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Executives

Devin Sullivan - Senior Vice President

Rene J. Robichaud - Chief Executive Officer, President and Director

Jerry W. Fanska - Principal Financial Officer, Principal Accounting Officer, Senior Vice President of Finance and Treasurer

Analysts

Anix Vyas - Gabelli & Company, Inc.

Michael G. Roomberg - Ladenburg Thalmann & Co. Inc., Research Division

John Rogers - D.A. Davidson & Co., Research Division

Robert Niewijk

Gerard J. Sweeney - Boenning and Scattergood, Inc., Research Division

John Rosenberg

Layne Christensen (LAYN) F3Q 2013 Earnings Call December 6, 2012 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Layne Christensen Co. Reports Third Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Devin Sullivan of The Equity Group. Sir, you may begin.

Devin Sullivan

Thank you, Mary. Good morning, everyone, and thank you for joining us today for Layne Christensen's fiscal 2013 third quarter conference call. Our speakers today will be Rene Robichaud, President and Chief Executive Officer of Layne Christensen; and Jerry Fanska, Senior Vice President of Finance.

Before we get started, I'd like to remind everyone that statements made during today's call may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Statements may include, but are not limited to, statements of plans and objectives, statements of future economic performance and statements of assumptions underlying such statements and statements of management's intentions, hopes, beliefs, expectations or predictions of the future. Forward-looking statements can often be identified by the use of forward-looking terminologies such as should, intended, continue, believe, may, hope, anticipate, goal, forecast, plan, estimate and similar words or phrases.

Such statements are based upon current expectations and are subject to certain risks and uncertainties and assumptions, including, but not limited to: the outcome of the ongoing internal investigation into, among other things, the legality under the FCPA; and local laws of certain payments to agents and other third parties interacting with government officials in certain countries in Africa relating to the payment of taxes and the importing of equipment, including any government enforcement action, which could arise out of the matters under review or that the matters under review may have resulted in a higher dollar amount of payments or may have a greater financial or business impact than management currently anticipates; prevailing prices for various commodities; unanticipated slowdowns in the company's major markets; the availability of credit; the risks and uncertainties normally incident to the construction industry; the impact of competition; the effectiveness of operational changes expected to increase efficiency and productivity; worldwide economic and political conditions and foreign currency fluctuations that may affect worldwide results of operations. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially and adversely from those anticipated, estimated or projected. These forward-looking statements are made as of the date of this filing, and the company assumes no obligation to update such forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.

With that, I'd now like to turn the call over to Rene Robichaud. Rene, please go ahead.

Rene J. Robichaud

Thanks, Devin, and good morning, everyone. Thank you, all, for joining us today. We issued 2 very important announcements this morning. The first being our results for the fiscal 2013 third quarter followed by the announcement that we will be consolidating our divisional headquarters and corporate staff to a new headquarters in Houston by the end of next year.

I'll begin with an overview of third quarter results. At Water Infrastructure, our Water Resources, our Inliner and our Geoconstruction segments reported higher quarter-over-quarter profitability. In Water Resources, our revenues and profits increased, primarily the result of improved performance in drought-affected areas of the Southeast and Midwest United States.

On the international front, in Ethiopia, we are moving equipment from the port to the job site and anticipate drilling for water this month. Our goal is to be drilling for water there for many years to come. We're currently working in Canada and Mexico on water-related and specialty drilling projects.

Domestically, we continue to make good progress on our plan to diversify from so much hard-bid municipal work, and to generate industrial-based revenue in Water Resources. During the first 9 months of fiscal year 2013, approximately $47 million of revenues came from a domestic industrial client. You'll recall that we set a goal of $50 million of negotiated industrial business by year end, and we will exceed our goal.

The lingering drought in many parts of the Southwest and Midwest and the impact of Hurricane Sandy on the East Coast earlier this year have made it clear that we must address our nation's aging water infrastructure, much of which is 50 to 100 years old.

At the same time, in many parts of the world, integrated effective water management systems have yet to be built. We believe that the opportunities to construct, rebuild and restore this infrastructure are significant. These projects would involve each of Layne's water services from hydrological mapping to drilling, to pipelines, water treatment and recycling and beyond. The need for water is quickly extending beyond agriculture and drinking to include areas such as unconventional oil and gas exploration and production.

From a financing perspective, these infrastructure projects could take a variety of forms including public-private partnerships. We are seeing a significant trend of raising water and sewer rates by municipalities and private utilities. This helps a lot for financing new projects.

Here are some statistics from last week's U.S. Drought Monitor report that are quite eye-opening and should help communicate why Layne's total water management solutions are so important. 94% of Texas is now abnormally dry, 54% is stuck in severe drought and 25% is mired in the extreme category. One year after a record Texas drought cost $7.6 billion in agriculture losses, the viability of 6 million acres of winter wheat is of concern with 40% to 45% of the crop rated poor to very poor. Over 90% of Oklahoma is in an extreme to exceptional drought, up from 72% in those categories in the previous report.

