United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended January 31, 2003
[ ] 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: 0-20578
Layne Christensen Company
(Exact name of registrant as specified in its charter)
Delaware 48-0920712
--------------------------------- -----------------
State or other jurisdiction (I.R.S. Employer Identification No.)
of 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
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 126-2 of the Act. Yes [X] No [ ]
The aggregate market value of the 4,231,637 shares of Common Stock of the
registrant held by non-affiliates of the registrant on July 31, 2002, the last
business day of the registrant's second fiscal quarter, computed by reference to
the closing sale price of such stock on the NASDAQ National Market System, was
$41,173,828. The aggregate market value of the 3,955,139 shares of Common Stock
of the Registrant held by non-affiliates of the Registrant on March 20, 2003,
computed by reference to the closing sale price of such stock as reported on the
NASDAQ National Market System, was $30,256,813.
At March 20, 2003, there were 11,852,650 shares of the Registrant's Common
Stock outstanding.
Documents Incorporated by Reference
1. Portions of the following document are incorporated by reference into the
indicated parts of this report: Definitive Proxy Statement for the 2003
Annual Meeting of Stockholders to be filed with the Commission pursuant to
Regulation 14ACPart III.
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PART I
Item 1. Business
General
Layne Christensen Company (the "Company") provides drilling services and
related products and services in four principal markets: water resources,
mineral exploration, geoconstruction services and energy services and
production. Layne Christensen's customers include municipalities, industrial
companies, mining companies, oil and gas companies and consulting and
engineering firms located principally in the United States, Canada, Mexico,
Australia, Africa and South America.
The Company acquired Christensen Boyles Corporation ("CBC") in December
1995, which expanded the Company's mineral exploration drilling business
domestically and marked the Company's entry into Chile and Peru and other South
American countries through CBC's affiliated companies. As a result of this
acquisition, the Company acquired CBC's drill rig and diamond drill bit design
and manufacturing business. On August 8, 2001, the Company sold its design and
manufacturing business to a subsidiary of Atlas Copco (see Note 14 of the Notes
to Consolidated Financial Statements).
On July 25, 1997, the Company, through its wholly owned subsidiary Layne
Christensen Australia Pty Limited, consummated a tender offer to the security
holders of Stanley Mining Services Limited ("Stanley"), a company listed on the
Australian Stock Exchange. Stanley is an Australian mineral exploration company
that provides services predominantly to gold mining companies in Australia and
Africa. In October 1996, Stanley acquired 51% of Glindemann & Kitching Pty Ltd.
("G&K"), a drilling contractor based and operating in Western Australia that
specializes in diamond core exploration drilling for gold projects. On September
5, 1997, G&K repurchased the remaining 49% of G&K's outstanding stock thereby
making G&K a wholly owned subsidiary of Stanley. The acquisition by the Company
of all the outstanding capital stock of Stanley and the repurchase by G&K of all
of G&K's capital stock not previously owned by Stanley are referred to as the
"Stanley Acquisition."
On August 19, 1997, the Company completed a secondary stock offering of
5,750,000 shares of its common stock, par value $0.01 per share, 2,756,565 of
which were sold by the Company and the balance of which were sold by certain of
the Company's existing stockholders. The proceeds received by the Company from
the shares it sold were used to reduce the debt incurred in connection with the
Stanley Acquisition.
The Company maintains its executive offices at 1900 Shawnee Mission
Parkway, Mission Woods, Kansas 66205. The Company's telephone number is (913)
362-0510. The Company's web site address is www.laynechristensen.com. The
Company's periodic and current reports are available, free of charge, on our
website as soon as reasonably practicable after such material is filed with or
furnished to the Securities and Exchange Commission.
Market Overview
The principal markets in which the Company operates are: water resources,
mineral exploration, geoconstruction services, and energy services and
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production. The characteristics of each of these markets vary, particularly with
respect to the maturity and cyclicality of the market in various geographic
areas. In each of these markets, however, the purchaser of drilling services and
products generally demands technical expertise, knowledge of local geological
conditions, project management skills, access to significant amounts of capital
equipment and cost effective pricing. See Note 14 to the Consolidated Financial
Statements for certain financial information about the Company's operating
segments and its foreign operations.
Water Resources
Through its water resources division, the Company provides a full line of
water-related services and products, including hydrological studies and related
engineering services, water well design, water well drilling and development,
pump sales, installation and service, and repair and maintenance. The Company
has expanded this market to include the design and construction of water
treatment facilities and the manufacture and sale of water treatment products.
These services are marketed on a turnkey basis. In addition, the Company's
environmental services related to the assessment and monitoring of groundwater
contaminants are included within this market as are the services provided by
Layne Water Development & Storage, LLC ("LWDS"), a limited liability company
formed between the Company and Western Development & Storage, LLC on September
25, 2001. LWDS intends to pursue opportunities in the areas of risk management
and financial services for water resources, water rights, resource acquisition,
development and management.
Demand for the design and construction of water treatment facilities is
driven by the economies and efficiencies gained through the bundling of design,
build and operate services traditionally performed by independent service
providers. The Company is targeting the same customer base it has serviced in
its traditional water service businesses. The Company competes with engineering
and consulting firms in this market.
Demand for water well drilling services is driven by the need to access
groundwater, which is affected by many factors including population movements
and expansions, such as new housing developments, deteriorating water quality
and limited availability of surface water. Groundwater is a vital natural
resource that is pumped from the earth for drinking water, irrigation and
industrial use. In many parts of the United States and other parts of the world,
groundwater is the only reliable source of water. Groundwater is located in
saturated geological zones at varying depths beneath the surface and accumulates
in subsurface strata (aquifers). Surface water, the other major source of
potable water, comes principally from large lakes and rivers.
The water well drilling market is highly fragmented, consisting of several
thousand water well drilling contractors in the United States. However, the
Company believes that a substantial majority of these contractors are regionally
and locally based, and are primarily involved in drilling low volume water wells
for agricultural and residential customers, markets in which the Company does
not generally compete. The Company's target groundwater drilling market consists
of high volume water wells drilled principally for municipal and industrial
customers. These wells have more stringent design specifications and are deeper
and larger in diameter than low-volume residential and agricultural wells.
Drillers for high-volume wells must have strong technical expertise,
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expert knowledge of local geology, large drilling equipment and the ability to
procure sizable performance bonds.
The demand for well and pump repair and maintenance depends upon the age
and use of the well and pump, the quality of material and workmanship applied in
the original well installation and changes in the depth and quality of the
aquifer. Repair and rehabilitation work is often required on an emergency basis
or within a relatively short period of time after a performance decline is
recognized and is often awarded to the firm that initially drilled the well.
Scheduling flexibility, together with appropriate expertise and equipment, are
critical for a repair and maintenance service provider. Like the water well
drilling market, the market for repair and maintenance is highly fragmented. It
consists of most well drilling companies as well as firms that provide solely
repair and maintenance services.
Demand for the Company's environmental products and environmental drilling
services is driven by public concern over groundwater contamination and
resulting regulatory requirements to investigate and remediate contaminated
sites and aquifers. Environmental drilling services are utilized to assess,
investigate, monitor and improve water quality and pumping capacity. Customers
are typically national and regional consulting firms engaged by federal and
state agencies as well as industrial companies that need to assess or clean up
groundwater contamination sources.
Mineral Exploration
Demand for mineral exploration drilling is driven by the need for
identifying, defining and developing underground mineral deposits. Factors
influencing the demand for mineral-related drilling services include growth in
the economies of developing countries, international political conditions,
inflation and foreign exchange levels, commodity prices, the economic
feasibility of mineral exploration and production, the discovery rate of new
mineral reserves and the ability of mining companies to access capital for their
activities.
Important changes in the international mining industry have led to the
development and growth of mineral exploration in developing regions of the
world, including Africa, Asia and South America. At the same time, stricter
environmental permitting rules in the United States and Canada have delayed or
blocked the development of certain projects forcing mining companies to look
overseas for growth. In addition, technological advancements now allow
development of mineral resources previously regarded as uneconomical. The mining
industry has also increased its focus on these areas due to their early stage of
mining development, relative to the more mature mining regions of the world such
as the United States and South Africa.
Mining companies hire exploration drillers to extract samples from sites
that the mining companies analyze for mineral content. Mineral exploration
drilling requires a high level of expertise and technical competence because the
samples extracted must be free of contamination and accurately reflect the
underlying mineral deposit. Familiarity with the local geology is critical to
acquiring this competence. Mineral exploration drilling consists of exploratory
drilling and definitional drilling. Exploratory drilling is conducted to
determine if there is a minable mineral deposit (an orebody) on the site.
Definitional drilling is typically conducted at a site to assess whether it
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would be economical to mine. The demand for definitional drilling has increased
in recent years as new and less expensive mining techniques have made it
feasible to mine previously uneconomical orebodies.
