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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, 2004
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 12,572,506 shares of common stock, $.01 par value per share,
outstanding on August 31, 2004.
PART I
ITEM 1. Financial Statements
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
July 31, January 31,
2004 2004
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,294 $ 21,602
Customer receivables, less allowance
of $4,194 and $4,104, respectively 61,529 55,336
Costs and estimated earnings in excess of
billings on uncompleted contracts 14,990 13,746
Inventories 14,880 13,947
Deferred income taxes 9,255 9,357
Income taxes receivable 220 724
Other 4,101 6,057
---------- ----------
Total current assets 112,269 120,769
---------- ----------
Property and equipment:
Land 7,729 7,861
Buildings 13,627 14,648
Machinery and equipment 164,169 160,327
Gas transportation facilities and equipment 3,616 2,267
Mineral interest in oil and gas properties 3,270 1,441
Oil and gas properties 15,437 10,376
---------- ----------
207,848 196,920
Less - Accumulated depreciation (134,054) (132,120)
---------- ----------
Net property and equipment 73,794 64,800
---------- ----------
Other assets:
Investment in affiliates 20,510 19,239
Goodwill 2,449 2,449
Deferred income taxes 5,861 7,717
Other 2,852 2,353
---------- ----------
Total other assets 31,672 31,758
---------- ----------
$ 217,735 $ 217,327
========== ==========
See Notes to Consolidated Financial Statements.
- Continued -
2
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
(in thousands, except per share data)
July 31, January 31,
2004 2004
----------- -----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 23,565 $ 25,568
Accrued compensation 11,876 11,925
Accrued insurance expense 6,072 6,392
Other accrued expenses 8,556 8,511
Lease termination costs - 6,603
Income taxes payable 3,588 463
Billings in excess of costs and estimated
earnings on uncompleted contracts 8,166 8,901
---------- ----------
Total current liabilities 61,823 68,363
---------- ----------
Noncurrent and deferred liabilities:
Long-term debt 46,100 42,000
Accrued insurance expense 8,604 7,690
Other 4,945 5,589
---------- ----------
Total noncurrent and deferred liabilities 59,649 55,279
---------- ----------
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, 12,572,506 and 12,533,818
shares issued and outstanding, respectively 126 125
Capital in excess of par value 90,115 89,759
Retained earnings 18,583 13,458
Accumulated other comprehensive loss (12,561) (9,629)
Notes receivable from management stockholders - (28)
---------- ----------
Total stockholders' equity 96,263 93,685
---------- ----------
$ 217,735 $ 217,327
========== ==========
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 Six Months
Ended July 31, Ended July 31,
(unaudited) (unaudited)
---------------------------- -----------------------------
2004 2003 2004 2003
---------- ----------- ----------- -----------
Revenues $ 86,186 $ 70,188 $ 162,395 $ 129,933
Cost of revenues (exclusive
of depreciation shown below) 62,169 49,769 118,322 92,263
---------- ---------- ---------- ----------
Gross profit 24,017 20,419 44,073 37,670
Selling, general and
administrative expenses 14,471 15,124 28,396 27,623
Depreciation, depletion and
amortization 3,338 2,951 6,523 6,011
Other income (expense):
Equity in earnings of affiliates 1,220 608 1,689 700
Interest (733) (672) (1,416) (1,231)
Debt extinguishment costs - (2,320) - (2,320)
Other, net 805 219 1,149 487
---------- ---------- ---------- ----------
Income before income taxes 7,500 179 10,576 1,672
Income tax expense 3,751 663 5,289 1,527
Minority interest - 107 - 163
---------- ---------- ---------- ----------
Net income (loss) from continuing
operations before discontinued
operations 3,749 (377) 5,287 308
Loss from discontinued operations,
net of income tax benefit of $1 and $53
for the three months ended July 31, 2004
and 2003, respectively, and $96 and $107
for the six months ended July 31,
2004 and 2003, respectively (96) (73) (162) (139)
---------- ---------- ---------- ----------
Net income (loss) $ 3,653 $ (450) $ 5,125 $ 169
========== ========== ========== ==========
Basic income (loss) per share:
Net income (loss) from continuing
operations $ 0.30 $ (0.03) $ 0.42 $ 0.02
Loss from discontinued operations,
net of tax (0.01) (0.01) (0.01) (0.01)
---------- ---------- ---------- ----------
Income (loss) per share $ 0.29 $ (0.04) $ 0.41 $ 0.01
========== ========== ========== ==========
Diluted income (loss) per share:
Net income (loss) from continuing
operations $ 0.29 $ (0.03) $ 0.41 $ 0.02
Loss from discontinued operations,
net of tax (0.01) (0.01) (0.01) (0.01)
---------- ---------- ---------- ----------
Income (loss) per share $ 0.28 $ (0.04) $ 0.40 $ 0.01
========== ========== ========== ==========
Weighted average shares outstanding 12,559,000 11,927,000 12,548,000 11,915,000
Dilutive stock options 345,000 - 328,000 237,000
---------- ---------- ---------- ----------
12,904,000 11,927,000 12,876,000 12,152,000
========== ========== ========== ==========
See Notes to Consolidated Financial Statements.
