3.65

)

$

(4.16

)

$

(4.62

)

Weighted average number of shares outstanding basic and diluted

 

986,552

 

986,552

 

986,552

 

986,552

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

4



 

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

SIX MONTH PERIODS ENDED
DECEMBER 31,

 

 

 

2003

 

2004

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings (loss)

 

$

546,000

 

$

(1,817,000

)

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities

 

 

 

 

 

Depreciation and amortization

 

7,578,000

 

6,222,000

 

Interest on preferred stock

 

 

2,534,000

 

Amortization of debt issuance costs

 

580,000

 

582,000

 

Provision for doubtful receivables

 

84,000

 

239,000

 

Gains on sale of assets, net

 

(1,117,000

)

(130,000

)

Amortization of deferred gain on sale-leaseback

 

 

(55,000

)

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables

 

1,440,000

 

(60,000

)

Inventories, prepaid expenses, other assets and income taxes receivable

 

1,913,000

 

(346,000

)

Costs and estimated earnings in excess of billings on uncompleted contracts

 

(417,000

)

616,000

 

Trade accounts payable, accrued liabilities, insurance reserves and income taxes payable

 

(3,468,000

)

(2,538,000

)

Billings in excess of costs and estimated earnings on uncompleted contracts

 

242,000

 

(140,000

)

Net cash provided by operating activities

 

7,381,000

 

5,107,000

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from sale of assets

 

12,880,000

 

381,000

 

Capital expenditures

 

(2,875,000

)

(6,458,000

)

Net cash provided by (used in) investing activities

 

10,005,000

 

(6,077,000

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Borrowings under long-term debt

 

27,000

 

271,000

 

Repayments of long-term debt

 

(409,000

)

(766,000

)

Borrowings under revolving credit facility

 

127,654,000

 

99,254,000

 

Repayments of revolving credit facility

 

(142,139,000

)

(99,251,000

)

Debt issuance costs

 

(161,000

)

 

Book overdraft

 

(514,000

)

430,000

 

Net cash used in financing activities

 

(15,542,000

)

(62,000

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

1,844,000

 

(1,032,000

)

Cash and cash equivalents at beginning of period

 

184,000

 

1,076,000

 

Cash and cash equivalents at end of period

 

$

2,028,000

 

$

44,000

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid (received) during the period for

 

 

 

 

 

Income taxes

 

$

(2,466,000

)

$

750,000

 

Interest

 

$

6,411,000

 

$

6,126,000

 

Supplemental disclosures of non cash investing and financing information:

 

 

 

 

 

Accretion of preferred stock to redemption value

 

$

2,246,000

 

$

 

Accrual of cumulative dividends on preferred stock

 

$

2,403,000

 

$

2,742,000

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5



 

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004

(Unaudited)

 

(1)         Basis of Presentation

 

The accompanying condensed consolidated financial statements are unaudited and in the opinion of management include all adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments.  All significant intercompany transactions have been eliminated and certain reclassifications have been made to prior periods’ condensed consolidated financial statements to conform to the current period presentation.

 

The Company’s business is seasonal in nature and the results of operations for these interim periods are not necessarily indicative of results for the full year.  The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included on Form 10-K/A of Penhall International Corp. (together with its subsidiaries, the “Company”) for the year ended June 30, 2004 as certain disclosures which would substantially duplicate those contained in such audited financial statements have been omitted from this report.

 

(2)         Stock-Based Compensation

 

As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) the Company continues 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 inter pretations in accounting for stock options and share units granted to employees 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. The Company has certain shares of Series B Preferred stock and common stock issued under the Securities Holders Agreement.  Certain compensation charges could result if triggering events (i.e. death, disability or termination) occur.  No compensation cost has been recognized on options granted to employees for the three and six month periods ended December 31, 2004. SFAS No. 123 requires that the Company provide pro forma information regarding net loss and net 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, & #147;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

 

Six months ended

 

 

 

December 31, 2003

 

December 31, 2004

 

December 31, 2003

 

December 31, 2004

 

 

 

 

 

 

 

 

 

 

 

Net loss available to common stockholders as reported

 

$

(2,316,000

)

$

(3,600,000

)

(4,103,000

)

$

(4,559,000

)

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

 

$

(2,000

)

$

(2,000

)

$

(6,000

)

$

(5,000

)

Pro forma net loss available to common stockholders

 

$

(2,318,000

)

$

(3,602,000

)

$

(4,109,000

)

$

(4,564,000

)

Basic and diluted loss per share as reported

 

$

(2.35

)

$

(3.65

)

$

(4.16

)

$

(4.62

)

Pro forma basic and diluted loss per share

 

$

(2.35

)

$

(3.65

)

$

(4.17

)

$

(4.63

)

 

6



 

(3)         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 potentially dilutive securities. The dilutive effect of outstanding options is reflected in diluted per share by application of the treasury stock method. For the three and six month periods ended December 31, 2003 and 2004 diluted loss per share is the same as basic loss per share as options to purchase 8,585 and 7,910 shares of common stock were not included in the computation of diluted loss per share for the three-month and six-month periods ended December 31, 2003 and 2004, respectively, as the effect would have been anti-dilutive.

 

(4)         Related Party

 

The Company has a balance due to Bruckmann, Rosser, Sherrill & Co., Inc. (BRS) of $525,000 as of December 31, 2004 related to management services.  The balance due at June 30, 2004 was $375,000.

 

(5)         Change in Accounting Principle

 

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 certain entities, including the Company, for which this statement is effective for fiscal periods beginning after December 15, 2003 (the Company’s fiscal 2005). The Company has adopted Statement 150 effective July 1, 2004.  As a result of the adoption of Statement 150, accretion related to the Senior Exchangeable Preferred Stock and the Series A Preferred Stock is treated as interest expense in the Company’s consolidated statements of operations.  Prior to the adoption accretion was treated as part of the determination of net loss applicable to common stockholders.