Geoconstruction Services
Geoconstruction services are used to modify weak and unstable soils,
decrease water flow in bedrock and provide support and groundwater control for
excavation. Methods used include cement and chemical grouting, vibratory ground
improvement and ground freezing, techniques for stabilizing soils; jet grouting,
a high-pressure method for providing subsurface support; and dewatering, a
method for lowering the water table. Geoconstruction services are important
during the construction of dams, tunnels, shafts, water lines, subways and other
civil construction projects. Demand for geoconstruction services is driven
primarily by the demand for these infrastructure improvements. The customers for
these services are primarily heavy civil construction contractors, governmental
agencies, mining companies and the industrial sector. The geoconstruction
services industry is highly fragmented.
Energy Services and Production
The Company's energy operations offer drilling services to the shallow,
unconventional oil and gas market, conventional oil field fishing services, coil
tubing fishing services, resonance technology solutions for stuck tubulars and
oil and gas well workover related activities. The Company's services in these
operations are offered to oil and gas companies. The market for these services
includes both land and offshore open-hole and cased-hole activities. In
addition, these operations include land-based oil and gas exploration activities
in the Gulf of Mexico regions. These operations also include the Company's
acquisition, development, and production activities associated with natural gas
properties, primarily focusing on coalbed methane projects located in the
Midwestern United States.
Demand for oil and gas services is driven by the demand for identifying,
defining and developing underground oil and gas reserves. Factors influencing
the demand for oil and gas services include consumption levels for these
commodities, growth in the economies of developing countries, international
political conditions, commodity prices, the economic feasibility of oil and gas
exploration and production, the discovery rate of new oil and gas reserves and
the ability of oil and gas companies to access capital for their activities.
Business Strategy
The Company's growth strategy is to expand its current geographic markets
and enter into new business lines that build on the Company's core competencies.
Key elements of this strategy are as follows:
In the Water Resources Division, Expand Design, Build, Own and Operate
Services as well as Water Resource Development and Management Services
Layne Christensen believes it is currently the largest provider of water
well drilling services in the United States, operating in all regions of the
country. In addition, the Company offers many services related to water well
drilling including hydrological studies, site selection, well design, design and
construction of water treatment facilities and water treatment products. The
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Company's growth strategy is to bundle its traditional products and service
offerings and market the combination downstream to the design, build, own and
operate market for water treatment and distribution facilities. The Company
believes that by combining these services into one turnkey project, the customer
can expedite the typical design, build project and achieve economies and
efficiencies over traditional unbundled services. Through LWDS, its joint
venture, the Company intends to expand growth in the water services market
through the pursuit of opportunities related to the acquisition, development and
management of water resources.
Position Mineral Exploration for Future Growth
The Company believes that its best mineral exploration drilling
opportunities exist in Africa and South America. The Company believes that the
foreign enterprises and their local affiliates acquired through the acquisitions
of CBC and Stanley create the opportunity to expand their businesses by
leveraging their local market expertise and the Company's technical competence,
combined with access to transferable drilling equipment and employee training
and safety programs. With the additional resources and capabilities provided by
its acquisitions, the Company believes it is positioned to expand its operations
in South America and Africa once growth returns to these markets.
Expand Presence in Geoconstruction Services
In the geoconstruction services market, the Company intends to leverage its
drilling capabilities, industry contacts, reputation, project management skills
and growing geographic presence to expand this business. In particular, the
Company's strategy is to focus on relatively larger, technically demanding
projects using its grouting, jet grouting, vibratory ground improvement and
ground-freezing capabilities.
Develop Existing Coalbed Methane Opportunities and Expand Presence in Coalbed
Methane Markets
The Company expects to continue to invest in coalbed methane development
and production opportunities within the United States. The Company has the
ability to move major coalbed methane development projects forward by leveraging
its internal resources, technical expertise and experience. The Company
anticipates significant growth during the next five years based on development
agreements already in place.
Services and Products
Layne Christensen's current business is divided into four primary areas:
water resources; mineral exploration; geoconstruction services; and energy
services and production.
Overview of the Company's Drilling Techniques
The types of drilling techniques employed by the Company in its drilling
activities have different applications:
- Conventional and reverse circulation rotary rigs are used in water
well and mineral exploration drilling primarily for drilling large
diameter
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wells and employ air or drilling fluid circulation for removal of
cuttings and borehole stabilization.
- Dual tube drilling, an innovation advanced by the Company primarily
for mineral exploration and environmental drilling, conveys the drill
cuttings to the surface inside the drill pipe. This drilling method is
critical in mineral exploration drilling and environmental sampling
because it provides immediate representative samples and because the
drill cuttings do not contact the surrounding formation thus avoiding
contamination of the borehole while providing reliable, uncontaminated
samples. Because this method involves circulation of the drilling
fluid inside the casing, it is highly suitable for penetration of
underground voids or faults where traditional drilling methods would
result in the loss of circulation of the drilling fluid, thereby
preventing further penetration.
- Diamond core drilling is used in mineral exploration drilling to core
solid rock, thereby providing geologists and engineers with solid rock
samples for evaluation.
- Cable tool drilling, which requires no drilling fluid, is used
primarily in water well drilling for larger diameter wells. While
slower than other drilling methods, it is well suited for penetrating
boulders, cobble and rock.
- Auger drilling is used principally in water well and environmental
drilling for efficient completion of relatively small diameter,
shallow wells. Auger rigs are equipped with a variety of auger sizes
and soil sampling equipment.
Water Resources
The Company provides a full range of services for the design and
construction of water treatment facilities, including hydrological studies, site
selection, well field design and facilities construction and operation. In
addition to water treatment plants, these services are provided in connection
with surface water intakes, pumping stations and well houses. The Company has
the capability to design, build, own and operate the complete water supply
system. In addition, the Company offers nonrecourse financing options for these
services to its traditional municipal and industrial customers.
Drilling Services
The Company provides complete water well systems on a turnkey basis,
offering the comprehensive range of services required to provide professionally
designed, constructed and maintained municipal, industrial and, to a lesser
extent, agricultural water wells. Although it may not perform each of the
services it offers on every project, the Company has the capability to provide
every element of a water well system, including test hole drilling, well casing
and screen selection and installation, gravel packing, grout sealing, well
development and testing and pump selection, equipment sales and installation.
Layne Christensen provides water well drilling services in most regions of the
United States and in certain foreign countries.
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Water well drilling requires the integration of hydrogeology and
engineering with the techniques of well drilling because the drilling methods
and size and type of equipment depend upon the depth of the wells and the
geological formations encountered at the project site. The Company has extensive
well archives and equipment in addition to technical personnel to determine
geological conditions and aquifer characteristics in most locations in the
United States, enabling it to locate suitable water-bearing formations to meet a
wide variety of customer requirements. The Company provides feasibility studies
using complex geophysical survey methods and has the expertise to analyze the
survey results and define the source, depth and magnitude of an aquifer. It can
then estimate recharge rates, specify required well design features, plan well
field design and develop water management plans. To conduct these services, the
Company maintains a staff of professional employees including geological
engineers, geologists, hydrogeologists and geophysicists.
As part of its water well drilling and installation business, the Company
sells a wide variety of pumps manufactured by third parties, including vertical
turbine, submersible, shortcoupled and horizontal centrifugal pumps. The Company
also sells and installs water treatment equipment, which is typically installed
at or near the wellhead, including chlorinators, aerators, filters and controls.
In addition, the Company sells miscellaneous supplies manufactured by third
parties for use in the water well drilling industry, including well casing, well
screens, drill pipe and bits, drilling fluids and well cleaning supplies.
Well and Pump Repair and Maintenance
Periodic repair and maintenance of well equipment is required during the
life of a well. In locations where the groundwater contains both bacteria and
iron, screen openings may become blocked with organic growth, reducing the
capacity and productivity of the well. Similarly, groundwater with high mineral
content may cause the buildup of scale on well screens, also reducing the
capacity and productivity of the well.
The Company offers complete repair and maintenance services for existing
wells, pumps and related equipment through a network of local offices throughout
its geographic markets in the United States. In addition to its well service
rigs, the Company has equipment capable of conducting downhole closed circuit
televideo inspections (one of the most effective methods for investigating water
well problems), enabling the Company to diagnose better and respond more quickly
to well and maintenance problems.
The Company's trained and experienced personnel can perform a variety of
well rehabilitation techniques, including chemical and mechanical methods, and
can perform bacteriological well evaluation and water chemistry analysis. The
Company also has the capability and inventory to repair, in its own machine
shops, most water well pumps, regardless of manufacturer, as well as to repair
well screens, casings and related equipment such as chlorinators, aerators and
filtration systems.
Environmental Drilling
The Company offers a wide range of environmental drilling services
including: investigative drilling, installation and testing of wells that
monitor the extent of groundwater contamination, installation of recovery wells
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that extract contaminated groundwater for treatment (pump and treat remediation)
and specialized site safety programs associated with drilling at contaminated
sites. Monitoring wells are installed to determine the nature and extent of
known or suspected subsurface contamination as well as to monitor an area for
future contamination. In addition, monitoring wells are often installed
surrounding underground petroleum or chemical storage tanks to monitor for
possible future tank leaks or product spills. After monitoring and testing the
groundwater, recovery wells may be installed to extract contaminated water from
the aquifer for treatment or disposal.