4
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
Six Months
Ended July 31,
-----------------------
2004 2003
--------- --------
(unaudited)
Cash flow used in operating activities:
Net income $ 5,125 $ 169
Adjustments to reconcile net income to cash
from operations:
Loss on discontinued operations, net of tax 162 139
Depreciation, depletion and amortization 6,523 6,011
Deferred income taxes 662 16
Equity in earnings of affiliates (1,689) (700)
Dividends received from foreign affiliates 671 273
Loss on extinguishment of debt - 2,320
Minority interest - (163)
Gain from disposal of property and equipment (1,292) (258)
Changes in current assets and liabilities:
Increase in customer receivables (14,438) (8,364)
Increase in costs and estimated earnings
in excess of billings on uncompleted contracts (1,249) (6,379)
Increase in inventories (1,042) (1,070)
(Increase) decrease in other current assets 1,834 (1,133)
Increase in accounts payable and accrued expenses 6,502 3,759
Increase (decrease) in billings in excess of costs
and estimated earnings on uncompleted contracts (717) 512
Other, net (185) 127
-------- --------
Cash from (used in) continuing operations 867 (4,741)
Cash from (used in) discontinued operations (3,899) 1,074
-------- --------
Cash used in operating activities (3,032) (3,667)
-------- --------
Cash flow used in investing activities:
Additions to property and equipment (8,636) (3,211)
Additions to gas transportation facilities and equipment (1,349) (15)
Additions to mineral interest in oil and gas properties (720) (360)
Additions to oil and gas properties (4,609) (2,835)
Proceeds from disposal of property and equipment 2,371 225
Proceeds from sale of business 300 -
Acquisition of oil and gas working interest (1,000) -
Acquisition of business - (1,150)
Investment in joint ventures (278) (40)
-------- --------
Cash used in continuing operations (13,921) (7,386)
Cash used in discontinued operations - (2,635)
-------- --------
Cash used in investing activities (13,921) (10,021)
-------- --------
Cash flow from financing activities:
Net borrowings under revolving credit facility 4,100 -
Issuance of long-term debt - 40,000
Repayment of long-term debt - (32,370)
Prepayment penalty on early extinguishment of debt - (671)
Debt issuance costs - (160)
Payments on DrillCorp promissory note (1,020) -
Issuance of common stock 216 562
Payments on notes receivable from management
stockholders 28 17
-------- --------
Cash from financing activities 3,324 7,378
-------- --------
Effects of exchange rate changes on cash (679) 842
-------- --------
Net decrease in cash and cash equivalents (14,308) (5,468)
Cash and cash equivalents at beginning of period 21,602 10,770
-------- --------
Cash and cash equivalents at end of period $ 7,294 $ 5,302
======== ========
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 (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,
2004 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 division, the Company engages in the operation, development,
production and acquisition of oil and gas properties, principally focusing on
coalbed methane gas 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. The
capitalized costs associated with the Company's oil and gas properties are
depleted using the units of production method. Costs associated with production
and general corporate activities are expensed in the period incurred. As of July
31, 2004 and January 31, 2004, the Company has capitalized $18,707,000 and
$11,817,000, respectively, related to oil and gas properties and mineral
interest acquisition costs. The Company has also capitalized $3,616,000 and
$2,267,000 as of July 31, 2004 and January 31, 2004, respectively, related to
gas transportation facilities and
6
equipment. The Company's projects are in the early stages of completion and the
Company does not have sufficient production information by which reserves can be
established.
The Company follows SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"), as amended, which requires all derivative
financial instruments to be recorded on the balance sheet at fair value and
establishes criteria for designation and effectiveness of hedging relationships.
Under SFAS 133, the Company accounts for its unrealized hedges of forecasted
costs as cash flow hedges, such that changes in fair value for the effective
portion of hedge contracts, if material, are recorded in accumulated other
comprehensive income in stockholders' equity. Changes in the fair value of the
effective portion of hedge contracts are recognized in accumulated other
comprehensive income until the hedged item is recognized in operations. The
ineffective portion of the derivatives change in fair value, if any, is
immediately recognized in operations (see Note 5 for disclosure regarding the
fair value of foreign currency derivative instruments).
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. Deferred tax assets are reviewed for recoverability and valuation
allowances are provided as necessary. Provision for U.S. income taxes on
undistributed earnings of foreign subsidiaries and foreign affiliates is made
only on those amounts in excess of those funds considered to be invested
indefinitely.
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 and earnings per share
for the three and six months ended July 31, 2004 and 2003, determined as if the
SFAS 123 Method had been applied, are presented in the following table (in
thousands, except per share amounts):
Three Months Six Months
Ended July 31, Ended July 31,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income (loss), as reported $ 3,653 $ (450) $ 5,125 $ 169
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of tax (17) (70) (34) (147)
------------ ------------ ------------ ------------
Pro forma net income (loss) $ 3,636 $ (520) $ 5,091 $ 22
============ ============ ============ ============
Income (loss) per share:
Basic - as reported $ 0.29 (.04) $ 0.41 $ .01
============ ============ ============ ============
Basic - pro forma $ 0.29 (.04) $ 0.41 $ --
============ ============ ============ ============
Diluted - as reported $ 0.28 $ (.04) $ 0.40 $ .01
============ ============ ============ ============
Diluted - pro forma $ 0.28 $ (.04) $ 0.40 $ --
============ ============ ============ ============
7
The amounts paid for income taxes, net of refunds, and interest are as follows
(in thousands):
Six Months Ended July 31,
---------------------------
2004 2003
------------ ------------
Income taxes $ 197 $ 2,599
Interest 1,381 1,135
Supplemental Non-cash Transactions - The Company issued 217,504 shares of common
stock at fair market value related to compensation awards during the six months
ended July 31, 2003. The Company did not issue shares of common stock related to
compensation awards during the six months ended July 31, 2004.
Reclassifications - Certain fiscal 2004 amounts, primarily related to
discontinued operations and segment allocation of incentive compensation, have
been reclassified to conform with the fiscal 2005 presentation.
