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 April 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _______
------------
Commission File Number 33-48432
Layne Christensen Company
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 48-0920712
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1900 Shawnee Mission Parkway, Mission Woods, Kansas 66205
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (913) 362-0510
Not Applicable
- ----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]. No [ ] .
There were 11,707,694 shares of common stock, $.01 par value per share,
outstanding on May 23, 2002.
PART I
ITEM 1. Financial Statements
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
April 30, January 31,
2002 2002
------ ------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,460 $ 2,983
Customer receivables, less allowance
of $3,812 and $3,596, respectively 51,990 43,603
Costs and estimated earnings in excess of
billings on uncompleted contracts 12,733 11,912
Inventories 20,623 21,885
Deferred income taxes 11,415 10,181
Income taxes receivable 1,029 3,074
Other 2,657 2,738
------------ ------------
Total current assets 103,907 96,376
------------ ------------
Property and equipment:
Land 7,989 8,163
Buildings 16,322 16,112
Machinery and equipment 162,343 162,967
------------ ------------
186,654 187,242
Less - Accumulated depreciation (129,948) (128,460)
------------ ------------
Net property and equipment 56,706 58,782
------------ ------------
Other assets:
Investment in foreign affiliates 19,444 19,504
Goodwill and other intangible assets,
at cost less accumulated amortization 23,178 22,284
Deferred income taxes 3,334 4,270
Other 1,241 1,126
------------ ------------
Total other assets 47,197 47,184
------------ ------------
$ 207,810 $ 202,342
============ ============
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)
April 30, January 31,
2002 2002
-------- --------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,880 $ 16,762
Current maturities of long-term debt 27,571 20,071
Accrued compensation 10,321 14,785
Accrued insurance expense 6,974 5,794
Other accrued expenses 9,796 10,983
Income taxes payable 5,355 4,049
Billings in excess of costs and estimated
earnings on uncompleted contracts 10,624 8,419
------------ ------------
Total current liabilities 89,521 80,863
------------ ------------
Noncurrent and deferred liabilities:
Long-term debt 10,714 14,286
Accrued insurance expense 5,829 6,358
Other 3,915 4,287
Minority interest 727 656
------------ ------------
Total noncurrent and deferred liabilities 21,185 25,587
------------ ------------
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, 11,707,694 shares issued
and outstanding 117 117
Capital in excess of par value 83,603 83,605
Retained earnings 24,553 24,302
Accumulated other comprehensive loss (11,124) (12,027)
Notes receivable from management stockholders (45) (105)
------------ ------------
Total stockholders' equity 97,104 95,892
------------ ------------
$ 207,810 $ 202,342
============ ============
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
Ended April 30,
(unaudited)
--------------------------------------
2002 2001
--------------- ---------------
Revenues $ 71,842 $ 79,832
Cost of revenues (exclusive of depreciation
shown below) 52,293 58,936
--------------- ---------------
Gross profit 19,549 20,896
Selling, general and administrative expenses 14,600 14,061
Depreciation and amortization 3,876 4,885
--------------- ---------------
Operating income 1,073 1,950
Other income (expense):
Equity in earnings (losses) of foreign
affiliates 272 (299)
Interest (601) (1,275)
Other, net (51) 436
--------------- ---------------
Income before income taxes 693 812
Income tax expense 409 569
Minority interest, net of income taxes (33) (81)
--------------- ---------------
Net income $ 251 $ 162
=============== ===============
Basic and diluted income per share $ 0.02 $ 0.01
=============== ===============
Weighted average shares outstanding 11,758,000 11,758,000
Dilutive stock options 409,000 120,000
--------------- ---------------
12,167,000 11,878,000
=============== ===============
See Notes to Consolidated Financial Statements.
