SecProbe.io

CORRESP
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filename1.htm

September 23, 2005

By EDGAR and
Facsimile

Securities and
Exchange Commission

Judiciary Plaza

450 Fifth Street,
N.W.

Washington, D.C.  20549-0510

Attention: Rufus
Decker, Accounting Branch Chief

  Re:

  Penhall
  International Corp. (the “Company”)

  Form 10-K/A
  for the fiscal year ended June 30, 2004

  Form 10-Q
  for the period ended March 31, 2005

  File
  No. 333-64745

Dear Mr. Decker:

Set forth below are the
Company’s responses to the comments contained in the letter of the staff of the
Division of Corporation Finance of the Securities and Exchange Commission (the “Commission”)
dated July 19, 2005 (the “Comment Letter”) with respect to the Form 10-K/A
filed by the Company on December 20, 2004 and the Form 10-Q filed by
the Company on May 13, 2005. The headings and numbered responses in this
response letter correspond to the headings and numbered comments contained in
the Comment Letter.  For your
convenience, we have repeated the staff’s comments below in bold face type
before each of our responses.

Form10-K/a
for the fiscal year ended June 30, 2004

Selected Financial Data, pages 11 - 12

1.             We
note your proposed disclosures and response to prior comment 2 in our letter
dated March 22, 2005 as well as your proposed disclosure.  We note that you have modified the
calculation of Adjusted EBITDA as well as expanded your disclosure to indicate
that management believes that Adjusted EBITDA is a meaningful measure and represent
an alternative view of your operating performance and have the following
comments.

•      We note that Adjusted EBITDA excludes goodwill impairment.  Confirm that you do not believe that it is
reasonably likely that you will incur goodwill impairment charges within two
years as required by Item 10 (e)(ii)(B) of Regulation S-K

•      You must revise your disclosures to provide all the disclosures
required by Question 8 of the Frequently Asked Questions Regarding the Use of
Non-GAAP Financial Measures.  Ensure that
your discussion of the material limitations associated with the use of your
non-GAAP financial measures addresses the material limitations caused by the
elimination of each recurring item.

•      Reconcile this non-GAAP financial performance measure to your most
directly comparable GAAP measure, net income.

Response
to Comment 1

With
regard to the first bullet point, as required by Item 10 (e)(ii)(B) of
Regulation S-K the Company has excluded goodwill impairment charges incurred in
2004 because we do not believe that we are reasonably likely to incur goodwill
impairment charges within two years.

The Company has
additionally modified Footnote (1) to Selected Financial Data which
further expands the discussion related to our use of the non-GAAP measure
Adjusted EBITDA.  We will modify the
following in future filings:

1.     Calculation
of Adjusted EBITDA which previously excluded certain charges.

2.     We
will also modify our discussion related to covenants in our New Credit
Agreement and limitations of the Indenture agreement.  These will be included in Management’s
Discussion and Analysis under Liquidity and Capital Resources.

In
our Annual Report of Form 10-K for the year ended June 30, 2005, and
in future filings we will include disclosure in substantially the form below:

Footnote (1) to Selected
Financial Data

(1)        Adjusted
EBITDA is a supplemental non-generally accepted accounting principle (“GAAP”)
financial measure.  Adjusted EBITDA represents
earnings before interest expense, income taxes, depreciation and amortization,
adjusted to exclude goodwill impairment because we believe that this charge in
2004 to be a non-recurring charge.  Regulation
S-K (Item 10(e)) and other provisions of the Exchange Act of 1934 define and
prescribe the conditions for use of certain non-GAAP financial
information.  We believe that our
Adjusted EBITDA information, which meets the definition of a non-GAAP financial
measure, is important supplemental information to investors.

Management has presented
Adjusted EBITDA because it is used as a measure in the terms of The Credit
agreement and in the Indenture agreement (see Management’s Discussion and
Analysis).