In its environmental health services department, the Company employs a
full-time staff qualified to prepare site specific health and safety plans for
customers who have workers employed on hazardous waste cleanup sites as required
by the Occupation and Safety Health Administration ("OSHA") and the Mine Safety
and Health Administration of the Department of Labor ("MSHA").
Mineral Exploration
The Company provides drilling services for geological assessment, in situ
mining and mineral exploration. These services are used primarily by major gold
and copper producers based in the United States, Europe and Canada, and to a
lesser extent, iron ore producers. In response to a shift in recent years by
many of these producers to foreign markets in search of economically minable
orebodies, the Company commenced mineral exploration drilling operations in
Mexico in 1991. With its acquisition of CBC in December 1995, the Company
acquired an ownership interest in foreign affiliates operating in South America
with facilities in Chile and Peru. These affiliates work in various South
American countries, including, but not limited to, Argentina, Bolivia, Chile,
Mexico and Peru. In addition, with the Stanley Acquisition, the Company has
operations in Australia and Africa.
Geoconstruction Services
Geoconstruction services include those services provided by the Company to
the heavy civil construction market to provide ground modification for
construction work in unstable soils during the construction of dams, tunnels,
shafts and other civil construction projects. Services offered include cement
and chemical grouting, jet grouting, drain hole drilling, installation of ground
anchors, tie backs, rock bolts and instrumentation. The Company offers expertise
in selecting the appropriate support techniques to be applied in various
geological conditions. In addition, the Company has extensive experience in the
placement of measuring devices capable of monitoring water levels and ground
movement. The Company also offers artificial ground-freezing capabilities,
typically utilized as an alternative method to dewatering large diameter
excavation and tunneling projects.
Energy Services and Production
The Company provides a variety of specialized services to the oil and gas
industry through its energy services and production division. Such services
include shallow gas and tar sands exploration drilling, conventional oil field
fishing services, coil tubing fishing services, resonance technology solutions
for stuck tubulars and land-based oil and gas search and development. Beginning
with the third quarter of 2003, the Company's land-based oil and gas search and
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development activities principally focus on coalbed methane development projects
in the Midwest Region of the United States.
Operations
The Company operates on a decentralized basis, with approximately 80 sales
and operations offices located in most regions of the United States as well as
in Canada, Australia, Africa, Mexico and Italy. In addition, the Company,
through its foreign affiliates, operates out of locations in Mexico and South
America.
The Company is primarily organized around division presidents responsible
for water resources, mineral exploration, geoconstruction services, and energy
services and production. Division vice presidents are responsible for geographic
regions within each division and district managers are in charge of individual
district office profit centers. The district managers report to their respective
divisional vice president on a regular basis. Each district office employs a
field superintendent who is in charge of projects in the field and sales
engineers who are responsible for marketing the Company's services in their
district as well as for monitoring the progress of projects. The Company does
not conduct significant marketing activities for its traditional water well and
mineral exploration drilling services. Instead, the Company's sales engineers
cultivate and maintain contacts with existing and potential customers. In this
way, the Company learns of and is in a position to compete for proposed drilling
projects in the region.
In its foreign affiliates, where the Company does not have majority
ownership or operating control, day-to-day operating decisions are made by local
management. The Company's interests in its foreign affiliates are overseen by an
executive vice president. The Company manages its interests in its foreign
affiliates through regular management meetings and analysis of comprehensive
operating and financial information. For its significant foreign affiliates, the
Company has entered into shareholder agreements that give it limited board
representation rights and require super-majority votes in certain circumstances.
Customers and Contracts
Each of the Company's service and product lines has major customers;
however, no single customer accounted for 10% or more of the Company's revenues
in any of the past three fiscal years.
Generally, the Company negotiates its service contracts with industrial and
mining companies and other private entities, while its service contracts with
municipalities are generally awarded on a bid basis. The Company's contracts
vary in length depending upon the size and scope of the project. The majority of
such contracts are awarded on a fixed price basis, subject to change of
circumstance and force majeure adjustments, while a smaller portion are awarded
on a cost plus basis. Substantially all of the contracts are cancelable for,
among other reasons, the convenience of the customer.
In the water resources product line, the Company's customers are typically
municipalities and local operations of industrial businesses. Of the Company's
water resources revenues in fiscal 2003, approximately 57% were derived from
municipalities and approximately 14% were derived from industrial businesses
while the balance was derived from other customer groups. The term
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"municipalities" includes local water districts, water utilities, cities,
counties and other local governmental entities and agencies that have the
responsibility to provide water supplies to residential and commercial users. In
the drilling of new water wells, the Company targets customers that require
compliance with detailed and demanding specifications and regulations and that
often require bonding and insurance, areas in which the Company believes it has
competitive advantages due to its drilling expertise and financial resources.
Customers for the Company's mineral exploration services in the United
States, Mexico, Canada, Australia, Africa and South America are primarily gold
and copper producers. The Company's largest customers in its mineral exploration
drilling business are multi-national corporations headquartered primarily in the
United States, Europe and Canada.
In its geoconstruction services product line, the Company's customers are
primarily heavy civil construction contractors, governmental agencies, mining
companies and industrial companies. The Company often acts as a specialty
subcontractor when it provides geoconstruction services.
In its energy services line, the Company's customers are primarily oil and
gas companies that conduct exploration and production activities in Canada and
the Gulf of Mexico region. The Company expects to market its coalbed methane
production to large energy pipeline companies and local industrial customers.
Backlog
The Company's backlog consists of executed service contracts, or portions
thereof, not yet performed by the Company. The Company believes that its backlog
does not have any significance other than as a short-term business indicator
because substantially all of the contracts comprising the backlog are cancelable
for, among other reasons, the convenience of the customer. The Company's backlog
was approximately $57,198,000 at January 31, 2003, compared to approximately
$61,465,000 at January 31, 2002. The Company's backlog as of year-end is
generally completed within the following fiscal year.
Competition
The Company's competition for its water resource division's design and
build services are primarily local and national engineering and consulting firms
which have traditionally performed engineering services and, in some cases,
construction oversight for these activities.
The Company's competition in the water well drilling business consists
primarily of small, local water well drilling operations and some regional
competitors. Oil and natural gas well drillers generally do not compete in the
water well drilling business because the typical well depths are greater for oil
and gas and, to a lesser extent, the technology and equipment utilized in these
businesses are different. Only a small percentage of all companies that perform
water well drilling services have the technical competence and drilling
expertise to compete effectively for high-volume municipal and industrial
projects, which typically are more demanding than projects in the agricultural
or residential well markets. In addition, smaller companies often do not have
the financial resources or bonding capacity to compete for large projects.
However, there are no proprietary technologies or other significant factors
which prevent other firms from entering these local or regional markets or from
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consolidating together into larger companies more comparable in size to the
Company. Water well drilling work is usually obtained on a competitive bid basis
for municipalities, while work for industrial customers is obtained on a
negotiated or informal bid basis.
As is the case in the water well drilling business, the well repair and
maintenance business is characterized by a large number of relatively small
competitors. The Company believes only a small percentage of the companies
performing these services have the technical expertise necessary to diagnose
complex problems, perform many of the sophisticated rehabilitation techniques
offered by the Company or repair a wide range of pumps in their own facilities.
In addition, many of these companies have only a small number of pump service
rigs. Repair and maintenance projects are typically negotiated at the time of
repair or contracted for in advance depending upon the lead time available for
the repair work. Since pump repair and rehabilitation work is typically
negotiated on an emergency basis or within a relatively short period of time,
those companies with available rigs and the requisite expertise have a
competitive advantage by being able to respond quickly to repair requests.
In its mineral exploration division, the Company competes with a number of
drilling companies as well as vertically integrated mining companies that
conduct their own exploration drilling activities; some of these competitors
have greater capital and other resources than the Company. In the mineral
exploration drilling market, the Company competes based on price, technical
expertise and reputation. The Company believes it has a well-recognized
reputation for expertise and performance in this market. Mineral exploration
drilling work is typically performed on a negotiated basis.
The geoconstruction services market is highly fragmented as a result of the
large area served, the wide range of techniques offered and the large number and
variety of contractors. In this market, the Company competes based upon a
combination of reputation, innovation and price.
In the energy services market, Layne Christensen competes with a number of
oil and gas service companies, many of which have greater capital and other
resources than the Company. The Company competes in this market based on quality
of service, technology, responsiveness and, to a lesser extent, price. The
Company's primary competitors in this market are Baker Hughes, Inc., Weatherford
International and Smith International, Inc. In the energy production market,
principally coalbed methane gas, the Company competes with many energy
production companies.
Employees and Training
At January 31, 2003, the Company had 2,414 employees, 165 of whom were
members of collective bargaining units represented by locals affiliated with
major labor unions in the United States. The Company believes that its
relationship with its employees is satisfactory.
In all of the Company's service lines, an important competitive factor is
technical expertise. As a result, the Company emphasizes the training and
development of its personnel. Periodic technical training is provided for senior
field employees covering such areas as pump installation, drilling technology
and electrical troubleshooting. In addition, the Company emphasizes strict
adherence to all health and safety requirements and offers incentive pay
12
based upon achievement of specified safety goals. This emphasis encompasses
developing site-specific safety plans, ensuring regulatory compliance and
training employees in regulatory compliance and good safety practices. Training
includes an OSHA-mandated 40-hour hazardous waste and emergency response
training course as well as the required annual eight-hour updates. The Company
has an environmental health sciences staff which allows it to offer such
training in-house. This staff also prepares health and safety plans for specific
sites and provides input and analysis for the health and safety plans prepared
by others.