4
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
Three Months
Ended April 30,
(unaudited)
--------------------------------------
2002 2001
------------ ------------
Cash flow from operating activities:
Net income $ 251 $ 162
Adjustments to reconcile net income to cash
from operations:
Depreciation and amortization 3,876 4,885
Deferred income taxes (896) 60
Equity in (earnings) losses of foreign affiliates (272) 299
Dividends received from foreign affiliates 333 221
Minority interest (33) 125
(Gain) loss from disposal of property and equipment (129) 56
Changes in current assets and liabilities:
Increase in customer receivables (8,252) (4,168)
Increase in costs and estimated earnings in
excess of billings on uncompleted contracts (810) (922)
Increase in inventories (117) (374)
Decrease in other current assets 1,765 962
Decrease in accounts payable and accrued expenses (646) (1,611)
Increase in billings in excess of costs and
estimated earnings on uncompleted contracts 2,198 1,106
Other, net (791) (1,213)
------------ ------------
Cash used in operating activities (3,523) (412)
------------ ------------
Cash flow from investing activities:
Additions to property and equipment (1,973) (2,438)
Proceeds from disposal of property and equipment 431 377
Proceeds from sale of business 1,800 --
------------ ------------
Cash from (used in) investing activities 258 (2,061)
------------ ------------
Cash flow from financing activities:
Net borrowings under revolving facility 7,500 6,500
Repayment of long-term debt (3,572) (3,571)
Payments on notes receivable from management
stockholders 60 11
------------ ------------
Cash from financing activities 3,988 2,940
------------ ------------
Effects of exchange rate changes on cash (246) 320
------------ ------------
Net increase in cash and cash equivalents 477 787
Cash and cash equivalents at beginning of period 2,983 3,421
------------ ------------
Cash and cash equivalents at end of period $ 3,460 $ 4,208
============ ============
See Notes to Consolidated Financial Statements.
5
LAYNE CHRISTENSEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies and Basis of Presentation
The consolidated financial statements include the accounts of Layne Christensen
Company and its subsidiaries (together, the "Company"). All significant
intercompany transactions have been eliminated. Investments in affiliates (33%
to 50% owned) in which the Company exercises influence over operating and
financial policies are accounted for on the equity method. The unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements of the Company for the year ended January 31,
2002 as filed in its Annual Report on Form 10-K.
The accompanying unaudited consolidated financial statements include all
adjustments (consisting only of normal recurring accruals) which, in the opinion
of management, are necessary for a fair presentation of financial position,
results of operations and cash flows. Results of operations for interim periods
are not necessarily indicative of results to be expected for a full year.
Revenue is recognized on large, long-term contracts using the percentage of
completion method based upon materials installed and labor costs incurred.
Changes in job performance, job conditions, and estimated profitability,
including those arising from contract penalty provisions, and final contract
settlements may result in revisions to costs and income and are recognized in
the period in which the revisions are determined. Revenue is recognized on
smaller, short-term contracts using the completed contract method. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined.
Income taxes are provided using the asset/liability method, in which deferred
taxes are recognized for the tax consequences of temporary differences between
the financial statement carrying amounts and tax bases of existing assets and
liabilities. The effective tax rate in excess of the statutory federal rate for
the three months ended April 30, 2002 and 2001 was a result of the impact of
non-deductible expenses and the tax treatment of certain foreign operations.
Earnings per share are based upon the weighted average number of common and
dilutive equivalent shares outstanding. Options to purchase common stock are
included based on the treasury stock method for dilutive earnings per share,
except when their effect is antidilutive.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
142, Goodwill and Other Intangible Assets, and SFAS NO. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, effective February 1, 2002. The
adoption of SFAS No. 142 resulted in the Company ceasing to amortize goodwill,
the expense of which totaled $282,000 for the three months ended April 30, 2001.
Management is in the process of completing the initial impairment assessment
required by SFAS No. 142. The adoption of SFAS No. 144 did not have a
significant impact on the financial position, results of operations, or cash
flow of the Company.
6
The amounts (refunded) paid for income taxes and interest are as follows (in
thousands):
Three Months Ended April 30,
----------------------------
2002 2001
------ ------
Income taxes (2,111) $ 146
Interest 831 1,891
Reclassifications - Certain 2001 amounts have been reclassified to conform with
the 2002 presentation.
2. Inventories
The Company values inventories at the lower of cost (first-in, first-out) or
market (in thousands):
As of
-----------------------------------
April 30, January 31,
2002 2002
---------- --------
Raw materials $ 262 $ 275
Work in process 66 541
Finished products, parts and supplies 20,295 21,069
---------- ----------
Total $ 20,623 $ 21,885
========== ==========
3. Indebtedness
During July 1997, the Company amended its existing credit agreement to provide
a reducing revolving credit facility ("Credit Agreement"). As of April 30,
2002, the commitment had been reduced to $53,500,000, less any outstanding
letter of credit commitments ($20,000,000 sublimit). The Company's Credit
Agreement will terminate in July 2002 and any borrowings thereunder will mature
at that time. During March 1996, the Company completed the private placement of
an unsecured note agreement for $25,000,000 ("Senior Notes"). The Senior Notes
bear a fixed interest rate of 6.75% and are due in annual installments of
$3,571,000, which began on March 15, 2000.