2. Discontinued Operations
During the third quarter of fiscal 2004, the Company reclassified the results of
operations of its Toledo Oil and Gas ("Toledo") business to discontinued
operations. Toledo was historically reported in the Company's energy segment and
offered conventional oilfield fishing services and coil tubing fishing services
(see Note 9). On January 6, 2004, the Company sold the Toledo operation for
$2,500,000 and recorded a gain on the sale of $57,000, net of income taxes of
$30,000, for the year ended January 31, 2004. The Company received $2,200,000
upon the sale and an additional $300,000 in February 2004 at the end of a
contingency period.
In connection with the sale of Toledo, the Company recorded a contract
termination liability for a long-term lease of the Toledo facilities. The
contract termination liability represents the present value of the rental
payments specified in the lease reduced by an estimate for sublease rentals
(based on market value of similar properties). The Company will record accretion
expense due to the passage of time for the difference between the expected lease
obligations, net of sublease rentals, and the present value of such operations
as a loss from discontinued operations. The present value liability was adjusted
during the six months ended July 31, 2004 to reflect lower than anticipated
sublease rentals during June and July netted against higher than anticipated
sublease rentals during February and March. A summary of the lease liability
follows (in thousands):
Amounts
------------
February 1, 2004 $ 117
Payments (10)
Accretion 3
Adjustments 25
------------
July 31, 2004 $ 135
============
Lease obligations of $163,000, net of sublease rentals, are expected to be paid
over the term of the lease which extends to 2008. Payments for the six months
ended July 31, 2004 totaled $8,000.
On January 30, 2004, the Company sold its Layne Christensen Canada Ltd. ("Layne
Canada") subsidiary for $15,914,000. Layne Canada was a component of the
Company's energy segment (see Note 9) and provided drilling services to the
shallow gas and unconventional oil and gas markets. The Company recorded a gain
on the sale of
8
$1,652,000, net of income taxes of $994,000 for the year ended January 31, 2004.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the results of operations for Toledo and Layne Canada have
been classified as discontinued operations. Revenues and net income (loss) from
discontinued operations for the three and six months ended July 31, 2004 and
2003 were as follows (in thousands):
Three Months Ended Six Months Ended
July 31, 2004 July 31, 2003 July 31, 2004 July 31, 2003
------------- ------------- ------------- -------------
Revenues:
Canada $ - $ 2,777 $ - $ 8,757
Toledo - 577 - 1,199
------------- ------------- ------------- -------------
Total $ - $ 3,354 $ - $ 9,956
============= ============= ============= =============
Income (loss) from
discontinued operations
before income taxes:
Canada $ (64) $ 190 $ (216) $ 457
Toledo (33) (316) (42) (703)
------------- ------------- ------------- -------------
Total $ (97) $ (126) $ (258) $ (246)
============= ============= ============= =============
3. 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 of 6.05% and are 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. The Credit
Agreement will be due and payable on July 31, 2006. On July 31, 2004, there were
letters of credit of $10,970,000 outstanding on the Credit Agreement.
The Master Shelf Agreement and the Credit Agreement contain certain covenants
including restrictions on the incurrence of additional indebtedness and liens,
investments, acquisitions, transfer or sale of assets, transactions with
affiliates, payment of dividends and certain financial maintenance covenants,
including among others, fixed charge coverage, maximum debt to EBITDA, minimum
tangible net worth and minimum asset coverage. The Company was in compliance
with its covenants as of July 31, 2004.
9
The Company's previous floating rate debt exposed it to changes in interest
rates going forward. During September 2002, the Company entered into an interest
rate swap agreement (the "Swap Agreement"), as required by the Previous Loan
Facilities. The Swap Agreement effectively converted a portion of the previous
term loan to a fixed rate basis, thus reducing the impact of interest rate
changes. Upon entering the Master Shelf Agreement, a fixed interest rate
contract, the Swap Agreement no longer qualified for hedge accounting and gains
and losses related to the Swap Agreement were included in Other, net in the
Company's Consolidated Statements of Income as incurred. The Swap Agreement
calls for quarterly interest payments which commenced on October 1, 2002, and
will terminate September 9, 2004. The Swap Agreement is recorded at its fair
market value of $25,000 as of July 31, 2004, in other accrued expenses in the
Company's Consolidated Balance Sheets. Debt outstanding as of July 31, 2004 and
January 31, 2004 was as follows (in thousands):
July 31, January 31,
2004 2004
----------- -----------
Long-term debt:
Credit Agreement $ 6,100 $ 2,000
Senior Notes 40,000 40,000
----------- -----------
Total long-term debt $ 46,100 $ 42,000
=========== ===========
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.
4. Acquisitions
During April 2004, the Company acquired the remaining 50% working interest in
oil and gas properties, including mineral interests, held by a third party under
an August 2002 development agreement for $1,000,000 cash and forgiveness of
approximately $489,000 in joint interest receivables from such partner. The
acquisition furthers the Company's expansion of its energy presence in the
mid-continent region of the United States. The acquisition had the following
effect on the Company's consolidated financial position (in thousands):
Amounts
-------
Customer receivables $ (409)
Other current assets (80)
Mineral interest in oil and gas properties 1,110
Oil and gas properties 379
-------
Total cash purchase price $ 1,000
=======
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.
5. Foreign Currency Derivatives
The Company has foreign operations that have significant costs denominated in
foreign currencies, and thus is exposed to risks associated with changes in
foreign currency exchange rates. At any point in time, the Company might use
various hedge
10
instruments, primarily foreign currency option contracts, to manage the
exposures associated with forecasted expatriate labor costs and purchases of
operating supplies. The Company does not enter into foreign currency derivative
financial instruments for speculative or trading purposes.