In the Southeast, we are working on numerous water supply expansion projects for industries along the Gulf Coast. Many of these projects are tied to drought and the inability of some public water suppliers to meet the needs of industry. We're using our Layne Hydro group to deliver turnkey solutions to clients' water supply needs for industry.

In the Midwest, we're performing work for public water supply agencies and industries that are expanding their water supply. In one case, for Decatur, Illinois, we're working on an emergency water supply tied to the drought. In our Layne Hydro group, we're assisting water users in developing new water supply services, which will ultimately pull through our construction services as well.

Layne Hydro recently won water supply expansion projects for the City of Muscatine, Iowa, and Indianapolis Citizens Water.

One Layne collaboration. We are working on several large One Layne opportunities in Texas, New Mexico and California. These projects would be alternative delivery in nature, meaning either public-private partnerships, design, build or alternative. The bottom line is that water is life. However, most people spend little to no time considering the implications of a future with limited water availability.

At Layne, it's what we think about. Our ability to invent, propose and deliver the solutions necessary to address water stress around the world will define our future and if through our successes, the future of generations to come.

In the Inliner group, our cured in pipe -- cured-in-place division, although the revenues declined in the third quarter, our profits rose by nearly 15% due to improved performance, highlighted by our projects with the Washington suburban sanitary districts. Our fourth quarter is always a little slower due to holiday shutdowns, but we expect to stay on or ahead of our plan.

Looking toward the future, foundations are in place for our new fiberglass wet-out facility in Southern Indiana, and this equipment is in fabrication. We plan to produce our first fiberglass tube next year. This is an exciting new technology for the United States, which is environmentally friendlier and widely used in Europe.

Geoconstruction business. This division performed well posting a revenue increase of almost $24 million, a combination of $15.6 million in revenue from the Costa Fortuna acquisition and contribution from our ground stabilization project in Washington, D.C. Demand is strong in Brazil, but not so strong in the U.S.

That said, we have several exciting U.S. prospects. Geoconstruction is our lumpy business with feast-or-famine characteristics on a quarterly basis, but generally had good full years. With the holidays and domestic slowdown, our Q4 results will likely be lower.

Heavy Civil. This is likely the segment that you're most interested in and the one where we have devoted a significant amount of time and resources. As expected, we reported a loss in this segment in Q3, largely due to the lingering impact of legacy low-margin projects, a practice that we have abandoned and replaced with a focus on higher margin, larger jobs that will allow us to apply all of our skills and assets.

It's important to note that the $5.5 million quarterly loss was 38% below that of the last quarter. We're making progress at Heavy Civil, but we can assure you we are very focused on the cumulative year-to-date pretax segment losses of over $21 million. Still, we are headed in the right direction for 2013 and beyond. We've reduced headcount by over 20% from last year and instituted other cost-saving measures that should produce annual savings of approximately $2 million.

We now expect that the most difficult, least profitable of our legacy projects will be completed by our fiscal year end of January 31, 2013. At the same time, our new project backlog booked this calendar year is profitable, in sharp contrast to the major projects booked in 2010 and 2011.

Further, our culture has changed at the Heavy Civil. We are simply more conservative now.

As to our outlook, we expect that losses will continue in Q4. We expect to see steady improvement, however, as we return to profitability by the middle of 2013. We are seeing the light at the end of the tunnel, and we remain committed to returning this segment to normal profitability.

Our Heavy Civil team is working closely with our Water Resources team on several major water project opportunities. They are also working closely with our Energy Services team, particularly on water transfer services. We'll keep you informed regarding progress on these fronts.

Regarding our Mineral Exploration business. This has been impacted by a slowdown in mine exploration activities, particularly in Africa and Australia, a consequence of commodity price uncertainties and cost pressures on mining companies. Revenues decreased 15% versus the same quarter of last year, and our operating income declined 34.5%.

Although we did our best to reduce overhead throughout the quarter to mitigate the impact of lower revenues, certain fixed costs, such as depreciation, could not be reduced. Our Latin American affiliates earnings were down slightly quarter-over-quarter due to the reduction of drilling programs of their major clients. We expect our fourth quarter profitability to be down roughly 15% from our third quarter.

So our Mineral Exploration business will be profitable, nicely profitable in the next quarter, and this is supported by our strong market position, meaning, one, that copper and gold represent about 80% of our revenues, not the more difficult commodities like iron ore, coal or other base metals. Approximately 75% of our revenues are from larger and intermediate-sized mining companies that have profitable operations underway, and not the junior mining companies that depend so much on equity financing.

With respect to our Energy Services business, as previously announced, on October 1, we sold the E&P assets out of Layne for $15 million. This transaction reflects our strategy to exit the upstream business and create a new business in the oil and gas services industry, focused on the critical water issues challenging the E&P industry. We plan to develop this service into a $200 million business over the next 3 to 5 years.

With respect to our progress, we are gaining traction in our water management strategy with more water supply wells under contract with our E&P clients. We've also been busy gearing up to enter the water transfer business with the first flows expected early next year. And lastly, we're expanding our total solution by developing our own treatment and recycling and flow back water, and this business will start up by the end of the first quarter of next fiscal year.