In July 2001, outstanding borrowings under the Credit Agreement were
reclassified as current liabilities as the agreement will expire on July 31,
2002. The Company intends to negotiate a new credit agreement prior to that
time. Debt outstanding as of April 30 and January 31, 2002 was as follows (in
thousands):
April 30, January 31,
2002 2002
------------ ------------
Current maturities of long-term debt:
Senior notes $ 3,571 $ 3,571
Revolving credit facility 24,000 16,500
------------ ------------
Total current maturities of long-term debt 27,571 20,071
------------ ------------
Long-term debt:
Senior notes 10,714 14,286
------------ ------------
Total long-term debt 10,714 14,286
------------ ------------
Total debt $ 38,285 $ 34,357
============ ============
7
4. Other Comprehensive Income (Loss)
Components of other comprehensive income (loss) are summarized as follows (in
thousands):
Three Months
Ended April 30,
---------------------------------------
2002 2001
------------ -------------
Net income $ 251 $ 162
Other comprehensive income (loss), net of taxes;
Foreign currency translation adjustments 938 (896)
Unrealized loss on available for sale
investments (35) (272)
Change in unrecognized pension liability -- 1
------------ ------------
Other comprehensive income (loss) $ 1,154 $ (1,005)
============ ============
The components of accumulated other comprehensive loss for the three months
ended April 30, 2002 are as follows (in thousands):
Accumulated
Cumulative Unrealized Unrecognized Other
Translation Loss On Pension Comprehensive
Adjustment Investments Liability Loss
----------- ----------- ------------ ----------
Balance, February 1, 2002 $ (10,992) $ (45) $ (990) $ (12,027)
Period Change 938 (35) -- 903
----------- ----------- ----------- -----------
Balance, April 30, 2002 $ (10,054) $ (80) $ (990) $ (11,124)
=========== =========== =========== ===========
5. Operating Segments
The Company is a multinational company which provides sophisticated services and
related products to a variety of markets. The Company is organized into discrete
divisions based on its primary product lines. The Company's reportable segments
are defined as follows:
Water Resources Division
This division provides a full line of water-related services and products
including hydrological studies, site selection, well design, drilling and well
development, pump installation, and repair and maintenance. The division's
offerings include large diameter Ranney(R) collector wells, design and
construction of water treatment facilities, and the manufacture and sale of
products to treat volatile inorganics in groundwater. The division also offers
environmental services to assess and monitor groundwater contaminants.
Mineral Exploration Division
This division provides a complete range of drilling services for the mineral
exploration industry. Its aboveground and underground drilling activities
include all phases of core drilling, diamond, reverse circulation, dual tube,
hammer and rotary air-blast methods.
8
Geoconstruction Services Division
This division focuses on services that improve soil stability, primarily jet
grouting, grouting, vibratory ground improvement and ground-freezing services.
The division also manufactures a line of high-pressure pumping equipment used in
grouting operations and geotechnical drilling rigs used for directional
drilling.
Energy Services and Production Division
This division offers a variety of specialized services including shallow gas and
tar sands exploration drilling, conventional oilfield fishing services, coil
tubing fishing services, resonance technology solutions for stuck tubulars and
land-based oil and gas search and development.
Products and Other
This grouping includes the Company's supply operation which distributes drilling
equipment, parts and supplies and other miscellaneous operations which do not
fall into the above divisions. Historically, it has also included a
manufacturing operation producing diamond drilling rigs, diamond bits, core
barrels and drill rods ("Christensen Products"). On August 8, 2001, the Company
sold its Christensen Products business to a subsidiary of Atlas Copco.