2

Management has also presented
Adjusted EBITDA because we believe it is a meaningful measure and represents an
alternate view of our operating performance and allows our management and our
investors to readily view operating trends and analyze the Company’s ability to
incur and/or service debt. We additionally use EBITDA for internal managerial
purposes, including for planning purposes, for preparation of our internal
annual operating budget and as a means to evaluate period-to-period
comparisons.  This non-GAAP financial
measure is used in addition to and in conjunction with results presented in
accordance with GAAP and should not be relied upon to the exclusion of GAAP
financial measures.  Adjusted EBITDA
information reflects an additional way of viewing aspects of our operations
that, when viewed with our GAAP results and the accompanying reconciliations to
corresponding GAAP financial measures, provide a more complete understanding of
factors and trends affecting our business.
We strongly encourage investors to review our financial statements and
publicly filed reports in their entirety and to not rely on any single
financial measure.  Since Adjusted EBITDA
is not a measure of performance calculated in accordance with GAAP, there are material limitations to its
usefulness on a stand alone basis, including the lack of comparability of this
presentation to the GAAP financial results of other companies. Adjusted EBITDA
has certain material limitations as follows:

•      It does not include interest expense.  Because we have borrowed money to finance the
purchase of a former shareholder’s interest in the Company, interest expense is
a necessary and continuing part of our costs.
Therefore, any measure that excludes interest expense has material
limitations.

•      It does not include taxes. Because the
payment of taxes is a necessary and ongoing part of our operations, any measure
that excludes taxes has material limitations.

•      It does not include depreciation and
amortization expense. Because we use capital assets, depreciation and
amortization expense is a necessary element of our costs and ability to
generate revenue. Therefore, any measure that excludes depreciation and
amortization expense has material limitations.

Accordingly,
the non-GAAP information should not be used in isolation of, or as a substitute
for, net loss or cash flows from operations, as an indicator of
operating performance, or as a measure of profitability or liquidity.  Adjusted EBITDA, as the Company calculates
it, may not be comparable to similarly titled measures

3

employed by other
companies.  In addition, this measure
does not necessarily represent funds available for discretionary use, and is
not necessarily a measure of the Company’s ability to fund its cash needs.

Adjusted EBITDA was computed as follows:

  FISCAL YEAR ENDED JUNE 30,

  2001

  2002

  2003

  2004

  2005

  Net earnings
  (loss)

  $

  5,259

  $

  (1,617

  )

  $

  (5,920

  )

  $

  (5,643

  )

  $

  (5,162

  )

  Interest expense

  15,263

  14,293

  14,355

  13,880

  13,432

  Interest expense
  – accretion on preferred stock

  —

  —

  —

  —

  5,180

  Income tax
  expense (benefit)

  3,900

  (856

  )

  (3,441

  )

  (2,342

  )

  95

  Depreciation and
  amortization

  16,252

  17,185

  16,733

  14,355

  12,072

  Goodwill
  impairment

  —

  —

  —

  2,682

  —

  Adjusted EBITDA

  $

  40,674

  $

  29,005

  $

  21,727

  $

  22,932

  $

  25,617

Note 1 – Summary of Significant Accounting Policies
– Segment Information, page 30

2.     We note your
response to our prior comment 14 in our letter dated March 22, 2005 and
have the following additional comments regarding your segment presentation.

•      You indicate that your 44 divisions are operating segments that have
been aggregated into one reportable segment.
You have not addressed how you have determined that these operating
segments have similar economic characteristics.
Provide us with a comprehensive analysis of the sales and gross margin trends
of these 44 divisions over the last fiver years.  Address any discrepancies in these
trends.  Refer to paragraphs 17 and 19 of
SFAS 131 as well as EITF 04-10 – Determining Whether to Aggregate Operating
Segments That Do Not Meet the Quantitative Thresholds.

•      Provide a more comprehensive analysis of how you have concluded that
your customers are similar in each of your 44 divisions.  Specifically address whether you serve
customers in the industrial, construction, governmental and residential markets
in each division or if certain divisions focus on certain markets.  Address how similar or different your
customer base is in each of these four markets you serve.

•      Your response indicates that you produce a variety of profit and loss
statements.  It appears that you have
provided us with only one such report – Sales & EBITDA Comparison for
the nine months ended March 31, 2004 and 2005.  Provide us with a representative copy of each
report prepared for your CODM.

4

Response
to Comment 2

Company Conclusion:

Management of Penhall International Corp has evaluated
segment reporting under SFAS 131 (“Statement”) and has determined that
aggregation is appropriate under paragraph 17 of the Statement.  Further management has determined that this
conclusion is consistent with the objectives of paragraph 3 of the
Statement.  Following is a discussion of
the specific facts and circumstances giving rise to management’s conclusion.

Overview
of Company’s Business

Penhall owns and operates
a fleet of 700 revenue units of operated equipment, including excavators,
stompers, backhoes, compressors, “bobcats,” crushing equipment, saws, drills
and grinding, asphalt milling, and grooving equipment. Penhall also carries
state-of-the-art manually-operated and remote-controlled breakers, which
provide access to contaminated, hazardous or limited access areas and which
have been used for hazardous projects such as the demolition of decommissioned
nuclear power plants. The Company employs skilled operators for each piece of
equipment it operates.

