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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 October 31, 2003
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 .
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
There were 12,357,915 shares of common stock, $.01 par value per share,
outstanding on November 20, 2003.
PART I
ITEM 1. Financial Statements
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
October 31, January 31,
2003 2003
-------- --------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,257 $ 10,770
Customer receivables, less allowance
of $4,578 and $4,078, respectively 44,409 39,117
Costs and estimated earnings in excess of
billings on uncompleted contracts 15,756 8,711
Inventories 14,250 12,738
Deferred income taxes 11,926 11,514
Income taxes receivable 1,758 463
Assets held for sale 3,027 -
Other 4,344 4,867
-------- --------
Total current assets 103,727 88,180
-------- --------
Property and equipment:
Land 6,821 6,801
Buildings 13,270 12,967
Machinery and equipment 166,151 167,043
Uncompleted wells, equipment and facilities 8,324 3,176
Mineral interest in property 865 369
-------- --------
195,431 190,356
Less - Accumulated depreciation 134,294 132,167
-------- --------
Net property and equipment 61,137 58,189
Other assets:
Investment in affiliates 18,732 18,587
Goodwill 2,449 1,659
Deferred income taxes 6,433 8,262
Other 2,670 3,223
-------- --------
Total other assets 30,284 31,731
-------- --------
$195,148 $178,100
======== ========
See Notes to Consolidated Financial Statements.
- Continued -
2
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
(in thousands, except share and per share data)
October 31, January 31,
2003 2003
--------- ---------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,660 $ 16,044
Current maturities of long-term debt - 3,938
Accrued compensation 10,490 10,874
Accrued insurance expense 7,397 7,845
Other accrued expenses 6,174 7,508
Income taxes payable 549 422
Billings in excess of costs and estimated
earnings on uncompleted contracts 8,878 7,874
--------- ---------
Total current liabilities 54,148 54,505
--------- ---------
Noncurrent and deferred liabilities:
Long-term debt 40,000 28,432
Accrued insurance expense 7,408 6,765
Other 5,186 5,025
--------- ---------
Total noncurrent and deferred liabilities 52,594 40,222
Contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share,
5,000,000 shares authorized, none issued and
outstanding - -
Common stock, par value $.01 per share, 30,000,000
shares authorized, 12,294,404 and 11,852,650
shares issued and outstanding, respectively 123 119
Capital in excess of par value 87,674 84,414
Retained earnings 11,517 10,807
Accumulated other comprehensive loss (10,880) (11,922)
Notes receivable from management stockholders (28) (45)
--------- ---------
Total stockholders' equity 88,406 83,373
--------- ---------
$ 195,148 $ 178,100
========= =========
See Notes to Consolidated Financial Statements.
- Concluded -
3
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
Three Months Nine Months
Ended October 31, Ended October 31,
(unaudited) (unaudited)
--------------------------- ---------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues $ 72,776 $ 66,630 $ 211,466 $ 203,355
Cost of revenues (exclusive
of depreciation shown below) 53,571 47,622 153,217 145,555
--------- --------- --------- ---------
Gross profit 19,205 19,008 58,249 57,800
Selling, general and
administrative expenses 13,280 13,638 41,419 39,987
Depreciation and amortization 3,057 3,410 9,531 10,601
Other income (expense):
Equity in earnings of affiliates 23 209 723 683
Interest (687) (631) (1,918) (1,899)
Debt extinguishment costs - - (2,320) (1,135)
Other income (expense), net (108) 830 442 1,179
--------- --------- --------- ---------
Income from continuing operations
before income taxes and
minority interest 2,096 2,368 4,226 6,040
Income tax expense 1,186 1,468 2,878 3,738
Minority interest (163) (10) - (192)
--------- --------- --------- ---------
Net income from continuing
operations before discontinued
operations and cumulative
effect of accounting change 747 890 1,348 2,110
Loss from discontinued operations,
net of income taxes (206) (690) (638) (1,655)
--------- --------- --------- ---------
Net income before cumulative
effect of accounting change 541 200 710 455
Cumulative effect of accounting
change, net of income taxes
of $5,796 - - - (14,429)
--------- --------- --------- ---------
Net income (loss) $ 541 $ 200 $ 710 $ (13,974)
========= ========= ========= =========
Basic income (loss) per share:
Net income from continuing
operations $ .06 $ .08 $ .11 $ .18
Loss from discontinued operations
net of income taxes (.02) (.06) (.05) (.14)
--------- --------- --------- ---------
Income before cumulative effect
of accounting change .04 .02 .06 .04
Cumulative effect of accounting
change, net of income taxes - - - (1.22)
--------- --------- --------- ---------
Net income (loss) per share $ .04 $ .02 $ .06 $ (1.18)
========= ========= ========= =========
See Notes to Consolidated Financial Statements.
