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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

Jeffrey J. Reynolds - Chief Operating Officer, Executive Vice President and Director

Analysts

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

Steven Fisher - UBS Investment Bank, Research Division

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

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

Taylor Finch

Layne Christensen (LAYN) Q2 2013 Earnings Call September 6, 2012 11:00 AM ET

Operator

Good day, ladies and gentlemen, and thank you for standing by and welcome to the Layne Christensen Company's 2013 Second Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, today's conference may be recorded. It is now my pleasure to turn the call over to Devin Sullivan, Senior Vice President of the Equity Group. Sir, the floor is yours.

Devin Sullivan

Thank you, Hewey. Good morning, everyone, and thank you for joining us today for Layne Christensen's Fiscal 2013 Second 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 forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Such 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 use of forward-looking terminology such as should, intended, continue, believe, may, hope, anticipate, goal, forecast, plan, estimate and similar words or phrases.

Such statements are based on 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 of local -- 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 and 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 and exploration for and development of production of oil and gas; 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.

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. Hopefully, you've had an opportunity to review our results for the second quarter. I'll make some brief remarks, turn it over to Jerry Fanska for a review of the numbers, and then we can open the call up for questions.

Three significant factors impacted our results for the second quarter. We realized a noncash loss of $7.7 million related to the remeasurement of our equity investment in Costa Fortuna, which was recorded in the Geoconstruction division. Exclusive of this adjustment, income from continuing operations for the second quarter was $4.8 million or $0.25 per diluted share.

This was an odd accounting result for what is a good business combination for Layne. Accounting rules require that we remeasure the value of the first half of the Costa Fortuna investment, which was acquired 2 years ago, based on what we paid for the second half. The purchase price is basically the same as the first half. With significant growth in earnings in the business over the last 2 years, we are paying substantially less for the second half than our recorded investment plus earnings for the first half. Again, a very odd accounting result for a very good acquisition.

As we move further down the P&L, you'll see that we recorded a net loss from discontinued operations for the second quarter of $21.1 million, reflecting our strategic decision to exit the exploration and production business. The great bulk of this charge is noncash.

As we've previously discussed, our shift in corporate strategy forced us to take a hard look at not only who we are, but more importantly, what we want to become. We do intend to be in the oil and gas services business for quite some time. We see a significant opportunity to build a water services business that addresses the critical needs of the E&P industry. Our plan is to develop this total water solutions business under the energy services banner into a $200-million enterprise over the next 3 to 5 years.

Finally, our Heavy Civil division continued to struggle due to a combination of reduced activity levels, some of which was by design as we migrate towards higher margin projects and some of which was due to lingering macroeconomic issues, and also due to just poor performance. One office in particular experienced 4 out of the 6 troubled projects we have, and we replaced the management team at this office and other overhead at that location. We're focusing on completing these legacy projects quickly. However, we'll only do that up to our high quality standards, and we expect to have this all accomplished by the end of the year.

Now onto a review of our results by division. First division, Water Resources. Our revenues and profits declined slightly quarter-over-quarter due to the continuing softness in the municipal market, offset by better performance in drought-affected areas of the United States. Drought projects, especially in places like Texas, offer us significant opportunities for profitable growth.

We're making good progress against our plan to generate industrial-based revenue. During the first half of fiscal year 2013, approximately $34 million of revenues came from domestic industrial clients, and we expect to far exceed our goal of $50 million at fiscal year end.

With respect to international expansion, we plan on starting to drill for water wells in Ethiopia this month. If all goes according to plan, we'll continue to do so for many years. Overall, we believe that Water Resources' performance for Q3 will be in line with what we just experienced in Q2.

Regarding collaboration in our One Layne philosophy, Water Resources is working closely with our Heavy Civil division on 2 major water supply project negotiations. Also, we have an initiative to substantially enhance our water management presence with our mining clients. Lastly, Water Resources is instrumental in helping to build our total water management solutions for our energy services clients.

