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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------- -------
Commission File Number 33-48432
Layne Christensen Company
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 48-0920712
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1900 Shawnee Mission Parkway, Mission Woods, Kansas 66205
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (913) 362-0510
Not Applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
There were 11,772,350 shares of common stock, $.01 par value per share,
outstanding on August 23, 2002.
PART I
ITEM 1. Financial Statements
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
July 31, January 31,
2002 2002
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,192 $ 2,983
Customer receivables, less allowance
of $3,617 and $3,596, respectively 47,709 43,603
Costs and estimated earnings in excess of
billings on uncompleted contracts 14,082 11,912
Inventories 20,450 21,885
Deferred income taxes 12,142 10,181
Income taxes receivable 1,048 3,074
Other 3,215 2,738
--------- ---------
Total current assets 101,838 96,376
--------- ---------
Property and equipment:
Land 8,202 8,163
Buildings 16,530 16,112
Machinery and equipment 163,179 162,967
--------- ---------
187,911 187,242
Less - Accumulated depreciation (131,795) (128,460)
--------- ---------
Net property and equipment 56,116 58,782
--------- ---------
Other assets:
Investment in foreign affiliates 19,440 19,504
Goodwill 1,659 21,884
Deferred income taxes 8,977 4,270
Other 3,118 1,526
--------- ---------
Total other assets 33,194 47,184
--------- ---------
$ 191,148 $ 202,342
========= =========
See Notes to Consolidated Financial Statements.
2
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
(in thousands, except share and per share data)
July 31, January 31,
2002 2002
---------- -----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,053 $ 16,762
Current maturities of long-term debt 3,500 20,071
Accrued compensation 10,869 14,785
Accrued insurance expense 7,248 5,794
Other accrued expenses 9,869 10,983
Income taxes payable 5,692 4,049
Billings in excess of costs and estimated
earnings on uncompleted contracts 10,571 8,419
--------- ---------
Total current liabilities 64,802 80,863
--------- ---------
Noncurrent and deferred liabilities:
Long-term debt 33,500 14,286
Accrued insurance expense 6,290 6,358
Other 3,551 4,287
Minority interest 875 656
--------- ---------
Total noncurrent and deferred liabilities 44,216 25,587
--------- ---------
Contingencies
Stockholders' equity:
Common stock, par value $.01 per share, 30,000,000
shares authorized, 11,719,033 and 11,707,694
shares issued and outstanding 117 117
Capital in excess of par value 83,673 83,605
Retained earnings 10,128 24,302
Accumulated other comprehensive loss (11,743) (12,027)
Notes receivable from management stockholders (45) (105)
--------- ---------
Total stockholders' equity 82,130 95,892
--------- ---------
$ 191,148 $ 202,342
========= =========
See Notes to Consolidated Financial Statements.
3
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
Three Months Six Months
Ended July 31, Ended July 31,
(unaudited) (unaudited)
---------------------------- ------------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenues $ 72,799 $ 80,114 $ 144,641 $ 159,946
Cost of revenues (exclusive 7
of depreciation shown below) 51,640 58,471 103,933 117,407
---------- ---------- ---------- ----------
Gross profit 21,159 21,643 40,708 42,539
Selling, general and
administrative expenses 14,837 15,123 29,437 29,184
Depreciation and amortization 3,711 4,726 7,587 9,611
---------- ---------- ---------- ----------
Operating income 2,611 1,794 3,684 3,744
Other income (expense):
Equity in earnings of foreign
affiliates 202 813 474 514
Interest (668) (1,143) (1,269) (2,418)
Other, net 398 440 347 876
---------- ---------- ---------- ----------
Income before income taxes 2,543 1,904 3,236 2,716
Income tax expense 1,694 1,196 2,103 1,765
Minority interest, net of
income taxes (149) (69) (182) (150)
---------- ---------- ---------- ----------
Income before extraordinary
item and cumulative effect
of accounting change 700 639 951 801
Extraordinary loss on early
extinguishment of debt,
net of income taxes of $439 (696) - (696) -
Cumulative effect of accounting
change, net of income taxes
of $5,796 - - (14,429) -
---------- ---------- ---------- ----------
Net income (loss) $ 4 $ 639 $ (14,174) $ 801
========== ========== ========== ==========
Basic income (loss)per share:
Income before extraordinary item
and cumulative effect of
accounting change $ .06 $ .05 $ .08 $ .07
Extraordinary loss (.06) - (.06) -
Cumulative effect of accounting
change - - (1.23) -
---------- ---------- ---------- ----------
Net income (loss) per share $ - $ .05 $ (1.21) $ .07
========== ========== ========== ==========
Diluted income (loss)per share:
Income before extraordinary item
and cumulative effect of
accounting change $ .06 $ .05 $ .08 $ .07
Extraordinary loss (.06) - (.06) -
Cumulative effect of accounting
change - - (1.18) -
---------- ---------- ---------- ----------
Net income (loss) per share $ - $ .05 $ (1.16) $ .07
========== ========== ========== ==========
Weighted average shares outstanding 11,764,000 11,758,000 11,761,000 11,758,000
Dilutive stock options 452,000 337,000 431,000 224,000
---------- ---------- ---------- ----------
12,216,000 12,095,000 12,192,000 11,982,000
========== ========== ========== ==========
See Notes to Consolidated Financial Statements.