Before I turn things over to Jerry, I'll spend a moment on our planned move to Houston. Layne is a global company with almost 5,000 employees in 80 offices on 5 continents. We're proud of this presence and excited about the opportunities it presents to further our reach in the years ahead. Our growth, the continuing evolution of our business, the vast expanse of 6 divisional offices in 6 different cities, our commitment to the collaboration tenet of One Layne make it necessary to consolidate our corporate and divisional leadership into 1 location. This was not an easy decision, but it's one that we believe will be in the best long-term interest of our company.

Although we chose Houston for a number reasons, one of the most compelling was the geographic access it provides to some of the nation's leading energy companies, an important consideration as we build our total water management solution business for the oil and gas industry.

We expect to commence the move of corporate and divisional leaders in the spring with completion of this phase targeted for the winter of 2013. As we also announced in today's release, Jerry Fanska and Jeff Reynolds have decided not to join us in Houston. Jerry has announced his retirement from Layne after more than 18 years with the company. He's agreed to remain with us until his successor is named, and to assist in the transition of responsibilities and the company's relocation to Houston. Jeff will resign his position effective January 1, but he will remain a member of the Board of Directors. I want to thank both Jerry and Jeff publicly. They've been instrumental in the growth and progress of our company and made lasting impressions, not just on our business, but on the people of Layne. They have created cultures of excellence, respect and responsibility that will endure.

I also want to congratulate and welcome Dave Singleton and Gernot Penzhorn, who, effective January 1, will assume Jeff's role. Dave has been promoted to Senior Vice President Operations for the United States, and Gernot has been promoted to Senior Vice President Operations for international work. Both Dave and Gernot have excellent resumes and significant relevant experience.

Dave has over 30 years of experience in various areas of Layne's operations. He was President of the Water Resources division since May of 2010 and before that, was Vice President of Water Resources beginning in 2004. Gernot became President of the Mineral Exploration division beginning in 2011 where he began his career with Layne in 2007. Prior to joining the company, Gernot served as the International Operations Director for Boart Longyear, which he joined in 2001.

With that, I'll pass it over to Jerry.

Jerry W. Fanska

Thank you, Rene, and thanks to each of you for participating in today's call. We do expect to file our 10-Q with the SEC on December 10.

Third quarter revenues decreased 2.4% from $289.8 million in Q3 FY 2012 to $282 million in Q3 of FY 2013 mainly due to a decline in Heavy Civil and Mineral Exploration revenues that Rene touched on earlier, offset by higher revenues at Geoconstruction and Water Resources. Cost of revenues for the quarter increased on a relative basis to $224.7 million or 79.4% of revenues from $226.4 million or 78% of revenues for Q3 FY 2012 due primarily to continued margin pressure in most divisions, as well as cost overruns on the Heavy Civil legacy projects.

Selling, general and administrative expenses decreased to $38.8 million or 13.7% of revenues from $43.2 million or 14% -- 14.9% of revenues last year. This was driven by declines in legal and professional fees of $2.5 million, operating taxes of $2 million and $2.4 million in lower compensation costs, reflecting last year's expenses related to the transition of our former CEO and other executives.

Depreciation, depletion and amortization increased 14.4% to $15.7 million for Q3 FY 2013 from $13.8 million in last year's quarter, the results of additional assets from acquisitions and also property additions. Equity and earnings of affiliates decreased 24.1% to $4.9 million for Q3 from $6.5 million for Q3 last year. The decrease was primarily driven by the purchase of the remaining 50% interest of our Geoconstruction joint venture in Brazil now being consolidated rather than treated as an equity investment.

The Latin American minerals business was slightly down quarter-over-quarter driven, as Rene mentioned, by reduced Mineral Exploration activities. Interest expense increased to $1.6 million for the quarter from $700,000 last year reflecting increased borrowings to fund capital expenditures, acquisitions and working capital.

Other income was $1.1 million in the third quarter, which was due to the recognition of a $700,000 gain on the sale of a facility, foreign-exchange losses and an offset by gains on sales of other surplus equipment. Income tax benefit for continuing operations was $1 million for Q3 FY 2013 compared to an income tax expense for continuing operations of $4.2 million in last year's third quarter.

During the third quarter, certain of our open tax years were closed with no adjustments resulting in a reversal of previously established reserves on uncertain tax positions. Absent these reversals in the current year, the effective income tax rate for Q3 would have been 26.5% compared to 30.6% in the prior year.

Our year-to-date income tax rate is 37% excluding the reserve reversals in the third quarter and the equity adjustment to our Diberil acquisition in Q2 and is estimated to hold at this level for the remainder of the year. We reported income from continuing operations of $8.8 million or $0.45 per diluted share, compared to income from continuing operations of $8.7 million or 45% -- $0.45 per share last year. Net income from the quarter, including discontinued operations, was $8.5 million or $0.43 per diluted share, and this compares to $8.8 million or $0.45 per diluted share last year.