Now for Inliner. The Inliner division performance improved across nearly all geographies, while benefiting from higher-margin project work. Inliner's crews and licensees are active in 45 U.S. states, applying its technology to modernize our water infrastructure in a sustainable, environmentally friendly fashion. For Q3, we expect performance at Inliner may be somewhat softer than our profits in Q2 as 2 of our regional markets appear to have slowed down. With respect to One Layne and collaboration, Inliner's contribution here stems from its cost controls and cost sharing with our Heavy Civil division.

Speaking of Heavy Civil, as I just discussed, it continued to struggle badly in the second quarter. This was largely due to the impact of legacy low-margin projects, a practice 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. We continue to align the cost structure of this business with projected revenues and profits and to streamline our operations. Since our last call, we've restructured the leadership of this division from 9 direct reports to 4. In the last 6 months, we've rightsized our salaried personnel. We project annual savings of $2 million a year from these actions, the full benefit of which will be realized next year.

The backlog at Heavy Civil rose to $309 million and included $52 million of backlog that was formerly business that was earned by our Water Resources division.

We're working on a number of exciting projects at Heavy Civil following our decision to emphasize negotiated work. One major success in this regard is our new $91-million Islamorada project, for which we released a press release today. And this will provide a centralized wastewater system and eliminate all residential septic systems for this village in the Florida Keys.

Heavy Civil's hard bid municipal sector business will remain soft over the next year. And as mentioned in last quarter's call, we expect that Heavy Civil will operate at a loss in the next 2 quarters. We do see more private investment partnering on public projects going forward, but the ramp-up is slow.

Regarding collaboration, Heavy Civil is working closely with our Water Resources group on major water treatment opportunities, and is very important to building our energy services water transfer business.

Now for Geoconstruction. It performed well in the second quarter, producing record revenues and income prior to the above-referenced remeasurement, driven by the combination with Costa Fortuna, which does great work in Brazil. We continue to expect that this business will produce record results for fiscal year 2013, excluding the remeasurement, and we are on track to achieve that.

Geoconstruction is benefiting from its collaboration efforts with our sister divisions, including Mineral Exploration, Water Resources and specialty drilling.

Regarding Mineral Exploration, our wholly-owned business, its profitability was flat this quarter despite the negative impact of our West African operations that suffered a coup in Mali. Our Latin American affiliates earnings were down $2.2 million quarter-to-quarter due to 2 factors: one, a major mine shutdown for an extended period in Latin America due to a third-party accident; and two, inefficiencies caused by mobilizing and demobilizing equipment between mine sites.

We expect our Q3 profitability to be in line with our Q2 performance. We've held extensive discussions with our mining clients about their capital expenditure plans. So far, we've not been told that our business will soften materially, and there are several reasons for this. Although iron ore operations globally will be reduced significantly, many of our clients expect to continue spending on their copper and gold business, which represents about 80% of our revenues. There is significant weakness in the Canadian and Australian mineral exploration markets, but we do not have much exposure there. Our focus is in Africa, the Western United States, Mexico and South America through our Latin American affiliates. In Africa, only Tanzania is unusually soft for us right now. About 75% of our revenues are from large or intermediate-sized mining companies and not from the juniors.

I'd now like to turn the conversation over to Jerry Fanska, our Chief Financial Officer.

Jerry W. Fanska

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

Second quarter revenues remained flat from last year's second quarter, with increases at Inliner, Geoconstruction and Mineral Exploration offset by declines at our Water Resources and Heavy Civil operations. Cost of revenues for the quarter rose to $230.5 million or 79.6% of revenues, from $228.6 million or 79% of revenues for Q2 FY 2012, due primarily to margin pressures across most divisions and the cost overruns in Heavy Civil. We continue to see an increase in the number of bidders for traditional competitive bid situations across our domestic market, and this has produced an environment of decreasing prices. These pressures, combined with cost overruns in Heavy Civil, have negatively affected our margins.