4
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
Six Months
Ended July 31,
--------------------------
2002 2001
--------- ---------
(unaudited)
Cash flow from operating activities:
Net income (loss) $(14,174) $ 801
Adjustments to reconcile net income (loss) to cash
from operations:
Depreciation and amortization 7,587 9,611
Deferred income taxes (1,100) 23
Equity in earnings of foreign affiliates (474) (514)
Dividends received from foreign affiliates 539 327
Minority interest 182 230
Gain from disposal of property and equipment (234) (149)
Loss on extinguishment of debt, net of tax 696 -
Cumulative effect of accounting change, net of tax 14,429 -
Changes in current assets and liabilities:
(Increase) decrease in customer receivables (4,106) 2,468
(Increase) decrease in costs and estimated
earnings in excess of billings on uncompleted
contracts (2,181) 719
Decrease in inventories 47 1,150
(Increase) decrease in other current assets 1,179 (843)
Decrease in accounts payable and accrued expenses (698) (1,995)
Increase in billings in excess of costs and
estimated earnings on uncompleted contracts 2,167 283
Other, net 747 (1,936)
-------- --------
Cash from operating activities 4,606 10,175
-------- --------
Cash flow from investing activities:
Additions to property and equipment (5,056) (4,456)
Proceeds from disposal of property and equipment 582 2,074
Proceeds from sale of business 1,800 -
-------- --------
Cash used in investing activities (2,674) (2,382)
-------- --------
Cash flow from financing activities:
Net borrowings (repayments) under revolving facility 43,500 (2,500)
Repayment of long-term debt (40,857) (3,571)
Prepayment penalty on early extinguishment of debt (1,135) -
Debt issuance costs (1,660) -
Payments on notes receivable from management
stockholders 60 11
Issuance of common stock 68 -
-------- --------
Cash used in financing activities (24) (6,060)
-------- --------
Effects of exchange rate changes on cash (1,699) 629
-------- --------
Net increase in cash and cash equivalents 209 2,362
Cash and cash equivalents at beginning of period 2,983 3,421
-------- --------
Cash and cash equivalents at end of period $ 3,192 $ 5,783
======== ========
See Notes to Consolidated Financial Statements.
5
LAYNE CHRISTENSEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies and Basis of Presentation
The consolidated financial statements include the accounts of Layne Christensen
Company and its subsidiaries (together the "Company"). All significant
intercompany transactions have been eliminated. Investments in affiliates (33%
to 50% owned) in which the Company exercises influence over operating and
financial policies are accounted for on the equity method. The unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements of the Company for the year ended January 31,
2002 as filed in its Annual Report on Form 10-K.
The accompanying unaudited consolidated financial statements include all
adjustments (consisting only of normal recurring accruals) which, in the opinion
of management, are necessary for a fair presentation of financial position,
results of operations and cash flows. Results of operations for interim periods
are not necessarily indicative of results to be expected for a full year.
Revenue is recognized on large, long-term contracts using the percentage of
completion method based upon materials installed and labor costs incurred.
Changes in job performance, job conditions, and estimated profitability,
including those arising from contract penalty provisions, and final contract
settlements may result in revisions to costs and income and are recognized in
the period in which the revisions are determined. Revenue is recognized on
smaller, short-term contracts using the completed contract method. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined.
Income taxes are provided using the asset/liability method, in which deferred
taxes are recognized for the tax consequences of temporary differences between
the financial statement carrying amounts and tax bases of existing assets and
liabilities. The effective tax rate in excess of the statutory federal rate for
the three and six months ended July 31, 2002 was a result of the impact of
non-deductible expenses and the tax treatment of certain foreign operations.
Earnings per share are based upon the weighted average number of common and
dilutive equivalent shares outstanding. Options to purchase common stock are
included based on the treasury stock method for dilutive earnings per share,
except when their effect is antidilutive.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
142, Goodwill and Other Intangible Assets, and SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, effective February 1, 2002. The
adoption of SFAS No. 142 resulted in the Company ceasing to amortize goodwill,
the expense of which totaled $281,000 and $563,000 for the three months and six
months ended July 31, 2001, respectively. See Note 4. The adoption of SFAS No.
144 did not have a significant impact on the financial position, results of
operations, or cash flows of the Company.
6
The amounts (refunded) paid for income taxes and interest are as follows (in
thousands):
Six Months Ended July 31,
-------------------------
2002 2001
------- ------
Income taxes $ (973) $2,475
Interest 1,407 2,695
Reclassifications - Certain 2001 amounts have been reclassified to conform with
the 2002 presentation.
2. Inventories
The Company values inventories at the lower of cost (first-in, first-out) or
market (in thousands):
As of
-------------------------------
July 31, January 31,
2002 2002
-------- ----------
Raw materials $ 19 $ 275
Work in process 84 541
Finished products, parts and supplies 20,347 21,069
---------- ----------
Total $ 20,450 $ 21,885
========== ==========
3. Indebtedness
On July 9, 2002, the Company established a new credit facility ("Credit
Agreement") with General Electric Capital Corporation as agent for a group of
banks. The Credit Agreement was used to refinance borrowings outstanding under
the Company's previous revolving credit facility ("Previous Credit Agreement")
and to pay the outstanding balance under the Company's unsecured note agreement
("Senior Notes"). The Credit Agreement provides a $35,000,000 revolving credit
facility that is available for working capital, capital expenditures, and for
other general corporate purposes. The Credit Agreement also includes a
$35,000,000 term loan ("Term Loan") that is payable in increasing quarterly
installments beginning October 1, 2002 and ending July 8, 2007.
