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Layne Christensen (NASDAQ:LAYN)

Q2 2012 Earnings Call

September 07, 2011 11:00 am ET

Executives

Andrew Schmitt - Chief Executive officer and Director

Rene Robichaud - President, Director, Member of Compensation Committee, Member of Nominating & Corporate Governance Committee and Member of Nominating & Corporate Governance Committee

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

Analysts

Gerard Sweeney - Boenning and Scattergood, Inc.

Christopher Purtill - Janney Montgomery Scott LLC

John Rogers - D.A. Davidson & Co.

Steven Fisher - UBS Investment Bank

Operator

Good day, ladies and gentlemen, and welcome to the Layne Christensen's Fiscal 2012 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Andrew Schmitt, Chief Executive Officer of Layne Christensen. You may begin.

Andrew Schmitt

Thanks, Jen. Good morning, everyone. I'm here with Jerry Fanska, our Senior VP of Finance; and Rene Robichaud, our new President. We would like to welcome you to Layne Christensen's second quarter conference call.

Earlier today, we issued a press release outlining the result for the second quarter ended July 31, 2011. Before we discuss the financial results, I would like to remind the participants that the call may contain forward-looking statements that are subject to the Safe Harbor statement found in today's press release.

Jerry will take you through the financial results, and I will give you an overview of division operating performance and how we see things going forward. Okay, Jerry, why don't you take us through the numbers?

Jerry Fanska

Thank you, Andy. Good morning, everyone. Revenues for the second quarter increased $41.8 million or 16.5% to $295.1 million from $253.3 million in the prior year.

Water Infrastructure revenues increased $23.7 million or 12.2% for the quarter to $217.7 million. Revenues from previously acquired and startup operations increased $16.5 million, and water supply and treatment technologies increased $9.3 million, accounting for most of the Water Infrastructure increase. These increases were offset by decreases of more than $4.1 million in heavy construction.

Mineral Exploration revenues increased 34 -- 35.9% to a record $69 million, with increased activity across all regions. Layne Energy revenues decreased 1.7% to $5.7 million, due to the current lower natural gas price environment.

Cost of revenues increased $33.7 million to $231.4 million or 78.4% of revenues for the quarter, compared to $197.7 million or 78.1% of revenues for the same period last year. Margin pressures, especially in the Water Infrastructure's heavy construction unit, were substantially offset by other product lines and divisions.

Selling, general and administrative expenses increased to $38.1 million in the quarter from $31.7 million in the prior year, primarily the result of $2.8 million in expenses from acquired operations, $2.8 million of increased compensation and related expenses, and $1.9 million in legal and professional costs. Depreciation, depletion and amortization increased in the quarter to $14.7 million from $12.1 million, primarily due to acquisitions and property additions.

Equity in earnings of affiliates increased 385.5% to a record $7.8 million in the quarter, due to improved Mineral Exploration markets in Latin America. Interest expense increased to $717,000 from $517,000 for the quarter as a result of additional working capital borrowings during the quarter. And Other income and expense for the quarter of $1.3 million included primarily gains of $2.3 million on equipment sales and a loss on currency exchange of $793,000.

The income tax rate for the quarter was 41.9% compared to 50.4% in the prior year. The decrease in the effective rate is primarily attributable to a lesser tax impact of certain foreign operations and foreign affiliates as income before taxes increases. The net result for the quarter was $0.54 per diluted share in earnings compared to $0.33 for last year.

The company's balance sheet at July 31 reflects total assets of $886.7 million; stockholders' equity of $529 million; total long-term debt of $47.5 million, excluding current maturities of $6.7 million; and cash and cash equivalents of $33.3 million.

The company used $14.8 million in cash from operating activities in the quarter. Investing activities totaled $11.6 million, net of proceeds from equipment sales. The investing activities included $904,000 in energy expenditures, with the remainder primarily for PP&E additions to other divisions.

With that, I'll turn it back over to Andy to talk about the operations.

Andrew Schmitt

Thanks, Jerry. We have said from time to time in this weaker economy we were having to generate a lot more revenue to achieve a continued stream of earnings improvement. Certainly, that was true this quarter, as we reported an all-time company record for quarterly revenue, and we needed it.