Revenues and operating income pertaining to the Company's operating segments are
presented below. Intersegment sales are accounted for based on the estimated
fair market value of the products sold or services provided. The Corporate
operating loss consists of unallocated corporate expenses, primarily general and
administrative functions and incentive compensation. Operating segment revenues
and operating income are summarized as follows (in thousands):
Three Months
Ended April 30,
---------------------------------------
2002 2001
------------ --------------
Revenues
Water resources $ 42,278 $ 40,226
Mineral exploration 12,904 16,103
Geoconstruction services 8,415 8,540
Energy services and production 5,502 9,486
Products and other 3,637 7,869
Intersegment products
and supply revenues (894) (2,392)
------------ ------------
Total revenues $ 71,842 $ 79,832
============ ============
Operating income(loss)
Water resources $ 5,863 $ 5,236
Mineral exploration (566) (1,078)
Geoconstruction services 1,364 1,055
Energy services and production (959) 737
Products and other (472) 12
Corporate (4,157) (4,012)
------------ ------------
Total operating income $ 1,073 $ 1,950
============ ============
9
Three Months
Ended April 30,
--------------------------------------
2002 2001
---------- ------------
Geographic Information:
Revenues
North America $ 61,025 $ 68,188
Africa/Australia 9,358 10,781
Other foreign 1,459 863
------------ ------------
Total revenues $ 71,842 $ 79,832
============ ============
On August 8, 2001, the Company signed a definitive agreement to sell its
Christensen Products business to a subsidiary of Atlas Copco. The Company
received $8,165,000 in the third quarter of last year and recorded a gain on the
sale of $3,991,000. As part of the definitive agreement, the Company agreed to
repurchase certain inventory items that remain unsold by Atlas Copco as of
August 8, 2002. The repurchase obligation of approximately $1,600,000 was
recorded in connection with the sale. Approximately $1,800,000 in additional
cash was received on February 1, 2002 upon the sale of certain assets and
inventory at book value. The Company intends to sell the land and building which
have a net book value of $3,361,000 at April 30, 2002.
Products and other segment revenues for the three months ended April 30, 2002,
and 2001, respectively, include $561,000 and $3,282,000 of revenue from
Christensen Products. Intersegment revenues for the three months ended April 30,
2002 and 2001, respectively, include $106,000 and $1,443,000 from Christensen
Products. Products and other segment operating income (loss) for the three
months ended April 30, 2002 and 2001, respectively, includes ($325,000) and
$105,000 from Christensen Products. Amounts related to Christensen Products for
the three months ended April 30, 2002 were primarily the result of residual
manufacturing orders completed during the period and increased costs associated
with a longer than expected closing of the Christensen Products plant.
Operating income for the three months ended April 30, 2002 and 2001,
respectively, includes $595,000 and $17,000 of expenses related to the Company's
oil and gas exploration activities in the Gulf of Mexico region of the United
States.
6. 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
10
may result in the Company being named as a defendant in lawsuits asserting large
claims. Although the Company maintains insurance protection that it considers
economically prudent, there can be no assurance that any such insurance will be
sufficient or effective under all circumstances or against all claims or hazards
to which the Company may be subject or that the Company will be able to continue
to obtain such insurance protection. A successful claim for damage resulting
from a hazard for which the Company is not fully insured could have a material
adverse effect on the Company. In addition, the Company does not maintain
political risk insurance or business interruption insurance with respect to its
foreign operations.
The Company is involved in various matters of litigation, claims and disputes
which have arisen in the ordinary course of the Company's business. While the
resolution of any of these matters may have an impact on the financial results
for the period in which the matter is resolved, the Company believes that the
ultimate disposition of these matters will not, in the aggregate, have a
material adverse effect upon its business or consolidated financial position,
results of operations or cash flows.
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Cautionary Language Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934.
Such statements are indicated by words or phrases such as "anticipate,"
"estimate," "project," "believe," "intend," "expect," "plan" and similar words
or phrases. Such statements are based on current expectations and are subject to
certain risks, uncertainties and assumptions, including but not limited to
prevailing prices for various metals, unanticipated slowdowns in the Company's
major markets, the impact of competition, the effectiveness of operational
changes expected to increase efficiency and productivity, worldwide economic and
political conditions and foreign currency fluctuations that may affect worldwide
results of operations. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially and adversely from those anticipated, estimated or
projected. These forward-looking statements are made as of the date of this
filing, and the Company assumes no obligation to update such forward-looking
statements or to update the reasons why actual results could differ materially
from those anticipated in such forward-looking statements.
Demand for the Company's mineral exploration drilling services and products
depends upon the level of mineral exploration and development activities
conducted by mining companies, particularly with respect to gold and copper.
Mineral exploration is highly speculative and is influenced by a variety of
factors, including the prevailing prices for various metals that often fluctuate
widely. In this connection, the decline in the prices of various metals has
continued to adversely impact the level of mineral exploration and development
activities conducted by mining companies and has had, and could continue to
have, a material adverse effect on the Company.