The Credit Agreement is secured by a majority of the assets of the Company and
certain of its subsidiaries, including but not limited to, accounts receivable,
inventory and equipment. The Credit Agreement contains certain covenants
including restrictions on the incurrence of additional indebtedness and liens,
transactions with affiliates, sale of assets or other dispositions, lease
transactions and certain financial maintenance covenants, including among
others, minimum EBITDA, minimum interest coverage and maximum leverage. The
Credit Agreement provides for interest at variable rates equal to, at the
Company's option, a Libor rate plus 2.75% to 3.25% (depending upon leverage
ratios), or an alternate reference rate as defined in the Credit Agreement.
The Company recorded an extraordinary loss of $696,000, net of taxes, or $.06
per share, as a result of the early redemption of the balance outstanding under
the Senior Notes. The loss consisted of a prepayment penalty and prepaid fees
associated with the Senior Notes, net of tax benefits of $439,000.
7
July 31, January 31,
2002 2002
-------- ----------
Current maturities of long-term debt:
Term Loan $ 3,500 $ -
Senior Notes - 3,571
Previous Credit Agreement - 16,500
-------- ---------
Total current maturities of long-term debt 3,500 20,071
-------- ---------
Long-term debt:
Revolving credit facility 2,000 -
Term Loan 31,500 -
Senior Notes - 14,286
-------- ---------
Total long-term debt 33,500 14,286
-------- ---------
Total debt $ 37,000 $ 34,357
======== =========
4. Goodwill
Effective February 1, 2002, the Company adopted SFAS No. 142. SFAS No. 142
requires that upon adoption and at least annually thereafter, goodwill be tested
for impairment by applying a fair value based test. Periodic amortization of
goodwill is no longer permitted under SFAS No. 142. Thus, the Company's
Consolidated Statements of Income for fiscal year 2003 include no periodic
amortization of goodwill.
SFAS 142 requires companies to make an initial assessment of goodwill for
impairment for each of its reporting units within six months after adoption. The
Company completed this initial assessment of goodwill during the second quarter
of fiscal year 2003 and determined a transitional impairment charge was
required.
At February 1, 2002, the Company had $21,884,000 of goodwill recorded in its
consolidated balance sheet, consisting primarily of goodwill associated with its
mineral exploration segment. In assessing goodwill, the Company assigned assets
and liabilities to its reporting units and developed a discounted cash flow
analysis to determine the fair value of the reporting units. Based on this
model, the Company determined that the mineral exploration goodwill was
impaired. As a result, the Company took a non-cash charge of $20,225,000 which
was recorded, net of taxes of $5,796,000, as a cumulative effect of a change in
accounting principle at February 1, 2002 in accordance with SFAS No. 142. After
giving effect to the change, results of operations for the first quarter of
fiscal year 2003 were a net loss of $14,178,000, or $1.17 per share, versus net
income of $251,000, or $.02 per share, as originally reported.
The carrying amount of goodwill attributed to each operating segment with
goodwill balances follows (in thousands):
Impairment
February 1, 2002 Adjustment July 31, 2002
---------------- ---------- -------------
Geoconstruction Services $ 1,499 $ - $ 1,499
Energy Services and Production 160 - 160
Mineral Exploration 20,225 (20,225) -
--------------- --------- -----------
$ 21,884 $ (20,225) $ 1,659
=============== ========= ===========
8
Actual results of operations before the cumulative effect of accounting change
for the three and six months ended July 31, 2002, and proforma results of
operations for the three and six months ended July 31, 2001 and the three fiscal
years ended January 31, 2002, had the Company applied the nonamortization
provisions of SFAS No. 142 in those periods follow (in thousands, except per
share amounts):
Three Months Ended Six months ended
July 31, July 31
2002 2001 2002 2001
------- ------ ------- ---------
Reported income before extraordinary
item and cumulative effect of
accounting change $ 700 $ 639 $ 951 $ 801
Add back: Goodwill amortization,
net of related tax effects - 216 - 433
------- ------- ------- ---------
Adjusted income before extraordinary
effect of accounting change $ 700 $ 855 $ 951 $ 1,234
======= ======= ======= =========
Basic and diluted earnings per share:
Reported income before extraordinary
item and cumulative effect of
accounting change $ 0.06 $ 0.05 $ 0.08 $ 0.07
Add back: Goodwill amortization
net of related tax effects - 0.02 - 0.03
------- ------- ------- ---------
Adjusted income before extraordinary
effect of accounting change $ 0.06 $ 0.07 $ 0.08 $ 0.10
======= ======= ======= =========
Years ended January 31,
2002 2001 2000
---------- ---------- ----------
Reported net income (loss) $ 1,078 $ (5,926) $ (7,665)
Add back: Goodwill amortization,
net of related tax effects 862 934 968
---------- --------- ---------
Adjusted net income (loss) $ 1,940 $ (4,992) $ (6,697)
========== ========= =========
Basic earnings per share:
Reported net income (loss) $ 0.09 $ (.50) $ (.66)
Add back: Goodwill amortization,
net of related tax effects .08 .07 .09
---------- --------- ---------
Adjusted net income (loss) $ .17 $ (.43) $ (.57)
========== ========= =========
Diluted earnings per share:
Reported net income (loss) $ 0.09 $ (.50) $ (.66)
Add back: Goodwill amortization,
net of related tax effects .07 .07 .09
---------- --------- ---------
Adjusted net income (loss) $ .16 $ (.43) $ (.57)
========== ========= =========
9
5. Other Comprehensive Income (Loss)
Components of other comprehensive income (loss) are summarized as follows (in
thousands):
Three Months Six Months
Ended July 31, Ended July 31,
----------------------- --------------------------
2002 2001 2002 2001
------- -------- -------- ---------
Net income (loss) $ 4 $ 639 $(14,174) $ 801
Other comprehensive income (loss),
net of taxes:
Foreign currency translation
adjustments 618 53 320 (843)
Unrealized gain (loss) on
available for sale investments 1 (12) (36) (284)
Change in unrecognized pension
liability - - - 1
------- ------- -------- -------
Other comprehensive income (loss) $ 623 $ 680 $(13,890) $ (325)
======= ======= ======== =======
The components of accumulated other comprehensive loss for the six months ended
July 31, 2002 are as follows (in thousands):
Accumulated
Cumulative Unrealized Unrecognized Other
Translation Loss On Pension Comprehensive
Adjustment Investments Liability Loss
----------- ----------- ----------- -------------
Balance, February 1, 2002 $ (10,992) $ (45) $ (990) $ (12,027)
Period changes 320 (36) - 284
---------- ---------- ----------- ------------
Balance, July 31, 2002 $ (10,672) $ (81) $ (990) $ (11,743)
========== ========== =========== ============
6. Operating Segments
The Company is a multinational company which provides sophisticated services and
related products to a variety of markets. The Company is organized into discrete
divisions based on its primary product lines. The Company's reportable segments
are defined as follows:
Water Resources Division
This division provides a full line of water-related services and products
including hydrological studies, site selection, well design, drilling and well
development, pump installation, and repair and maintenance. The division's
offerings include large diameter Ranney(R) collector wells, design and
construction of water treatment facilities, and the manufacture and sale of
products to treat volatile inorganics in groundwater. The division also offers
environmental services to assess and monitor groundwater contaminants.