- Continued -
4
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
Three Months Nine Months
Ended October 31, Ended October 31,
(unaudited) (unaudited)
----------------------------------- -----------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Diluted income (loss) per share:
Net income from continuing
operations $ .06 $ .07 $ .11 $ .17
Loss from discontinued operations,
net of income taxes (.02) (.05) (.05) (.14)
-------------- -------------- -------------- --------------
Income before cumulative effect
of accounting change .04 .02 .06 .03
Cumulative effect of accounting
change, net of income taxes - - - (1.19)
-------------- -------------- -------------- --------------
Net income (loss) per share $ .04 $ .02 $ .06 $ (1.16)
============== ============== ============== ==============
Weighted average shares outstanding 12,039,000 11,864,000 11,957,000 11,796,000
Dilutive stock options 266,000 299,000 230,000 334,000
-------------- -------------- -------------- --------------
12,305,000 12,163,000 12,187,000 12,130,000
============== ============== ============== ==============
See Notes to Consolidated Financial Statements.
- Concluded -
5
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
Nine Months
Ended October 31,
-----------------------
2003 2002
-------- --------
(unaudited)
Cash flow from operating activities:
Net income (loss) $ 710 $(13,974)
Adjustments to reconcile net income (loss) to cash
from operations:
Loss on discontinued operations, net of tax 638 1,655
Cumulative effect of accounting change, net of tax - 14,429
Depreciation and amortization 9,531 10,601
Deferred income taxes 359 (1,510)
Equity in earnings of affiliates (723) (683)
Dividends received from foreign affiliates 605 1,751
Loss on extinguishment of debt 2,320 1,135
Minority interest - 192
Gain from disposal of property and equipment (199) (926)
Changes in current assets and liabilities:
Increase in customer receivables (7,256) (1,261)
Increase in costs and estimated earnings
in excess of billings on uncompleted contracts (6,762) (3,787)
(Increase) decrease in inventories (1,544) 1,946
(Increase) decrease in other current assets (129) 822
Increase (decrease) in accounts payable and
accrued expenses 3,389 (36)
Increase in billings in excess of costs and
estimated earnings on uncompleted contracts 1,011 1,533
Other, net 461 (624)
-------- --------
Cash from continuing operations 2,411 11,263
Cash from (used in) discontinued operations 1,299 (1,086)
-------- --------
Cash from operating activities 3,710 10,177
-------- --------
Cash flow used in investing activities:
Additions to property and equipment (8,786) (6,103)
Additions to uncompleted wells, equipment, and
facilities (5,148) (1,778)
Additions to mineral interest in properties (496) -
Proceeds from disposal of property and equipment 117 1,362
Proceeds from sale of business - 1,800
Acquisition of business (1,150) -
Investment in joint venture (40) (1,059)
-------- --------
Cash used in investing activities from continuing
operations (15,503) (5,778)
Cash from (used in) discontinued operations - (1,321)
-------- --------
Cash used in investing activities (15,503) (7,099)
-------- --------
Cash flow from (used in) financing activities:
Net borrowings under revolving facility - 8,500
Issuance of long-term debt 40,000 35,000
Repayment of long-term debt (32,370) (43,732)
Prepayment penalty on early extinguishment of debt (671) (1,135)
Debt issuance costs (160) (1,709)
Payments on notes receivable from management stockholders 17 60
Issuance of common stock 1,403 513
-------- --------
Cash from (used in) financing activities 8,219 (2,503)
-------- --------
Effects of exchange rate changes on cash 1,061 (687)
-------- --------
Net decrease in cash and cash equivalents (2,513) (112)
Cash and cash equivalents at beginning of period 10,770 2,983
-------- --------
Cash and cash equivalents at end of period $ 8,257 $ 2,871
======== ========
See Notes to Consolidated Financial Statements.
6
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 (20%
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,
2003 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.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and 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. Actual results could differ from those estimates.
The Company values inventories at the lower of cost (first in, first out) or
market. Allowances are recorded for inventory considered to be excess or
obsolete. Inventories consist primarily of parts and supplies.
Through its Energy Services and Production division, the Company engages in the
operation, development, production and acquisition of natural gas properties,
principally focusing on coalbed methane projects. The Company follows the
full-cost method of accounting for these properties. Under this method, all
productive and nonproductive costs incurred in connection with the exploration
for and development of oil and gas reserves are capitalized. Such capitalized
costs include lease acquisition, geological and geophysical work, delay rentals,
drilling, completing and equipping oil and gas wells, including salaries,
benefits and other internal costs directly attributable to these activities.
Costs associated with production and general corporate activities are expensed
in the period incurred. As of October 31, 2003 and January 31, 2003, the Company
has capitalized $9,189,000 and $3,545,000 related to uncompleted wells,
equipment and facilities and land acquisition costs. These are unevaluated
properties and therefore are not being amortized as reserves have not yet been
established.
7
The Company records asset retirement obligations at estimated fair value in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 143,
"Accounting For Asset Retirement Obligations." Under SFAS No. 143, those
liabilities are recognized at fair value as incurred and capitalized as part of
the cost of the related long-lived asset. Accretion of the liabilities due to
the passage of time is recorded as an operating expense. As of October 31, 2003,
the Company recorded an initial asset retirement obligation of $94,000 for
plugging and abandonment obligations related to its oil and gas properties.
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 rates in excess of the statutory federal rate for
the three and nine months ended October 31, 2003 and 2002 were a result of the
impact of certain non-deductible expenses, the tax treatment of certain foreign
operations and the discrete period tax treatment related to the debt
extinguishment costs recorded in the second quarter of each year.
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.