In our Water Infrastructure group, we had a number of job-related problems in our heavy construction division that adversely affected the quarter. There were several weather events in the Midwest, but most of the damage were self-inflicted, as we were plagued with cost overruns and performance issues.

Year-over-year revenue was down only about 2%, but the aforementioned problems resulted in negative operating EBIT swing of $6 million. Now we've owned Reynolds since late 2005, and except for our record wet spring a couple of years ago, have never had a quarter that was impaled year-over-year like this one, and certainly not on job execution. We have resolved those operating and job management issues and do not expect a recurrence going forward. Naturally, these performance events occur when you can least afford them, as we are experiencing declining heavy construction backlog and tight margins. In the past, at least until this quarter, our job execution has always been the positive offset that allowed us to still show progress, and for once that didn't happen.

As difficult as things were on the heavy construction side, our much smaller geoconstruction division almost offset the EBIT impact. Geo's year-over-year revenue was up 68%, division EBIT totaling almost $5 million versus essentially a breakeven quarter a year ago. Our 2 stars in this division continue to be the Bencor acquisition and our Brazilian joint venture, Costa Fortuna. Both of these businesses look very solid for the rest of the year as well.

Inliner, our CIPP division, on 21% higher revenue was essentially flat when comparing year-over-year operating EBIT. Our liner product sales were all compared to the prior period. And we have experienced a slightly more competitive market, as activities tightened a bit as the stimulus funds have been depleted. The backlog for the balance of the year, though, seems to be just fine. In fact, it is up from July a year ago.

The final part of our Water Infrastructure segment, our groundwater supply and treatment business, experienced impressive revenue growth, up 19%, but the division operating EBIT fell about 29%. The earnings challenge lies primarily on the treatment side. Two acquisitions last year -- Intevras, focused on the treatment of frac and produced water in oil and gas industry; and MCL, focused on de-ionized pure water -- continued to experience growing pains. However, as our rate of penetration continues to improve monthly, we should push more margin to the bottom line. Both of these treatment markets are growing rapidly, and we are convincing more customers that we have the right solutions.

So in summary, a rare setback in the quarter in operating earnings for our Water Infrastructure segment, despite revenue being up 12%. However, for the full year, we are still up 15% in segment earnings, and certainly, our goal is to be ahead when we finish fiscal 2012.

As Jerry reported, our Mineral Exploration business is operating just flat out. All of our wholly-owned operations and Latin American affiliates had a tremendous quarter. In fact, $18.8 million in segment earnings is an all-time company record, as was the $69 million in revenue in our wholly-owned business. The prior record had been in the quarter ending July in 2008.

Our drilling schedule is solid, and so any tail-off from the record level earnings next quarter will be tied to the wet season in Africa and maybe a spillover effect from Escondido work stoppage experienced in July in Chile. Even with the strike in Chile, our Latin American affiliates are on track to break all prior-year revenue and earnings records, as is our wholly-owned business. These Mineral Exploration results couldn't come at a better time, as it helps provide our version of stimulus, if you will, to the company's earnings.

The last segment to cover is Layne Energy. I think just real flat is the best way to describe it. We have been shifting our mix to oil to help offset the soft prices for natural gas. This has helped sustain revenues and keep the division in the black. Division EBITDA for the quarter was still holding at 37%, which continues to be the highest relative rate in the company. Total net production was 1,135 million cubic feet versus 1,143 MMcf a year ago. Average natural gas price for us was $3.67 per Mcf versus $4.12 a year ago. Layne Energy's oil production will continue to grow in our mix, as we begin our Kansas water flood later this year.

Looking forward, we think the third quarter will look a lot like the second. Water Infrastructure will struggle against last year's comparisons, mainly due to the very weak municipal market and less earnings impact from Afghanistan. Bencor and Costa Fortuna should partly offset the Water Infrastructure challenges, but we still need some new job awards in our base geoconstruction jet grouting work to really fill out the schedule here. Energy should remain fairly flat in the current natural gas environment. Mineral Exploration will continue to be strong, as all-time records are certainly possible.