Mineral Exploration Division
This division provides a complete range of drilling services for the mineral
exploration industry. Its aboveground and underground drilling activities
10
include all phases of core drilling, diamond, reverse circulation, dual tube,
hammer and rotary air-blast methods.
Geoconstruction Services Division
This division focuses on services that improve soil stability, primarily jet
grouting, grouting, vibratory ground improvement and ground-freezing services.
The division also manufactures a line of high-pressure pumping equipment used in
grouting operations and geotechnical drilling rigs used for directional
drilling.
Energy Services and Production Division
This division offers a variety of specialized services including shallow gas and
tar sands exploration drilling, conventional oilfield fishing services, coil
tubing fishing services, resonance technology solutions for stuck tubulars and
land-based oil and gas search and development.
Products and Other
This grouping includes the Company's supply operation which distributes drilling
equipment, parts and supplies and other miscellaneous operations which do not
fall into the above divisions. Historically, it has also included a
manufacturing operation producing diamond drilling rigs, diamond bits, core
barrels and drill rods ("Christensen Products"). On August 8, 2001, the Company
sold its Christensen Products business to a subsidiary of Atlas Copco.
Revenues and operating income pertaining to the Company's operating segments are
presented below. Intersegment sales are accounted for based on the estimated
fair market value of the products sold or services provided. The Corporate
operating loss consists of unallocated corporate expenses, primarily general and
administrative functions and incentive compensation. Operating segment revenues
and operating income are summarized as follows (in thousands):
Three Months Six Months
Ended July 31, Ended July 31,
---------------------------- -----------------------------
2002 2001 2002 2001
--------- --------- ---------- ----------
Revenues
Water resources $ 44,964 $ 46,218 $ 87,242 $ 86,444
Mineral exploration 15,029 16,328 27,933 32,431
Geoconstruction services 7,508 5,649 15,923 14,189
Energy services and
production 3,232 5,742 8,734 15,228
Products and other 3,035 9,507 6,672 17,376
Intersegment products
and other revenues (969) (3,330) (1,863) (5,722)
--------- --------- --------- ---------
Total revenues $ 72,799 $ 80,114 $ 144,641 $ 159,946
========= ========= ========= =========
11
Three Months Six Months
Ended July 31, Ended July 31,
---------------------------- -----------------------------
2002 2001 2002 2001
--------- --------- ---------- ----------
Operating income (loss)
Water resources $ 7,004 $ 6,235 $ 12,867 $ 11,471
Mineral exploration (159) (548) (725) (1,626)
Geoconstruction services 617 (82) 1,981 973
Energy services and
production (1,043) 438 (2,002) 1,175
Products and other (302) (159) (774) (147)
Corporate (3,506) (4,090) (7,663 (8,102)
--------- --------- --------- ---------
Total operating income $ 2,611 $ 1,794 $ 3,684 $ 3,744
========= ========= ========= =========
July 31, January 31,
2002 2002
--------- -----------
Assets
Water resources $ 61,093 $ 60,802
Mineral exploration 48,364 76,020
Geoconstruction services 21,401 18,274
Energy services and
production 12,613 11,352
Products and other 10,679 14,165
Corporate 36,998 21,729
--------- ---------
Total assets $ 191,148 $ 202,342
========= =========
Three Months Six Months
Ended July 31, Ended July 31,
---------------------------- -----------------------------
2002 2001 2002 2001
--------- --------- ---------- ----------
Geographic Information:
Revenues
North America $ 61,384 $ 67,823 $ 122,409 $ 136,011
Africa/Australia 10,026 11,642 19,384 22,423
Other foreign 1,389 649 2,848 1,512
--------- --------- --------- ---------
Total revenues $ 72,799 $ 80,114 $ 144,641 $ 159,946
========= ========= ========= =========
On August 8, 2001, the Company signed a definitive agreement to sell its
Christensen Products business to a subsidiary of Atlas Copco. The Company
received $8,165,000 in the third quarter of last year and recorded a gain on the
sale of $3,991,000. As part of the definitive agreement, the Company agreed to
repurchase certain inventory items that remain unsold by Atlas Copco as of
August 8, 2002, and recorded a repurchase obligation of approximately $1,600,000
in connection with the sale. The obligation was settled on August 9, 2002 with a
payment of $1,013,000. Approximately $1,800,000 in additional cash was received
on February 1, 2002 upon the sale of certain assets and inventory at book value.