Selling, general and administrative expenses increased to 14.5% of revenues for Q2 from 13% of revenues from Q2 last year. On a dollar basis, SG&A rose to $41.9 million from $37.5 million, primarily due to increases of $3.5 million in legal and professional expenses, an increase of $1.2 million in compensation costs, partially offset by various other expense reductions.

Depreciation, depletion and amortization increased 24% to $16 million for Q2 from $12.8 million in the prior year. The increase was primarily a result of our acquisition of Costa Fortuna and normal property additions.

Equity in earnings of affiliates decreased 18.8% to $6.4 million for Q2 from $7.8 million last year. The decrease in year-over-year earnings of our affiliates is due to a temporary mine shutdown by one of our clients, as well as the logistical issues relating to relocating the equipment.

On a year-to-date basis, earnings of our affiliates increased 12.9% to $14 million from $12.5 million last year due to continued strength in the mineral exploration markets in Latin America, particularly copper and gold in Chile and Peru. Interest expense increased to $0.8 million from $0.7 million last year, reflecting increased borrowings to fund capital expenditures, acquisitions and seasonal working capital.

Other income net was $1.9 million in Q2 compared to $1.3 million last year, which is due to a combination of equipment sales, an adjustment of an expected earn-out liability from a previous acquisition and foreign exchange gains. For fiscal 2013, we expect the effective tax rate to remain in the low 40% range for the remainder of the year.

We reported a loss from continuing operations of 10.9 -- $2.9 million or $0.15 per share compared to income from continuing operations of $10.3 million or $0.53 per share in last year's second quarter. The net loss in the second quarter was largely due to the $8.8 million in pretax losses at Heavy Civil and a $7.7-million noncash charge related to the readjustment of an equity investment in the parent company of Costa Fortuna.

Due to moving Costa Fortuna and its operations to a fully consolidated basis, the accounting guidance mandates that we remeasure the carrying value of our initial equity investment based on many factors, including the acquisition price for the second half. The implied fair value of the company was calculated to be roughly $37 million or double the amount that Layne had paid for the remaining 50% for the second half of the Costa Fortuna. Accounting principles require us to compare this implied value of the company on a discounted basis against the carrying value of Layne's investment in the initial 50%. The resulting onetime noncash charge was $7.7 million.

Our cash position at July 31, 2012, was $36.3 million. We had working capital of $183.5 million, including assets held for sale in Layne Energy of $13.8 million; long-term debt less current maturities of $109 million; and equity was $427.3 million or $21.57 per share.

Before I turn the presentation back over to Rene, I want to give you just a brief update on the systems. We continue to transform Layne from a group of separately operated businesses to a cohesive and collaborative organization. We have completed most of the implementation of Oracle JD Edwards EnterpriseOne ERP solutions as the platform of our current and future business. This follows a number of company-wide IT upgrades over the last 2 years. We are currently planning several additional operational system upgrades by the end of calendar 2012, all of which should allow us to run our business more effectively and efficiently.

For FY 2013, our IT spend is projected to be less than 1% of revenue, with a slight uptrend expected in future years as we continue to introduce new services. We have made the necessary investments in our IT infrastructure to deliver better service to our customers and derive full value from all of our activities.

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

Rene J. Robichaud

Thanks, Jerry. In summary, we had a decidedly mixed quarter. Water Resources, Inliner, Mineral Exploration, each operated profitably as did our geo group, excluding this noncash equity adjustment. This was offset by margin pressures and cost overruns at Heavy Civil. The performance at Heavy Civil must and will improve, and we are devoting all necessary resources to make sure that happens. I'm both pleased and proud of our people and the progress we're making to transform Layne into a global total solutions provider for water, mineral and energy. We believe that we are on the correct path and remain confident that performance will improve as we continue our collaborative efforts through fiscal year 2013.

Thanks for your attendance today. We're now happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first questioner on the phone queue comes from John Rogers with D.A. Davidson.