As of July 31, 2004, the Company held option contracts with an aggregate U.S.
dollar notional value of $12,010,000 to hedge the risks associated with
forecasted Australian dollar denominated costs in its African operations. The
contracts settle in various increments through January 2005. The fair value of
the instruments of $95,000 at July 31, 2004, is recorded in other current assets
and, net of income taxes of $35,000, in accumulated other comprehensive income.
Aggregate losses of $40,000 on foreign currency hedging transactions were
recognized for the six months ended July 31, 2004 as the forecasted transactions
being hedged occurred and were recorded primarily in cost of revenues in the
Company's Consolidated Statements of Income.
6. Severance Costs
During the second quarter of fiscal 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 2004 in
accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." As of July 31, 2004, the Company had paid all costs
associated with these workforce reductions. A summary of the severance costs and
related activity follows:
Number of Amount
Employees (in 000's)
--------- ----------
Balance February 1, 2003 - $ -
Charges 189 530
Payments (187) (502)
--------- ----------
Balance January 31, 2004 2 28
Payments (2) (28)
--------- ----------
Balance July 31, 2004 - $ -
========= ==========
7. 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,
--------------------- ---------------------
2004 2003 2004 2003
------- ------- ------- -------
Net income (loss) $ 3,653 $ (450) $ 5,125 $ 169
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments (859) 237 (2,136) 338
Unrealized loss on available
for sale investments - (9) - (13)
Reclassification of unrealized
loss on swap - 157 - 134
Unrealized loss on exchange
contract (180) - (796) -
------- ------- ------- -------
Other comprehensive income (loss) $ 2,614 $ (65) $ 2,193 $ 628
======= ======= ======= =======
11
The components of accumulated other comprehensive loss for the six months ended
July 31, 2004 are as follows (in thousands):
Unrealized Accumulated
Cumulative Unrecognized Gain (loss) Other
Translation Pension on Exchange Comprehensive
Adjustment Liability Contracts Loss
----------- ------------ ----------- --------------
Balance,
February 1, 2004 $ (8,701) $ (1,784) $ 856 $ (9,629)
Period change (2,136) - (796) (2,932)
---------- ----------- ---------- -------------
Balance,
July 31, 2004 $ (10,837) $ (1,784) $ 60 $ (12,561)
========== =========== ========== =======-=====
8. Employee Benefit Plans
The Company sponsors a pension plan covering certain hourly employees not
covered by union-sponsored, multi-employer plans. Benefits are computed based
mainly on years of service. The Company makes annual contributions to the plan
substantially equal to the amounts required to maintain the qualified status of
the plans. Contributions are intended to provide for benefits related to past
and current service with the Company. Effective December 31, 2003, the Company
froze the pension plan and recorded a curtailment loss of approximately $20,000
for the year ended January 31, 2004. Benefits will no longer be accrued after
December 31, 2003, and no further employees will be added to the Plan. The
Company expects to maintain the assets of the Plan to pay normal benefits
accrued through December 31, 2003. Assets of the plan consist primarily of
stocks, bonds and government securities.
Net periodic pension cost for the three and six months ended July 31, 2004 and
2003 includes the following components (in thousands):
Three Months Six Months
Ended July 31, Ended July 31,
------------------------- ----------------------------
2004 2003 2004 2003
------- ------- --------- ---------
Service cost $ 17 $ 53 $ 34 $ 106
Interest cost 110 105 220 210
Expected return on assets (113) (104) (226) (208)
Net amortization 48 48 96 96
------- ------- -------- --------
Net periodic pension cost $ 62 $ 102 $ 124 $ 204
======= ======= ======== ========
The Company has recognized the full amount of its actuarially determined pension
liability and the related intangible asset (if applicable). The unrecognized
pension cost has been recorded as a charge to consolidated stockholders' equity
after giving effect to the related future tax benefit.
The Company also provides supplemental retirement benefits to its chief
executive officer. Benefits are computed based on the compensation earned during
the highest five consecutive years of employment reduced for a portion of Social
Security benefits and an annuity equivalent of the chief executive's defined
contribution plan balance. The Company does not contribute to the plan or
maintain any investment assets related to the expected benefit obligation. The
Company has recognized the full amount of its actuarially determined pension
liability. Net periodic pension cost of the supplemental retirement benefits for
the three and six
12
months ended July 31, 2004 and 2003 include the following components (in
thousands):
Three Months Six Months
Ended July 31, Ended July 31,
------------------------- ----------------------------
2004 2003 2004 2003
------- ------- -------- --------
Service cost $ 25 $ 25 $ 50 $ 50
Interest cost 18 17 36 34
------- ------- -------- --------
Net periodic pension cost $ 43 $ 42 $ 86 $ 84
======= ======= ======== ========
9. 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 organics and other
contaminants such as nitrates, iron, manganese, arsenic, radium and radon 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
include all phases of core drilling, diamond, reverse circulation, dual tube,
hammer and rotary air-blast methods.
Geoconstruction Division
This division focuses on services that improve soil stability, primarily jet
grouting, grouting, vibratory ground improvement, drilled micropiles, stone
columns, anchors and tiebacks. The division also manufactures a line of
high-pressure pumping equipment used in grouting operations and geotechnical
drilling rigs used for directional drilling.
Energy Division
This division primarily focuses on exploration and production of coalbed methane
("CBM") properties in the United States. To date it has been concentrated on
projects in the mid-continent region of the United States. Historically, the
division has also included Layne Canada, Toledo and two small specialty energy
service companies. During fiscal 2004, the division's strategy shifted to focus
mainly on resource development rather than providing services to external
customers. Accordingly, in January 2004, the Company sold Layne Canada and
Toledo. The results of operations for these units have been reclassified to
discontinued operations for all periods presented (see Note 2). The division is
now composed of the Company's CBM development activities and the two small
specialty energy service companies.