Products and other segment revenues for the six months ended July 31, 2002, and
2001, respectively, include $812,000 and $8,110,000 of revenue from Christensen
Products. Intersegment revenues for the six months ended July 31, 2002 and 2001,
respectively, include $195,000 and $3,979,000 from Christensen Products.
Products
12
and other segment operating income (loss) for the six months ended July 31, 2002
and 2001, respectively, includes ($486,000) and $248,000 from Christensen
Products. Amounts related to Christensen Products for the six months ended July
31, 2002 were primarily the result of residual manufacturing orders completed
during the period and increased costs associated with a longer than expected
closing of the Christensen Products plant.
Operating income for the six months ended July 31, 2002 and 2001, respectively,
includes $798,000 and $20,000 of expenses related to the Company's oil and gas
exploration activities in the Gulf of Mexico region of the United States.
7. Contingencies
The Company's drilling activities involve certain operating hazards that can
result in personal injury or loss of life, damage and destruction of property
and equipment, damage to the surrounding areas, release of hazardous substances
or wastes and other damage to the environment, interruption or suspension of
drill site operations and loss of revenues and future business. The magnitude of
these operating risks is amplified when the Company, as is frequently the case,
conducts a project on a fixed-price, "turnkey" basis where the Company delegates
certain functions to subcontractors but remains responsible to the customer for
the subcontracted work. In addition, the Company is exposed to potential
liability under foreign, federal, state and local laws and regulations,
contractual indemnification agreements or otherwise in connection with its
provision of services and products. Litigation arising from any such occurrences
may result in the Company being named as a defendant in lawsuits asserting large
claims. Although the Company maintains insurance protection that it considers
economically prudent, there can be no assurance that any such insurance will be
sufficient or effective under all circumstances or against all claims or hazards
to which the Company may be subject or that the Company will be able to continue
to obtain such insurance protection. A successful claim for damage resulting
from a hazard for which the Company is not fully insured could have a material
adverse effect on the Company. In addition, the Company does not maintain
political risk insurance or business interruption insurance with respect to its
foreign operations.
The Company is involved in various matters of litigation, claims and disputes
which have arisen in the ordinary course of the Company's business. While the
resolution of any of these matters may have an impact on the financial results
for the period in which the matter is resolved, the Company believes that the
ultimate disposition of these matters will not, in the aggregate, have a
material adverse effect upon its business or consolidated financial position,
results of operations or cash flows.
13
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Cautionary Language Regarding Forward-Looking Statements
This Form 10-Q contains 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 are indicated by words or phrases such as "anticipate,"
"estimate," "project," "believe," "intend," "expect," "plan" and similar words
or phrases. Such statements are based on current expectations and are subject to
certain risks, uncertainties and assumptions, including but not limited to
prevailing prices for various metals, unanticipated slowdowns in the Company's
major markets, 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.
Demand for the Company's mineral exploration drilling services and products
depends upon the level of mineral exploration and development activities
conducted by mining companies, particularly with respect to gold and copper.
Mineral exploration is highly speculative and is influenced by a variety of
factors, including the prevailing prices for various metals that often fluctuate
widely. In this connection, the decline in the prices of various metals has
continued to adversely impact the level of mineral exploration and development
activities conducted by mining companies and has had, and could continue to
have, a material adverse effect on the Company.
Results of Operations
The following table presents, for the periods indicated, the percentage
relationship which certain items reflected in the Company's consolidated
statements of income bear to revenues and the percentage increase or decrease in
the dollar amount of such items period to period.
14
Three Months Six Months Period-to-Period
Ended July 31, Ended July 31, Change
------------------ ---------------- -----------------
Three Six
2002 2001 2002 2001 Months Months
---- ---- ---- ---- ------ ------
Revenues:
Water resources 61.8% 57.7% 60.3% 54.0% (2.7)% .9%
Mineral exploration 20.7 20.4 19.4 20.3 (8.0) (13.9)
Geoconstruction 10.3 7.0 11.0 8.9 32.9 12.2
Energy services and production 4.4 7.2 6.0 9.5 (43.7) (42.6)
Products and other 2.8 7.7 3.3 7.3 (66.6) (58.7)
----- ----- ----- -----
Total net revenues 100.0% 100.0% 100.0% 100.0% (9.1) (9.6)
Cost of revenues 70.9 73.0 71.9 73.4 (11.7) (11.5)
Gross profit 29.1 27.0 28.1 26.6 (2.2) (4.3)
Selling, general and
administrative expenses 20.4 18.9 20.4 18.2 (1.9) .9
Depreciation and amortization 5.1 5.8 5.1 6.0 (21.5) (21.1)
----- ----- ----- -----
Operating income (loss) 3.6 2.3 2.6 2.4 45.5 (1.6)
Other income (expense):
Equity in earnings of
foreign affiliates .3 1.0 .3 .3 * *
Interest (.9) (1.4) (.9) (1.5) 41.6 47.5
Other, net .5 .5 .2 .5 (9.5) (60.4)
----- ----- ----- -----
Income (loss) before income
taxes and minority interest 3.5 2.4 2.2 1.7 33.6 19.1
Income tax expense 2.3 1.5 1.4 1.1 * *
Minority interest, net of
income taxes (.2) (.1) (.1) (.1) * *
----- ----- ----- -----
Income before extraordinary item 1.0 .8% .7% .5% * *
Extraordinary loss on early
extinguishment of debt
(net of tax) (1.0) - (.5) - * *
Cumulative effect of accounting
change (net of tax) - - (10.0) - * *
----- ----- ----- -----
Net Income (loss) -% .8% (9.8)% .5% * *
===== ===== ===== =====
- ------------------
* Not meaningful.