On average, the Company's field supervisors and drillers have 19 and 14
years, respectively, of experience with the Company. Many of the Company's
professional employees have advanced academic backgrounds in agricultural,
chemical, civil, industrial, geological and mechanical engineering, geology,
geophysics and metallurgy. The Company believes that its size and reputation
allow it to compete effectively for highly qualified professionals.
Regulatory and Environmental Matters
The services provided by the Company are subject to various licensing,
permitting, approval and reporting requirements imposed by federal, state, local
and foreign laws. Its operations are subject to inspection and regulation by
various governmental agencies, including the Department of Transportation, OSHA
and MSHA in the United States as well as their counterparts in foreign
countries. In addition, the Company's activities are subject to regulation under
various environmental laws regarding emissions to air, discharges to water and
management of wastes and hazardous substances. To the extent the Company fails
to comply with these various regulations, it could be subject to monetary fines,
suspension of operations and other penalties. In addition, these and other laws
and regulations affect the Company's mineral drilling services and influence
their determination whether to conduct mineral exploration and development.
Many localities require well operating licenses which typically specify
that wells be constructed in accordance with applicable regulations. Various
state, local and foreign laws require that water wells and monitoring wells be
installed by licensed well drillers. The Company maintains well drilling and
contractor's licenses in those jurisdictions in which it operates and in which
such licenses are required. In addition, the Company employs licensed engineers,
geologists and other professionals necessary to the conduct of its business. In
those circumstances in which the Company does not have a required professional
license, it subcontracts that portion of the work to a firm employing the
necessary professionals.
Potential Liability and Insurance
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
13
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. For example, the
Company could be held responsible for contamination caused by an accident which
occurs as a result of the Company drilling through a contaminated water source
and creating a channel through which the contaminants migrate to an
uncontaminated water source. Litigation arising from any such occurrences may
result in the Company's 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 or 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.
Applicable Legislation
There are a number of complex foreign, federal, state and local
environmental laws which impact the demand for the Company's mining and
environmental drilling services. For example, under Environmental Protection
Agency regulations and comparable state laws, the potential liability of real
property buyers and lenders secured by real property for the cost of responding
to past or present release of hazardous substances at or from that property has
prompted a widespread practice of phased environmental audits as a condition to
the sale and financing of real estate. These audits may include soil and
groundwater testing to determine the nature and extent of contamination that may
impact the value of the property or give rise to liability for the new owner. A
change in these laws, or changes in governmental policies regarding the funding,
implementation or enforcement of the laws, could have a material adverse effect
on the Company.
Item 2. Properties and Equipment
The Company's corporate headquarters are located in Mission Woods, Kansas
(a suburb of Kansas City, Missouri), in approximately 41,000 square feet of
office space leased by the Company pursuant to a written lease agreement which
expires December 31, 2008.
As of January 31, 2003, the Company (excluding foreign affiliates) owned or
leased approximately 570 drill and well service rigs throughout the world, a
substantial majority of which were located in the United States. This includes
rigs used primarily in each of its service lines as well as multi-purpose rigs.
In addition, as of January 31, 2003, the Company's foreign affiliates owned or
leased approximately 110 drill rigs.
14
Item 3. Legal Proceedings
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 on the Company's business or consolidated financial
position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the stockholders of the Company
during the last quarter of the fiscal year ended January 31, 2003.
Item 4A. Executive Officers of the Registrant
Executive officers of the Company are appointed by the Board of Directors
or the President for such terms as shall be determined from time to time by the
Board or the President, and serve until their respective successors are selected
and qualified or until their respective earlier death, retirement, resignation
or removal.
Set forth below are the name, age and position of each executive officer of
the Company.
Name Age Position
---- --- --------
Andrew B. Schmitt 54 President, Chief Executive Officer and
Director
H. Edward Coleman 65 Executive Vice President
Norman E. Mehlhorn 62 Executive Vice President
Gregory F. Aluce 47 Senior Vice President and Division
President - Water Resources
Eric R. Despain 54 Senior Vice President and Division
President - Mineral Exploration
Steven F. Crooke 46 Vice President, Secretary and General
Counsel
Jerry W. Fanska 54 Vice President-Finance and Treasurer
Set forth below are the name, age and position of each significant
employee of the Company.
Name Age Position
---- --- --------
Pier L. Iovino 57 Division President - Geoconstruction
Colin B. Kinley 43 Division President - Energy
The business experience of each of the executive officers and significant
employees of the Company is as follows:
Andrew B. Schmitt has served as President and Chief Executive Officer since
October 1993. For approximately two years prior to joining the Company, Mr.
Schmitt managed two privately-owned hydrostatic pump and motor manufacturing
companies and an oil and gas service company. He served as President of the
Tri-State Oil Tools Division of Baker Hughes Incorporated from February 1988 to
October 1991.
H. Edward Coleman has served as an officer of the Company since 1976 and as
Executive Vice President since September 1, 2001. Mr. Coleman has over 40 years
experience in various areas of the Company's operations.
15
Norman E. Mehlhorn has served as Executive Vice President since September
1, 2001, and as Senior Vice President from 1992 to September 2001. Mr. Mehlhorn
has over 40 years experience in the drilling business, with particular emphasis
on dual tube drilling technology.
Gregory F. Aluce has served as Senior Vice President since April 14, 1998.
Since September 1, 2001, Mr. Aluce has also served as President of the Company's
water resource division. Mr. Aluce is responsible for the Company's
water-related services and products. Mr. Aluce has over 22 years experience in
various areas of the Company's operations.
Eric R. Despain has served as Senior Vice President since February 1996.
Since September 1, 2001, Mr. Despain has also served as President of the
Company's mineral exploration division and is responsible for the Company's
mineral exploration operations. Prior to joining the Company in December 1995,
Mr. Despain was President and a member of the Board of Directors of CBC since
1986.
Steven F. Crooke has served as Vice President, Secretary and General
Counsel since May 2001. For the period of June 2000 through April 2001, Mr.
Crooke served as Corporate Legal Affairs Manager of Huhtamaki Van Leer. Prior to
that, he served as Assistant General Counsel of the Company from 1995 to May
2000.
Jerry W. Fanska has served as Vice President-Finance and Treasurer since
April 1994 and as Controller since December 1993. Prior to joining Layne
Christensen, Mr. Fanska served as corporate controller of The Marley Company
since October 1992 and as its Internal Audit Manager since April 1984.
Pier L. Iovino has served as President of the Company's geoconstruction
division since September 1, 2001, and is responsible for the Company's
geoconstruction services. Prior to becoming President of the Company's
geoconstuction division, Mr. Iovino was district manager of the Company's Boston
district, which included the Company's geoconstruction operations.
Colin B. Kinley has served as President of Layne Christensen Canada, a
wholly-owned subsidiary of the Company, since 1990. Since September 1, 2001, Mr.
Kinley has also served as President of the Company's energy division. Mr. Kinley
is responsible for the Company's energy services and production operations.
There is no arrangement or understanding between any executive officer and
any other person pursuant to which such executive officer was selected as an
executive officer of the Company.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded in the over-the-counter market through
the NASDAQ National Market System under the symbol LAYN. The stock has been
traded in this market since the Company became a publicly-held company on August
20, 1992. The following table sets forth the range of high and low sales prices
of the Company's stock by quarter for fiscal 2003 and 2002, as reported
16
by the NASDAQ National Market System. These quotations represent prices between
dealers and do not include retail mark-up, mark-down or commissions.
Fiscal Year 2003 High Low
---------------- ---- ---
First Quarter $10.60 $7.35
Second Quarter 10.80 8.60
Third Quarter 10.00 5.47
Fourth Quarter 8.70 7.35
Fiscal Year 2002 High Low
---------------- ---- ---
First Quarter $ 7.50 $4.00
Second Quarter 8.88 6.15
Third Quarter 8.60 7.10
Fourth Quarter 8.30 7.35
At March 20, 2003, there were 133 owners of record of the Company's common
stock.
The Company has not paid any cash dividends on its common stock. Moreover,
the Board of Directors of the Company does not anticipate paying any cash
dividends in the foreseeable future. The Company's future dividend policy will
depend on a number of factors including future earnings, capital requirements,
financial condition and prospects of the Company and such other factors as the
Board of Directors may deem relevant, as well as restrictions under the Credit
Agreement between the Company, various financial institutions and General
Electric Capital Corporation as agent, and other restrictions which may exist
under other credit arrangements existing from time to time. The Credit Agreement
limits the cash dividends payable by the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations' Liquidity and
Capital Resources" under Item 7 and Note 11 of the Notes to Consolidated
Financial Statements.