13
Revenues and income from continuing operations pertaining to the Company's
operating segments are presented below. Intersegment revenues are accounted for
based on the fair market value of the services provided. Unallocated corporate
expenses primarily consist of general and administrative functions. Previously,
the unallocated corporate expenses included incentive compensation expenses for
division-level personnel; however, for the second quarter of fiscal 2005, the
incentive compensation has been allocated to the segments to reflect a change in
division performance evaluation. The comparable period for fiscal 2004 has been
reclassified to conform to the current presentation. Operating segment revenues
and income from continuing operations are summarized as follows (in thousands):
Three Months Six Months
Ended July 31, Ended July 31,
------------------------- -------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenues
Water resources $ 47,918 $ 44,607 $ 93,201 $ 83,376
Mineral exploration 26,153 16,836 50,242 30,892
Geoconstruction 10,949 8,221 17,039 14,352
Energy 1,166 524 1,913 1,313
--------- --------- --------- ---------
Total revenues $ 86,186 $ 70,188 $ 162,395 $ 129,933
========= ========= ========= =========
Income (loss) from
continuing operations
Water resources $ 6,299 $ 4,807 $ 10,330 $ 9,510
Mineral exploration 3,705 1,213 7,227 1,003
Geoconstruction 1,654 1,068 1,519 1,272
Energy (1) (176) (1,019) (546)
Unallocated corporate
expenses (3,424) (3,741) (6,065) (6,016)
Debt extinguishment costs - (2,320) - (2,320)
Interest (733) (672) (1,416) (1,231)
--------- --------- --------- ---------
Total income from
continuing operations $ 7,500 $ 179 $ 10,576 $ 1,672
========= ========= ========= =========
Geographic Information:
Revenues
North America $ 66,152 $ 57,342 $ 125,060 $ 106,360
Africa/Australia 17,133 10,760 33,383 20,117
Other foreign 2,901 2,086 3,952 3,456
--------- --------- --------- ---------
Total revenues $ 86,186 $ 70,188 $ 162,395 $ 129,933
========= ========= ========= =========
10. 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
14
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.
11. New Accounting Pronouncements
On April 30, 2004, the FASB staff issued FASB Staff Position (FSP) FAS 141-1 and
FAS 142-1, which amends FASB Statement No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets." The FSP clarifies that mineral
rights in oil and gas properties should be classified as tangible assets. This
amendment is effective for the first reporting period beginning after April 29,
2004. The adoption of this amendment did not have a significant impact on the
Company's results of operations or financial position as the Company's mineral
interests in oil and gas properties are recorded as tangible assets.
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.
Results of Operations
The following table presents, for the periods indicated, the percentage
relationship which certain items reflected in the Company's consolidated
statements
15
of income bear to revenues and the percentage increase or decrease in the dollar
amount of such items period to period.
Three Months Six Months Period-to-Period
Ended July 31, Ended July 31, Change
----------------- ----------------- ----------------
Three Six
2004 2003 2004 2003 Months Months
---- ---- ---- ---- ------ ------
Revenues:
Water resources 55.6% 63.6% 57.4% 64.2% 7.4 11.8
Mineral exploration 30.3 24.0 30.9 23.8 55.3 62.6
Geoconstruction 12.7 11.7 10.5 11.0 33.2 18.7
Energy 1.4 0.7 1.2 1.0 * 45.7
----- ----- ----- -----
Total net revenues 100.0% 100.0% 100.0% 100.0% 22.8 25.0
===== ===== ===== =====
Cost of revenues 72.1 70.9 72.9 71.0 24.9 28.2
----- ----- ----- -----
Gross profit 27.9 29.1 27.1 29.0 17.6 17.0
Selling, general and
administrative expenses 16.8 21.5 17.5 21.3 (4.3) 2.8
Depreciation, depletion and
amortization 3.9 4.2 4.0 4.6 13.1 8.5
Other income (expense):
Equity in earnings of
affiliates 1.4 0.9 1.0 0.5 * *
Interest (0.8) (1.0) (0.8) (0.9) 9.1 15.0
Debt extinguishment costs 0.0 (3.3) 0.0 (1.8) * *
Other, net 0.9 0.3 0.7 0.4 * *
----- ----- ----- -----
Income from continuing
operations before income
taxes and minority interest 8.7 0.3 6.5 1.3 * *
Income tax expense 4.4 1.0 3.2 1.2 * *
Minority interest 0.0 0.2 0.0 0.1 * *
----- ----- ----- -----
Net income (loss) from
continuing operations before
discontinued operations 4.3 (0.5) 3.3 0.2 * *
Loss from discontinued operations,
net of tax (0.1) (0.1) (0.1) (0.1) 31.5 16.5
----- ----- ----- -----
Net Income (loss) 4.2% (0.6)% 3.2% 0.1% * *
===== ===== ===== =====
- ----------
* Not meaningful.
Results of Operations
Revenues for the three months ended July 31, 2004 increased $15,998,000, or
22.8%, to $86,186,000 while revenues for the six months ended July 31, 2003
increased $32,462,000, or 25.0%, to $162,395,000 from the same periods last
year. See further discussion of results of operations by division below.
Gross profit as a percentage of revenues was 27.9% and 27.1% for the three and
six months ended July 31, 2004 compared to 29.1% and 29.0% for the three and six
months ended July 31, 2003. The decreases in gross profit percentage were
primarily attributable to continued pricing pressures from municipal customers
in the water resources division along with reduced margins associated with the
promotion of certain new water treatment products. The decreases in the water
resources division margins were partially offset by increased margins in the
mineral exploration division due to increased exploration activity because of
higher gold and base metal prices.