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

Couple of things. First of all, in terms of the losses in the Heavy Civil, the -- I know you're trying to figure these out and take the charges for them, but Rene, when you said you expect continued losses there, I assume all the projects that you're having problems with -- I mean, you've recognized all the anticipated losses there, and I don't know whether you can break that out, what the charges were with those. Was it 4 projects or 6 projects?

Rene J. Robichaud

Yes. We had 4 of the 6 troubled projects show up in one location. We found this out during the course of the second quarter, immediately after replacing the management team at this location. So the new management team comes in and they take a much different look at what the old management team had done. And their estimates for completing the projects in a high-quality way were much different than the older team. I have to admit nobody could be more disappointed than us, but I can tell you that we have scrubbed down our projects. We continue to take a very hard look at what it takes to complete our projects. That said, there's a lot of judgment on how much revenues will come from the completion of all these projects, and that's where our miss came from this quarter. Looking forward, we have a fixed cost charge of keeping the team together. The team has been reduced to a high-quality core team that we have confidence in. But that said, in the absence of a lot of high margin projects, we're having trouble covering our fixed charges. Our new projects and the margins on those are covering kind of the old projects that have virtually no margin. But we'll probably suffer losses in the coming 6 months equivalent to our fixed charges of managing the business.

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

And that's a couple of million dollars a quarter.

Rene J. Robichaud

That could be up to $3 million a quarter.

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

Okay. Okay. And then my second question is just as it relates to the Mineral Exploration business, your comments that you expect similar quarters going forward, is that similar to what we saw in the second quarter?

Rene J. Robichaud

Yes.

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

Because that's down from where we've been running the last year or so.

Rene J. Robichaud

That's true. That's exactly right. We would have said 90 days ago that our business would do better. But in the last 90 days, we watched the price of iron ore collapse, which doesn't really affect us directly. That's not a big part of our business, but it's a big part of other people's business. And so there are some of our competitors that have more idled rigs and they are scrambling, trying to get into our business. So the business is more competitive today than it was 90 days ago.

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

Okay. And at the end of the year, is it -- do you start renegotiating prices for 2013, calendar 2013?

Rene J. Robichaud

Well, it doesn't all happen worldwide at one particular month. Different companies have different strategies on how they want to plan these things. But at the end of the year, we'll be putting in place quite a number of contracts for calendar year 2013. In this environment, we -- our goal is to hold prices where they are, but we don't imagine price increases on average over our whole portfolio of rigs.

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

Right. Okay. And lastly, what is your utilization rate now?

Rene J. Robichaud

To date -- today it's probably -- normalized for West Africa rain, it's probably in the mid-70s. The most it could be is in the 80% to 85% range, just given the maintenance that we have to do and normal mobe-ing and de-mobe-ing.

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

Okay, all right. That helps. I'm sorry, the last thing is, when do you -- any idea on when you might actually sell the energy assets?

Rene J. Robichaud

Well, if we were in a hurry, we could get it done today, but we're not going to do that at just any price, so we are not in a hurry.

Operator

Our next questioner in queue is Steven Fisher with UBS.

Steven Fisher - UBS Investment Bank, Research Division

On the Heavy Civil with this nice Florida contract that you have now, do you expect that you can get that back to profitability next year for the division? And if so, I mean, do you think you can get back to, say, the 2011 levels, which I think were around $10 million of profit?

Rene J. Robichaud

Well, you're not ambitious enough. We peaked in Heavy Civil at $17 million of profit. That's our next target. When we get there is the question. We're not yet forecasting 2013 numbers. We see some healing in the market. We're really delighted to be working with the village of Islamorada on this very important project for them, and it's part of the whole Florida Keys exercise of eliminating all septic systems across the Keys. And this will be a good project for us. It will last several years, right? So it certainly will add to our profitability. But that's one of many pieces of portfolios that have to come forward. I would say the theme to think about for Heavy Civil is that our history of focusing on hard bid municipal business is not our future. We will not abandon the hard bid municipal business or our customers, but certainly, we will look to negotiate deals, larger deals where the fray is less competitive.