 

(6)         Commitments and Contingencies

 

The Company has an employment related legal matter which has been substantially settled.  The Company estimates that the remaining reserves of $29,000 are sufficient based on the settlement. 

 

There are various additional lawsuits and claims pending 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.

 

7



 

(7)         Condensed Consolidating Financial Information

 

The following consolidating financial information is presented for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. The Guarantor Subsidiaries, (Penhall Company and subsidiaries), guarantee certain obligations of the Company, including the Senior Notes.  Separate financial statements and other disclosures with respect to each of the individual Guarantor Subsidiaries are not presented because the Company believes that such financial statements and other information would not, in the opinion of management, provide additional information that is material to investors.

 

The condensed consolidating financial information presents condensed financial statements as of June 30, 2004 and December 31, 2004 and for the three and six month periods ended December 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 (Penhall Company and subsidiaries),

 

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

 

d.                                      the Company on a consolidated basis.

 

8



 

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004

(Unaudited)

 

Condensed Consolidating Balance Sheet

 

 

 

JUNE 30, 2004

 

 

 

PENHALL
INTERNATIONAL
CORP.

 

PENHALL
COMPANY

 

ELIMINATIONS

 

CONSOLIDATED

 

Assets

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Receivables, net

 

$

 

$

33,430,000

 

$

 

$

33,430,000

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

 

2,957,000

 

 

2,957,000

 

Inventories

 

 

2,171,000

 

 

2,171,000

 

Other current assets

 

114,000

 

5,194,000

 

 

5,308,000

 

Total current assets

 

114,000

 

43,752,000

 

 

43,866,000

 

Net plant and equipment

 

23,000

 

36,017,000

 

 

36,040,000

 

Other assets, net

 

1,388,000

 

8,113,000

 

 

9,501,000

 

Investment in subsidiaries

 

60,171,000

 

 

(60,171,000

)

 

 

 

$

61,696,000

 

$

87,882,000

 

$

(60,171,000

)

$

89,407,000

 

Liabilities and Stockholders’ Equity (Deficit):

 

 

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

 

$

882,000

 

$

 

$

882,000

 

Trade accounts payable

 

3,000

 

5,661,000

 

 

5,664,000

 

Accrued liabilities and taxes payable

 

5,725,000

 

7,132,000

 

 

12,857,000

 

Current portion of insurance reserves

 

 

2,698,000

 

 

2,698,000

 

Current portion of deferred gain-sale-leaseback

 

109,000

 

 

 

109,000

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

 

1,526,000

 

 

1,526,000

 

Total current liabilities

 

5,837,000

 

17,899,000

 

 

23,736,000

 

Long-term debt, excluding current installments

 

 

113,000

 

 

113,000

 

Long-term portion of deferred gain – sale-leaseback

 

2,015,000

 

 

 

2,015,000

 

Long-term portion of insurance reserves

 

 

4,878,000

 

 

4,878,000

 

Senior notes

 

100,000,000

 

 

 

100,000,000

 

Deferred tax liabilities

 

(1,050,000

)

4,821,000

 

 

3,771,000

 

Senior Exchangeable Preferred stock

 

18,602,000

 

 

 

18,602,000

 

Series A Preferred stock

 

22,484,000

 

 

 

22,484,000

 

Series B Preferred stock subject to put option

 

7,688,000

 

 

 

7,688,000

 

Common stock subject to put option

 

325,000

 

 

 

325,000

 

Stockholders’ equity (deficit)

 

(94,205,000

)

60,171,000

 

(60,171,000

)

(94,205,000

)

 

 

$

61,696,000

 

$

87,882,000

 

$

(60,171,000

)

$

 89,407,000

 

 

9



 

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004

(Unaudited)

 

Condensed Consolidating Balance Sheet

 

 

 

 

DECEMBER 31, 2004

 

 

 

PENHALL
INTERNATIONAL
CORP.

 

PENHALL
COMPANY

 

ELIMINATIONS

 

CONSOLIDATED

 

Assets

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Receivables, net

 

$

 

$

33,251,000

 

$

 

$

33,251,000

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

 

2,341,000

 

 

2,341,000

 

Inventories

 

 

2,101,000

 

 

2,101,000

 

Other current assets

 

95,000

 

4,597,000

 

 

4,692,000

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

95,000

 

42,290,000

 

 

42,385,000

 

Net plant and equipment

 

6,000

 

36,175,000

 

 

36,181,000

 

Other assets, net

 

1,056,000

 

7,707,000

 

 

8,763,000

 

Investment in subsidiaries

 

61,168,000

 

 

(61,168,000

)

 

 

 

$

62,325,000

 

$

86,172,000

 

$

(61,168,000

$

87,329,000

 

Liabilities and Stockholders’ Equity (Deficit):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

 

$

493,000

 

$

 

$

493,000

 

Borrowings under revolving credit facility

 

 

3,000

 

 

3,000

 

Trade accounts payable

 

 

4,240,000

 

 

4,240,000

 

Accrued liabilities and taxes payable

 

5,695,000

 

6,413,000

 

 

12,108,000

 

Current portion of insurance reserves

 

 

1,738,000

 

 

1,738,000

 

Current portion of deferred gain- sale-leaseback

 

109,000

 

 

 

109,000

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

 

1,386,000

 

 

1,386,000

 

Total current liabilities

 

5,804,000

 

14,273,000

 

 

20,077,000

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, excluding current installments

 

 

7,000

 

 

7,000

 

Long-term portion of deferred gain – sale-leaseback

 

1,960,000

 

 

 

1,960,000

 

Long-term portion of insurance reserves

 

 

5,903,000

 

 

5,903,000

 

Senior notes

 

100,000,000

 

 

 

100,000,000

 

Deferred tax liabilities

 

(1,050,000

)

4,821,000

 

 

3,771,000

 

Senior Exchangeable Preferred stock

 

19,613,000

 

 

 

19,613,000

 

Series A Preferred stock

 

24,007,000

 

 

 

24,007,000

 

Series B Preferred stock subject to put option

 

7,688,000

 

 

 

7,688,000

 

Common stock subject to put option

 

325,000

 

 

 

325,000

 

Stockholders’ equity (deficit)

 

(96,022,000

)

61,168,000

 

(61,168,000

)

(96,022,000

)

 

 

$

62,325,000

 

$

86,172,000

 

$

(61,168,000

)

$

87,329,000

 

 

10



 

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004

(Unaudited)

 

Condensed Consolidating Statement of Operations

 

 

 

THREE MONTH PERIOD ENDED DECEMBER 31, 2003

 

 

 

Penhall
International
Corp.