11
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.
Three Months
Ended
April 30, Period-to-Period
--------------------- Change
2002 2001 Three Months
---- ---- --------------
Revenues:
Water resources 58.8% 50.4% 5.1%
Mineral exploration 18.0 20.2 (19.9)
Geoconstruction services 11.7 10.7 (1.5)
Energy services and production 7.7 11.9 (42.0)
Products and other 3.8 6.8 (49.9)
----- -----
Total net revenues 100.0% 100.0% (10.0)
===== =====
Cost of revenues 72.8 73.8 (11.3)
----- -----
Gross profit 27.2 26.2 (6.4)
Selling, general and administrative
expenses 20.3 17.6 3.8
Depreciation and amortization 5.4 6.1 (20.7)
----- -----
Operating income 1.5 2.5 (45.0)
Other income (expense):
Equity in earnings (losses) of
foreign affiliates 0.4 (0.4) *
Interest (0.8) (1.6) (52.9)
Other, net (0.1) 0.5 *
----- -----
Income before income taxes and
minority interest 1.0 1.0 (14.7)
Income tax expense 0.6 0.7 (28.1)
Minority interest, net of income taxes -- (0.1) *
----- -----
Net income 0.4% 0.2% 54.9%
===== =====
- ----------------------------
* Not meaningful.
Results of Operations
- ---------------------
Revenues for the three months ended April 30, 2002 decreased $7,990,000, or
10.0%, to $71,842,000 compared to $79,832,000 the same period last year. See
further discussion of results of operations by division below.
Gross profit as a percentage of revenues was 27.2% for the three months ended
April 30, 2002 compared to 26.2% for the three months ended April 30, 2001. The
increase in gross profit was primarily attributable to improved pricing and
margins at the Company's domestic water locations.
Selling, general and administrative expenses increased to $14,600,000 for the
three months ended April 30, 2002 compared to $14,061,000 for the three months
ended April 30, 2001. The increase was primarily a result of start-up expenses
12
related to Layne Water Development and Storage and the Company's coalbed methane
business development activities.
Depreciation and amortization decreased to $3,876,000 for the three months ended
April 30, 2002 compared to $4,885,000 for the same period last year. The
decrease in depreciation and amortization was the result of reduced asset values
associated with the purchase method of accounting for the remaining 50% interest
in West African Drilling Services ("WADS"). The decrease is also partially
attributable to the Company ceasing to amortize goodwill upon adoption of
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets".
Interest expense decreased to $601,000 for the three months ended April 30, 2002
compared to $1,275,000 for the three months ended April 30, 2001. The decrease
was primarily a result of decreases in the Company's average borrowings and in
interest rates for the period.
Income tax expense of $409,000 was recorded for the three months ended April 30,
2002, compared to $569,000 for the same period last year. The effective rate in
excess of the statutory federal rate for the periods was a result of the impact
of nondeductible expenses and the tax treatment of certain foreign operations.
WATER RESOURCES DIVISION
(in thousands)
Three months ended
April 30,
2002 2001
---- ----
Revenues $42,278 $40,226
Operating income 5,863 5,236
Water resources revenue increased 5.1% to $42,278,000 from $40,226,000 for the
three months ended April 30, 2002 and 2001. The increase in revenue was
primarily attributable to increased demand for the Company's services due to
drought conditions and increased infrastructure needs created by population
growth in the western United States.
Operating income for the water resources division increased 12.0% to $5,863,000
for the three months ended April 30, 2002, compared to $5,236,000 for the three
months ended April 30, 2001. The increase in operating income was primarily
attributable to improved pricing and margins at the Company's domestic water
supply locations.
MINERAL EXPLORATION DIVISION
(in thousands)
Three months ended
April 30,
2002 2001
---- ----
Revenues $12,904 $16,103
Operating loss (566) (1,078)
13
Mineral exploration revenues decreased 19.9% to $12,904,000 from $16,103,000 for
the three months ended April 30, 2002 and 2001. The decrease in revenue was
primarily a result of continued softness in most exploration markets served by
the Company.
The operating loss for the mineral exploration division was $566,000 for the
three months ended April 30, 2002, compared to an operating loss of $1,078,000
for the three months ended April 30, 2001. The reduced loss in the division was
primarily the result of improved margins and reduced depreciation expenses
attributable to the WADS purchase and the result of ceasing to amortize goodwill
upon adoption of SFAS No. 142.