Steven Fisher - UBS Investment Bank, Research Division

Can you say if that project itself is enough to get you back to at least break-even or profitability in 2014, I guess, fiscal?

Rene J. Robichaud

Steven, I know you keep pushing. We're not ready to talk about the full calendar year 2013. As we approach year end, we will be. Islamorada will have a very fair margin on it. Based on historical norms, it will be a fair margin. It won't be the crazy margins that we had to agree to in 2010 and 2011. We are out of that business of doing work for no money.

Steven Fisher - UBS Investment Bank, Research Division

That's very helpful. I appreciate that. And on the -- moving over to the equity investment. I guess curious just the thoughts on why you decided to buy out the rest of the Diberil. And why now?

Rene J. Robichaud

Oh boy, the Costa Fortuna business, which was owned by this entity called Diberil, the Costa Fortuna operating entity is an extremely high-quality geoconstruction business that's got tremendous opportunities to help with the infrastructure needs of Brazil for the coming decades. And we are working on projects that are just terrific, related to bringing electricity across vast stretches of the Amazon and bidding on projects that will relate to the World Cup and the Olympics that are coming. So we just think Brazil is a great market for infrastructure. And that our skills worldwide, combined with the Costa Fortuna team, it's a very, very important combination.

Steven Fisher - UBS Investment Bank, Research Division

Okay. And then over to MinEx. The rigs that you moved to Brazil from Canada, are they already contracted?

Rene J. Robichaud

Some are; some are not. We paid a pretty heavy price in the last 6 months to take those rigs out of Canada, send them down to Brazil. And then in Brazil, we've got to make sure that those rigs are ready for operation, crew them up, and so it's more of a long-term investment in the Brazilian mineral exploration market, which we think is a terrific long-term market. But it's cost us money this year to be in there, and so the results of Mineral Exploration are negatively impacted by this investment that we're making in Brazil. We think the future is bright there though.

Steven Fisher - UBS Investment Bank, Research Division

And then just lastly, maybe for Jerry, can you give us what the current portion of debt is?

Jerry W. Fanska

Yes. $109 million is the long term and -- find my balance sheet here -- and the current portion is $10.6 million.

Operator

Our next questioner in queue is Michael Roomberg with Ladenburg.

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

I just want to turn back to the backlog in Heavy Civil for a moment, if I could. You had mentioned the shifting of some backlog from Water Resources to Heavy Civil. If I look at the numbers that you gave in the press release today for the first quarter of '13 and the second quarter of '12, do those numbers also include the backlog that was shifted?

Rene J. Robichaud

Yes. The $309 million includes a little over $50 million of business that was transferred from Water Resources to Heavy Civil in a restructuring that we did last year.

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

Okay. So the $309.4 million is comparable to the $297 million in the first quarter, reported as the backlog?

Rene J. Robichaud

Yes, it is.

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

Okay. So given that your bookings in the quarter appear to be almost $90 million, which is up 50% from the first quarter, and when I try to square that with your -- you've made it pretty clear that you're only focusing on looking for business that is of a higher margin. Can you kind of -- that would -- that strategy would imply that your -- there'll be downward pressure on new bookings. And when we see the strong increase, can you help square what is now in the backlog and then what those new bookings entail?

Rene J. Robichaud

I'm not exactly sure of what your question is. Just to be clear, the $91-million deal for the village of Islamorada is not included in the $309 million.

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

I guess what I'm asking, Rene, is your backlog -- I'm sorry, your new bookings in the second quarter of '13 were up very strongly from your new bookings in the first quarter of '13. And given your decision to now focus more on higher-margin business, it would imply downward pressure on the growth in new bookings. You're cutting back to look at only more -- higher profitability projects, yet there's a huge increase in your bookings in the quarter. And so I'm just trying to square the 2. The increase in the bookings in the quarter, is that in line with the new discipline in bidding only on higher-margin business?