Our cash position at October 31 was $44.3 million. We had working capital of $190.9 million, long-term debt less current maturities of $118.3 million and stockholders' equity of $435.9 million or $21.99 per share.

Before I turn it back over to Rene, one thing to keep in mind as you model out our performance for FY 2014 is that we expect to incur pretax charges of approximately $14 million to $17 million associated with our move to Houston, with about $2 million to $3 million incurred in the remainder of this year with the remainder substantially completed in FY 2014. These charges, again, will start in the fourth quarter, and they'll wind down by FY 2015. They cover such things as employee relocation costs, attrition and replacement costs and office relocation expenses.

With that, I'll turn it back over to Rene.

Rene J. Robichaud

Thanks, Jerry. I remain very pleased and proud of our people and the transformative process that they are authoring and advancing each and every day at Layne. Thank you for your attendance today. We're now happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Anix Vyas from Gabelli & Company.

Anix Vyas - Gabelli & Company, Inc.

I guess I'll start off to say congratulations on the move, and sorry to see Jeff and Jerry not joining. But I guess, the first question has to do with the move. There's obvious reasons for moving there given kind of where you want to take the company, but I guess maybe you can talk a little bit more about how -- what this means for the size of the opportunity for the business in terms of Energy Services? Does moving there change any of that in the longer term?

Rene J. Robichaud

Well, the way we discussed this is really a probability of success. We are, of the view, our clients are really anxious to have us start up our business. They would've wanted us to start up our business 6 months ago. We're doing this in a methodical way. We see amazing demand for Layne to stand between the communities that we have serviced for over 100 years, and the oil and gas industry that needs so much to execute its hydraulic frac-ing strategy. I mean, we are uniquely positioned between both those constituencies. And we -- but we do not want to rush before we're completely ready. So we will start up operations, all 3 of the major operations being sourcing, transfer and treatment by the end of Q1 next year, and we're already putting in more capital expenditure requests for several components of this business. So from our perspective, being in Houston, closer to the industry, it enhances the probability of success of creating a $200 million business in the next 3 to 5 years by a material amount.

Anix Vyas - Gabelli & Company, Inc.

Great. And I guess, I mean, I'm sure taxes have nothing to do with this, but to the extent that this will impact, kind of, the taxes going forward, any color there would be helpful in terms of modeling that out.

Rene J. Robichaud

Jerry, you want to touch on that or...

Jerry W. Fanska

Yes. I mean basically, all the expenditures that we mentioned would be tax expenditures, and all would be tax deductible. So it'd be pretty much at the normal rates.

Anix Vyas - Gabelli & Company, Inc.

Okay. Got it. And then, I guess, just one other question in terms of the changes. With now having 2 people, I guess, one focused on U.S. opportunities and one focused on international opportunities, can you talk a little bit more about kind of how you -- how you're looking at international opportunities going forward, and kind of does the competitive landscape, kind of how that looks like for kind of the Water Resources?

Rene J. Robichaud

Well, we have found it very competitive internationally as well. The U.S., though, is probably the single most competitive market that we've seen for water management business. That said, what Layne has failed to do in the past and what we are committed to not failing to do in the future is to use our Energy or our water management capability for the benefit of our global mining clients and to focus that same capability for the benefit of the hydraulic fracturing industry here in the U.S.

Operator

Our next question comes from Michael Roomberg from Ladenburg Thalmann.

Michael G. Roomberg - Ladenburg Thalmann & Co. Inc., Research Division

I also want to echo the sentiments and congrats to Gernot and Dave, and best of luck to Jeff and Jerry as well.

Jerry W. Fanska

Thank you.

Michael G. Roomberg - Ladenburg Thalmann & Co. Inc., Research Division

I just have, actually, a question for you, Jerry, first to start off. With respect to the other income items, there were a few that you mentioned, were they all in the Water Resources division or were they scattered throughout?

Jerry W. Fanska

The $700,000 gain was in Water Resources, and the rest of it was scattered.

Michael G. Roomberg - Ladenburg Thalmann & Co. Inc., Research Division

Okay. All right. Fair enough. And then on the Heavy Civil bookings that you reported in the quarter, obviously, the Florida Islamorada project was in there, but if I back into the bookings from the reported backlog numbers that you provide in each quarter, it appears that, that may have been the only project that was booked as a new business in the quarter. Obviously, you have a strategy of kind of honing in on only projects that are of a better profit profile. I'm just wondering if -- is that correct that, that was the only project that was booked in the backlog in the quarter?

Rene J. Robichaud

No. That's not how it works, because every quarter, we burn through old projects and shrink it and we bring on new ones. So that's regularly happening. I've got a book of at least 60 projects I looked at this morning that were booked in this calendar year 2012.