Results of Operations
Revenues for the three months ended July 31, 2002 decreased $7,315,000, or 9.1%,
to $72,799,000 while revenues for the six months ended July 31, 2002 decreased
$15,305,000, or 9.6%, to $144,641,000 from the same periods last year. See
further discussion of results of operations by division below.
Gross profit as a percentage of revenues was 29.1% and 28.1% for the three and
six months ended July 31, 2002 compared to 27.0% and 26.6% for the three and six
months ended July 31, 2001. The increase in gross profit for the periods was
primarily attributable to improved pricing and margins at the Company's domestic
water locations.
Selling, general and administrative expenses decreased to $14,837,000 for the
three months ended July 31, 2002 and increased to $29,437,000 for the six months
ended July 31, 2002 compared to $15,123,000 and $29,184,000 for the three and
six
15
months ended July 31, 2001. The decrease for the three months ended July 31,
2002 was primarily a result of reduced incentive-related accruals partially
offset by start-up expenses related to Layne Water Development and Storage and
the Company's coalbed methane business development activities. The increase for
the six months ended July 31, 2002 was a result of the start-up expenses noted
above.
Depreciation and amortization decreased to $3,711,000 and $7,587,000 for the
three and six months ended July 31, 2002 compared to $4,726,000 and $9,611,000
for the same periods last year. The decreases in depreciation and amortization
were the result of reduced asset values associated with the purchase method of
accounting for the remaining 50% interest in West African Drilling Services
("WADS"), and ceasing to amortize goodwill upon adoption of SFAS No. 142.
Interest expense decreased $475,000 and $1,149,000 for the three and six months
ended July 31, 2002 as compared to the same periods last year. The decreases
were primarily a result of decreases in the Company's average borrowings and in
interest rates for the period.
Income tax expense of $1,694,000 and $2,103,000 was recorded for the three and
six months ended July 31, 2002, compared to $1,196,000 and $1,765,000 for the
same periods last year. The effective rate in excess of the statutory federal
rate for the periods was a result of the impact of nondeductible expenses and
the tax treatment of certain foreign operations.
WATER RESOURCES DIVISION
(in thousands)
Three months ended Six months ended
July 31 July 31,
------------------------- -------------------------
2002 2001 2002 2001
------- ------- ------- -------
Revenues $44,964 $46,218 $87,242 $86,444
Operating income 7,004 6,235 12,867 11,471
Water resources revenue decreased 2.7% to $44,964,000 for the three months ended
July 31, 2002 and increased 0.9% to $87,242,000 for the six months ended July
31, 2002 compared to $46,218,000 and $86,444,000 for the three and six months
ended July 31, 2001. The decrease in revenue for the three months ended July 31,
2002 was primarily attributable to lower demand for the Company's services in
certain areas of the United States due to reduced municipal spending and
resulting competitive pricing pressures. The decrease was partially offset by
increased revenue due to drought conditions and increased infrastructure needs
created by population growth in the western United States and a large project
being performed by multiple divisions. The impact of the increases noted above
accounted for the overall increase for the six months ended July 31, 2002.
Operating income for the water resources division increased 12.3% to $7,004,000
for the three months ended July 31, 2002 and 12.2% to $12,867,000 for the six
months ended July 31, 2002 compared to $6,235,000 and $11,471,000 for the three
and six months ended July 31, 2001. The increase in operating income was
primarily attributable to improved pricing and margins at the Company's domestic
water supply locations and the large multi-divisional project noted above.
16
MINERAL EXPLORATION DIVISION
(in thousands)
Three months ended Six months ended
July 31 July 31,
------------------------- -------------------------
2002 2001 2002 2001
------- ------- ------- -------
Revenues $15,029 $16,328 $27,933 $32,431
Operating loss (159) (548) (725) (1,626)
Mineral exploration revenues decreased 8.0% to $15,029,000 and 13.9% to
$27,933,000 for the three and six months ended July 31, 2002 compared to
revenues of $16,328,000 and $32,431,000 for the three and six months ended July
31, 2001. The decreases for the periods were primarily the result of reduced
mining activity in certain areas of Africa.
The operating loss for the mineral exploration division was $159,000 for the
three months ended July 31, 2002 and $725,000 for the six months ended July 31,
2002 compared to operating losses of $548,000 and 1,626,000 for the three and
six months ended July 31, 2001. The reduced loss in the division was primarily
the result of improved margins and reduced depreciation expenses attributable to
the WADS purchase and ceasing to amortize goodwill upon adoption of SFAS No.
142.
GEOCONSTRUCTION SERVICES DIVISION
(in thousands)
Three months ended Six months ended
July 31 July 31,
------------------------- -------------------------
2002 2001 2002 2001
------- ------- ------- -------
Revenues $7,508 $5,649 $15,923 $14,189
Operating income (loss) 617 (82) 1,981 973
Geoconstruction services revenues increased 32.9% to $7,508,000 and 12.2% to
15,923,000 for the three and six months ended July 31, 2002, compared to
$5,649,000 and $14,189,000 for the three and six months ended July 31, 2001. The
increase in revenue for the periods was attributable to two large construction
projects in Hawaii and increased equipment sales at the Company's manufacturing
subsidiary in Italy.