Stock-based compensation may be accounted for either based on the estimated fair
value of the awards at the date they are granted (the "SFAS 123 Method") or
based on the difference, if any, between the market price of the stock at the
date of grant and the amount the employee must pay to acquire the stock (the
"APB 25 Method"). The Company uses the APB 25 Method to account for its
stock-based compensation programs. Pro forma net income (loss) and earnings per
share for the three and nine months ended October 31, 2003 and 2002, determined
as if the SFAS 123 Method had been applied, is presented in the following table
(in thousands, except per share amounts):
Three Months Nine Months
Ended October 31, Ended October 31,
---------------------- ------------------------
2003 2002 2003 2002
-------- -------- -------- ----------
Net income (loss), as reported $ 541 $ 200 $ 710 $ (13,974)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of tax (21) (144) (111) (434)
-------- -------- -------- ----------
Pro forma net income (loss) $ 520 $ 56 $ 599 $ (14,408)
======== ======== ======== ==========
Income (loss) per share:
Basic - as reported $ .04 $ .02 $ .06 $ (1.18)
======== ======== ======== ==========
Basic - pro forma $ .04 $ - $ .05 $ (1.22)
======== ======== ======== ==========
Diluted - as reported $ .04 $ .02 $ .06 $ (1.16)
======== ======== ======== ==========
Diluted - pro forma $ .04 $ - $ .05 $ (1.19)
======== ======== ======== ==========
8
The amounts paid (refunded) for income taxes and interest are as follows (in
thousands):
Nine Months
Ended October 31,
--------------------
2003 2002
------- -------
Income taxes $ 2,801 $ (571)
Interest 1,771 2,049
Supplemental Non-cash Transactions - The Company issued 217,504 shares of common
stock related to compensation awards during the nine months ended October 31,
2003.
Reclassifications - Certain 2002 amounts have been reclassified to conform with
the 2003 presentation.
2. Discontinued Operations
During the third quarter of 2003, the Company reclassified the results of
operations of its Toledo Oil and Gas ("Toledo") business to discontinued
operations. The Company continues to shift the energy division's focus to the
resource development side of the business. Toledo was historically reported in
the Company's Energy Services and Production segment and offered conventional
oilfield fishing services and coil tubing fishing services. The net loss from
discontinued operations for the three and nine months ended October 31, 2003
includes a goodwill impairment charge of $160,000.
On December 10, 2002, the Company sold its Ranney(R) collector well business.
The Ranney(R) business was a component of the Company's water resources
division. On January 23, 2003, the Company sold its Drilling Equipment Supply,
Inc. ("DESI") division. DESI was a supply operation that distributed drilling
equipment, parts and supplies and was the last remaining component of the
Company's products segment.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the results of operations for Toledo, Ranney(R) and DESI
have been classified as discontinued operations. Revenues and pre-tax net loss
from discontinued operations for the three and nine months ended October 31,
2003 and 2002 were as follows (in thousands):
Three Months Nine Months
Ended October 31, Ended October 31,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues:
Toledo $ 781 $ 661 $ 1,980 $ 2,281
Ranney(R) - 360 - 2,303
DESI - 2,006 - 6,359
-------- -------- -------- --------
Total $ 781 $ 3,027 $ 1,980 $ 10,943
======== ======== ======== ========
Pre-tax net loss:
Toledo $ (296) $ (535) $ (999) $ (1,345)
Ranney(R) - (222) - (486)
DESI - (368) - (861)
-------- -------- -------- --------
Total $ (296) $ (1,125) $ (999) $ (2,692)
======== ======== ======== ========
9
As of October 31, 2003, the Toledo assets of $3,027,000 were reclassified to
assets held for sale in the Company's Consolidated Balance Sheets. The major
classes of those assets classified as held for sale are presented below (in
thousands).
As of
October 31, 2003
----------------
Customer receivables $ 647
Costs and estimated earnings in excess
of billings on uncompleted contracts 71
Inventories 85
Net property and equipment 2,224
------
Total assets held for sale $3,027
======
3. Goodwill
Effective February 1, 2002, the Company adopted SFAS No. 142 "Goodwill and Other
Intangible Assets." 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.
SFAS No. 142 required 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 recorded a non-cash charge of
$20,225,000, 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. The
Company completed its annual impairment test as of December 31, 2002 and no
further impairment was indicated.
The carrying amount of goodwill attributed to each operating segment follows (in
thousands):
January 31, Impairment October 31,
2003 Adjustment Addition 2003
------- ------- ------- -------
Geoconstruction services $ 1,499 $ - $ - $ 1,499
Energy services and production 160 (160) 950 950
------- ------- ------- -------
$ 1,659 $ (160) $ 950 $ 2,449
======= ======= ======= =======
4. Indebtedness
On July 31, 2003, the Company entered into an agreement ("Master Shelf
Agreement") whereby it could issue up to $60,000,000 in unsecured notes. Upon
closing, the Company issued $40,000,000 of notes ("Senior Notes") under the
Master Shelf Agreement. The remaining $20,000,000, subject to terms and
conditions and acceptance by the lender, is available for issuance by the
Company at market rates until July 31, 2005. The Senior Notes bear a fixed
interest rate
10
of 6.05% and will be due on July 31, 2010, with annual principal payments of
$13,333,000 beginning July 31, 2008. Proceeds from issuance of the Senior Notes
were used to refinance borrowings outstanding under the Company's previous term
loan and revolving credit facility ("Previous Loan Facilities").