From a macro point of view, I expect the municipal market to bottom around the end of 2012. I also expect some slowdown in short-term demand for commodities, as China and India are somewhat successful in cooling off their economies. And that will have a ripple effect on the other Asian and some of the emerging economies. In the U.S., natural gas markets looked to be well supplied at U.S. growth rates under 3%, so flat maybe the word of the day in Energy.

At Layne Christensen, we have been operating these choppy markets since late 2008, and doing so very successfully. Along the way, we've repositioned, restructured and added new businesses. That process will continue, and I think our track record is pretty good in dealing with all manner of adverse conditions.

A couple of important items before we move to the Q&A session. As I said, we have with us on the call Layne Christensen's new President, Rene Robichaud. It is our intention Rene will also be our new CEO when I retire, August 31, 2012. I will remain on Layne Christensen's Board of Directors going forward.

I assume most of you have seen the announcement on such, which went out about August 1. If so, you also saw Rene's very strong background in investment banking and public company experience as a CEO. He has also been on our board now for almost 3 years, so he knows Layne Christensen very well. And we recently dispatched Rene to our operations in Africa, Chile and Peru, so he is rapidly becoming a Layne veteran. He's also, you will find, a very quick study, has been a good supporter of our management team, and I'm very confident he will do a great job.

With that, let me introduce my fellow board member and new President, Rene Robichaud.

Rene Robichaud

Thanks, Andy. It's an honor to be President of Layne Christensen, a company which will celebrate its 130th anniversary next year. I look forward to working with Andy, Jerry and the entire Layne team. The employees I have met during my travels in the last 5 weeks alone are impressive professionals. It's encouraging to see so many dedicated employees at various sites on 3 continents. My goal is to visit all of our major operations in the near term.

In the coming months, we will renew our efforts to enhance our corporate culture and further refine our competitive strategy. We look forward to this process, which we believe is the foundation for maximizing the value of Layne over the long term. I also plan to visit with you in the investment community as soon as possible. Andy?

Andrew Schmitt

Thank you, Rene. One final note on the FCPA investigation. You saw in the press release we did terminate 3 of our Australian employees who were previously on paid suspension. We also elected to part ways with our longtime Mineral Exploration division President, Eric Despain. Eric's replacement, Gernot Penzhorn, has been with us for 4 years and was hired to be Eric's successor one day. He has been running all Mineral Exploration operations for over a year now. Gernot was previously in an operating capacity with Boart Longyear in their Mineral Exploration division, so he is very experienced in this business. My expectation is we should not miss a beat with Gernot at the helm of this most important business.

As for the FCPA investigation itself, we are still hoping to have our part completed by year end. After that, it will be up to SEC and DOJ to complete their review of such, which we hope can also be finished very quickly. But since the investigation is ongoing, we can't comment on such other than what you've seen in the public filings.

Okay. With that out of the way, we are ready to take questions. Jen, if you want to see if there are any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we have a question from John Rogers from D.A. Davidson.

John Rogers - D.A. Davidson & Co.

I was just wondering if maybe you could talk a little bit, I guess, Andy or Rene, in terms of the comments regarding strategic direction. Are you talking or implying that you might look at additional acquisitions or spin-offs from the business? Kind of what your thoughts are there. And I know it's early but...

Andrew Schmitt

It is early but, Rene, why don't you take a shot at it?

Rene Robichaud

No, we're pretty ambitious. It's day 2 here for me, so Andy is expecting a complete strategy review by tomorrow morning. No, nothing is off the table. I've asked Andy, "What are the sacred cows in Layne Christensen?" And we've looked around very hard. There are none. Everybody is expected to run their businesses well, create wealth for shareholders, and do that with an eye towards the long term. Our review of our corporate culture and strategic direction will take months and will be continuously refined. Is that fair, John?

John Rogers - D.A. Davidson & Co.

That's a start. I'll be eager to see what happens. One of the just technical question, Andy, is when you talked about the heavy construction business and the project losses there, is there much work that's yet to be completed or will be completed at abnormally low or 0 margin?