Michael G. Roomberg - Ladenburg Thalmann & Co. Inc., Research Division

Got it. Got it. Okay. Okay. All right. Well I have to double check that then. But then I guess lastly, I wanted to ask you somewhat of a bigger picture question on the Heavy Civil business. And really I guess it probably translates to several of your different businesses in water. One of the large engineering and design firms recently held an investor event where they spoke about the need to continue to move downstream into more of the construction services that you participate in. I guess they've heard from their clients which clearly on the water side they participate in many different engineering businesses, but they had demanded that kind of they have one single point provider for all project. And my understanding is that Layne is more participating on the construction side, and I'm just wondering as you evaluate this industry, where it's going forward whether or not you feel like you have all the tools that you need to compete effectively in the Heavy Civil business I guess primarily, or you would look to protect -- perhaps require some sort of vertical integration whether it's on, perhaps, the engineering design side or even the financing side of some of these projects, and whether you'd look to go that route?

Rene J. Robichaud

Well, to be as clear as possible, Layne's strategy is to be a solutions provider to our clients in water, mineral and energy. That means we're not

trying to sell a single service. We're trying to solve the whole problem. Actually, Layne is uniquely positioned to help with engineering, design, construction, sourcing alternative supply. So that's one of the reasons we won the $91 million Islamorada project. The village is happy to have one single provider for the whole thing. The history of our business has been too many players and when something goes wrong, the finger pointing is incessant. And so we're getting this kind of feedback on major projects, 2x, 3x, 4x the size of Islamorada where people are talking to us and going, "Look, you just take the whole thing." So that's, I think, a big strength of Layne's position because the trend is going more to what we deliver. Further, we partner regularly with the engineering community so that it's just the engineering community and Layne solving the client's complex problem.

Michael G. Roomberg - Ladenburg Thalmann & Co. Inc., Research Division

Okay. Okay. That's -- it's helpful to understand kind of how the industry dynamics are revolving and you're participating in that regard so -- on the Energy Services business, Rene, it seems like with respect to the transport of water that there's really 2 angles. One is to finance fixed infrastructure projects, and the other is to be involved in the design and construction of that. I mean, how do you see Layne participating in those types of projects as they come about?

Rene J. Robichaud

For Energy Services?

Michael G. Roomberg - Ladenburg Thalmann & Co. Inc., Research Division

Yes.

Rene J. Robichaud

Yes. As a fixed infrastructure, it probably won't be a big part of the Energy Services revenues, not for Layne. That's not what we're imagining. We're imagining mobile services coming in and out all the way from mapping alternative sources and laying out the risks and rewards for various alternatives, tapping those sources, moving the water from where we tapped it to where it needs to be stored, storing the water, moving it from storage to one frac job after another then move -- then treating the produced water and the flow back, recycling it, drilling injection wells and disposing of it, evaporating it, filtering it. All of those services are in our portfolio, and we're organizing them for the benefit of oil and gas companies as early as the first quarter.

Operator

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

John Rogers - D.A. Davidson & Co., Research Division

I guess, Rene, in terms of the Energy business, when do you expect to see meaningful revenue coming out of that? You mentioned that you should start doing some of this work in the beginning of calendar 2013, but in terms of real financial impact, when should we expect that?

Rene J. Robichaud

Well, the year 2014, next year, we're going to...

John Rogers - D.A. Davidson & Co., Research Division

[indiscernible] calendar or fiscal?

Rene J. Robichaud

Yes. I'm very sorry with having the -- that problem between calendar and fiscal. The calendar year 2014, fiscal '15, is really when we'll start to see meaningful growth. Although we will be a full solution provider come April 30 of next year, we'll really not be producing much revenue really until we get into the next year. Over the course of the next year, I expect to see up to $20 million, maybe $30 million of capital expenditure requests coming in. And we'll continue to build our business as fast as we can staff it, making sure that we're focused on those Energy Services clients that are truly interested in a cradle-to-grave solution. Some E&P clients really just want a given service in our portfolio, and we respect that, but that's really not what we're offering.

John Rogers - D.A. Davidson & Co., Research Division

And do you need to acquire anything else? Or is it just you believe you can build it all yourselves now?

Rene J. Robichaud

Well, we have certainly had many people approach us with respect to strategic possibilities. We think that the opportunities for business smart and valuable business combinations will increase with our move to Houston. We don't necessarily need to fill in a major part of the full services solution. We can partner with people on those holes that we have in our full suite of services. But if a good business combination comes along that creates wealth for us, we will certainly entertain it.

John Rogers - D.A. Davidson & Co., Research Division

And then in terms of the other businesses, the Heavy Civil projects that you had the additional losses in, are they the same projects or was -- that you've had problems with?

Rene J. Robichaud

Yes. The -- we're not showing any new significant projects. The biggest problem continues to be in the same place where we had continued -- we changed the complete management team somewhere about 3 to 6 months ago.

John Rogers - D.A. Davidson & Co., Research Division

Okay. And these are all the projects that will be largely finished by the end of...

Rene J. Robichaud

January 31, we are -- but we will be delivering a high-quality project to our client. It's just going to cost us more than we had ever hoped. We've learned a lot from that. We certainly gained a great deal of humility from that, and we've become much smarter business people going forward.