Concurrent with the signing of the Master Shelf Agreement, the Company closed on
a new bank revolving credit facility ("Credit Agreement"). The Credit Agreement
is an unsecured $30,000,000 revolving facility to be used for working capital
requirements and general corporate purposes. The maximum available under the
Credit Agreement is $30,000,000, less any outstanding letter of credit
commitments (which are subject to a $15,000,000 sublimit). The Credit Agreement
provides interest at variable rates equal to, at the Company's option, a
Eurodollar rate plus 1.75% to 2.75% (depending upon certain ratios) or an
alternative reference rate as defined in the Credit Agreement. As of October 31,
2003, there were no borrowings outstanding on the Credit Agreement and
outstanding letters of credit were $9,444,000. Debt outstanding as of October
31, 2003 and January 31, 2003, whose carrying value approximates fair market
value, was as follows (in thousands):
October 31, January 31,
2003 2003
----------- -----------
Current maturities of long-term debt:
Term Loan $ - $ 3,938
------- -------
Long-term debt:
Senior Notes 40,000 -
Term Loan - 28,432
------- -------
Total debt $40,000 $32,370
======= =======
In connection with refinancing the Previous Loan Facilities on July 31, 2003,
the Company recorded debt extinguishment costs of $2,320,000. The costs included
a prepayment penalty of $671,000, the write-off of deferred loan costs related
to the Previous Loan Facilities of $1,447,000 and the write-off of the
unrealized loss on the Company's interest rate swap of $202,000. The debt
extinguishment costs of $1,135,000 recorded in July 2002 was the result of the
refinancing of a previous credit facility. The July 2002 loss, which was
previously reported as an extraordinary item, was reclassified to income from
continuing operations upon adoption of SFAS No. 145, "Rescission of FASB
Statement No. 4, 44, and 64, Amendment to FASB Statement No. 13, and Technical
Corrections," as of February 1, 2003.
5. Acquisitions
On June 3, 2003, the Company acquired substantially all the assets of Mohajir
Engineering Group, Inc., a full service engineering, geophysical, and geological
consulting firm serving the energy industry. The acquisition did not have a
significant effect on the Company's financial position, results of operations or
cash flows.
6. Severance Costs
During the second quarter of fiscal year 2004, the Company announced involuntary
workforce reductions of 189 employees. The actions were primarily necessary to
align the Company's cost structure with current market conditions. As of July
31, 2003, the Company had notified all applicable employees affected by these
actions. The Company recorded severance and benefit charges of approximately
$530,000 related to these actions in the second quarter of fiscal year 2004 in
11
accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." The severance costs are recorded in the Company's
Consolidated Statements of Income as selling, general and administrative
expenses for the nine months ended October 31, 2003. A reconciliation of the
severance costs by segment follows (in thousands):
Nine Months Ended
October 31, 2003
-----------------
Water resources $ 90
Mineral exploration 289
Energy Services and Production 25
Corporate 126
-----------------
Total $ 530
=================
As of October 31, 2003, the Company had paid $475,000 in costs associated with
these workforce reductions. A summary of the severance costs and related
activity follows:
Number of Amount
Employees (in 000's)
--------- ----------
Balance January 31, 2003 - $ -
2003 Charges 189 530
2003 Payments (186) (475)
-------- ---------
Balance October 31, 2003 3 $ 55
======== =========
The Company also provided termination benefits to certain employees in exchange
for employees' voluntary termination of service. These benefits were offered to
align the Company's cost structure with current market conditions. The Company
recorded charges of approximately $714,000 as selling, general and
administrative expenses in the Consolidated Statements of Income related to the
voluntary termination benefits in accordance with SFAS No. 88, "Employers
Accounting for Settlement and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits."
7. Other Comprehensive Income (Loss)
Components of other comprehensive income (loss) are summarized as follows (in
thousands):
Three Months Nine Months
Ended October 31, Ended October 31,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income (loss) $ 541 $ 200 $ 710 $(13,974)
Other comprehensive income (loss),
net of taxes:
Foreign currency translation
adjustments 528 83 866 403
Unrealized gain (loss) on
available for sale investments 55 (4) 42 (40)
Reclassification of unrealized
loss on swap - (110) 134 (110)
-------- -------- -------- --------
Other comprehensive income (loss) $ 1,124 $ 169 $ 1,752 $(13,721)
======== ======== ======== ========
12
The components of accumulated other comprehensive loss for the nine months ended
October 31, 2003 are as follows (in thousands):
Accumulated
Cumulative Unrealized Unrecognized Unrealized Other
Translation Loss On Pension Loss on Comprehensive
Adjustment Investments Liability Swap Loss
------------ ----------- ------------ -------- ----------
Balance,
February 1, 2003 $ (9,794) $ (98) $ (1,896) $ (134) $ (11,922)
Period change 866 42 - 134 1,042
----------- ---------- ----------- --------- -----------
Balance,
October 31, 2003 $ (8,928) $ (56) $ (1,896) $ - $ (10,880)
=========== ========== =========== ========= ===========
8. 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 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. Effective February 1, 2003, the Company's
ground-freezing services were included in the division on a prospective basis
due to a change in reporting responsibility.