Andrew Schmitt

No. I think we have done a complete review of the remaining projects, checking to make sure we're on schedule, checking to make sure we don't have costs that are unaccounted for, that are coming in after the fact or costs after closing. We're pretty satisfied with the margins that we booked are conservative. And if we perform, we should get back on track. It's -- certainly, we have from time to time problem jobs. We just don't have that many things unison, not a lot of them hitting in the same quarter. There's no question, John, there is less room to move. These margins are tighter than they were a couple of years ago. So we don't have the wiggle room, and that tends to sort of push any problems to the surface in a hurry. But we've done a pretty thorough review. We've addressed the issues that caused us the problem. We've looked carefully at the cost overruns. We've tightened up the timeliness of our reviews, so it's just a case of sharpening our focus a bit. And everybody knows that there is 2 or 3 percentage points less room in these projects, and they can tend to last a long time. As you know, they're some fairly good-sized projects. So you really have to stay on top of it and know where you are at any given point along the way. And we had some rotten luck, too, but I mean that's going to happen. There are 4 or 5 jobs that caused us problems. We probably have 500 jobs on the books with the Reynolds group right now. So like I say we've had an awfully good track record ever since we've owned those guys. We expected it to be more lumpy in the construction side, particularly the heavier construction side, than it has been. The Reynolds folks have done an admirable job. And all the companies we bought that we plugged underneath Reynolds have done an admirable job of staying on top of this work. So it just hit us at the wrong time. I mean, it's a big swing when you look at quarter-to-quarter, $6 million swing. If we'd have just been flat, just came in as normal, we would have had a record earnings quarter all-time for the company as well. So -- but at least we had other businesses that could pick up the slack. And in this case, the minerals was there, but -- so I don't see any problems going forward. We'd like to think we're going to get back and stay on track through the balance of the year.

John Rogers - D.A. Davidson & Co.

Okay. And that includes -- I mean, you've also, I guess, got the headwind of not having the Afghanistan work or the Afghanistan contribution.

Andrew Schmitt

Yes, that's coming down. It's not as big a factor. Going forward, it won't be. We have another injection rig on the specialty work in Florida, which will help buffer that a bit. But the guys are going to have to scramble and try to find something to offset that. That will be a little bit of a struggle. Our treatment product line, if we gain a little bit more traction there, would be helpful. In fact, that may be a part of the equation that has to occur. The specialty work and improvement in treatment going forward, that will be key to our trying to replace that Afghanistan work.

John Rogers - D.A. Davidson & Co.

And I'm sorry; one last thing, if I could. In terms of the Mineral Exploration drilling, when do you start sitting down to set prices for 2012?

Andrew Schmitt

That will be towards the end of the year. We'll start getting renewals around November. They'll run a little bit into December. Most of our contracts -- our Latin American partner's contracts are quite lengthy. Most of those will be negotiated with escalators in them already. Our wholly-owned business runs on a little shorter cycle, and we don't lock ourselves in, so it's a question of coming back when our customers say, "These are our plans. These are the rigs we're going to need next year. Can you make them available? Here's where we need, when we need them." And we'll work that out. And then we'll be saying, "Here's the price we think we have to have going forward." So that give and take will begin in the fall.

Operator

Our next question comes from Steven Fisher from UBS.

Steven Fisher - UBS Investment Bank

Just a follow-up on John's question on the heavy construction side of the water. Is it possible to quantify how many projects were experiencing challenges? And what's the range of percentage complete on those?

Andrew Schmitt

About 4 or 5 projects, and I think we have those projects closed out and have taken our hit on the margin adjustment. I believe they're behind us. Aren't they, Jerry?

Jerry Fanska

Yes, pretty darn close, if not.

Andrew Schmitt

Yes, I don't think there's any more there, Steven. I think we're okay from that standpoint. If we have any problems, it will be new ones. It won't be these.

Steven Fisher - UBS Investment Bank

Okay. And, Andy, you mentioned you need some geoconstruction orders to fill out the book of business. Can you just talk about what prospects you do have there? How confident are you that you may be able to fill that?