 

Penhall
Company

 

Eliminations

 

Consolidated

 

Revenues

 

$

1,245,000

 

$

37,875,000

 

$

(1,245,000

)

$

37,875,000

 

Cost of revenues

 

 

27,966,000

 

 

27,966,000

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

1,245,000

 

9,909,000

 

(1,245,000

)

9,909,000

 

General and administrative expenses

 

256,000

 

7,589,000

 

(397,000

)

7,448,000

 

Royalties

 

 

848,000

 

(848,000

)

 

Other operating income, net

 

 

334,000

 

 

334,000

 

Equity in earnings of subsidiary

 

1,374,000

 

 

(1,374,000

)

 

 

 

 

 

 

 

 

 

 

 

Earnings from operations

 

2,363,000

 

1,806,000

 

(1,374,000

)

2,795,000

 

Interest expense

 

3,227,000

 

297,000

 

 

3,524,000

 

Other income

 

11,000

 

795,000

 

 

806,000

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) before income taxes

 

(853,000

)

2,304,000

 

(1,374,000

)

77,000

 

Income tax expense (benefit)

 

(901,000

)

930,000

 

 

29,000

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

48,000

 

$

1,374,000

 

$

(1,374,000

)

$

48,000

 

 

11



 

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004

(Unaudited)

 

Condensed Consolidating Statement of Operations

 

 

 

THREE MONTH PERIOD ENDED DECEMBER 31, 2004

 

 

 

Penhall
International
Corp.

 

Penhall
Company

 

Eliminations

 

Consolidated

 

Revenues

 

$

1,256,000

 

$

38,390,000

 

$

(1,256,000

)

$

38,390,000

 

Cost of revenues

 

 

29,671,000

 

 

29,671,000

 

Gross profit

 

1,256,000

 

8,719,000

 

(1,256,000

)

8,719,000

 

General and administrative expenses

 

463,000

 

7,138,000

 

(396,000

)

7,205,000

 

Royalties

 

 

860,000

 

(860,000

)

 

Other operating income, net

 

 

262,000

 

 

262,000

 

Equity in earnings of subsidiary

 

486,000

 

 

(486,000

)

 

Earnings from operations

 

1,279,000

 

983,000

 

(486,000

)

1,776,000

 

Interest expense

 

3,146,000

 

172,000

 

 

3,318,000

 

Interest expense - preferred stock

 

1,286,000

 

 

 

1,286,000

 

Other income

 

28,000

 

 

 

28,000

 

Earnings (loss) before income taxes

 

(3,125,000

)

811,000

 

(486,000

)

(2,800,000

)

Income tax expense (benefit)

 

(919,000

)

325,000

 

 

(594,000

)

Net earnings (loss)

 

$

(2,206,000

)

$

486,000

 

$

(486,000

)

$

(2,206,000

)

 

12



 

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004

(Unaudited)

 

Condensed Consolidating Statement of Operations

 

 

 

SIX MONTH PERIOD ENDED DECEMBER 31, 2003

 

 

 

Penhall
International
Corp.

 

Penhall
Company

 

Eliminations

 

Consolidated

 

Revenues

 

$

2,705,000

 

$

85,399,000

 

$

(2,705,000

)

$

85,399,000

 

Cost of revenues

 

 

64,220,000

 

 

64,220,000

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

2,705,000

 

21,179,000

 

(2,705,000

)

21,179,000

 

General and administrative expenses

 

448,000

 

14,743,000

 

(792,000

)

14,399,000

 

Royalties

 

 

1,913,000

 

(1,913,000

)

 

Other operating income, net

 

 

398,000

 

 

398,000

 

Equity in earnings of subsidiary

 

3,121,000

 

 

(3,121,000

)

 

 

 

 

 

 

 

 

 

 

 

Earnings from operations

 

5,378,000

 

4,921,000

 

(3,121,000

)

7,178,000

 

Interest expense

 

6,421,000

 

682,000

 

 

7,103,000

 

Other income

 

11,000

 

795,000

 

 

806,000

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) before income taxes

 

(1,032,000

)

5,034,000

 

(3,121,000

)

881,000

 

Income tax expense (benefit)

 

(1,578,000

)

1,913,000

 

 

335,000

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

546,000

 

$

3,121,000

 

$

(3,121,000

)

$

546,000

 

 

13



 

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004

(Unaudited)

 

Condensed Consolidating Statement of Operations

 

 

 

SIX MONTH PERIOD ENDED DECEMBER 31, 2004

 

 

 

Penhall
International
Corp.