Mineral Exploration Division
This division provides a complete range of drilling services for the mineral
exploration industry. Its aboveground and underground drilling activities
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 and vibratory ground improvement. The division also
manufactures a line of high-pressure pumping equipment used in grouting
operations and geotechnical drilling rigs used for directional drilling.
Effective February 1, 2003, the division no longer includes the Company's
ground- freezing services due to a change in reporting responsibility.
Energy Services and Production Division
This division offers a variety of specialized services including shallow gas and
tar sands exploration drilling, resonance technology solutions for stuck
tubulars and land-based oil and gas search and development. The division's
land-based oil and gas search and development activities focus primarily on
natural gas properties, principally coalbed methane projects located in the
Midwest region of the United States.
13
Products and Other
This grouping has historically included the Company's supply operation, Drilling
Equipment Supply ("DESI"), which distributed drilling equipment and parts and
supplies, a manufacturing operation ("Christensen Products") which produced
diamond drilling rigs, diamond bits, core barrels and drill rods and other
miscellaneous operations which did not fall into the above divisions. On January
23, 2003, the Company sold its DESI operations. Upon the sale of DESI, the
results of operations were reclassified to discontinued operations for fiscal
year 2003. On August 8, 2001, the Company sold its Christensen Products
business.
Revenues and income from continuing operations pertaining to the Company's
operating segments are presented below. Unallocated corporate expenses consist
primarily of general and administrative functions and incentive compensation.
Operating segment revenues and income from continuing operations are summarized
as follows (in thousands):
Three Months Nine Months
Ended October 31, Ended October 31,
------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues
Water resources $ 43,817 $ 43,164 $ 127,193 $ 128,463
Mineral exploration 18,353 13,888 49,245 41,821
Geoconstruction services 6,921 6,750 21,273 22,673
Energy services and
production 3,685 2,848 13,755 9,962
Products and other - (20) - 436
--------- --------- --------- ---------
Total revenues $ 72,776 $ 66,630 $ 211,466 $ 203,355
========= ========= ========= =========
Income (loss) from
continuing operations
Water resources $ 5,551 $ 7,190 $ 16,684 $ 20,429
Mineral exploration 1,066 (926) 2,123 (1,117)
Geoconstruction services 221 291 1,599 2,204
Energy services and
production (658) (63) (729) (1,067)
Products and other - (51) - (651)
Unallocated corporate
expenses (3,397) (3,443) (11,213) (10,724)
Debt extinguishment costs - - (2,320) (1,135)
Interest (687) (630) (1,918) (1,899)
--------- --------- --------- ---------
Total income from
continuing operations $ 2,096 $ 2,368 $ 4,226 $ 6,040
========= ========= ========= =========
Geographic Information:
Revenues
North America $ 59,629 $ 56,367 $ 174,746 $ 171,539
Africa/Australia 11,645 8,724 31,762 27,429
Other foreign 1,502 1,539 4,958 4,387
--------- --------- --------- ---------
Total revenues $ 72,776 $ 66,630 $ 211,466 $ 203,355
========= ========= ========= =========
Income from continuing operations of the energy services and production segment
for the three and nine months ended October 31, 2002 include $15,000 and
$813,000, respectively, of expenses related to the Company's oil and gas
exploration activities in the Gulf of Mexico region of the United States. These
14
activities are unrelated to the Company's coalbed methane exploration and
development efforts and were charged to expense as no reserves were identified.
The Company is no longer pursuing these exploration activities.
9. 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 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.
10. New Accounting Pronouncements
The Financial Accounting Standards Board has issued several statements which
were effective in the current fiscal year or will be effective in future fiscal
years. SFAS No. 148, "Accounting for Stock-Based Compensation," amends SFAS No.
123 to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 149, "Amendments of
Statement 133 on Derivative Instruments and Hedging Activities Summary" amends
and clarifies financial reporting for derivative instruments, including certain
derivative instruments embedded in other contacts and for hedging activities
under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity" establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. This Statement is effective
15
for financial instruments entered into or modified after May 31, 2003.
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46")
requires consolidation of certain variable interest entities if certain
conditions are met. The adoption of SFAS No. 148, 149 and 150 and FIN 46 did not
have significant impacts on the Company's results of operations or financial
position.
11. Subsequent Events
On November 10, 2003, the Company acquired certain assets and inventory of
DrillCorp Tanzania Ltd ("DrillCorp"), a mineral exploration drilling operation
in Tanzania, for $3,500,000. The Company issued a non-interest bearing
promissory note for $3,500,000 to a related entity of DrillCorp to finance the
acquisition. The acquisition will be accounted for using the purchase method of
accounting.
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 volatility 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.