16
Selling, general and administrative expenses decreased to $14,471,000 for the
three months ended July 31, 2004 and increased to $28,396,000 for the six months
ended July 31, 2004 compared to $15,124,000 and $27,623,000 for the three and
six months ended July 31, 2003. Excluding severance-related benefits of
$1,244,000 accrued in the second quarter of fiscal 2004 (see Note 6 of the Notes
to Consolidated Financial Statements), the increase for both the three and six
month periods was primarily related to the Company's expansion of its water
treatment capabilities, increased expenses associated with the Company's CBM
development efforts and incremental costs of approximately $650,000 for the
implementation of Sarbanes-Oxley requirements.
Depreciation, depletion and amortization increased to $3,338,000 and $6,523,000
for the three and six months ended July 31, 2004 compared to $2,951,000 and
$6,011,000 for the same periods last year. The increase was primarily a result
of increased depreciation in the mineral exploration division and depletion
associated with the Company's CBM projects.
The Company recorded a loss on extinguishment of debt of $2,320,000 for the
three and six months ended July 31, 2003. The loss represents prepayment
penalties and the write-off of associated deferred fees in connection with
refinancing of the Company's credit facilities in July 2003.
Income tax expense of $3,751,000 and $5,289,000 were recorded for the three and
six months ended July 31, 2004, compared to $663,000 and $1,527,000 for the same
periods last year. The debt extinguishment costs recorded in the second quarter
of fiscal 2004 were treated as discrete period items for interim tax accounting
purposes, which resulted in the recording of a tax benefit at the statutory tax
rate. Exclusive of the impact of the tax treatment of the debt extinguishment
costs in July 2003, the effective rate was 50% for the six months ended July 31,
2004 compared to 60.7% for the same period last year. The improvement in the
effective rate is primarily attributable to improved earnings in international
operations. The effective rate in excess of the statutory federal rate 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,
------------------- -------------------
2004 2003 2004 2003
------- ------- ------- -------
Revenues $47,918 $44,607 $93,201 $83,376
Income from continuing operation 6,299 4,807 10,330 9,510
Water resources revenues increased 7.4% to $47,918,000, and 11.8% to
$93,201,000, for the three and six months ended July 31, 2004, respectively. The
increases were primarily attributable to the Company's continued efforts to
maintain market share, results from the Company's water treatment initiatives
and increased infrastructure needs in metropolitan areas of California and
Illinois.
Income from continuing operations for the water resources division increased
31.0% to $6,299,000 for the three months ended July 31, 2004, and 8.6% to
$10,330,000 for the six months ended July 31, 2004 compared to $4,807,000 and
$9,510,000 for the three and six months ended July 31, 2003. The increases in
income from continuing operations were primarily the result of the incremental
earnings impact from increases in revenues.
17
MINERAL EXPLORATION DIVISION
(in thousands)
Three months ended Six months ended
July 31 July 31,
------------------- -------------------
2004 2003 2004 2003
------- ------- ------- -------
Revenues $26,153 $16,836 $50,242 $30,892
Income from continuing operations 3,705 1,213 7,227 1,003
Mineral exploration revenues increased 55.3% to $26,153,000 and 62.6% to
$50,242,000 for the three and six months ended July 31, 2004 compared to
revenues of $16,836,000 and $30,892,000 for the three and six months ended July
31, 2003. The increase for the periods was primarily the result of increased
exploration activity in the Company's markets due to higher gold and base metal
prices. Additionally, increases in Africa were partially the result of capacity
from the purchase of DrillCorp assets late in fiscal 2004.
Income from continuing operations for the mineral exploration division was
$3,705,000 for the three months ended July 31, 2004 and $7,227,000 for the six
months ended July 31, 2004, compared to $1,213,000 and $1,003,000 for the three
and six months ended July 31, 2003. The improved earnings in the division were
primarily attributable to the increased activity levels noted above and improved
earnings by the Company's Latin American affiliates. In addition, in the prior
year, the Company incurred increased expenses in Australia to bring equipment
into compliance with changes to local transportation regulations.
GEOCONSTRUCTION DIVISION
(in thousands)
Three months ended Six months ended
July 31 July 31,
------------------ -------------------
2004 2003 2004 2003
------- ------- ------- -------
Revenues $10,949 $8,221 $17,039 $14,352
Income from continuing operations 1,654 1,068 1,519 1,272
Geoconstruction revenues increased 33.2% to $10,949,000 and 18.7% to $17,039,000
for the three and six months ended July 31, 2004 compared to $8,221,000 and
$14,352,000 for the three and six months ended July 31, 2003. The increases in
revenues were primarily attributable to certain large domestic projects and
increased product sales by the Company's manufacturing unit in Italy.
Income from continuing operations for the geoconstruction division increased
54.9% to $1,654,000 for the three months ended July 31, 2004, and 19.4% to
$1,519,000 for the six months ended July 31, 2004 compared to $1,068,000 and
$1,272,000 for the three and six months ended July 31, 2003. The increases in
income from continuing operations were primarily the result of the incremental
earnings impact from increases in revenues.
18
ENERGY DIVISION
(in thousands)
Three months ended Six months ended
July 31 July 31,
-------------------- --------------------
2004 2003 2004 2003
------- ----- ------- -------
Revenues $ 1,166 $ 524 $ 1,913 $ 1,313
Loss from continuing operations (1) (176) (1,019) (546)
Energy revenues increased 122.5% to $1,166,000 and 45.7% to 1,913,000 for the
three and six months ended July 31, 2004, compared to revenues of $524,000 and
$1,313,000 for the three and six months ended July 31, 2003. Increased
production from the Company's CBM projects resulted in the increases in revenues
for the three and six months ended July 31, 2004 compared to the same periods
last year.