 

Penhall
Company

 

Eliminations

 

Consolidated

 

Revenues

 

$

2,835,000

 

$

91,209,000

 

$

(2,835,000

)

$

91,209,000

 

Cost of revenues

 

 

68,262,000

 

 

68,262,000

 

Gross profit

 

2,835,000

 

22,947,000

 

(2,835,000

)

22,947,000

 

General and administrative expenses

 

871,000

 

15,241,000

 

(792,000

)

15,320,000

 

Royalties

 

 

2,043,000

 

(2,043,000

)

 

Other operating income, net

 

 

319,000

 

 

319,000

 

Equity in earnings of subsidiary

 

3,356,000

 

 

(3,356,000

)

 

Earnings from operations

 

5,320,000

 

5,982,000

 

(3,356,000

)

7,946,000

 

Interest expense

 

6,398,000

 

388,000

 

 

6,786,000

 

Interest expense - preferred stock

 

2,534,000

 

 

 

2,534,000

 

Other income

 

55,000

 

 

 

55,000

 

Earnings (loss) before income taxes

 

 

 

 

 

 

 

 

 

 

 

(3,557,000

)

5,594,000

 

(3,356,000

)

(1,319,000

)

Income tax expense (benefit)

 

(1,740,000

)

2,238,000

 

 

498,000

 

Net earnings (loss)

 

$

(1,817,000

)

$

3,356,000

 

$

(3,356,000

)

$

(1,817,000

)

 

14



 

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004

(Unaudited)

 

Condensed Consolidating Statement of Cash Flows

 

 

 

SIX MONTH PERIOD ENDED DECEMBER 31, 2003

 

 

 

Penhall
International
Corp.

 

Penhall
Company

 

Eliminations

 

Consolidated

 

Net cash provided by operating activities

 

$

1,203,000

 

$

6,178,000

 

$

 

$

7,381,000

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Proceeds from sale of assets

 

11,312,000

 

1,568,000

 

 

12,880,000

 

Capital expenditures

 

 

(2,875,000

)

 

(2,875,000

)

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

11,312,000

 

(1,307,000

)

 

10,005,000

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Due to (from) affiliates

 

(12,317,000

)

12,317,000

 

 

 

Borrowings under long-term debt

 

 

27,000

 

 

27,000

 

Repayments of long-term debt

 

(183,000

)

(226,000

)

 

(409,000

)

Borrowings under revolving credit facility

 

 

127,654,000

 

 

127,654,000

 

 

 

 

 

 

 

 

 

 

 

Repayments of revolving credit facility

 

 

(142,139,000

)

 

(142,139,000

)

Debt issuance costs

 

 

(161,000

)

 

(161,000

)

Book overdraft

 

(152,000

)

(514,000

)

152,000

 

(514,000

)

 

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

(12,652,000

)

(3,042,000

)

152,000

 

(15,542,000

)

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(137,000

)

1,829,000

 

152,000

 

1,844,000

 

Cash and cash equivalents at beginning of period

 

152,000

 

184,000

 

(152,000

)

184,000

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

15,000

 

$

2,013,000

 

$

 

$

2,028,000

 

 

15



 

PENHALL INTERNATIONAL CORP.
AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004

(Unaudited)

 

Condensed Consolidating Statement of Cash Flows

 

 

 

SIX MONTH PERIOD ENDED DECEMBER 31, 2004

 

 

 

PENHALL
INTERNATIONAL
CORP.

 

PENHALL
COMPANY

 

ELIMINATIONS

 

CONSOLIDATED

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

(2,363,000

)

$

7,470,000

 

$

 

$

5,107,000

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Proceeds from sale of assets

 

 

381,000

 

 

381,000

 

Capital expenditures

 

 

(6,458,000

)

 

(6,458,000

)

Net cash used in investing activities

 

 

(6,077,000

)

 

(6,077,000

)

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Due to (from) affiliates

 

2,359,000

 

(2,359,000

)

 

 

Borrowings under long-term debt

 

 

270,000

 

 

270,000

 

Repayments of long-term debt

 

 

(765,000

)

 

(765,000

)

Borrowings under revolving credit facility

 

 

99,254,000

 

 

99,254,000

 

Repayments of revolving credit facility

 

 

(99,251,000

)

 

(99,251,000

)

Book overdraft

 

 

430,000

 

 

430,000

 

Net cash provided by (used in)
financing activities

 

2,359,000

 

(2,421,000

)

 

(62,000

)

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(4,000

)

(1,028,000

)

 

(1,032,000

)

Cash and cash equivalents at beginning of period

 

8,000

 

1,068,000

 

 

1,076,000

 

Cash and cash equivalents at end of period

 

$

4,000

 

$

40,000

 

$

 

$

44,000

 

 

16



 

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. and subsidiaries (Penhall or the Company) 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 its 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 37 locations in 17 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 Kansas City, Missouri-based company acquired in March 2002.  Effective October 1, 2004, the Kansas City location was closed.  The assets have been transferred to other locations,

 

7.                                       Bob Mack Company, California-based company acquired in March 2002,

 

8.                                       Arizona Curb Cut Company, an Arizona-based company acquired in April 2002.

 

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 provided primarily under hourly rentals, which are complemented by fixed-price contracts.

 

Fixed-price contracts are obtained primarily through competitive bidding in response to advertisements by federal, state and local agencies and private parties and to a lesser extent through negotiation with private parties. Our bidding activity is affected by such factors as backlog, current utilization of equipment and other resources, our ability to obtain necessary surety bonds and competitive considerations. Bidding activity, backlog and revenue resulting from the award of new contracts may vary significantly from period to period.

 

The two primary economic drivers of our business are (1) federal, state and local public funding levels for transportation and other infrastructure projects and (2) the overall health of the economy, nationally and locally, particularly as it affects private non-residential construction. The level of demand for our services will have a direct correlation to these drivers. For example, a weak economy will generally result in a reduced demand for construction in the private sector. This reduced demand increases competition for fewer private sector projects and will ultimately also increase competition in the public sector as companies migrate from bidding on scarce private sector work to projects in the public sector. Greater competition can reduce revenue growth and/or increase pressure on gross profit margins. A weak economy also tends to produce less tax revenue, thereby decreasing the funds available for spending on public infrastructure improvements. There are funding sources that have been specifically earmarked for infrastructure

 

17



 

spending, such as gasoline taxes, which are not necessarily directly impacted by a weak economy. However, even these funds can be temporarily at risk as state and local governments struggle to balance their budgets. Conversely, higher public funding and/or a robust economy will increase demand for our services and provide opportunities for revenue growth and margin improvement.