16
Three Months Nine Months
Ended Ended Period-to-Period
October 31, October 31, Change
----------------- ---------------- ------------------
2003 2002 2003 2002 Three Nine
---- ---- ---- ---- Months Months
------ ------
Revenues:
Water resources 60.2% 64.8% 60.1% 63.2% 1.5 (1.0)
Mineral exploration 25.2 20.8 23.3 20.6 32.2 17.8
Geoconstruction services 9.5 10.1 10.1 11.1 2.5 (6.2)
Energy services and production 5.1 4.3 6.5 4.9 29.4 38.1
Products and other - - - 0.2 * *
----- ----- ----- -----
Total net revenues 100.0% 100.0% 100.0% 100.0% 9.2 4.0
Cost of revenues 73.6 71.5 72.5 71.6 12.5 5.3
----- ----- ----- -----
Gross profit 26.4 28.5 27.5 28.4 1.0 0.8
Selling, general and
administrative expenses 18.2 20.5 19.6 19.7 (2.6) 3.6
Depreciation and amortization 4.2 5.1 4.5 5.2 (10.4) (10.1)
Other income (expense):
Equity in earnings of affiliates - 0.3 0.3 0.3 * 5.9
Interest (0.9) (0.9) (0.9) (0.9) 8.9 1.0
Debt extinguishment costs - - (1.1) (0.6) * *
Other income (expense), net (0.2) 1.3 0.3 0.6 * *
----- ----- ----- -----
Income from continuing operations
before income taxes and
minority interest 2.9 3.6 2.0 2.9 (11.5) (30.0)
Income tax expense 1.7 2.3 1.4 1.8 (19.2) (23.0)
Minority interest (0.2) - - (0.1) * *
----- ----- ----- -----
Net income from continuing
operations before discontinued
operations and cumulative
effect of accounting change 1.0 1.3 0.6 1.0 (16.1) (36.1)
Loss from discontinued operations,
net of income taxes (0.3) (1.0) (0.3) (0.8) * *
----- ----- ----- -----
Net income before cumulative
effect of accounting change 0.7 0.3 0.3 0.2 * *
Cumulative effect of accounting
change, net of income taxes - - - (7.1) * *
----- ----- ----- -----
Net income (loss) 0.7% 0.3% 0.3% (6.9)% * *
===== ===== ===== =====
- ------------------
* Not meaningful.
Results of Operations
- ---------------------
Revenues for the three months ended October 31, 2003 increased $6,146,000, or
9.2%, to $72,776,000 while revenues for the nine months ended October 31, 2003
increased $8,111,000, or 4.0%, to $211,466,000 from the same periods last year.
See further discussion of results of operations by division below.
Gross profit as a percentage of revenues was 26.4% and 27.5% for the three and
nine months ended October 31, 2003 compared to 28.5% and 28.4% for the three and
nine months ended October 31, 2002. The decrease in gross profit percentage for
the periods was primarily related to the continued negative impact of
competitive pricing pressures at the Company's domestic water locations due to
reduced municipal spending. The decrease for the periods was partially offset by
improved margins in the Company's mineral exploration division due to increased
activity levels associated with higher gold prices.
17
Selling, general and administrative expenses were $13,280,000 for the three
months ended October 31, 2003 and $41,419,000 for the nine months ended October
31, 2003 (18.2% and 19.6% of revenues, respectively) compared to $13,638,000 and
$39,987,000 for the three and nine months ended October 31, 2002 (20.5% and
19.7% of revenues, respectively). The decrease in selling, general and
administrative expenses for the three months ended October 31, 2003 was
primarily the result of workforce reductions completed during the second quarter
of fiscal 2004 partially offset by increased insurance costs. The increase in
selling, general and administrative expenses for the nine months ended October
31, 2003 was primarily a result of severance-related benefits of $1.2 million
accrued during the second quarter (see Note 6 to the Financial Statements),
start-up expenses related to the Company's groundwater transfer project in
Texas, and increased insurance costs.
Depreciation and amortization decreased to $3,057,000 and $9,531,000 for the
three and nine months ended October 31, 2003 compared to $3,410,000 and
$10,601,000 for the same periods last year. The decreases in depreciation and
amortization were the result of less depreciation from assets fully depreciated
in prior periods primarily in the mineral exploration and geoconstruction
services divisions.
The Company recorded a loss on extinguishment of debt of $2,320,000 for the nine
months ended October 31, 2003 and $1,135,000 for the nine months ended October
31, 2002. The losses for the periods represent prepayment penalties and the
write-off of associated deferred fees in connection with refinancing of the
Company's debts. The prior year loss was accounted for as an extraordinary item
last year and was reclassed to income from continuing operations upon adoption
of SFAS No. 145, "Rescission of FASB Statement No. 4, 44 and 64, Amendment to
FASB No. 13 and Technical Corrections."
Other income (expense), net was an expense of $108,000 for the three months
ended October 31, 2003, compared to income of $830,000 in the prior year, and
income of $442,000 for the nine months ended October 31, 2003, compared to
income of $1,179,000 in the prior year. The variance in income from both prior
periods is primarily due to gains from insurance proceeds and fixed asset sales
in the prior year which have not recurred at the same levels in the current
year.
Income tax expense for continuing operations of $1,186,000 and $2,878,000 was
recorded for the three and nine months ended October 31, 2003 compared to
$1,468,000 and $3,738,000 for the same periods last year. The debt
extinguishment costs recorded in the second quarter of 2003 and 2002 were
treated as discrete period items for interim tax accounting purposes which
resulted in the recording of a tax benefit during the periods at the statutory
tax rate. Exclusive of the impact of the discrete period treatment, the
effective rate would have been 57.7% compared to 58.2% for the nine months ended
October 31, 2003 and 2002. The remaining difference in the effective rate versus
the statutory federal rate was due primarily to the impact of nondeductible
expenses and the tax treatment of certain foreign operations.