Item 6. Selected Financial Data
The following selected historical financial information as of and for each
of the five fiscal years ended January 31, 2003, has been derived from the
Company's audited Consolidated Financial Statements. The Company completed
various acquisitions in each of the fiscal years, except for 2001, which are
more fully described in Note 2 of the Notes to Consolidated Financial Statements
or in previously filed Forms 10-K. The acquisitions have been accounted for
under the purchase method of accounting and, accordingly, the Company's
consolidated results include the effects of the acquisitions from the date of
each acquisition. During fiscal year 2003, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 142 and recorded a non-cash charge
of $14,429,000, net of tax, as a cumulative effect of a change in accounting
principle (see Note 5 of the Notes to Consolidated Financial Statements). The
Company also sold two operating companies during 2003 and classified their
results as discontinued operations for all years presented (see Note 4 of the
Notes to Consolidated Financial Statements). The information below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under Item 7 and the Consolidated Financial
Statements and Notes thereto included elsewhere in this Form 10-K.
17
Fiscal Years Ended
January 31,
--------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Income Statement Data
(in thousands, except
per share data):
Revenues $269,922 $289,958 $293,966 $265,893 $271,489
Cost of revenues
(exclusive of
depreciation
shown below) 191,983 209,112 219,600 195,624 194,848
-------- -------- -------- -------- --------
Gross profit 77,939 80,846 74,366 70,269 76,641
Selling, general and
administrative expenses 55,624 55,877 55,080 50,160 47,431
Depreciation and
amortization 14,565 17,956 21,065 22,706 22,086
Other income (expense):
Equity in earnings (losses)
of affiliates 842 925 894 (27) 1,128
Interest (2,490) (3,934) (6,205) (4,818) (4,987)
Other, net 2,089 224 1,054 (69) 603
-------- -------- -------- -------- -------
Income (loss) from
continuing operations
before income taxes 8,191 4,228 (6,036) (7,511) 3,868
Income tax expense
(benefit) 5,171 2,498 238 (39) 2,525
Minority interest,
net of taxes (188) (70) 118 (255) (79)
-------- -------- -------- -------- -------
Net income (loss) from
continuing operations
before discontinued
operations,
extraordinary item
and cumulative effect
of accounting change 2,832 1,660 (6,156) (7,727) 1,264
Income (loss) from
discontinued operations,
net of taxes (1,179) (582) 230 62 (63)
Loss on sale of
discontinued operations,
net of taxes (23) - - - -
-------- ---- -------- -------- --------
Net income (loss) before
extraordinary item
and cumulative effect
of accounting change 1,630 1,078 (5,926) (7,665) 1,201
Extraordinary loss on
early extinguishment
of debt, net of taxes (696) - - - -
Cumulative effect of
accounting change,
net of taxes (14,429) - - - -
-------- -------- -------- -------- ------
Net income (loss) $(13,495) $ 1,078 $ (5,926) $ (7,665) $ 1,201
======== ======== ======== ======== ========
Basic earnings (loss)
per share $ (1.14) $ 0.09 $ (0.50) $ (0.66) $ 0.10
======== ======== ======== ======== =======
Diluted earnings (loss)
per share $ (1.11) $ 0.09 $ (0.50) $ (0.66) $ 0.10
======== ======== ======== ======== =======
18
At January 31,
-------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Balance Sheet Data
(in thousands):
Working capital,
excluding debt $ 37,613 $ 35,584 $ 50,531 $ 48,816 $ 46,211
Total assets 178,100 202,342 233,868 245,335 251,503
Total debt 32,370 34,357 61,928 63,500 63,500
Total stockholders'
equity 83,373 95,892 93,925 106,840 113,270
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto under Item 8.
Cautionary Language Regarding Forward-Looking Statements
This Form 10-K 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
Demand for the Company's mineral exploration drilling services 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 level of mineral exploration and development activities
conducted by mining companies has had, and could continue to have, a material
adverse effect on the Company.
Overview of Reportable Operating Segments
The Company is a multinational company which provides sophisticated
services and related products to a variety of markets. During fiscal 2002,
management redefined the Company's operational organization structure into
discrete divisions based on its primary product lines. Each division comprises
19
a combination of individual district offices, which primarily offer similar
types of services and serve similar types of markets. Although individual
offices within a division may periodically perform services normally provided by
another division, the results of those services are recorded in the offices' own
division. For example, if a water resources division office performed
geoconstruction services, the revenues would be recorded in the water resources
division rather than the geoconstruction services division. Should an office's
primary responsibility move from one division president to another, that
office's results going forward would be reclassified between divisions at that
time. The Company's reportable segments under the new operational structure are
defined as follows:
Water Resources Division
This division provides a full line of water-related services and products
including hydrological studies, site selection, well design, drilling and well
development, pump installation, and repair and maintenance. The division's
offerings include design and construction of water treatment facilities and the
manufacture and sale of products to treat volatile inorganics in groundwater.
The division also offers environmental services to assess and monitor
groundwater contaminants.
Mineral Exploration Division
This division provides a complete range of drilling services for the
mineral exploration industry. Its aboveground and underground drilling
activities include all phases of core drilling, diamond, reverse circulation,
dual tube, hammer and rotary air-blast methods.
Geoconstruction Services Division
This division focuses on services that improve soil stability, primarily
jet grouting, grouting, 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. The division's land-based oil
and gas search and development activities focus primarily on natural gas
properties, principally coalbed methane projects located in the Midwest region
of the United States.
Products and Other
This grouping has historically included the Company's supply operation
which distributed drilling equipment, parts and supplies, a manufacturing
operation producing diamond drilling rigs, diamond bits, core barrels and drill
rods ("Christensen Products") and other miscellaneous operations which do not
fall into the above divisions. On January 23, 2003, the Company sold its supply
operations to Boart Longyear. Upon the sale, the results of operations were
20
reclassified to discontinued operations for all years presented (see Note 4 of
the Notes to Consolidated Financial Statements). On August 8, 2001, the Company
sold its Christensen Products business to a subsidiary of Atlas Copco (see Note
6 of the Notes to Consolidated Financial Statements).
The following table, which is derived from the Company's Consolidated
Financial Statements as discussed in Item 6, presents, for the periods
indicated, the percentage relationship which certain items reflected in the
Company's statements of income bear to revenues and the percentage increase or
decrease in the dollar amount of such items period-to-period.
Period-to-Period
Change
Fiscal Years Ended ------------------
January 31, 2003 2002
------------------------------- vs. vs.
Revenues: 2003 2002 2001 | 2002 2001
---- ---- ---- | ---- ----
Water resources 61.9% 59.6% 56.1% | (3.3)% 4.8%
Mineral exploration 20.6 20.0 22.5 | (3.8) (12.4)
Geoconstruction services 11.0 9.3 12.9 | 9.7 (29.0)
Energy services and production 6.3 9.3 7.2 | (37.0) 27.2
Products and other 0.2 1.8 1.3 | (91.6) 40.7
----- ----- ----- |
Total revenues 100.0% 100.0% 100.0% | (6.9) (1.4)
===== ===== ===== |
Cost of revenues 71.1% 72.1% 74.7% | (8.2) (4.8)
----- ----- ----- |
Gross profit 28.9 27.9 25.3 | (3.6) 8.7
Selling, general and |
administrative expenses 20.6 19.3 18.7 | (0.5) 1.5
Depreciation and amortization 5.4 6.2 7.2 | (18.9) (14.8)
|
Other income (expense): |
Equity in earnings of |
affiliates 0.3 0.3 0.3 | (9.0) 3.5
Interest (0.9) (1.3) (2.1) | (36.7) (36.6)
Other, net 0.8 0.1 0.4 | * (78.7)
----- ---- ----- |
Income (loss) from continuing operations |
before income taxes 3.1 1.5 (2.0) | 93.7 *
Income tax expense 1.9 0.9 0.1 | * *
Minority interest, net of taxes (0.1) 0.0 0.0 | * *
----- ---- ----- |
Net income (loss) from continuing |
operations before discontinued operations, |
extraordinary item and cumulative |
accounting change 1.1 0.6 (2.1) | 70.6 *
Income (loss) from discontinued |
operations, net of taxes (0.4) (0.2) 0.1 | * *
Loss from sale of discontinued |
operations, net of taxes 0.0 0.0 0.0 | * *
----- ---- ----- |
Net income (loss) before extraordinary |
item and cumulative accounting |
change 0.7 0.4 (2.0) | * *
Extraordinary item, net of taxes (0.3) 0.0 0.0 | * *
Cumulative effect of accounting |
change, net of taxes (5.3) 0.0 0.0 | * *
----- ---- ----- |
Net income (loss) (4.9)% 0.4% (2.0)% | * *
===== ==== ===== |
* Not meaningful
21
Comparison of Fiscal 2003 to Fiscal 2002
Revenues for fiscal 2003 decreased $20,036,000, or 6.9%, to $269,922,000
compared to $289,958,000 for fiscal 2002. The decrease was primarily the result
of decreases in the Company's water resources, energy services and production,
and products divisions. See further discussion of results of operations by
division presented below.
Gross profit as a percentage of revenues was 28.9% for fiscal 2003 compared
to 27.9% for fiscal 2002. The increase in gross profit was primarily
attributable to improved pricing and margins at the Company's domestic water
locations partially offset by expenses associated with the Company's domestic
oil and gas exploration activities.