 

Revenue growth is also 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 three to eight years with a 10% residual value.

 

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 affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:

 

Revenue Recognition on Long-Term Construction Contracts

 

Income from construction operations is recorded using the percentage-of-completion method of accounting. The majority of our long-term fixed price contracts with our customers are either “fixed unit price” or “fixed price”. Under fixed unit price contracts, the Company is committed to provide materials or services required by a project at fixed unit prices.  The fixed unit price contract shifts the risk of estimating the quantity of units required for a particular project to the customer, any increase in our unit cost over the expected unit cost in the bid, whether due to inflation, inefficiency, faulty estimates or other factors, is borne by the Company unless otherwise provided in the contract. Fixed price contracts are priced on a lump-sum basis under which we bear the risk that we may not be able to perform all the work profitably for the specified contract amount.  All state and federal government contracts and many of our other contracts provide for termination of the contract for the convenience of the party contracting with us, with provisions to pay us for work performed through the date of termination.

 

We use the percentage-of-completion accounting method for construction contracts in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” Revenue and earnings on construction contracts are recognized on the percentage-of-completion method in the ratio of costs incurred to estimated final costs.  Provisions are recognized in the statement of operations for the full amount of estimated losses on uncompleted contracts whenever evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue.

 

Contract cost consists of direct costs on contracts, including labor and materials, amounts payable to subcontractors, direct overhead costs and equipment expense (primarily depreciation, blades, fuel, maintenance and repairs). Contract cost is recorded as incurred and revisions in contract revenue and cost estimates are reflected in the accounting period when known.

 

The accuracy of our revenue and profit recognition in a given period is dependent on the accuracy of our estimates of the cost to complete each project which are completed by our project managers. However, projects can be complex and in most cases the profit margin estimates for a project will either increase or decrease to some extent from the amount that was originally estimated at the time of bid. Because we have many projects of varying levels of complexity and size in process at any given time (during 2004 we worked on over 1,000 projects) these changes in estimates typically offset each other without materially impacting our overall profitability. However, large changes in cost estimates in the larger projects, can have a more significant effect on profitability.

 

18



 

Valuation of Long-Lived Assets

 

When triggering events occur, we will review the carrying value of long-lived assets (excluding goodwill) for potential impairment.  Our review considers a combination of appraised value, anticipated future undiscounted cash flows and location of the asset for each line of equipment.  Deteriorating market conditions could potentially impact valuation of long-lived assets.  In markets where adverse market conditions exist, the Company will consider reallocation of long-lived assets to markets where those assets will produce cash flow.  Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.

 

Goodwill

 

We use estimates in order to determine if goodwill has been impaired. An impairment loss may be recognized if the carrying amount of a reporting unit’s net book value exceeds the estimated fair value of the reporting unit. We arrive at the estimated fair value of a reporting unit based on cash flow utilizing a multiple of earnings before interest, depreciation, taxes and amortization (EBIDTA).  This multiple is determined based on prior transactions conducted by the company and by others in comparable market sectors to calculate the fair value.  We will perform our valuation analysis at least annually or sooner if an event occurs or circumstances change that would indicate the carrying amount of goodwill may be impaired. If our estimates or assumptions change from those used in our current valuation, we may be required to recognize an impairment loss in future periods. The Company evaluates goodwill for impairment at June 30 of each year.

 

Factors we consider important which could trigger an impairment review include:

 

                    Significant underperformance relative to expected historical or projected future operating results;

 

                    Significant changes in the manner of our use of the acquired assets or the strategy for our overall business;

 

                    Significant negative industry or economic trends;

 

                    Unanticipated competition; and

 

                    EBITDA relative to net book value

 

RESULTS OF OPERATIONS

 

Six months Ended December 31, 2004 Compared to Six months Ended December 31, 2003

 

Revenues.  Revenues for the six months ended December 31, 2004  (“Interim 2005”) were $91.2 million an increase of $5.8 million or 6.8% from the six months ended December 31, 2003 (“Interim 2004”).   In Interim 2005, service revenues increased $4.0 million or 6.8% and contract revenues increased $1.8 million or 6.8% as compared to Interim 2004.  The increase in revenues is primarily attributable to increases in non-residential construction nationwide and particularly in California as well as the increase in concrete restoration projects undertaken by many of the states.

 

Penhall operated through 37 locations in 16 states at December 31, 2004, and through 38 locations in 17 states at December 31, 2003.  At December 31, 2004, Penhall’s operated rental fleet consisted of 686 units compared to 701 units at December 31, 2003, a decrease of 2.1%.  The smaller fleet of revenue units is attributable to the Company not replacing all of the disposed units since revenue unit utilization rates remain below 72% for the six-month period.

 

Gross Profit.  Gross profit totaled $22.9 million in Interim 2005, an increase of  $1.8 million or 8.3% from Interim 2004. Gross profit as a percentage of revenues increased from 24.8% in Interim 2004 to 25.2% in Interim 2005. The increase in gross profit from Interim 2004 to Interim 2005 is primarily attributable to higher market demand for operated equipment which increased demand for the Company’s services during Interim 2005.  Another factor increasing gross profit was the $1.1 million decrease in depreciation expense, which is the result of low capital expenditures during 2003 and 2004.

 

General and Administrative Expenses.  General and administrative expenses were $15.3 million in Interim 2005 compared to $14.4 million in Interim 2004. As a percent of revenues, general and administrative expenses were 16.8% in Interim 2005 compared to 16.9% in Interim 2004. The increase in general and administrative expenses during Interim 2005 is primarily attributable to increases in rent expense of $0.6 million associated with the sale/leaseback of Company properties and increases in incentive compensation of $0.4 million.