Losses from continuing operations for the energy division were $1,000 and
$1,019,000 for the three and six months ended July 31, 2004 compared to $176,000
and $546,000 for the three and six months ended July 31, 2003. The loss for the
three months ended July 31, 2004 included a gain on the sale of exploration
equipment of approximately $906,000. Excluding the gain, the loss from
continuing operations would have been $907,000 and $1,925,000 for the three and
six months ended July 31, 2004, respectively, and was primarily a result of
increased expenses associated with exploration and development activity and a
slow first half of the year in the division's energy service businesses.
Unallocated corporate expenses decreased to $3,424,000 for the three months
ended July 31, 2004 and increased to $6,065,000 for the six months ended July
31, 2004 compared to $3,741,000 and $6,016,000 for the three and six months
ended July 31, 2003. Excluding severance-related costs of approximately $800,000
included in the second quarter of fiscal 2004, the increases for both the three
and six month periods were primarily due to incremental costs of approximately
$650,000 for the implementation of Sarbanes-Oxley requirements and higher
travel-related expenses.
19
Operating segment revenues and income from continuing operations are summarized
as follows (in thousands):
Three Months Six Months
Ended July 31, Ended July 31,
---------------------- -----------------------
2004 2003 2004 2003
-------- -------- --------- ---------
Revenues
Water resources $ 47,918 $ 44,607 $ 93,201 $ 83,376
Mineral exploration 26,153 16,836 50,242 30,892
Geoconstruction 10,949 8,221 17,039 14,352
Energy 1,166 524 1,913 1,313
-------- -------- --------- ---------
Total revenues $ 86,186 $ 70,188 $ 162,395 $ 129,933
======== ======== ========= =========
Income (loss) from
continuing operations
Water resources $ 6,299 $ 4,807 $ 10,330 $ 9,510
Mineral exploration 3,705 1,213 7,227 1,003
Geoconstruction 1,654 1,068 1,519 1,272
Energy (1) (176) (1,019) (546)
Unallocated corporate
expenses (3,424) (3,741) (6,065) (6,016)
Debt extinguishment costs -- (2,320) -- (2,320)
Interest (733) (672) (1,416) (1,231)
-------- -------- --------- ---------
Total income from
continuing operations $ 7,500 $ 179 $ 10,576 $ 1,672
======== ======== ========= =========
CHANGES IN FINANCIAL CONDITION
Management exercises discretion regarding the liquidity and capital resource
needs of its business segments. This includes the ability to prioritize the use
of capital and debt capacity, to determine cash management policies and to make
decisions regarding capital expenditures. The Company's primary sources of
liquidity have historically been cash from operations, supplemented by
borrowings under its credit facilities.
The Company maintains an agreement (the "Master Shelf Agreement") whereby it can
issue up to $60,000,000 in unsecured notes. The Company also holds a revolving
credit facility (the "Credit Agreement") composed of an unsecured $30,000,000
revolving facility. Borrowings under the Master Shelf and Credit Agreements were
used to refinance borrowings outstanding under the Company's previous credit
facilities. At July 31, 2004, the Company had $6,100,000 of borrowings
outstanding under the Credit Agreement and outstanding notes of $40,000,000
under the Master Shelf Agreement (see Note 3 of the Notes to Consolidated
Financial Statements). The remaining $20,000,000 of notes under the Master Shelf
Agreement are available for issuance at market rates until July 2005. Issuance
of the notes is contingent on, among other things, compliance with financial
covenants in the Master Shelf and Credit Agreements. The Company was in
compliance with its financial covenants at July 31, 2004 and expects to remain
in compliance through the foreseeable future.
The Company's working capital as of July 31, 2004 and January 31, 2004 was
$50,446,000 and $52,406,000, respectively. The decrease in working capital at
July 31, 2004 was primarily attributable to the use of available cash to fund
capital expenditures. The Company believes it will have sufficient cash from
operations and access to credit facilities to meet the Company's operating cash
requirements and to fund its budgeted capital expenditures for fiscal 2005. At
20
July 31, 2004, the Company had no material commitments outstanding for capital
assets.
Operating Activities
Cash used in operating activities, including discontinued operations, decreased
to $3,032,000 for the six months ended July 31, 2004 from $3,667,000 from the
same period last year. The cash used for operating activities for the six months
ended July 31, 2004 included $3,899,000 used in discontinued operations. This
was primarily attributable to the payment of lease termination liabilities and
closing costs related to the sale of Layne Canada, partially offset by
collection of receivables related to Layne Canada. Proceeds from the sale of
Layne Canada of approximately $16,000,000 had been received on January 31, 2004.
Cash from continuing operations increased to $867,000 for the six months ended
July 31, 2004 compared to cash used in operations of $4,741,000 for the same
period in the prior year. The increase in cash from continuing operations was
primarily a result of the improved earnings from operations for the six months
ended July 31, 2004 compared to the same period last year.
Investing Activities
The Company's capital expenditures of $16,314,000 for the six months ended July
31, 2004 were directed primarily toward the Company's expansion into coalbed
methane exploration and production, including the acquisition of a joint
interest partner's working interest for $1,000,000. The remaining capital
expenditures were directed towards expansion and upgrading of the Company's
equipment and facilities primarily in the water resources and mineral
exploration divisions.
Additionally, the Company sold certain equipment for total proceeds of
$2,371,000, which was reinvested in the Company for ongoing working capital
requirements and capital expenditures.
Financing Activities
The Company's financing activities primarily related to borrowings of $4,100,000
under the Company's revolving credit facility to fund working capital
requirements, capital expenditures and payment of $1,020,000 for the DrillCorp
promissory note.