Andrew Schmitt

We've got a couple of very attractive jobs, one of them in Canada that we'd sure like to pick up. We finished out -- we were back in New Orleans again and finished up that work, I think, Jerry, this quarter. So we're pulling those crews, that equipment, out of New Orleans. We've got some small work, but nothing really of size to move to. This second trip to New Orleans was not like the first one when we did all the Katrina-related work. It was just going back and working for the corps there. So we've said we need to pick up -- it's in our base jet grouting work, which is normally smaller jobs than at Bencor, but pretty profitable jobs. And so I'm reasonably comfortable we will restore that backlog. But we don't have that booked out for the balance of the year, so it's created a little gap bars where we've got crews and equipment, and we just don't have a bigger project to send them to.

Steven Fisher - UBS Investment Bank

Okay. And then, Jerry, we probably have the numbers to do this in the press release, but what was the organic growth in the water business year-over-year?

Jerry Fanska

From -- what do you mean? From the perspective of just revenue growth?

Steven Fisher - UBS Investment Bank

Revenue growth, yes, x acquisitions.

Jerry Fanska

We've got, let's see here...

Andrew Schmitt

For this whole segment there, Steven?

Jerry Fanska

For the whole segment?

Steven Fisher - UBS Investment Bank

Yes.

Jerry Fanska

Right at 12%. That's the infrastructure segment in total.

Andrew Schmitt

Yes, that's without Bencor.

Jerry Fanska

Yes.

Andrew Schmitt

Bencor had about $10 million, Steven, for the quarter. So back that out, that's where you end up.

Steven Fisher - UBS Investment Bank

Okay. Great. And then just lastly, Andy, you mentioned some headwind as some of the stimulus has worked its way off. Do you have any expectation that Obama's plan that will be discussed tomorrow will have any benefit for water-related business? Or what could he say that could be helpful, that we should listen for?

Andrew Schmitt

Well, last time, John, when we had that -- I mean, Steven, when we had that $800 billion stimulus of shovel-ready jobs, there was only about $42 billion that was direct in the infrastructure. I think $36 billion of that was roads, bridges, et cetera, and only $6 billion for water and wastewater treatment. I would hope if they're going to do probably what should have been done in the first go around and really create shovel-ready jobs, that water and wastewater infrastructure should get a fairly good chunk of business at least proposed. And they have good mechanisms that have been around in state revolving funds that can push that through fairly quickly. So they actually have a mechanism that can move that type of work along fairly rapidly. So we had a hope that would happen before. We'll cross our fingers and see if that happens again. But I think the administration would be roundly and deservedly criticized if we come out with another shovel-ready program that's not really a shovel-ready program. And so both size-wise and target-wise, you'd like to think that we would get a pretty good chunk. That's the most obvious place other than the roads that are in need of work, and you see it everywhere. So -- and it certainly didn't get any better. Now the water and wastewater infrastructure business is about a $137 billion business annually, so you've got to have a pretty meaningful amount of work and get it done in a decent period of time to have a big impact. So we'd like to think that's going to happen this time. Like I say, with the skepticism from the last go around, you'd think the pressure would be on to actually deliver in a meaningful way if they're interested in providing that stimulus, which we did show -- see show up in the CIPP business. Not so much in water and wastewater plant, short-term water well work, or anything, but we did see it more prominently in the CIPP business last time.

Operator

Our next question comes from Gerry Sweeney from Boenning.

Gerard Sweeney - Boenning and Scattergood, Inc.

I want to see if you could give a little bit more detail on the Mineral Exploration business. Obviously, with the recent several weeks, some dislocations in the markets, some current concerns that economies are slowing down, and understanding that I guess your contracts don't come out to EBIT for another month or 2 or a couple of months, are you seeing any type of indication on slowdown on business or demand, maybe it via wage inflation, which you've spoken about before being a little bit of a headwind in that area?