John Rogers - D.A. Davidson & Co., Research Division

And then in terms of the Minerals Exploration business, seasonally, that is typically weaker in your first calendar or first fiscal quarter, and you talked about a 15% decline in the current quarter. So I mean, do you see that business bottoming then sometime in the winter of next year and improving? Or what are your clients telling you?

Rene J. Robichaud

Okay. Excellent question because there's -- you read so much and you hear so much about what's going on with the global mining community, right? And it's interesting because -- I will give you our perspective, and hopefully, it enhances your understanding. But we've had tremendous years in the year -- for the -- our mining clients in the year 2007 and 2008 and then it caused [ph] a sharp pullback in 2009 and then a really great year in '10, a really great year in '11. And up until this minute, it looked like we were going to have another record year, but we're not. We'll probably be down 15% to 20% from our record year last year. And what happens in a super cycle, either in mining or oil and gas or pulp and paper or you name the cycle, when you get a super cycle, 3 things happen to the natural resources companies. One is governments want more. Around the world, they ask for more royalties. They ask for more taxes. They ask for more equity. Two is the labor force wants more. So the unionized labor typically goes on strike. They demand a lot more money, and we've seen that certainly in Spain this year. And the third is the services provider to those major natural resources companies, they also ask for price increases. And we did and so did our competitors, and so if you're one of the major mining companies of the world, you're going, "Hey, our costs have gone up to governments. Our costs have gone up to labor. Our costs have gone up to services. Stop it." And even though the price of copper is at, what most people would say, a very rich level, the price of gold is at a very good level. The only argument you can make against copper and gold is that the outlook for much higher prices is not that great, but the outlook for much lower prices doesn't make that much sense either. So most players who are operating mining companies in those commodities will probably do fine. The problem is, the mining companies are lowering their record-high exploration expenses as a major signal to the suppliers that, guys, we need some price breaks. Our costs have gotten too high. So in my mind, what we're going to see is a somewhat softer environment, no doubt, for the end of this fiscal year, probably for the first 2 quarters of next fiscal year. And by halfway through the year, I believe that we will start seeing the exploration budgets really kicking in more than expected, and we'll get back to more positive trends. I could be wrong. That's a judgment call. And the one data point that I find truly compelling is when we thought the world was falling apart in January, February and March of 2009, our mining clients told us, "Stop working. Just completely stop working." And we did, we stacked half our rigs. We let go 2/3 of our people. And it didn't take 9 months before all those mining clients said, "We were just kidding. Please come back, and come back bigger than you were." So in my mind, the industrialization of the world's poorest countries is a unstoppable trend, and that will require a great deal of natural resources going forward. And we're happy to be service providers to the world of natural resources.

John Rogers - D.A. Davidson & Co., Research Division

One last thing if I could and maybe for Jerry, so the tax rate on a go-forward basis, how should we be thinking about that?

Jerry W. Fanska

We're -- as I mentioned for this year, it should be somewhere around 37% rate. Now you have to back out the reserves that we did, reversals that we talked about in the press release. And then, also, we had that $7 million adjustment to our equity interest in Diberil in the second quarter. You take those items out, then the rate for the 9 months is about 37%, and that should be the rate for the current year.

John Rogers - D.A. Davidson & Co., Research Division

Okay. And that's probably sustainable then, Jerry?

Jerry W. Fanska

Next year...

John Rogers - D.A. Davidson & Co., Research Division

Or does it go back to that 40% that [indiscernible] ...

Jerry W. Fanska

Yes, yes. I think to be safe, I'd move back up for the -- next year.

Operator

Our next question comes from Robert Niewijk from Katana Capital.

Robert Niewijk

Your answer earlier on the tax question implied that you did not get any incentives from the government for the move, which would be very surprising. Was that accurate?

Rene J. Robichaud

Boy, that's not true at all. That's not accurate. No, Texas work is -- I was really impressed with how fast the state of Texas and the local and county communities worked with us to help us with economic incentives and for employee benefits. So I must say they were very accommodated -- accommodating.

Robert Niewijk

Do those incentives -- I know you don't want to give numbers, but -- and I'm sure they stretch out over years. Did they make your move -- given the $14 million to $17 million costs you have to pay out, did the incentives make it NPV positive to move just on the incentives and costs? Or is it still a cost to you?

Rene J. Robichaud

Oh, absolutely not. It's definitely a big cost to us. We are investing in this move to consolidate our 7 different headquarters because we feel that the increase in our profitability and revenue growth potential well offsets this onetime cost. And from our perspective, it's -- there's definitely short-term pain involved for our shareholders, for the people of Layne, but we are absolutely convinced it's for the greater long-term good.

Robert Niewijk

It sounds -- it makes perfect sense. My only follow-up is the guy who asked earlier was trying to figure out you've got upfront costs and somewhere in your P&L, those stretched out benefits from the incentives need to show up. Where do they show up?

Jerry W. Fanska

Yes. Right now, we're being ultraconservative in not showing those.

Operator

Our next question comes from Gerry Sweeney from Boenning.