The geoconstruction services division had operating income of $617,000 for the
three months ended July 31, 2002 and operating income of $1,981,000 for the six
months ended July 31, 2002 compared to an operating loss of $82,000 for the
three months ended July 31, 2001 and operating income of $973,000 for the six
months ended July 31, 2001. The increase in operating income was primarily
attributable to the construction projects in Hawaii and cost reduction measures
implemented in fiscal 2002.
ENERGY SERVICES AND PRODUCTION DIVISION
(in thousands)
Three months ended Six months ended
July 31 July 31,
------------------------- -------------------------
2002 2001 2002 2001
------- ------- ------- -------
Revenues $ 3,232 $5,742 $ 8,734 $15,228
Operating income (loss) (1,043) 438 (2,002) 1,175
17
Energy services revenues decreased 43.7% to $3,232,000 and 42.6% to $8,734,000
for the three and six months ended July 31, 2002, compared to revenues of
$5,742,000 and $15,228,000 for the three and six months ended July 31, 2001.
The decrease was primarily the result of reduced exploration activity by our
Canadian drilling unit and depressed market conditions for our oil and gas
services in the Gulf of Mexico region of the United States.
Operating losses for the energy services and production division were $1,043,000
and $2,002,000 for the three and six months ended July 31, 2002, compared to
operating income of $438,000 and $1,175,000 for the three and six months ended
July 31, 2001. The decrease in operating profit was the result of expenses
related to the Company's energy exploration activities and coalbed methane
development efforts, start-up expenses for a new service location in Louisiana
and reduced profit in Canada associated with lower volume.
PRODUCTS AND OTHER
(in thousands)
Three months ended Six months ended
July 31 July 31,
------------------------- -------------------------
2002 2001 2002 2001
------- ------- ------- -------
Revenues $2,066 $6,177 $4,809 $11,654
Operating loss (302) (159) (774) (147)
Products and other sales decreased 66.6% to $2,066,000 and 58.7% to $4,809,000
for the three and six months ended July 31, 2002, compared to $6,177,000 and
$11,654,000 for the three and six months ended July 31, 2001. The decrease in
sales was primarily the result of the sale of Christensen Products to a
subsidiary of Atlas Copco in the third quarter of last year.
Operating losses for products and other were $302,000 and $774,000 for the three
and six months ended July 31, 2002, compared to operating losses of $159,000 and
$147,000 for the same periods last year. The operating losses were primarily the
result of closing costs associated with certain operations, primarily
Christensen Products.
Changes in Financial Condition
- ------------------------------
Cash from operations was $4,606,000 for the six months ended July 31, 2002
compared to $10,175,000 for the same period last year. The decrease in cash from
operations is primarily attributable to increased customer receivables and other
working capital requirements during the period which were funded by borrowings
under the Company's available credit agreement. The increase in customer
receivables for the six months ended July 31, 2002 was primarily a result of
increased revenues in the geoconstruction division which tends to have a longer
collection period than the Company's other divisions.
The Company believes that borrowings from its available credit agreement and
cash from operations will be sufficient for the Company's seasonal cash
requirements and to fund its budgeted capital expenditures for the balance of
the fiscal year.
18
Critical Accounting Policies and Estimates
- ------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates its
estimates and judgments, which are based on historical experience and on various
other factors that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Our accounting policies are more fully described in Note 1 to the financial
statements, located elsewhere in this Form 10-Q and in our Annual Report on Form
10-K for the year ended January 31, 2002. We believe that the following
represent our more critical estimates and assumptions used in the preparation of
our consolidated financial statements, although not all inclusive.
Revenue Recognition - Revenue is recognized on large, long-term contracts using
the percentage of completion method based upon materials installed and labor
costs incurred. Changes in job performance, job conditions and estimated
profitability, including those arising from contract penalty provisions, and
final contract settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined.
Goodwill and Other Intangibles - In June 2001, the Financial Accounting
Standards Board issued SFAS No. 142, which was effective for the Company as of
February 1, 2002. SFAS No. 142 substantially changes the accounting for
goodwill, requiring that goodwill and other intangible assets with indefinite
useful lives cease to be amortized, but instead periodically tested for
impairment. This statement also requires that within six months of adoption,
goodwill be tested for impairment at the reporting unit level as of the date of
adoption.
As disclosed in the consolidated financial statements, the Company had goodwill
of $21,884,000 at January 31, 2002. The goodwill is primarily attributable to
the Company's Mineral Exploration Division. The process of evaluating goodwill
for impairment involves the determination of the fair value of the Company's
reporting units. Inherent in such fair value determinations are certain
judgments and estimates, including the interpretation of current economic
indicators and market valuations, and assumptions about the Company's strategic
plans with regard to its operations. The Company completed the initial
assessment of goodwill during the second quarter of fiscal year 2003 and
determined a transitional impairment charge was required. As a result, the
Company took a non-cash charge of $20,225,000, which was recorded, net of taxes
of $5,796,000,
19
as a cumulative effect of a change in accounting principle in
accordance with SFAS No. 142. To the extent additional information arises or the
Company's strategies change, it is possible that the Company's conclusions
regarding impairment of the remaining goodwill could change and result in a
material effect on its financial position or results of operations.
Other Long-lived assets - In evaluating the fair value and future benefits of
long-lived assets, we perform an analysis of the anticipated future net cash
flows of the related long-lived assets and reduce their carrying value by the
excess, if any, of the result of such calculation. We believe at this time that
the long-lived assets' carrying values and useful lives continue to be
appropriate.