GEOCONSTRUCTION SERVICES DIVISION
(in thousands)
Three months ended
April 30,
2002 2001
---- ----
Revenues $8,415 $8,540
Operating income 1,364 1,055
Geoconstruction services revenues were essentially flat at $8,415,000 for the
three months ended April 30, 2002, compared to $8,540,000 for the three months
ended April 30, 2001.
The geoconstruction services division had operating income of $1,364,000 for the
three months ended April 30, 2002, compared to $1,055,000 for the three months
ended April 30, 2001. The increase in operating income was primarily
attributable to cost reduction measures implemented late in fiscal 2002.
ENERGY SERVICES AND PRODUCTION DIVISION
(in thousands)
Three months ended
April 30,
2002 2001
---- ----
Revenues $5,502 $9,486
Operating income (loss) (959) 737
Energy services revenues decreased 42.0% to $5,502,000 for the three months
ended April 30, 2002, compared to revenues of $9,486,000 for the three months
ended April 30, 2001. The decrease was primarily the result of decreased
exploration activity due to unusually warm temperatures during the Canadian
drilling season and depressed market conditions in the Gulf of Mexico region of
the United States.
The operating loss for the energy services and production division was $959,000
for the three months ended April 30, 2002, compared to operating income of
$737,000 for the three months ended April 30, 2001. The decrease in operating
profit was the result of expenses related to the Company's oil and gas
exploration activities, the Company's coalbed methane business development
efforts, start-up expenses for a new service location in Louisiana and reduced
profit in Canada associated with lower volume.
14
PRODUCTS AND OTHER
(in thousands)
Three months ended
April 30,
2002 2001
---- ----
Revenues $2,743 $5,477
Operating income (loss) (472) 12
Products and other sales decreased 49.9% to $2,743,000 for the three months
ended April 30, 2002, compared to $5,477,000 for the three months ended April
30, 2001. The decrease in sales was primarily the result of the sale of
Christensen Products to a subsidiary of Atlas Copco in the third quarter of last
year.
Operating loss for products and other was $472,000 for the three months ended
April 30, 2002, compared to operating income of $12,000 for the three months
ended April 30, 2001. The operating loss was primarily the result of costs
associated with the longer than expected closing of the Christensen Products
plant.
Changes in Financial Condition
- ------------------------------
Cash used in operations was $3,523,000 for the three months ended April 30, 2002
compared to $412,000 used for the same period last year. The increase in cash
used in operations is primarily attributable to increased working capital
requirements during the period which were funded by borrowings under the
Company's available credit agreement.
The Company believes that borrowings from its available credit agreement and
cash from operations will be sufficient for the Company's seasonal cash
requirements and to fund its budgeted capital expenditures for at least 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 judgements, 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 judgements about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Our accounting policies are more fully described in Note 1 to the financial
statements, located elsewhere in this Form 10-Q and in our Annual Report on Form
15
10-K for the year ended January 31, 2002. We believe that the following
represent our more critical estimates and assumptions used in the preparation of
our consolidated financial statements, although not all inclusive.
Revenue Recognition - Revenue is recognized on large, long-term contracts using
the percentage of completion method based upon materials installed and labor
costs incurred. Changes in job performance, job conditions and estimated
profitability, including those arising from contract penalty provisions, and
final contract settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined.
Goodwill and Other Intangibles - In June 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," which is effective for the Company as of
February 1, 2002. SFAS No. 142 substantially changes the accounting for
goodwill, requiring that goodwill and other intangible assets with indefinite
useful lives no longer be amortized, but instead periodically be tested for
impairment. This statement also requires that within six months of adoption,
goodwill be tested for impairment at the reporting unit level as of the date of
adoption. If any impairment is indicated to have existed upon adoption, it
should be measured and recorded before the end of the year of adoption. SFAS No.
142 requires that any goodwill impairment loss recognized as a result of initial
application be reported as a change in accounting principle, and that the
earnings per share effect of the accounting change be separately disclosed.
As disclosed in the consolidated financial statements, the Company had goodwill
and other intangible assets in the amount of $22,284,000 at January 31, 2002.