Selling, general and administrative expenses decreased to $55,624,000 for
fiscal 2003 compared to $55,877,000 for fiscal 2002 (20.6% and 19.3% of
revenues, respectively). The decrease was primarily a result of lower
incentive-related accruals partially offset by start-up expenses related to LWDS
and expenses associated with the Company's coalbed methane exploration and
development activities. The increase as a percentage of revenues is attributable
to start-up expenses associated with LWDS and the relative level of fixed costs
in the Company's operating divisions.
Depreciation and amortization decreased to $14,565,000 for fiscal 2003
compared to $17,956,000 for fiscal 2002. The decrease in depreciation and
amortization was the result of less depreciation from assets fully depreciated
in prior periods in the mineral exploration division and ceasing to amortize
goodwill upon adoption of SFAS No. 142 (see Note 5 to the Notes to Consolidated
Financial Statements).
Interest expense decreased to $2,490,000 for fiscal 2003 compared to
$3,934,000 for fiscal 2002. The decrease was a result of decreases in the
Company's average borrowings and in interest rates during the year.
Other, net increased to $2,089,000 for the year ended January 31, 2003
compared to $224,000 for the year ended January 31, 2002. The increase was
primarily due to a gain on the sale of the Company's investment in a gold
exploration project in Africa, and gains as a result of a Company initiative to
monetize excess property and equipment. These gains were partially offset by a
write-down of the Company's former Christensen Products plant.
Income tax expense related to continuing operations of $5,171,000 was
recorded for the year ended January 31, 2003 (an effective rate of 63.1%),
compared to $2,498,000 for the same period last year (an effective rate of
59.1%). 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.
Net income (loss) for 2003 included losses related to discontinued
operations of $1,202,000, an extraordinary loss of $696,000 due to debt
extinguishment costs incurred in connection with a refinancing of the Company's
credit facilities, and a $14,429,000 non-cash impairment loss related to
goodwill recorded as the cumulative effect of an accounting change upon the
adoption of SFAS No. 142.
22
Water Resources Division
(in thousands)
Year ended January 31,
-----------------------
2003 2002
---- ----
Revenues $167,080 $172,806
Income from continuing operations 28,654 27,474
Water resources revenues decreased 3.3% to $167,080,000 for the year ended
January 31, 2003 from $172,806,000 for the year ended January 31, 2002. The
decrease in revenues was primarily the result of reduced municipal spending in
certain of the Company's markets and the resulting competitive pressures,
partially offset by increased demand for the Company's services due to increased
infrastructure needs created by population growth in the western United States.
Income from continuing operations for the water resources division
increased 4.3% to $28,654,000 for the year ended January 31, 2003, compared to
$27,474,000 for last year. The increase was primarily attributable to improved
pricing and margins at certain of the Company's domestic water supply locations,
a large drilling project performed in the oil and gas sector and certain gains
on the sale of property and equipment, partially offset by start-up expenses
associated with a water development and storage venture.
Mineral Exploration Division
(in thousands)
Year ended January 31,
------------------------
2003 2002
---- ----
Revenues $55,769 $57,945
Loss from continuing operations (1,082) (7,313)
Mineral exploration revenues decreased 3.8% to $55,769,000 for the year
ended January 31, 2003, compared to revenues of $57,945,000 for the year ended
January 31, 2002. Increased activity levels in North America and Australia due
to rising precious metal prices were not sufficient to offset reduced
exploration activity in certain areas of Africa.
The loss from continuing operations for the mineral exploration division
was $1,082,000 for the year ended January 31, 2003, compared to a loss of
$7,313,000 for the year ended January 31, 2002. Results of operations for the
year ended January 31, 2003 reflect losses in Africa partially offset by
improved operating performance and increased activity levels in North America
and Australia. Included in the African losses was the impact of losing two
significant contracts and approximately $1,000,000 of costs associated with
relocating the West African operations base. The division benefited in fiscal
2003 from reduced depreciation and amortization of $2,753,000 due to assets
fully depreciated in prior periods and ceasing to amortize goodwill upon the
adoption of SFAS No. 142. Also included in the year was a gain of $901,000 on
the sale of an investment in a gold exploration project in Africa. The prior
year loss includes a $3.3 million charge related to the sale of the Company's
investment in Ausdrill Limited (see Note 6 of the Notes to Consolidated
Financial Statements).
23
Geoconstruction Services Division
(in thousands)
Year ended January 31,
-------------------------
2003 2002
---- ----
Revenues $29,621 $27,006
Income from continuing operations 2,631 1,194
Geoconstruction services revenues increased 9.7%, to $29,621,000 for the
year ended January 31, 2003 compared to $27,006,000 for last year. The increase
in revenues was a result of two large construction projects in Hawaii, the large
multi-divisional project in the oil and gas sector and increased equipment sales
as a result of new product offerings at the Company's manufacturing facility in
Italy.
The geoconstruction services division had income from continuing operations
of $2,631,000 for the year ended January 31, 2003, compared to $1,194,000 for
the year ended January 31, 2002. The increased profits were primarily
attributable to the margins associated with increased revenues and the
elimination of costs incurred in the prior year associated with complications on
certain of the Company's groundfreezing projects.
Energy Services and Production Division
(in thousands)
Year ended January 31,
---------------------------
2003 2002
---- ----
Revenues $17,016 $27,011
Income (loss) from continuing operations (2,621) 1,014
Energy services revenues decreased 37.0% to $17,016,000 for the year ended
January 31, 2003, compared to revenues of $27,011,000 for the year ended January
31, 2002. Revenues for the division were negatively impacted by decreased oil
and gas exploration spending in Canada and depressed market conditions for our
oil and gas services in the Gulf of Mexico region of the United States.
The division had a loss from continuing operations of $2,621,000 for the
year ended January 31, 2003, compared to income from continuing operations of
$1,014,000 for the year ended January 31, 2002. The decrease in profits was the
result of expenses related to the Company's energy exploration activities and
coalbed methane development efforts, start-up expenses for a new service
location in Louisiana, and reduced profits due to depressed market conditions.
Products and Other
(in thousands)
Year ended January 31,
--------------------------
2003 2002
---- ----
Revenues $ 436 $5,190
Income (loss) from continuing operations (2,142) 1,389
Products and other revenues decreased 91.6% to $436,000 for the year ended
January 31, 2003, compared to $5,190,000 for the year ended January 31, 2002.
The decrease in revenues was the result of the sale of Christensen Products to a
subsidiary of Atlas Copco in the third quarter of last year and two large
specialty construction projects completed last year.
24
The loss for products and other of $2,142,000 for the year ended January
31, 2003, includes a write-down of the Christensen Products land and building to
reflect further declines in fair market value and residual expenses associated
with closing Christensen Products. Income for the year ended January 31, 2002
includes a $4.0 million gain on the sale of Christensen Products to Atlas Copco
(see Note 6 to the Notes to Consolidated Financial Statements).
Corporate expenses not allocated to individual divisions (primarily
included in selling, general and administrative expenses) were $14,759,000 and
$15,596,000 for the years ended January 31, 2003 and 2002, respectively. The
decrease in unallocated corporate expenses was primarily the result of lower
incentive-related accruals for the year.
Comparison of Fiscal 2002 to Fiscal 2001
The financial comparison and discussion of fiscal 2002 versus fiscal 2001
has been reclassified to reflect discontinued operations and to conform to the
2003 presentation of income measures.
Results of Operations
Revenues for fiscal 2002 decreased $4,008,000 or 1.4% to $289,958,000
compared to $293,966,000 for fiscal 2001. The decrease was primarily the result
of decreases in the Company's mineral exploration and geoconstruction services
divisions, partially offset by increased revenues in the water resources and
energy services and production divisions.
Gross profit as a percentage of revenues was 27.9% for fiscal 2002 compared
to 25.3% for fiscal 2001. The increase in gross profit was primarily
attributable to improved margins at the Company's domestic water locations and
certain international mineral exploration locations, combined with reduced
expenses associated with the Company's domestic oil and gas exploration
activities. The increases above were partially offset by reduced margins at the
Company's products locations in the United States.
Selling, general and administrative expenses increased to $55,877,000 for
fiscal 2002 compared to $55,080,000 for fiscal 2001. The increase was primarily
a result of increased employee benefit, insurance premium and legal costs for
the year.
Depreciation and amortization decreased to $17,956,000 for fiscal 2002
compared to $21,065,000 for fiscal 2001. The decrease in depreciation and
amortization was attributable to the disposal of assets in certain international
locations and the application of purchase accounting resulting in negative
goodwill reducing assets associated with the purchase of the remaining 50% of
WADS from Ausdrill (see Note 2 to the Notes to Consolidated Financial
Statements).
Interest expense decreased to $3,934,000 for fiscal 2002 compared to
$6,205,000 for fiscal 2001. The decrease was primarily a result of decreases in
the Company's average borrowings and in interest rates during the year.
25
Income tax expense of $2,498,000 was recorded for the year ended January
31, 2002 (an effective rate of 59.1%), compared to $238,000 for the same period
last year (an effective rate of (3.9%)). The effective rate in excess of the
statutory federal rate for the year ended January 31, 2002, was a result of the
impact of nondeductible expenses and the tax treatment of certain foreign
operations.