Accrued Insurance Expense - We record estimates for certain health and welfare,
workers' compensation, and casualty insurance costs that are self-insured
programs. Should a greater amount of claims occur compared to what was estimated
or costs of the medical profession increase beyond what was anticipated,
reserves recorded may not be sufficient and additional costs to the consolidated
financial statements could be required.
Litigation and Other Contingencies - The Company is involved in litigation
incidental to its business, the disposition of which is expected to have no
material effect on the Company's financial position or results of operations. It
is possible, however, that future results of operations for any particular
quarterly or annual period could be materially affected by changes in the
Company's assumptions related to these proceedings. The Company accrues its best
estimate of the probable cost for the resolution of legal claims. Such estimates
are developed in consultation with outside counsel handling these matters and
are based upon a combination of litigation and settlement strategies. To the
extent additional information arises or the Company's strategies change, it is
possible that the Company's best estimate of its probable liability in these
matters may change.
The Company's contractual obligations and commercial commitments are summarized
as follows:
Payments/Expiration by Period
Less than
Total 1 year 1-3 years 4-5 years
------ ------- --------- ---------
Contractual Obligations and Other
Commercial Commitments
Debt $37,000 $3,500 $16,625 $16,875
Operating leases 15,046 5,432 6,975 2,639
Ausdrill promissory note 1,500 1,200 300 -
Repurchase obligation 1,600 1,600 - -
------- ------- ------- -------
Total contractual cash
obligations 55,146 11,732 23,900 19,514
------- ------- ------- -------
Standby letters of credit 6,911 6,911 - -
------- ------- ------- -------
Total contractual obligations
and commercial commitments $62,057 $18,643 $23,900 $19,514
======= ======= ======= =======
20
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The principal market risks to which the Company is exposed are interest rates on
variable rate debt, equity risk on investments, and foreign exchange rates
giving rise to translation and transaction gains and losses.
The Company centrally manages its debt and investment portfolios considering
overall financing strategies and tax consequences. A description of the
Company's variable rate debt is in Note 3 to the Consolidated Financial
Statements appearing in this Form 10-Q. Assuming then existing debt levels, an
instantaneous change in interest rates of one percentage point would impact the
Company's annual interest expense by $370,000 and $165,000 at July 31, 2002 and
January 31, 2002, respectively. The Company's investments are described in Note
1 to the Consolidated Financial Statements appearing in the Company's January
31, 2002 Form 10-K. The investments are carried at market value and are held for
long-term investing purposes rather than trading purposes.
Operating in international markets involves exposure to possible volatile
movements in currency exchange rates. Currently, the Company's primary
international operations are in Australia, Africa, Mexico, Canada, and Italy.
The operations are described in Note 1 to the Consolidated Financial Statements
appearing in the Company's January 31, 2002 Form 10-K and Note 6 of this Form
10-Q. The majority of the Company's contracts in Africa and Mexico are U.S.
dollar based, providing a natural reduction in exposure to currency
fluctuations.
As currency exchange rates change, translation of the income statements of the
Company's international operations into U.S. dollars may affect year-to-year
comparability of operating results. We estimate that a ten percent change in
foreign exchange rates would not significantly impact operating income for the
six months ended July 31, 2002 and 2001. This quantitative measure has inherent
limitations, as it does not take into account any governmental actions, changes
in customer purchasing patterns or changes in the Company's financing and
operating strategies.
21
PART II
ITEM 1 - Legal Proceedings
NONE
ITEM 2 - Changes in Securities
NOT APPLICABLE
ITEM 3 - Defaults Upon Senior Securities
NOT APPLICABLE
ITEM 4 - Submission of Matters to a Vote of Security Holders
An annual meeting of stockholders was held on May 30, 2002. Set forth
below is a brief description of each matter voted upon at the meeting and the
results of the balloting:
a) Election of Donald K. Miller as a Class I Director to hold office
for a term expiring at the 2005 Annual Meeting of the Stockholders
of the Company and until his successor is duly elected and
qualified or until his earlier death, retirement, resignation or
removal:
For Against Withheld Authority
----------- ------- ------------------
10,944,476 0 112,772
b) Election of Andrew B. Schmitt as a Class I Director to hold office
for a term expiring at the 2005 Annual Meeting of the Stockholders
of the Company and until his successor is duly elected and
qualified or until his earlier death, retirement, resignation or
removal:
For Against Withheld Authority
----------- ------- ------------------
9,366,473 0 1,690,775
c) Approval of the Layne Christensen Company 2002 Stock Option Plan:
For Against Withheld Authority
----------- ------- ------------------
6,580,232 2,365,466 34,119
There were 2,077,431 broker non-votes with respect to the proposal
to approve the Layne Christensen Company 2002 Stock Option Plan.
d) Ratification and approval of the selection of the accounting firm
of Deloitte and Touche LLP as the independent auditors of the
Company for the fiscal year ended January 31, 2003:
For Against Withheld Authority
----------- ------- ------------------
11,046,153 10,210 885
22
ITEM 5 - Other Information
NONE
ITEM 6 - Exhibits and Reports on Form 8-K
a) Exhibits
NONE
b) Reports on Form 8-K
NONE
23
* * * * * * * * * *
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Layne Christensen Company
-------------------------------
(Registrant)
DATE: August 27, 2002 /s/A.B. Schmitt
-------------------------------
A.B. Schmitt, President
and Chief Executive Officer
DATE: August 27, 2002 /s/Jerry W. Fanska
-------------------------------
Jerry W. Fanska, Vice President
Finance and Treasurer
24