Gerard J. Sweeney - Boenning and Scattergood, Inc., Research Division

I want to circle back to MinEx. Right now, just generally the contract season, I think you're negotiating contracts with some of the -- some of your customers. Any insight as to how that's going?

Rene J. Robichaud

It's -- the customers are asking for what as much as they can get, and we're saying we have some room for flexibility but not a great deal. There are players out there that you can hire that have lower quality standards, lower safety standards, lower productivity standards. If you're a mining company, what you want is you want somebody to drill those core samples. You want them quick. You want them precise. You want them clean. You want them straight. And I can assure you that when you hire Layne MinEx, that's what you get. And when you hire people below our level that you're taking your chances. So we're not going to -- I mean we are going to be flexible on pricing, but we're certainly not going to do dramatic price changes.

Gerard J. Sweeney - Boenning and Scattergood, Inc., Research Division

Okay. And I mean, does some of that -- obviously, I'm sure some of the negotiations filter back towards you. And is that any input and towards your anticipated maybe CapEx budgets being, I guess, slowly doling out the money in Q1 and Q2 and then maybe accelerating those budgets? I think from what I heard this year, they got -- they spent their CapEx budgets by Q3, Q4, and they shut everything down. As opposed to years past, they kept going. Is that any insight into what's happening there? Or is that...

Rene J. Robichaud

Yes, I can confirm that our expectation is that the -- our mining clients and mining clients, generally, ours and the rest of them, are probably going to take a bigger breather this holiday season than we might have seen in the last 2 years so that more of our competitors will be down. We'll have more rigs stacked, any rig stacked. We never like it, but we'll have some. That's for sure. And I don't imagine -- I imagine that the mining community wants people to slow down for a little bit, get that sense that it's not a free ride. And then they'll have their own pressures to continue their exploration programs because even though we've had record exploration expenditures in the calendar year '11 and this calendar year as well, we have not had the sort of ore deposit finds that, that large amount of money you would have expected. And so that just puts even more pressure on people to continue looking and defining and finding more copper, gold, nickel, zinc, you name it, iron ore.

Gerard J. Sweeney - Boenning and Scattergood, Inc., Research Division

I mean, that sort of leads to the next question. I mean, do -- when you talk super cycles, you -- I mean, it's been -- MinEx has been a great business for a long time. Any concern that maybe there is a little bit of overcapacity in the system that has to be worked out? Or I mean -- or do you think there's going to be -- obviously, there's going to be continued need for drilling and exploration and especially in your line of work. But any concern that there was maybe some overexpansion that has to be brought back in over the next year or 2 and it may be some little bit more than just maybe a squeezing of margins?

Rene J. Robichaud

Yes. Gerry, if -- let me rephrase the question and see if I'm getting this right. But a lot of our competitors brought on a few hundred rigs in the last 3 years in the total scheme of things. As you know, Layne has roughly a couple hundred exploration rigs for our mining clients. We have a couple of hundred or more water rigs for our clients. Major is, what, the 700-plus rigs. Boart has 1,100-plus rigs. And then there's a host of smaller players who thought this would be an easy game in the last couple of years to get into, and they board to get into the business, and they're collapsing. So there are some players who will just pick up a good rig and stack it for maybe a year because the prices get so low. Is this a new phenomenon? Absolutely not. This has been going on for a generation. It just got a little overheated but so does the whole mining exploration business. And the mining exploration business has grown substantially since the year 2005, which in and of itself, 2005 was a record year. And that total global mineral exploration in 2005 might have been $5 billion; and at that time, people went, wow, that's really great except that at the beginning of this year, people announced $18 billion of mineral exploration budget, which is up from last year. To be determined, if all $18 billion will be spent this year, I doubt it. But these last 2 years are so far ahead from where we were only a few years ago. There is a lot of business, and there is a lot of need. And it really comes down to having 7 billion people on the planet, of which 2 billion people are virtually dirt poor. And having another 2 billion to 3 billion people join us in the next 30 to 40 years, there's so much work to be done. It's coming.

Gerard J. Sweeney - Boenning and Scattergood, Inc., Research Division

I agree. I just want to see if there would be a little bit more of a prolonged, maybe a resetting, but you've answered my question so -- and then just one quick question on Heavy Civil, and it's when you say backlog's moving back to normal profit, I mean, obviously, that business was much more profitable in the past. But maybe what is normal profit? And is that what you're bidding at right now, sort of a line in the sand? Or is that going to be a gradual move up to that profit level, I mean, x the bad projects that are in that backlog?