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.
21
Our accounting policies are more fully described in Note 1 to the financial
statements, located elsewhere in this Form 10-Q and in Note 1 of our Annual
Report on Form 10-K for the year ended January 31, 2004. 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.
Other Long-lived assets - In evaluating the fair value and future benefits of
long-lived assets, including the Company's coalbed methane assets, the Company
performs 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. The Company believes at this time that the
long-lived assets' carrying values and useful lives continue to be appropriate.
Accrued Insurance Expense - The Company maintains insurance programs where it is
responsible for a certain amount of each claim up to a self-insured limit.
Estimates are recorded for health and welfare, property and casualty insurance
costs that are associated with these programs. These costs are estimated based
on actuarially determined projections of future payments under these 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.
Income Taxes - 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. Deferred tax assets are reviewed for
recoverability and valuation allowances are provided as necessary. Provision for
U.S. income taxes on undistributed earnings of foreign subsidiaries and foreign
affiliates is made only on those amounts in excess of those funds considered to
be invested indefinitely.
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
22
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 More than
Total 1 year 1-3 years 4-5 years 5 years
-------- --------- -------- --------- ---------
Contractual obligations and
other commercial commitments
Credit facilities $ 46,100 $ - $ 6,100 $ 13,333 $ 26,667
Operating leases 18,099 6,641 7,488 3,423 547
Mineral interest
Obligations 472 92 99 80 201
DrillCorp promissory note 1,800 1,440 360 - -
-------- --------- --------- --------- ---------
Total contractual cash
obligations 66,471 8,173 14,047 16,836 27,415
Standby letters of credit 10,970 10,970 - - -
Asset retirement
obligations 173 - - - 173
-------- --------- --------- --------- ---------
Total contractual
obligations and
commercial commitments $ 77,614 $ 19,143 $ 14,047 $ 16,836 $ 27,588
======== ========= ========= ========= =========
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 and foreign exchange rates giving rise to translation and
transaction gains and losses.
The Company centrally manages its debt portfolio considering overall financing
strategies and tax consequences. A description of the Company's variable rate
debt is in Note 12 of the Notes to Consolidated Financial Statements appearing
in the Company's January 31, 2004 Form 10-K. As of July 31, 2004, the
$46,100,000 of the Company's debt outstanding is fixed-rate debt. Accordingly,
an instantaneous change in interest rates of one percentage point would not
significantly impact the Company's annual interest expense.
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 and Italy. The
operations are described in Note 1 of the Notes to Consolidated Financial
Statements appearing in the Company's January 31, 2004 Form 10-K and Note 9 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. The Company also may utilize various hedge instruments, primarily
foreign currency option contracts, to manage the exposures associated with
fluctuating currency exchange rates (see Note 5 of the Notes to Consolidated
Financial Statements). As of July 31, 2004, the Company held option contracts
with an aggregate U.S. dollar notional value of $12,010,000.
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 income from continuing
23
operations for the three and six months ended July 31, 2004 and 2003. 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.
ITEM 4. Controls and Procedures
Based on an evaluation of disclosure controls and procedures for the period
ended July 31, 2004 conducted under the supervision and with the participation
of the Company's management, including the Principal Executive Officer and the
Principal Financial Officer, the Company concluded that its disclosure controls
and procedures are effective to ensure that information required to be disclosed
by the Company in reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
Based on an evaluation of internal controls conducted by management for the
period ended July 31, 2004, no significant deficiencies or material weaknesses
were identified and the Company has not made any significant changes in internal
controls or in other factors that could significantly affect internal controls
since such 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
An annual meeting of stockholders was held on June 3, 2004. Set forth
below is a brief description of each matter voted upon at the meeting and the
results of the balloting:
a) Election of J. Samuel Butler as a Class III Director to hold office
for a term expiring at the 2007 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
- ----------- ------- ------------------
11,684,845 0 297,916
b) Election of Warren G. Lichtenstein as a Class III Director to hold
office for a term expiring at the 2007 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
- ----------- ------- ------------------
11,710,136 0 272,625
c) Election of Nelson Obus as a Class III Director to hold office for a
term expiring at the 2007 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
- ----------- ------- ------------------
11,680,847 0 301,914
d) Approval of the Layne Christensen Company Amended and Restated 2002
Stock Option Plan:
For Against Withheld Authority
- ----------- ------- ------------------
6,905,078 927,600 16,684
25
e) 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, 2005:
For Against Withheld Authority
- ----------- ------- ------------------
11,939,542 42,119 1,100
ITEM 5 - Other Information
NONE
ITEM 6 - Exhibits and Reports on Form 8-K
a) Exhibits
**10(20) Layne Christensen Company 2002 Stock Option Plan (Amended and
Restated) (April 26, 2004).
**10(21) Form of Nonqualified Stock Option Agreement (2002) between the
Company and Directors of the Company effective June 3, 2004.
**10(22) Form of Incentive Stock Option Agreement (2002) between the
Company and Management of the Company effective June 3, 2004.
**10(23) Form of Nonqualified Stock Option Agreement (2002) between the
Company and Management of the Company effective June 3, 2004.
**10(24) Layne Christensen Company Deferred Compensation Plan for
Directors (Amended and Restated) April 26, 2004.
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 June 2, 2004 related to the Company's first quarter
press release.
26
* * * * * * * * * *
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: September 3, 2004 /s/ A.B. Schmitt
-----------------------------------
A.B. Schmitt, President
and Chief Executive Officer
DATE: September 3, 2004 /s/ Jerry W. Fanska
-----------------------------------
Jerry W. Fanska, Vice President
Finance and Treasurer
27