The goodwill is primarily attributable to the Company's Mineral Exploration
Division. The process of evaluating goodwill for impairment involves the
determination of the fair value of the Company's reporting units. Inherent in
such fair value determinations are certain judgments and estimates, including
the interpretation of current economic indicators and market valuations, and
assumptions about the Company's strategic plans with regard to its operations.
To the extent additional information arises or the Company's strategies change,
it is possible that the Company's conclusion regarding goodwill impairment could
change and result in a material effect on its financial position or results of
operations. During the quarter ended April 30, 2001, the Company recorded
goodwill amortization expense of $282,000. As of February 1, 2002, the Company
ceased amortization of its goodwill. During the quarter ended April 30, 2001,
the Company recorded goodwill amortization expense of $282,000. Management is
currently assessing the additional impact of adoption of SFAS 142, however,
because of the extensive effort needed to comply with the application of SFAS
No. 142, the impairment loss, if any, related to the Company's goodwill upon
adoption of this statement cannot be estimated at this time.
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
16
the long-lived assets' carrying values and useful lives continue to be
appropriate.
Accrued Insurance Expense - We record estimates for certain health and welfare,
workers' compensation, and casualty insurance costs that are self-insured
programs. Should a greater amount of claims occur compared to what was estimated
or costs of the medical profession increase beyond what was anticipated,
reserves recorded may not be sufficient and additional costs to the consolidated
financial statements could be required.
Litigation and Other Contingencies - The Company is involved in litigation
incidental to its business, the disposition of which is expected to have no
material effect on the Company's financial position or results of operations. It
is possible, however, that future results of operations for any particular
quarterly or annual period could be materially affected by changes in the
Company's assumptions related to these proceedings. The Company accrues its best
estimate of the probable cost for the resolution of legal claims. Such estimates
are developed in consultation with outside counsel handling these matters and
are based upon a combination of litigation and settlement strategies. To the
extent additional information arises or the Company's strategies change, it is
possible that the Company's best estimate of its probable liability in these
matters may change.
The Company's contractual obligations and commercial commitments are summarized
as follows:
Payments/Expiration by Period
Less than
Total 1 year 1-3 years 4-5 years
------ -------- --------- ---------
Contractual Obligations and Other
Commercial Commitments
Debt $38,285 $27,571 $10,714 $ --
Operating leases 15,008 5,468 8,528 1,012
Ausdrill promissory note 1,800 1,200 600 --
Repurchase obligation 1,600 1,600 -- --
------- ------- ------- -------
Total contractual cash
obligations 56,693 35,839 19,842 1,012
------- ------- ------- -------
Standby letters of credit 4,981 4,981 -- --
------- ------- ------- -------
Total contractual obligations
and commercial commitments $61,674 $40,820 $19,842 $ 1,012
======= ======= ======= =======
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The principal market risks to which the Company is exposed are interest rates on
variable rate debt, equity risk on investments, and foreign exchange rates
giving rise to translation and transaction gains and losses.
The Company centrally manages its debt and investment portfolios considering
overall financing strategies and tax consequences. A description of the
Company's variable rate debt is in Note 8 to the Consolidated Financial
Statements appearing in the Company's January 31, 2002 Form 10-K. Assuming then
17
existing debt levels, an instantaneous change in interest rates of one
percentage point would impact the Company's annual interest expense by $240,000
and $165,000 at April 30, 2002 and January 31, 2002, respectively. The Company's
investments are described in Note 1 to the Consolidated Financial Statements
appearing in the Company's January 31, 2002 Form 10-K. The investments are
carried at market value and are held for long-term investing purposes rather
than trading purposes.
Operating in international markets involves exposure to possible volatile
movements in currency exchange rates. Currently, the Company's primary
international operations are in Australia, Africa, Mexico, Canada, and Italy.
The operations are described in Note 1 to the Consolidated Financial Statements
appearing in the Company's January 31, 2002 Form 10-K and Note 4 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
three months ended April 30, 2002 and 2001. This quantitative measure has
inherent limitations, as it does not take into account any governmental actions,
changes in customer purchasing patterns or changes in the Company's financing
and operating strategies.
18
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
NONE
b) Reports on Form 8-K
NONE
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* * * * * * * * * *
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: May 30, 2002 /s/A.B. Schmitt
--------------------------------
A.B. Schmitt, President
and Chief Executive Officer
DATE: May 30, 2002 /s/Jerry W. Fanska
--------------------------------
Jerry W. Fanska, Vice President
Finance and Treasurer
20