WATER RESOURCES DIVISION
(in thousands)
Three Months Ended Nine Months Ended
October 31, October 31,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues $ 43,817 $ 43,164 $127,193 $128,463
Income from continuing operations 5,551 7,190 16,684 20,429
18
Water resources revenue increased 1.5% to $43,817,000 for the three months ended
October 31, 2003 and decreased 1.0% to $127,193,000 for the nine months ended
October 31, 2003 compared to $43,164,000 and $128,463,000 for the three and nine
months ended October 31, 2002. The increase for the three months ended October
31, 2003 was primarily the result of a focused effort to maintain market share
in the division's markets, especially the soft municipal market where pricing
has been impacted by competitive pressures and reduced demand. The decrease in
revenues for the nine months ended October 31, 2003 was primarily attributable
to a large multi-divisional project performed last year. Excluding the impact of
this project, the division's revenues for the nine months ended October 31, 2003
increased 2.4% as a result of the same factors discussed above for the quarter.
Income from continuing operations for the water resources division decreased
22.8% to $5,551,000 for the three months ended October 31, 2003 and 18.3% to
$16,684,000 for the nine months ended October 31, 2003 compared to $7,190,000
and $20,429,000 for the three and nine months ended October 31, 2002. The
decrease in operating income for the three and nine months ended October 31,
2003 was primarily attributable to pricing pressures associated with a soft
municipal market and reduced activity on the multi-divisional project discussed
above.
MINERAL EXPLORATION DIVISION
(in thousands)
Three Months Ended Nine Months Ended
October 31, October 31,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues $ 18,353 $ 13,888 $ 49,245 $ 41,821
Income (loss) from continuing
operations 1,066 (926) 2,123 (1,117)
Mineral exploration revenues increased 32.2% to $18,353,000 and increased 17.8%
to $49,245,000 for the three and nine months ended October 31, 2003 compared to
revenues of $13,888,000 and $41,821,000 for the three and nine months ended
October 31, 2002. The increases for the three and nine months ended October 31,
2003 was attributable to increased exploration activity in the Company's markets
as a result of higher gold prices.
Income from continuing operations for the mineral exploration division was
$1,066,000 for the three months ended October 31, 2003 and $2,123,000 for the
nine months ended October 31, 2003 compared to losses from continuing operations
of $926,000 and $1,117,000 for the three and nine months ended October 31, 2002.
The improved profitability in the division for the three months ended October
31, 2003 was primarily due to the increased activity levels noted above. The
increase for the nine months ended October 31, 2003 was attributable to
increased activity levels noted above and lower depreciation from assets fully
depreciated in prior periods, partially offset by severance-related accruals in
the second quarter and increased expenses in Australia to bring equipment into
compliance with recently enacted changes to local transportation requirements.
GEOCONSTRUCTION SERVICES DIVISION
(in thousands)
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------- --------------------
2003 2002 2003 2002
------- ------- ------- -------
Revenues $ 6,921 $ 6,750 $21,273 $22,673
Income from continuing operations 221 291 1,599 2,204
19
Geoconstruction services revenues increased 2.5% to $6,921,000 and decreased
6.2% to $21,273,000 for the three and nine months ended October 31, 2003
compared to $6,750,000 and $22,673,000 for the three and nine months ended
October 31, 2002. The increase in revenue for the three months ended October 31,
2003 was primarily the result of beginning certain public sector projects that
had been previously delayed. The decrease for the nine months ended October 31,
2003 was attributable to delays on the public sector projects and the
non-replacement of a multi-divisional project performed in the prior year.
The geoconstruction services division had income from continuing operations of
$221,000 for the three months ended October 31, 2003 and income from continuing
operations of $1,599,000 for the nine months ended October 31, 2003 compared to
$291,000 for the three months ended October 31, 2002 and $2,204,000 for the nine
months ended October 31, 2002. The decrease for the three months ended October
31, 2003 was primarily the result of problems encountered on certain projects
partially offset by reduced depreciation expense from assets fully depreciated
in prior periods. The decrease for the nine months ended October 31, 2003 was
primarily due to a slow start to the year due to delays on certain public sector
projects partially offset by reduced depreciation expense.
ENERGY SERVICES AND PRODUCTION DIVISION
(in thousands)
Three Months Ended Nine Months Ended
October 31, October 31,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues $ 3,685 $ 2,848 $ 13,755 $ 9,962
Loss from continuing operations (658) (63) (729) (1,067)
Energy services and production revenues increased 29.4% to $3,685,000 and 38.1%
to $13,755,000 for the three and nine months ended October 31, 2003 compared to
revenues of $2,848,000 and $9,962,000 for the three and nine months ended
October 31, 2002. The increase for the three months ended October 31, 2003 was
primarily the result of increased drilling services for a large shallow gas
project in the northwest region of the United States and third-party coalbed
methane exploration drilling. The increase for the nine months ended October 31,
2003 was also attributable to an increase in tar sands activity in Canada.