 

Interest Expense. Interest expense was $6.8 million in Interim 2005 compared to interest expense of $7.1 million in Interim 2004. The decrease in interest expense is attributable to lower borrowings in Interim 2005 primarily resulting from the proceeds on the sale-leaseback of the Company owned properties, which was used to reduce the borrowings under the revolving credit facility, partially offset by higher costs for letters of credit.

 

Interest Expense - Preferred Stock.  In Interim 2005, the Company adopted SFAS No. 150 which required the Company to present separately as interest expense $2.5 million of accretion related to mandatorily redeemable instruments.  Prior to Interim 2005, the Company recorded the accretion in the determination of net loss applicable to common stockholders which was $2.2 million in Interim 2004.

 

Other Income.  Other income was $55,000 in Interim 2005 compared to $0.8 million in Interim 2004.  The decrease is attributable to the sale of an FCC license during Interim 2004.

 

19



 

Income Tax Expense.  The Company recorded an income tax expense of $0.5 million or 41% of earnings before income taxes excluding the impact of non-deductible interest expense on preferred stock, compared to an income tax expense of $0.3 million, or 38.0% of earnings before income taxes in Interim 2004.   The change in the effective tax rate adjusted for the non-deductible interest for Interim 2005 is primarily attributable to a change in estimated deductible depreciation for 2005.

 

Three Months Ended December 31, 2004 Compared to Three Months Ended December 31, 2003

 

Revenues.  Revenues for the three months ended December 31, 2004  (“Interim 2005”) were $38.4 million an increase of $0.5 million or 1.4% from the three months ended December 31, 2003 (“Interim 2004”).   In Interim 2005, service revenues increased $2.2 million or 8.3% and contract revenues decreased $1.7 million or 15.6% as compared to Interim 2004.  The increase in service revenues is primarily attributable to increases in non residential construction nationwide and particularly in California as well as the increase in concrete restoration projects undertaken by many of the states.  The decrease in contract revenues in Interim 2005 is primarily related to a large project in Interim 2004 which was substantially completed prior to Interim 2005.

 

Gross Profit.  Gross profit totaled $8.7 million in Interim 2005, a decrease of $1.2 million or 12.0% from Interim 2004. Gross profit as a percentage of revenues decreased from 26.2% in Interim 2004 to 22.7% in Interim 2005. The decrease in gross profit from Interim 2004 to Interim 2005 is primarily attributable to the significant gross profit of a large project in Interim 2004 partially offset by a $0.5 million decrease in depreciation expense, which is the result of lower capital expenditures during 2003 and 2004, compared with previous periods.

 

General and Administrative Expenses.  General and administrative expenses were $7.2 million in Interim 2005 compared to $7.4 million in Interim 2004. As a percent of revenues, general and administrative expenses were 18.8% in Interim 2005 compared to 19.7% in Interim 2004. The decrease in general and administrative expenses as a percentage of revenues during Interim 2005 is primarily to decreases in bonus expense of $0.3 million and depreciation of $0.1 million partially offset by increases in rent expense of $0.3 million associated with the sale/leaseback of Company properties.

 

Interest Expense. Interest expense was $3.3 million in Interim 2005 compared to interest expense of $3.5 million in Interim 2004. The decrease in interest expense is attributable to lower borrowings in Interim 2005 primarily resulting from the proceeds on the sale-leaseback of the Company owned properties, which was used to reduce the borrowings under the revolving credit facility, partially offset by higher costs for letters of credit.

 

Interest Expense - Preferred Stock.  In Interim 2005, the Company adopted SFAS No. 150 which required the Company to present separately as interest expense $1.3 million of accretion related to mandatorily redeemable instruments.  Prior to Interim 2005, the Company recorded the accretion in the determination of net loss applicable to common stockholders which was $1.1 million in Interim 2004.

 

Other Income.  Other income was $28,000 in Interim 2005 compared to $0.8 million in Interim 2004.  The decrease is attributable to the sale of an FCC license during Interim 2004.

 

Income Tax Benefit. The Company recorded an income tax benefit of $0.6 million, or 39.2% of earnings before income taxes excluding the impact of non-deductible interest expense on preferred stock, compared to an income tax expense of $29,000, or 37.7% of earnings before income taxes in Interim 2004.    The change in the effective tax rate adjusted for the non-deductible interest for Interim 2005 is primarily attributable to a change in estimated deductible depreciation for 2005.

 

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 Company’s new credit facility (“The New Credit”) secured in May 2003. 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.

 

The provisions of The New Credit include a lock-box agreement and also allow the lender, in its reasonable credit judgment, to assess additional reserves against the borrowing base calculation.  Accordingly, borrowings under the agreement are classified as current.  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 receivable, equipment, fixtures, cash, and other assets of the Company.  As of December 31, 2004, the Company had outstanding borrowings of $3,000, $17.9 million of outstanding letters of credit, borrowing base limitations of $10.1 million, and borrowings unused and available under The New Credit of $22.0 million.

 

20



 

Summary Cash Flow Data (000’s) for the six months
ended December 31,

 

2003

 

2004

 

Cash and cash equivalents

 

$

2,028

 

$

44

 

 

 

 

 

 

 

Net cash provided by (used in):

 

 

 

 

 

Operating activities

 

$

7,381

 

$

5,107

 

Investing activities

 

$

10,005

 

$

(6,077

)

Financing activities

 

$

(15,542

)

$

(62

)

Capital expenditures

 

$

(2,875

)

$

(6,458

)

 

We believe that our current cash and cash equivalents, cash generated from operations, and the amount available under our existing credit facility will be sufficient to meet our expected working capital needs, capital expenditures, financial commitments and other liquidity requirements associated with our existing operations through the next 12 months.