Andrew Schmitt

Yes, the biggest challenge we have is training people and having people to do the work. I think that would be true. You'd hear that from Major Drilling. You'd hear that from Boart Longyear. You'd probably also hear that we're not seeing a slowdown and the junior matters, which were always sort of cream on the top, have raised money, continue to raise money, and they provide a nice filler on top of the larger mining companies in their exploration budget. They all expect to be raised and they're all -- we've not heard anybody back off. No one is indifferent and doesn't notice all the problems we see from a macro standpoint in the economy. One would expect at some point that, that would have an impact, but we haven't seen it in our customers' budgets yet. We haven't seen that caution. The concern is still on adding rigs, both for base metals and for gold. I mean, in the big picture, there's only 30 years of reserves of copper. So I mean, it's pretty hard to say how you could slow down in that particular base metal. On the gold side, it's hard to determine how much is built in for other factors as opposed to pure consumption, but it helps the juniors raise money, and when they raise money, they typically spend it and spend it pretty quick. So I'd say at this point in time, we certainly wouldn't anticipate doing less work next year than we're doing now. Now if there were a liquidity crisis, like we had in late 2008, surely that would affect everybody with pulling their horns and sort of check and see which way the wind is blowing, but we haven't seen that, don't expect that at this point. And so we'll get a good indication though when we get into November. I'd say our Latin America partners are set. They could tell you now that their contract work is contracted. We'll get a better picture on our wholly-owned business just because of the shorter cycle, shorter-term nature of that business. But no problem so far.

Gerard Sweeney - Boenning and Scattergood, Inc.

How quickly did things slow down in '08 or '09? And I mean, was there any type of indication or indicators aside for maybe some of the contract pricing that you're launching?

Andrew Schmitt

Well, in 2008 -- in late 2008, we didn't experience any slowdown until mid-December. And what happened is we had the normal year-end slowdown, okay? And what happened was when we came back, we didn't come back at all in the spring. So what happened was lots of rigs stayed shut down. Lots of customers were reticent to put the machines back to work, because at that point in time, now here you are in mid-January, February, March 2009 -- you remember those days, and they were really reticent to do anything. When they did start back, we -- later that year in 2009, we weren't sure that they really needed the rigs that they were calling for. So I think we were a bit a little reticent as they. We hear what you're saying, but do you really need that much equipment? By the time we got into that early 2010, it was pretty clear they needed lots of equipment, and all of the exploration companies were scrambling. The one notable exception in that scenario was in Chile. In 2009, none of the big mining companies -- Xstrata, BHP, Codelco, Anglo, they just didn't slow down at all in Chile. You would have -- you would not have known you were -- had any difference at all. If anything, our work ramped up in 2009 in Chile, whereas in Mexico, where we and our partners both were, Peru slowed down just like it did in Africa. So -- but to us it looked more like a liquidity crisis as opposed to an economic -- if you will, global economic slowdown because they came back so quick. So it would depend on the nature of it. We just saw the plateau and things level off at this level. It's a pretty high level, and we can focus on efficiency and push some more pricing out there and catch up with our training. And so at this point, we'll get an indication if budgets are being curtailed. But at least what they're representing right now is they're all much likely oil and gas exploration people still -- the big ones still pushing those budgets up.

Gerard Sweeney - Boenning and Scattergood, Inc.

Okay. One other quick question here. I guess on the MinEx side, on the wholly-owned area, was there actually a downtick in the EBIT margins quarter-over-quarter?

Andrew Schmitt

No. On the EBITDA margin without -- quarter-over-quarter, we were 22.5% this quarter and 20.7% last quarter. So in EBITDA on the wholly-owned business, it was 22.5% versus 20.7%, so no downtick there. There are a lot of things coming into the EBIT line other than depreciation. So -- but at least on that run rate, there wasn't any problem. It was actually up.

Gerard Sweeney - Boenning and Scattergood, Inc.

Got it. Okay. And then one last question, and then I'll jump back in line. Gold -- or at least we'll take a look at copper. Is there a certain level that you would see, almost like a "line in the sand," like for example, people say like $4 gasoline, people stop driving as much -- or any number in the copper world which you would say people would start to slow down drilling or slow down exploration business, just to deal with the pricing side?