Rene J. Robichaud

Okay. I'm struggling here because the $309 million backlog is not a huge increase over the first quarter, right?

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

But the bookings in the quarter were $88 million versus the $62 million in new bookings that you reported in the first quarter of this year. I guess that's the increase that I'm referring here.

Jerry W. Fanska

He's taking the sales plus whatever the bookings would be to get to the new backlog.

Rene J. Robichaud

Oh, I see. I see.

Jerry W. Fanska

And basically what you're saying is the new projects, what do they look like going into the backlog?

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

Exactly.

Rene J. Robichaud

And they are more normalized historical margins than we've had in 2010 and 2011. I mean, we've had -- and we've had a lot of discussions internally about this. Our Heavy Civil business could do no wrong from 1996 to the year 2010. It was on a tear and then just a tremendous business. And then 2010 and 2011 hit hard and things changed. So by the end of last year, 2011, we realized -- unfortunately, I'd say, maybe a year late, but we realized that the business strategy we were pursuing in 2010 and 2011 was going to hurt us. So the new business that we started booking, we talked about this at the end of the year last year. The new business that we've been booking this year is at more -- is at better margins, more historical margins along the lines of what we would have seen in the '96 through 2010 period.

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

Okay, okay. All right. That is helpful. Just another question on Heavy Civil. With respect to the expenses in the quarter, you did mention the headcount reductions and some of the other actions that you took. Are there any of those costs that could be considered onetime in nature related to those actions?

Rene J. Robichaud

Sure. I mean, we have incurred pretty significant severance costs and closing offices and things. So those are -- we're not going to repeat those. We've done the bulk of our restructuring, and we believe we're down to a core group of A players that we can grow this business successfully in the coming years and decades.

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

Got it. Okay. And then lastly on the Brazilian business. You had mentioned in your press release when you acquired it, that it had reported $50 million in revenue in 2011. Can you talk about your expectations -- obviously, it's a very lumpy business -- what your expectations are for the remainder of fiscal '13?

Rene J. Robichaud

For the overall Geoconstruction or the Brazil...

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

Well, specifically for the business that was acquired and for the whole Geoconstruction as well.

Rene J. Robichaud

Well, if it's all right with you, Michael, we prefer to talk about a division as opposed to a division of a division.

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

Sure.

Rene J. Robichaud

The Costa Fortuna business, the reason we bought in the second half is because they're bidding on hundreds of millions of dollars, or at least their plan is to bid on hundreds of millions of dollars' worth of business that's coming in the next few years. And they're going to need help to do that work. And combining fully with Layne makes a lot of sense to them and to us. So where could this business go? Well, I mean, we could win it all if we lower our price. We've been there and we're not going to do that. We're going to maintain our standards of high quality, and we're going to ask for, and we expect to get fair margins for that work in Brazil. The overall Geoconstruction business, that's a great business. We've had record results for the last 3 years in a row with Geoconstruction, and we think that's an important area of our total water management solutions. And so we think that business should have another record year this year. And clearly, that will be easier with the combination of Costa Fortuna. It's not to say that, that business is not competitive. We're not the only ones in that business. But I would say that our track record of working with some of the most demanding clients, including the Army Corps of Engineers, is just a terrific track record.

Operator

[Operator Instructions] Our next questioner in queue is Gerard Sweeney with Boenning and Scattergood.

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

A lot of my questions have been answered, but I want to circle back to the energy services side. Rene, obviously made that comment, you're looking to make it a $200-million business in the next 3 to 5 years. Understanding that I think this year is more of a planning phase, getting an operational plan, business plan in place, but curious as to when you can start maybe breaking that out, giving some clarity as to how that's going to develop and maybe some run rates in the next couple of years.

Rene J. Robichaud

Jerry's going to want to break it out as soon as it's bigger. That's kind of my fault, Jerry.