 

Cash provided by operating activities decreased from $7.4 million in Interim 2004 to $5.1 million in Interim 2005.  In Interim 2005, the net cash was provided by net loss adjusted by non-cash expenses partially offset by increases in inventories, prepaid expenses and other assets and decreases in accounts payable, accrued liabilities and income taxes payable.  In Interim 2004, the net cash was provided by net earnings adjusted by non-cash expenses plus decreases in receivables and inventories, prepaid expenses and other asset partially offset by increases in costs and estimated earnings in excess of billings on uncompleted contracts and accounts payable, accrued liabilities and income taxes payable.

 

Cash used by investing activities in Interim 2005 of $6.1 million was a $16.1 million change from the $10.0 million provided by investing activities in Interim 2004.  The change was due to the higher level of capital expenditures in Interim 2005 compared to the $12.9 million received from the proceeds from the sale-leaseback of properties, the sale of the FCC license and the normal sales of assets in Interim 2004.  The Company had no acquisitions in Interim 2004 or 2005.

 

Cash used by financing activities were $62,000 and $15.5 million in Interim 2005 and 2004, respectively.  In Interim 2004 cash from the sale-leaseback was used primarily to reduce debt under the revolving credit facility.

 

The Company had standby letters of credit totaling $17.9 million at December 31, 2004, all of which are automatically renewable unless participating parties notify the other party thirty days prior to cancellation.  The letters of credit are provided as collateral for our surety and for our insurance programs.  In addition, we are generally required to provide surety bonds that provide an additional measure of security under certain public and private sector contracts. Most of the Company’s surety bonds are performance bonds which do not have a stated expiration date; instead the bonds are generally released when each contract is accepted by our customer.

 

Management estimates that Penhall’s annual capital expenditures will be approximately $12.0 million for fiscal 2005, including replacement and maintenance of equipment, purchases of new equipment, and purchases of real property improvements.

 

Historically, Penhall funded its working capital requirements, capital expenditures and other needs principally from operating cash flows. However, in 1998, a series of transactions occurred similar to a leveraged buyout.  As a result of these transactions the Company has substantial indebtedness and debt service obligations. As of December 31, 2004, the Company and its subsidiaries had $100.5 million of indebtedness related to borrowings, $43.6 million of indebtedness related to mandatorily redeemable preferred stock and a stockholders’ deficit of $96.0 million.  As of December 31, 2004 approximately $22.0 million of additional borrowing was available under The New Credit.

 

As of December 31, 2004, the Company has the following obligations subject to redemption or maturity in fiscal 2007 and 2008:

 

 

 

Due date

 

Balance at
December 31,
2004

 

Senior Notes

 

08/01/06

 

$

100,000,000

 

Senior Exchangeable Preferred Stock

 

02/01/07

 

$

19,613,000

 

Preferred Series A

 

08/01/07

 

$

24,007,000

 

 

The accretion of preferred stock will increase the total obligation through the dates of redemption.  The Company anticipates extending or refinancing these obligations.  No assurance can be given that such financing will be available to the Company or, if available that it may be obtained on terms and conditions that are satisfactory to the Company.

 

21



 

As long as the uncertainty associated with the resolution of these obligations remains, the Company could be subject to adverse consequences including:

 

                    Making it more difficult to obtain surety support;

 

                    Increasing our vulnerability to general adverse economic and industry conditions;

 

                    Limiting our ability to extend or replace the Company’s existing credit facility;

 

                    Limiting our ability to extend or replace the Company’s existing Senior Notes:

 

                    Limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.

 

The Company also has certain common stock and Series B Preferred stock that are subject to the terms and conditions of a Securities Holders Agreement.  The Company may be required to repurchase these shares if certain conditions are met.  As of June 30, 2004 and December 31, 2004, the Company has recorded these shares at historical cost of $8,013,000, as temporary equity in the condensed consolidated balance sheet.  The Series B Preferred stock subject to the terms and conditions of the Securities Holders Agreement and the remaining Series B Preferred stock include provisions for cumulative dividends of 13% which have not been recorded as the dividends have not been declared.  Such dividends approximate $24,261,000 as of December 31, 2004.  The Company believes that the likelihood of the conditions allowing redemption by the stockholder occurring is remote.

 

From August 1, 2002 through October 25, 2002, the Company repurchased capital stock of the Company from four former employees for aggregate consideration of $35,000.  The Company’s Indenture dated as of August 1, 1998 (the “Indenture”) with United States Trust Company, as Trustee (the “Trustee”), permits repurchases of capital stock from former employees in annual amounts up to $1,000,000 and up to $5,000,000 in aggregate over the life of the Indenture; provided that, at the time of any such repurchase, the Company must be able to incur additional indebtedness under the Indenture’s fixed charge coverage ratio.  At the time of the repurchases described above, the Company was not able to incur additional indebtedness under the Indenture’s fixed charge coverage ratio, and accordingly such repurchases were not permitted by the Indenture.  The Company has informed the Trustee of such repurchases.  The Trustee has indicated that it considers the infraction minor and will not pursue written notice of default to the Company.  In the event that the Company receives written notice specifying the default and demanding that such default be remedied from either the Trustee or from Holders of at least 25% of the outstanding principal amount of the Notes, then the Company will arrange for a third party to repurchase Company stock in the aggregate consideration of $35,000 to remedy the default.

 

The Company’s bonding capacity has been restricted due to both Penhall’s poor operating results over the past three fiscal years, as well as the reduced bonding capacity in the market.  Further, one of the Company’s current surety has indicated that another year of operating losses could result in the discontinuation of their surety support.  The Company has obtained additional surety support from a secondary source.  Our inability to obtain surety bonds in the future would significantly impact our ability to obtain new contracts, which could have a material adverse effect on our business.

 

CHANGE IN ACCOUNTING PRINCIPLE

 

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 certain entities, including the Company, for which this statement is effective for fiscal periods beginning after December 15, 2003 (the Company’s fiscal 2005). The Company has adopted Statement 150 effective July 1, 2004.  As a result of the adoption of Statement 150, accretion related to the Senior Exchangeable Preferred Stock and the Series A Preferred Stock is treated as interest expense in the Company’s consolidated statements of operations.  Prior to the adoption accretion was treated as part of the determination of net loss applicable to common stockholders.