Through its skilled
operators and equipment rental fleet, Penhall performs new construction,
rehabilitation and demolition services in connection with infrastructure
projects. For shorter duration projects, Penhall generally provides operated
equipment rental services on an hourly or fixed-price quote basis. Services
provided in this manner include specialized work such as highway and airport
runway grooving and asphalt cutting, as well as demolition work such as
concrete breaking, removal and recycling. A majority of longer duration
projects are provided on a fixed-price contractual basis. Services provided in
this manner include work for highway, airport, building general contractors, specialty
subcontractors, federal, state and municipal agencies and for property
owners.  Fixed-price contract duration
may be as short as a couple of weeks or last up to three years, but have an
average contract length of approximately six months.  For larger projects or time sensitive
projects, it is not uncommon for a division to employ resources from other
divisions with excess capacity.
Occasionally, resources are drawn from locations (also referred to as
divisions)  throughout the country to
properly staff a project.  For example,
in fiscal 2000, the Hartsfield Airport runway removal project in Atlanta
required Penhall to draw resources from locations in Colorado, Arizona,
California, Texas, North Carolina, South Carolina, and Minnesota in order to
complete the project within the allotted time frame.

Penhall’s services are
made available to customers through its 39 regional locations in 18
states.  In addition, Penhall is
qualified to do work in all 50 states and typically performs work in 35 - 40
states, with minimal work also performed in Canada and Mexico each year.  Penhall performed work for about 11,000
customers in both fiscal 2003 and 2004.
Penhall’s ability to provide operated equipment to customers throughout
the United States on the same basis is a competitive advantage.  Many of the Company’s customers operate
across wide geographical areas and utilize the services of multiple Penhall
locations.  These customers have
expectations that Penhall’s quality and pricing of services will be similar at
every location.

5

Penhall maintains a basic
equipment rental fleet and operators at each of our locations. Equipment can be
shipped from any of Penhall’s locations to projects at remote sites.  Penhall solicits and receives business over
the telephone, by facsimile, by written purchase order or through Penhall
employed at each location. Penhall’s dispatchers at each location are
responsible for the allocation of resources to meet the customer’s service and
timing requirements. The dispatcher matches all of the work requests for that
day to available equipment and operators.

Operating locations do
not compete with each other for customers or projects.  When a conflict arises between locations over
which one will pursue a business opportunity, senior management will intercede
and make a determination.  Occasionally
the final determination will result in more than one location providing
resources to the opportunity.

If a location lacks
available resources to service a customer’s needs, the location’s dispatcher or
manager will contact other Penhall locations for available equipment and
operators.  Locations often cooperate in
this fashion, regardless of which region the location resides. For example, San
Diego in the Southwest Region often shares resources with the locations in the
Los Angeles Basin Region, which are in the Southern California Region. Or,
recently Penhall completed a project in Florida that was managed by and
credited to the San Diego location, but utilized equipment and operators out of
the Dallas, Birmingham, and Atlanta offices.
Due to the location’s sharing of equipment and skilled labor resources,
all of the Company’s services are available at every location.

When one location
provides equipment and operators on another location’s projects, both locations
recognize revenues.  One location will
recognize revenue equal to the amount they bill to the customer, while the
supporting location would recognize revenue billed to the other location.  The internal billing is ultimately eliminated
during the consolidation processes, but not eliminated in the information
provided to the CODM.  If information was
provided at a location level or some other level of disaggregation, the
information would not be meaningful; in fact the information would be
misleading to the investors and other users of the financial statements.

Each of Penhall’s skilled
operators has an expertise with a particular piece of equipment. Depending on
the requirements for that day, an operator may be assigned from one to four
jobs on a given day. An operator’s time is allocated by job through job
tickets, which generate both payroll and customer billing data.

All of the operating
divisions use the same automated centralized integrated accounting and job cost
system for their accounting needs.
Further, all dispatchers in the operating divisions use the centralized
dispatch system for deployment of resources to our customers.  Both the accounting and dispatch system
reside on the Company’s mainframe at the Company’s corporate headquarters in
Anaheim, California.  Services such as
banking, insurance, surety, and health benefits are purchased at the corporate
level and provided to the divisions.

Although Penhall
occasionally contracts directly with private owners, federal, state or local
governments or agencies, most of its work is performed