Water Resources Division
(in thousands)
Year ended January 31,
----------------------------
2002 2001
---- ----
Revenues $172,806 $164,883
Income from continuing operations 27,474 20,650
Water resources revenues increased 4.8% to $172,806,000 for the year ended
January 31, 2002 from $164,883,000 for the year ended January 31, 2001. The
increase in revenues was primarily the result of the Company's project for the
City of Azusa, California, combined with increased demand for the Company's
water-related services, partially due to drought conditions in certain areas of
the United States.
Income from continuing operations for the water resources division
increased 33.0% to $27,474,000 for the year ended January 31, 2002, compared to
$20,650,000 for last year. The increase was primarily attributable to improved
pricing and margins at the Company's domestic water supply locations.
Mineral Exploration Division
(in thousands)
Year ended January 31,
-----------------------------
2002 2001
---- ----
Revenues $57,945 $66,153
Loss from continuing operations (7,313) (6,898)
Mineral exploration revenues decreased 12.4% to $57,945,000 for the year
ended January 31, 2002 from $66,153,000 for the year ended January 31, 2001. The
decrease in revenue was primarily a result of continued softness in the
exploration market in the United States, Australia and Mexico, partially offset
by increased activity in certain areas of Africa.
The loss from continuing operations for the mineral exploration division
was $7,313,000 for the year ended January 31, 2002, compared to $6,898,000 for
the year ended January 31, 2001. The increased losses in the division were
primarily the result of a $3,329,000 charge related to the sale of the Company's
investment in Ausdrill Limited in fiscal 2002, partially offset by improved
margins at certain of the Company's international locations and cost reductions
in Australia.
Geoconstruction Services Division
(in thousands)
Year ended January 31,
-----------------------------
2002 2001
---- ----
Revenues $27,006 $38,010
Income from continuing operations 1,194 5,926
26
Geoconstruction services revenues decreased 29.0%, to $27,006,000 for the
year ended January 31, 2002, compared to $38,010,000 for last year. The decrease
in revenues was a result of slowing construction activity in certain areas of
the United States combined with competitive pricing pressures in certain markets
served by the Company.
The geoconstruction services division had income from continuing operations
of $1,194,000 for the year ended January 31, 2002, compared to $5,926,000 for
the year ended January 31, 2001. The reduced profits were primarily attributable
to lower revenues and to costs associated with complications on certain of the
Company's ground-freezing projects.
Energy Services and Production Division
(in thousands)
Year ended January 31,
-----------------------------
2002 2001
---- ----
Revenues $27,011 $21,232
Income (loss) from continuing operations 1,014 (1,866)
Energy services revenues increased 27.2% to $27,011,000 for the year ended
January 31, 2002, compared to revenues of $21,232,000 for the year ended January
31, 2001. The increase was primarily the result of increased oil and gas
exploration activity in Canada and increased capacity in the Company's service
operations in the Gulf of Mexico region of the United States.
Income from continuing operations for the energy services and production
division was $1,014,000 for the year ended January 31, 2002, compared to a loss
from continuing operating loss of $1,866,000 for the year ended January 31,
2001. The improved profits were the result of lower expenditures attributable to
the Company's oil and gas exploration activities and improved results from the
Company's oil and gas service businesses in the United States, combined with
increased levels of activity in Canada.
Products and Other
(in thousands)
Year ended January 31,
---------------------------
2002 2001
---- ----
Revenues $5,190 $ 3,688
Income (loss) from continuing operations 1,389 (2,454)
Products and other revenues increased 40.7% to $5,190,000 for the year
ended January 31, 2002, compared to $3,688,000 for the year ended January 31,
2001. The increase in revenues was primarily the result of increased demand for
drill rigs manufactured by the Company for the mineral exploration market and
two significant projects completed by the Company's specialty products group.
Income from continuing operations for products and other was $1,389,000 for
the year ended January 31, 2002, compared to a loss from continuing operations
of $2,454,000 for the year ended January 31, 2001. The improved results were
primarily the result of a $4.0 million gain on the sale of Christensen Products
recorded in 2002.
Corporate expenses not allocated to individual divisions (primarily
included in selling, general and administrative expenses) were $15,596,000 and
27
$15,189,000 for the years ended January 31, 2002 and 2001, respectively. The
increase in unallocated corporate expenses was primarily the result of increased
employee benefit and insurance premium costs.
Fluctuation in Quarterly Results
The Company historically has experienced fluctuations in its quarterly
results arising from the timing of the award and completion of contracts, the
recording of related revenues and unanticipated additional costs incurred on
projects. The Company's revenues on large, long-term drilling contracts are
recognized on a percentage of completion basis for individual contracts based
upon the ratio of costs incurred to total estimated costs at completion.
Contract price and cost estimates are reviewed periodically as work progresses
and adjustments proportionate to the percentage of completion are reflected in
contract revenues and gross profit in the reporting period when such estimates
are revised. 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. A significant
number of the Company's contracts contain fixed prices and assign responsibility
to the Company for cost overruns for the subject projects; as a result, revenues
and gross margin may vary from those originally estimated and, depending upon
the size of the project, variations from estimated contract performance could
affect the Company's operating results for a particular quarter. Many of the
Company's contracts are also subject to cancellation by the customer upon short
notice with limited damages payable to the Company. In addition, adverse weather
conditions, natural disasters, force majeure and other similar events can
curtail Company operations in various regions of the world throughout the year,
resulting in performance delays and increased costs. Moreover, the Company's
domestic drilling activities and related revenues and earnings tend to decrease
in the winter months when adverse weather conditions interfere with access to
drilling sites and the ability to drill; as a result, the Company's revenues and
earnings in its second and third quarters tend to be higher than revenues and
earnings in its first and fourth quarters. Accordingly, as a result of the
foregoing as well as other factors, quarterly results should not be considered
indicative of results to be expected for any other quarter or for any full
fiscal year. See the Company's Consolidated Financial Statements and Notes
thereto.
Inflation
Management believes that the Company's operations for the periods discussed
have not been adversely affected by inflation or changing prices from its
suppliers.
Liquidity and Capital Resources
The primary source of the Company's liquidity in fiscal 2003, 2002 and 2001
was its cash from operating activities of $18,818,000, $25,509,000 and
$12,952,000, respectively. The decrease in cash from operations in 2003 was
primarily attributable to incentive compensation payments paid in 2003 related
to fiscal 2002, note payments to Ausdrill Limited and payment of closing costs
related to certain subsidiaries closed at the end of fiscal 2002. In fiscal
2003, cash from operations was primarily used to pay debt issuance costs related
to the Credit Agreement, a prepayment penalty on early redemption of the Senior
28
Notes, and additions to property and equipment of $17,505,000. Capital
expenditures during the fiscal years were directed primarily toward expansion
and upgrading of the Company's equipment and facilities and the Company's
expansion into coalbed methane exploration and production. In fiscal 2004, the
Company expects to accelerate its expansion into the production of coalbed
methane gas. Capital expenditure estimates for fiscal 2004 include up to
$13,000,000 related to the Company's coalbed methane development efforts and
approximately $8,000,000 to upgrade equipment and facilities in the Company's
water resources, mineral exploration, and geoconstruction divisions. As of
January 31, 2003, the Company had no material commitments outstanding for
capital assets.
The Company maintains a cash borrowing facility (the "Credit Agreement")
comprised of a term loan and a $35,000,000 revolving credit facility. Borrowings
under the Credit Agreement were used to refinance borrowings outstanding under
the Company's previous credit facilities. The Company's borrowings under the
Credit Agreement were $32,370,000 at January 31, 2003 (see Note 11 to the
Consolidated Financial Statements).
The Company's working capital as of January 31, 2003, 2002 and 2001, was
$33,675,000, $15,513,000 and $46,960,000, respectively. Working capital at
January 31, 2002 was reduced by outstanding balances of $16,500,000 under its
previous revolving credit facility, which was refinanced during 2003. 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 2004. The Company also expects to
defray the cash cost of its fiscal 2003 incentive compensation awards by making
a portion of the payments in common stock.
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 $32,370 $ 3,938 $10,938 $17,494
Operating leases 15,798 5,975 6,557 3,266
Ausdrill promissory note 900 900 - -
------- ------- ------- -------
Total contractual cash
obligations 49,068 10,813 17,495 20,760
------- ------- ------- -------
Standby letters of credit 6,911 6,911 - -
------- ------- ------- -------
Total contractual obligations
and commercial commitments $55,979 $17,724 $17,495 $20,760
======= ======= ======= =======
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
29
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.
Accounting policies are more fully described in Note 1 to the financial
statements, located elsewhere in this Annual Report on Form 10-K for the year
ended January 31, 2003. We believe that the following represent our more
critical estimates and assumptions used in the preparation of our consolidated
financial statements.
Revenue Recognition -- Revenue is recognized on large, long-term contracts using
the percentage of completion method based upon materials installed and labor
costs incurred. Changes in job performance, job conditions and estimated
profitability, including those arising from contract penalty provisions, and
final contract settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined.