 

NEW ACCOUNTING PRINCIPLES

 

In December 2004, the FASB issued FASB Staff Position No. 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (“FSP No. 109-1”), and FASB Staff Position No. 109-2, “ (“FSP No. 109-2”). These staff positions provide accounting guidance on how companies should account for the effects of the American Jobs Creation Act of 2004 (“AJCA”) that was signed into law on October 22, 2004. FSP No. 109-1 states that the tax relief (special tax deduction for domestic manufacturing) from this legislation should be accounted for as a “special deduction” instead of a tax rate reduction. FSP No. 109-2 gives a company additional time to evaluate the effects of the legislation on any plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. We are currently investigating the effects of both FSP No’s 109-1 and 109-2 on the Company.

 

22



 

In December 2004, the FASB Statement No. 123R (revised 2004), “Share-Based Payment” which replaces Statement No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Statement No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under Statement No. 123, will no longer will be an alternative to financial statement recognition. We are required to adopt Statement No. 123R in our first quarter of fiscal 2006. Under Statement No. 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of Statement No.123R, while the retroactive method would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. We are evaluating the requirements of Statement No. 123R, and we do not expect that the adoption of Statement No.123R to have a material impact on our consolidated results of operations and earnings per share. We have not yet determined the method of adoption or the effect of adopting Statement No. 123R, and we have not determined whether the adoption will result in amounts that are different than the current pro forma disclosures under Statement No. 123.

 

In November 2004, the FASB issued Statement No. 151, “Inventory Costs - An Amendment of ARB No. 43, Chapter 4”.  Statement No. 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Statement No. 151 is effective for fiscal periods beginning after June 15, 2005 and is required to be adopted by the Company in the first quarter of fiscal 2006. The adoption of Statement No. 151 is not expected to have a material impact on our consolidated financial condition, results of operations, or cash flows.

 

In December 2004, the FASB issued Statement No. 153, “Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions”.  Statement No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. Statement No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. Statement No. 153 is effective for the fiscal periods beginning after June 15, 2005 and is required to be adopted by the Company in the first quarter of fiscal 2006. The adoption of Statement No. 153 is not expected to have a material impact on our consolidated financial condition, results of operations, or cash flows.

 

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

 

The Company is exposed to interest rate changes primarily as a result of its notes payable, including New Revolver and Senior Notes which are 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. To achieve its objectives the Company borrows primarily at fixed rates and has the ability to choose interest rates under the Company’s credit facility.  The Company does not enter into derivative or interest rate transactions for speculative purposes.

 

23



 

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 December 31, 2004.

 

 

 

YEARS ENDING JUNE 30,

 

 

 

2005

 

2006

 

2007

 

2008

 

2009

 

THERE-
AFTER

 

TOTAL

 

FAIR
VALUE

 

 

 

(IN THOUSANDS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate debt

 

$

379

 

$

124

 

$

100,000

 

$

0

 

$

0

 

$

0

 

$

100,500

 

$

100,810

(3)

Average interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

11.94

%

 

 

Variable rate LIBOR debt (1) (2)

 

3

 

0

 

0

 

0

 

0

 

0

 

3

 

0

 

Weighted average current interest rate (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

7.25

%

 

 

 


(1)          The revolving credit facility is classified as a short-term obligation in the consolidated balance sheet; however, the credit facility matures in 2006.  This is a $50 million revolving credit facility with the interest based upon LIBOR plus 350 basis points.  The total borrowing unused and available under the facility was $22.0 million at December 31, 2004.

 

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

 

(3)          The fair value of fixed rate debt was determined based on quoted market price for the debt instrument.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures.  We carried out an evaluation, under the supervision and with the participation of our management, including our president and chief executive officer and our chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on this evaluation, our president and chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report in that they were reasonably designed to ensure that information required to be disclosed by our company in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. It should be noted that any system of controls, however well designed and operated, is based in part upon certain assumptions and can provide only reasonable, and not absolute, assurance that the objectives of the system are met.

 

Changes in Internal Control Over Financial Reporting.  There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

During the period, senior management implemented certain enhancements including enhanced analysis and support for the financial presentation of our redeemable securities and securities subject to shareholder agreements.

 

24



 

Part II Other Information

 

Items 1 – 5 are not applicable

 

Item 6. Exhibits

 

EXHIBIT NO.

 

DESCRIPTION

31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated February 14, 2005*

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated February 14, 2005*

 

 

 

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 February 14, 2005*

 

 

 

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 February 14, 2005*

 


*

 

Filed herewith.

 

25



 

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.

 

Date: February 14, 2005

 

SIGNATURE

 

TITLE

 

 

 

 

/s/ JOHN T. SAWYER

 

 

Chairman of the Board, President and Chief Executive Officer

 

John T. Sawyer

 

 

(Principal Executive Officer)

 

 

 

 

/s/ JEFFREY E. PLATT

 

 

Vice President-Finance and Chief Financial Officer (Principal

 

Jeffrey E. Platt

 

 

Accounting Officer)

 

 

 

 

/s/ PAUL N. ARNOLD

 

 

Director

 

Paul N. Arnold

 

 

 

 

 

 

 

/s/ HAROLD O. ROSSER

 

 

Director

 

Harold O. Rosser

 

 

 

 

 

 

 

/s/ J. RICE EDMONDS

 

 

Director

 

J. Rice Edmonds

 

 

 

 

26



 

EXHIBIT NO.

 

DESCRIPTION

31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated February 14, 2005*

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated February 14, 2005*

 

 

 

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 February 14, 2005*

 

 

 

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 February 14, 2005*

 


*

 

Filed herewith.

 

27