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

Okay. Do you know when that's going to be?

Rene J. Robichaud

Within 3 to 5 years. No, well, we have had a successful sourcing business with major E&P companies and large independents, successful projects on transferring water for them. We are successfully filtering water in the Marcellus Shale for a very large independent. On our pilot testing of evaporation, and we'll see where that goes, we've done pilot testing of filtration systems for the nastiest, oiliest water, and we're very encouraged with that. So we'll be bringing all these to market simultaneously at the beginning of next year and growing our way one step at a time and investing in that business, as we see success in bringing our total water management capabilities to large and major E&P companies, and then Jerry will separate it out for you.

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

Understood. Okay. One other housekeeping item. SG&A, $3.5 million in legal, and I forgot the other half of that cost or a portion of that cost. Is that from the FCPA investigation? Can you break that out? Or is there...

Jerry W. Fanska

Yes. Some of it is and some of it's M&A activities. It's various, various things.

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

Would you know how much is sort of the FCPA? Just so an idea of maybe that's a -- eventually becomes a nonrecurring cost.

Jerry W. Fanska

Yes, I don't know that off the top of my head.

Operator

Next questioner in queue is Taylor Finch with Century Management.

Taylor Finch

You guys seem to be calling out more pipeline work and less plant work in Heavy Civil. Is that correct? And are these 6 poor projects plant work primarily?

Jeffrey J. Reynolds

[indiscernible] it's fairly unchanged [indiscernible]

Rene J. Robichaud

We're just having Jeff Reynolds, who's here with us, kind of tell us that the mix has not dramatically changed. Going forward, we plan on being very capable in both businesses. It's project-by-project, and it can be very lumpy. As you see, we did an Islamorada project all of a sudden, and that's a pretty lumpy piece of business, but it's great. It's the sort of business we want to do long term and that can change the mix.

Taylor Finch

Okay. Was any of those 6 projects -- are those characterized by any specific type of work? Or is it just general?

Rene J. Robichaud

It's mostly plant business. Again, it's in one office. What can I say? That management team -- we had to remove that management team. They had lost our confidence, but we have great confidence in the new team. A very talented, experienced group has gone in there to continue working and finish our projects before the end of the year in a high-quality way.

Taylor Finch

So you've been bringing in fresh work this quarter that's going to be at a better margin. So at this time, what percent of your backlog would you say is low- and no-margin work in Heavy Civil versus better work?

Rene J. Robichaud

The percentage of the better work, I don't know how to answer that exactly. But I would say, you've probably got 1/3 of our portfolio at normal margins and 2/3 of our portfolio at the bad margins we booked in 2010, 2011. Jerry, have you got anything more specific?

Jerry W. Fanska

I think it might be just reversed at least at half...

Rene J. Robichaud

Did I get that backward? Half and half?

Jerry W. Fanska

Well, we reported a little bit more in new business since December '11 at margins that are substantially improved over what we had in pre-2011. So we still have some projects, obviously, that we need to work through, but the backlog that is now being put in is definitely at much higher margins.

Rene J. Robichaud

And that does not include Islamorada, which is a big change.

Taylor Finch

That's really helpful. And do you have any FCPA update for us on what we should be expecting?

Rene J. Robichaud

We can't talk about FCPA. It's really -- if we put anything in the 10-Q, and we do not expect to, that's all we can say about that. I mean, we have to word those -- so carefully word that. The last 10-Q had everything we've got to say on the FCPA.

Jerry W. Fanska

And that's it. If there was any significant update, we would definitely put it in the press release.

Operator

And speakers, it looks like there are no additional questioners on the queue. I'd like to turn the program back over to Mr. Robichaud for any additional remarks.

Rene J. Robichaud

Well, again, I just want to thank you all for joining us today. We appreciate it and we'll be back with you in 3 months. Bye-bye now.

Operator

Thank you, gentlemen. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.

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