Andrew Schmitt

It's going to vary quite a bit depending on the cost at the particular mine. The bigger mines, like the ones we see in South America, will have more staying power. The smaller mines will typically have a higher cost, and they'll be more affected. So it would vary a little bit. You would see the small to mid-sized on the list, lesser low-cost properties or properties that got extended in this current run. We saw that last time. The ones that had started up later stage, weren't as economic, got brought onstream, they're the first ones to peel off. So it would hard to pick a number. I mean, I know the really big low-cost ones, some along the Zambian border, DRC, where they've got fairly rich ore bodies, it'd take quite a bit to move them down. So it would be a mixed bag. We tend to be, and our partners in Latin America tend to be, more centered on the majors. So we have a little more staying power there. Less junior, less small mine focused, so -- but I wouldn't know a number, just because they vary so much by mine and so...

Gerard Sweeney - Boenning and Scattergood, Inc.

I understand. I just wanted to see if there was a specific number, so that is helpful.

Operator

[Operator Instructions] And our next question comes from Christopher Purtill from Janney Montgomery.

Christopher Purtill - Janney Montgomery Scott LLC

Just first on the -- in the MinEx business, can you just give us your take on how you think the industry has responded, I guess, as a whole to the demand environment in terms of the pace at which new rigs have been added? Maybe talk about your utilization rates there. Or you think industry-wide utilization rates are leveling out here or increasing, as we look at pricing maybe for the next 12 months.

Andrew Schmitt

I think the difference between this period and recovery from what we saw in 2006, 2007 and 3 quarters through 2008 is this buildup has been very more paced and controlled. I'm seeing more equipment as competitors bring on rigs. There is a fair amount of retirement. So the net rig count is not going up, like in '07 and '08 where we were collectively all pulling anything we could off the fence, getting it ready to work and somehow getting it out into the field. I'm not seeing that now in the early stage in 2010. We were almost skeptical, as a group, of the recovery. As we got through last year and we began to see just how strong this recovery was, we began to see the smaller competitors go out and add rigs. We started adding rigs. Major did and Boart Longyear, as did our partners in Latin America, later in 2010. Have picked that pace up a little bit this year, but still with a fair amount of retirement. I think we've added about 8 drills and retired -- and picked up 3 from our partners, so 11, and we've retired about 8. Our Latin American affiliates have picked up about 14, probably add 28 in total this year. I think Major's picked up 21 this quarter, but they retired 10. So it's a -- Boart's retired quite a few as well. So we're seeing much more paced. And one of the things that's putting a governor on us is people. So the training of people has become such an issue, and they have to be very well qualified with experience. It's put a little bit of a governor on that as well. So I think a much more controlled environment. I think our customers have been much more controlled in where they want to go and what they need to add. So I'm not feeling the trough we had in 2007 and early part of 2008. I'm not feeling it, I'm not sensing it, and so this seems a lot more paced to me.

Christopher Purtill - Janney Montgomery Scott LLC

Okay. And then, I mean, any comment on where you think industry capacity utilization is running right now?

Andrew Schmitt

Probably in the 85% range. And you can't get to 100% because the maintenance downtime moves between jobs. So probably 90% is the peak. So we're pushing close to that, I think, as an industry at this point.

Christopher Purtill - Janney Montgomery Scott LLC

All right. Great. That's very helpful. And then just, I guess, a quick housekeeping on the FCPA issue. The, I guess, professional fees and legal fees associated with that, it sounds like we can expect those to persist through the back half of the year. Is that right?

Andrew Schmitt

It will be probably not at the level they've been as we've had the prior month. So -- but the expenses are there and they'll continue into -- until we get this wrapped up.

Operator

And I'm showing no further questions at this time.

Andrew Schmitt

Okay. Guys, we appreciate the time and attention. And nice to continue to report good numbers and better numbers than the previous year. And that's our goal. We'll keep trying to do it. A welcome again to Rene joining the management team, and we're delighted to have him and look forward to great things as he helps take Layne Christensen company to the next level. Take care, and we'll see you next time. Thanks, Jen.

Operator

Ladies and gentlemen, this does conclude your conference. You may all disconnect, and have a wonderful day.

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