Losses from continuing operations for the energy services and production
division were $658,000 and $729,000 for the three and nine months ended October
31, 2003 compared to $63,000 and $1,067,000 for the three and nine months ended
October 31, 2002. The increased loss for the three months ended October 31, 2003
was primarily the result of increased maintenance expenses at the Company's
Canadian drilling unit in preparation for the winter drilling season and
start-up expenses related to the Company's coalbed methane development efforts.
The decreased loss for the nine months ended October 31, 2003 was primarily the
result of reduced expenses associated with certain energy exploration activities
in the prior year, partially offset by the increases in the quarter discussed
above.
Corporate expenses not allocated to individual divisions were $3,397,000 and
$13,533,000 for the three and nine months ended October 31, 2003 compared to
$3,443,000 and $11,859,000 for the three and nine months ended October 31, 2002.
The decrease in unallocated corporate expenses for the three months ended
October 31, 2003 was primarily the result of workforce reductions completed in
the second quarter. The increase for the nine months ended October 31, 2003 was
primarily the result of debt extinguishment costs of $2,320,000 (compared to
$1,135,000
20
last year) and severance-related costs of approximately $800,000 partially
offset by the workforce reductions noted above and cost reduction measures
implemented late in fiscal 2003.
Changes in Financial Condition
- ------------------------------
Cash from operations was $3,710,000 for the nine months ended October 31, 2003
compared to cash from operations of $10,177,000 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 agreements.
The increase in receivables for the nine months ended October 31, 2003 was
primarily a result of a slowing of collections from Water Resources division
customers, increased activity in the mineral exploration division, and
receivables from our joint interest partners on coalbed methane projects. The
Company believes it has adequately reserved for potential uncollectable
accounts.
The Company believes that borrowings from its available credit agreements 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.
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 and 10 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, 2003. 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,
21
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.
The Company had goodwill of $21,884,000 at February 1, 2002. The goodwill was
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 recorded 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
in accordance with SFAS No. 142. In connection with the decision to reclassify
its Toledo Oil and Gas business as discontinued operations in the third quarter
of fiscal 2004, the Company reassessed the recoverability of the goodwill
associated with that business and recorded an impairment charge of $160,000. 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.
Costs estimated to be incurred in the future for employee medical benefits,
workers' compensation and casualty insurance programs resulting from claims
which have occurred are accrued currently. Under the terms of the Company's
agreement with the various insurance carriers administering these claims, the
Company is not required to remit the total premium until the claims are actually
paid by the insurance companies. These costs are not expected to significantly
impact liquidity in future periods.
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
22
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 (in 000's):
Payments/Expiration by Period
Less than
Total 1 year 1-3 years 4-5 years
----- ------ --------- ---------
Contractual Obligations and Other
Commercial Commitments
Debt $40,000 $ - $ - $13,333
Operating leases 14,376 5,659 5,980 2,737
------- ------- ------- -------
Total contractual cash
obligations 54,376 5,659 5,890 16,070
Standby letters of credit 9,444 9,444 - -
------- ------- ------- -------
Total contractual obligations
and commercial commitments $63,820 $15,103 $ 5,980 $16,070
======= ======= ======= =======
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 debt is in Note 11 to the Consolidated Financial Statements appearing
in the Company's January 31, 2003 Form 10-K and in Note 4 to the Consolidated
Financial Statements appearing in this Form 10-Q. Assuming then existing debt
levels and the Swap Agreement, an instantaneous change in interest rates of one
percentage point would impact the Company's annual expenses by $152,000 and
$157,000 at October 31, 2003 and January 31, 2003, respectively. The Company's
investments are described in Note 1 to the Consolidated Financial Statements
appearing in the Company's January 31, 2003 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, 2003 Form 10-K and Note 8 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
nine months ended October 31, 2003 and 2002. 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.
23
ITEM 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in alerting them on a
timely basis to material information required to be included in our periodic
filing with the SEC.
In addition, there were no significant changes in our internal control over
financial reporting or in other factors that have materially affected or are
reasonably likely to materially affect these internal controls over financial
reporting subsequent to the date of our most recent evaluation.
24
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
NONE
ITEM 5 - Other Information
NONE
ITEM 6 - Exhibits and Reports on Form 8-K
a) Exhibits
4(2) - Amended and Restated Bylaws of the Registrant (filed
as Exhibit 99.2 to the Registrant's Form 8-K dated
December 5, 2003, and incorporated herein by reference)
31(1) - Section 302 Certification of Chief Executive Officer
of the Company
31(2) - Section 302 Certification of Chief Financial Officer
of the Company
32(1) - Section 906 Certification of Chief Executive Officer
of the Company
32(2) - Section 906 Certification of Chief Financial Officer
of the Company
b) Reports on Form 8-K
Form 8-K filed on December 3, 2003, related to the Company's third
quarter press release.
Form 8-K filed on December 5, 2003, related to the Company's election
of directors and amendment to bylaws.
25
* * * * * * * * * *
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: December 9, 2003 /s/A.B. Schmitt
--------------------------------
A.B. Schmitt, President
and Chief Executive Officer
DATE: December 9, 2003 /s/Jerry W. Fanska
-------------------------------
Jerry W. Fanska, Vice President
Finance and Treasurer
26