Rene J. Robichaud

Yes. I know it's a gradual move up. We cannot change the marketplace. We have to reduce our capacity to meet the marketplace, and it's a bit of a tough call because the opportunities in the United States are highly segmented. It used to be that we do a lot of business in the $2 million, $3 million project range, and that business has turned out to be just a bloody red ocean, too many players. Pricing's horrible, and so we go, look, even though we used to be in that business for a long time, it doesn't make sense for us anymore. We're going to reduce our capacity like we've talked about, and we're going to focus on the bigger business and then the extremely large business, which is very lumpy, of course, but that's like an Islamorada. And I'm aware of things that I can't share you that we're working on several larger projects than Islamorada from people who really need the water delivered and cleaned for them pretty soon. It's a competitive world. It's not all going to come to us, but if we just get a fair share of that, I'm of the belief that our strategy of being a full solutions water management provider will pay off for us handsomely in the coming years. Plus, Heavy Civil is very important for our Energy Services initiative to be a full services -- a full solution provider to oil and gas companies. Lastly, and I don't know if this is going to go anywhere, but we're now being asked by the international community to look at major Heavy Civil projects for mining companies and elsewhere. So I go, but we can't be sure where all this is going, but we're sure that we need to keep our core talented Heavy Civil people for a overall service business.

Gerard J. Sweeney - Boenning and Scattergood, Inc., Research Division

It fits the One Layne program.

Rene J. Robichaud

It sure does.

Operator

[Operator Instructions] Our next question comes from John Rosenberg from Loughlin Water Partners.

John Rosenberg

A lot of what I was going to ask, which is yet another question about Energy Services, has been covered by your commentary, and I thank you very much for that. But I do have -- I wonder if you could provide just a little bit more color. A lot of companies are going into water treatment with -- in the frac-ing -- in all the frac-ing plays. Could you expand a bit about how you intend to differentiate yourself? A lot of the E&P -- excuse me, a lot of the service companies are kind of also entering this space. And additionally, if also if you could give me just a little bit of color? And I apologize if I'm a little bit new to the Layne story, so my apologies if you've already talked about this on other forums. But do you guys have existing E&P relationships that you're going to be leveraging? Or are you just coming into this completely de novo and saying, hey, we're a water company, but we want to be in Haynesville or Bakken or Eagle Ford or what have you?

Rene J. Robichaud

Yes. No, we do have existing relationships. We've been growing those relationships this year. We would -- if we were ready, we'd already be running really hard in the total solution, meaning sourcing, transfer and treatment. You're going to -- If you want to pull out treatment as an example, I can say well, yes, that's one service where a lot of people are claiming they're really good, and I'm sure they're really good. And I'm very sure that what we're proposing to our clients is also very good, and the question is, is it really cost effective? Does it work without a hassle? Is it just the one service you're providing? Or are you really taking all of my water problems off my hand? Because our guys will be tempted by selected energy clients to sell just one service out of our portfolio, and we will resist that. It doesn't mean we won't do it, but that's not what we're selling. We're selling a complete water problem solution. Some people want that, some people don't. That's okay. It's not personal. If you want just one of our services, that's just not what we do.

John Rosenberg

Yes, I understand that part. Are you guys -- I mean, I suspect you're not just intending to basically just pump the water back into other wells or anything like that when dealing with flowback water, but you guys are also -- or you are considering disposal wells?

Rene J. Robichaud

John, we drill a good number of injection wells. Now we have the equipment. We have the people, so injection wells are a possibility for us. It's certainly part of the total solution. If that's what the client wants and that's environmentally friendly and cost effective, that's what we'll do. I was on a injection well drilling site on Tuesday afternoon. We were inspecting one of our completely electric, very silent $7.5 million rigs in Florida, working for a power -- electric power utility.

John Rosenberg

Interesting. I mean I am aware that it is the law in many places that if it comes out of the ground, it can be put back into the ground. But there's also -- there are also have been some environmental concerns in other parts of the country about reinjection in other plays. I don't want to...

Rene J. Robichaud

Environmental concerns with water problems is something we have been dealing with day in, day out for generations.

John Rosenberg

I realize that. I acknowledge you guys are part of the solution, not the problem. I'm not trying to suggest otherwise at all. But just to amplify my question a bit more, do you guys also -- you mentioned evaporation. You guys are also -- do a lot with filtration. Do you do that on your own? Or do you partner with other people?

Rene J. Robichaud

Our evaporation technology is still in the lab, pilot testing to be determined. Our filtration technology is not. We have various filtration technologies, and we'll bring them depending on what the client needs are and what the geographic needs are. We will adapt our solutions based on the fact at hand. It's not a one size fits all, and that's the beauty of Layne. We work coast to coast, north to south. We have probably the most extensive sourcing history of any company in the world, and that's by virtue of being at the business of drilling for water since the year 1882. And many of the solutions we will provide to our oil and gas clients are proprietary to Layne.

Operator

I show no further questions. I would like to turn the conference back to Rene Robichaud for closing remarks.

Rene J. Robichaud

Well, I really want to thank everyone who was on the call today and listening to what I consider to be a historic moment for Layne Christensen Company. The decision to bring all of our headquarters and senior people together over time in Houston is a critical cultural statement that all of the leaders of Layne and all of the members of our board have embraced. And I know that there'll be short-term pain. For that, I'm sorry, but we are also very confident that this is the right long-term decision for the people of Layne; Layne, the company; and our shareholders. Thank you so much.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.

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