Goodwill and Other Intangibles -- In June 2001, the Financial Accounting
Standards Board issued SFAS No. 142, which was effective for the Company as of
February 1, 2002. SFAS No. 142 substantially changes the accounting for
goodwill, requiring that goodwill and other intangible assets with indefinite
useful lives cease to be amortized, and, instead periodically tested for
impairment. This statement also requires that within six months of adoption,
goodwill be tested for impairment at the reporting unit level as of the date of
adoption.
As disclosed in the consolidated financial statements, the Company had goodwill
of $21,884,000 at January 31, 2002. The goodwill was primarily attributable to
the Company's Mineral Exploration Division. The process of evaluating goodwill
for impairment involves the determination of the fair value of the Company's
reporting units. Inherent in such fair value determinations are certain
judgments and estimates, including the interpretation of current economic
indicators and market valuations, and assumptions about the Company's strategic
plans with regard to its operations. The Company completed the initial
assessment of goodwill during the second quarter of fiscal year 2003 and
determined a transitional impairment charge was required. As a result, the
Company recorded a non-cash charge of $14,429,000, which was recorded, net of
taxes of $5,796,000, as a cumulative effect of a change in accounting principle
in accordance with SFAS No. 142. The Company completed its annual impairment
test as of December 31, 2002 and no further impairment was indicated. We believe
at this time that the carrying value of the remaining goodwill is appropriate,
although to the extent additional information arises or the Company's strategies
change, it is possible that the Company's conclusions regarding impairment of
the remaining goodwill could change and result in a material effect on its
financial position or results of operations.
Other Long-lived Assets -- In evaluating the fair value and future benefits of
long-lived assets, we perform an analysis of the anticipated future net cash
flows of the related long-lived assets and reduce their carrying value by the
30
excess, if any, of the result of such calculation. We believe at January 31,
2003 that the long-lived assets' carrying values and useful lives continue to be
appropriate.
Accrued Insurance Expense -- We record estimates for certain health and welfare,
workers' compensation, and casualty insurance costs that are self-insured
programs. Should a greater amount of claims occur compared to what was estimated
or costs of the medical profession increase beyond what was anticipated,
reserves recorded may not be sufficient and additional costs to the consolidated
financial statements could be required.
Costs estimated to be incurred in the future for employee medical benefits,
workers' compensation and casualty insurance programs resulting from claims
which have occurred are accrued currently. Under the terms of the Company's
agreement with the various insurance carriers administering these claims, the
Company is not required to remit the total premium until the claims are actually
paid by the insurance companies. These costs are not expected to significantly
impact liquidity in future periods (see Note 13 to the Consolidated Financial
Statements).
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 (see Note 8 of the Notes to Consolidated Financial
Statements).
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 estimate of its probable liability in these matters
may change.
See Note 15 of the Notes to Consolidated Financial Statements for a
discussion of new accounting pronouncements and their impact on the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The principal market risks to which the Company is exposed are interest
rate risk on variable rate debt, equity risk on marketable investments, and
foreign exchange rate risk that could give 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
31
the Company's variable rate debt and an associated interest rate swap agreement
appear in Note 11 to the Consolidated Financial Statements of this Form 10-K.
Assuming then existing debt levels and the swap agreement, an instantaneous
change in interest rates of one percentage point would impact the Company's
annual interest expense by $157,000 and $165,000 at January 31, 2003 and 2002,
respectively. The Company's investments are described in Note 1 to the
Consolidated Financial Statements. Marketable 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 Notes 1 and 14 to the Consolidated Financial
Statements. The Company's affiliates also operate in Chile, Peru, Mexico and
Panama (see Note 3 to the Notes to Consolidated Financial Statements). 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 10% change in foreign
exchange rates would not significantly impact income from continuing operations
for the years ended January 31, 2003 and 2002. This quantitative measure has
inherent limitations, as it does not take into account any governmental actions,
changes in customer purchasing patterns or changes in the Company's financing
and operating strategies.
Foreign exchange gains and losses in the Company's Consolidated Statements of
Income reflect transaction gains and losses and translation gains and losses
from the Company's Mexican and African operations which use the U.S. dollar as
their functional currency. Net foreign exchange gains and losses for 2003, 2002
and 2001 were not significant.
32
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
Independent Auditors' Report .......................................... 34
Financial Statements:
Consolidated Balance Sheets as of January 31, 2003 and 2002......... 35
Consolidated Statements of Income for the Years
Ended January 31, 2003, 2002 and 2001............................ 37
Consolidated Statements of Stockholders' Equity for the Years
Ended January 31, 2003, 2002 and 2001............................ 39
Consolidated Statements of Cash Flows for the Years Ended
January 31, 2003, 2002 and 2001 ................................. 40
Notes to Consolidated Financial Statements.......................... 42
Financial Statement Schedule II..................................... 64
All other schedules have been omitted because they are not applicable or
not required as the required information is included in the Consolidated
Financial Statements of the Company or the Notes thereto.
33
INDEPENDENT AUDITORS' REPORT
Layne Christensen Company:
We have audited the accompanying consolidated balance sheets of Layne
Christensen Company and subsidiaries as of January 31, 2003 and 2002, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended January 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the company as of January 31,
2003 and 2002, and the results of their operations and their cash flows for each
of the three years in the period ended January 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 5 to the financial statements, in 2003 the Company
changed its method of accounting for goodwill to conform with Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Kansas City, Missouri
March 31, 2003
34
Layne Christensen Company and Subsidiaries
Consolidated Balance Sheets
As of January 31, 2003 and 2002
(in thousands)
January 31, January 31,
ASSETS 2003 2002
------ ----------- -----------
Current assets:
Cash and cash equivalents $ 10,770 $ 2,983
Customer receivables, less allowance
of $4,078 and $3,596, respectively 39,117 43,603
Costs and estimated earnings in excess of
billings on uncompleted contracts 8,711 11,912
Inventories12,738 21,885
Deferred income taxes 11,514 10,181
Income taxes receivable 463 3,074
Other 4,867 2,738
---------- ---------
Total current assets 88,180 96,376
---------- ---------
Property and equipment:
Land 6,801 8,163
Buildings 12,967 16,112
Machinery and equipment 167,043 162,967
Uncompleted wells, equipment and facilities 3,176 -
Mineral interest in properties 369 -
---------- ---------
190,356 187,242
Less-accumulated depreciation (132,167) (128,460)
---------- ---------
Net property and equipment 58,189 58,782
---------- ---------
Other assets:
Investment in affiliates 18,587 19,504
Goodwill 1,659 21,884
Deferred income taxes 8,262 4,270
Other 3,223 1,526
---------- ---------
Total other assets 31,731 47,184
---------- ---------
$ 178,100 $ 202,342
========== =========
See Notes to Consolidated Financial Statements.
- Continued -
35
Layne Christensen Company and Subsidiaries
Consolidated Balance Sheets(Continued)
As of January 31, 2003 and 2002
(in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
------------------------------------ ---------- --------
Current liabilities:
Accounts payable $ 16,044 $ 16,762
Current maturities of long-term debt 3,938 20,071
Accrued compensation 10,874 14,785
Accrued insurance expense 7,845 5,794
Other accrued expenses 7,508 10,983
Income taxes payable 422 4,049
Billings in excess of costs and estimated
earnings on uncompleted contracts 7,874 8,419
--------- ---------
Total current liabilities 54,505 80,863
--------- ---------
Noncurrent and deferred liabilities:
Long-term debt 28,432 14,286
Accrued insurance expense 6,765 6,358
Other 5,025 4,287
Minority interest - 656
--------- ---------
Total noncurrent and deferred liabilities 40,222 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, 11,852,650
and 11,707,694 shares issued and outstanding 119 117
Capital in excess of par value 84,414 83,605
Retained earnings 10,807 24,302
Accumulated other comprehensive loss (11,922) (12,027)
Notes receivable from management stockholders (45) (105)
--------- ---------
Total stockholders' equity 83,373 95,892
--------- ---------
$ 178,100 $ 202,342
========= =========
See Notes to Consolidated Financial Statements.
- Concluded -
36
Layne Christensen Company and Subsidiaries
Consolidated Statements of Income
For the Years Ended January 31, 2003, 2002 and 2001
(in thousands, except per share data)
2003 2002 2001
-------- ---------- --------
Revenues $ 269,922 $ 289,958 $ 293,966
Cost of revenues (exclusive of
depreciation shown below) 191,983 209,112 219,600
---------- ---------- ----------
Gross profit 77,939 80,846 74,366
Selling, general and administrative
expenses 55,624 55,877 55,080
Depreciation and amortization 14,565 17,956 21,065
Other income (expense):
Equity in earnings of affiliates 842 925 894
Interest (2,490) (3,934) (6,205)
Other, net 2,089 224 1,054
---------- ---------- ----------
Income (loss) from continuing
operations before income taxes 8,191 4,228 (6,036)
Income tax expense (5,171) (2,498) (238)
Minority interest, net of taxes
of $0, $37 and $64 (188) (70) 118
---------- ---------- ----------
Net income (loss) from continuing
operations before discontinued
operations, extraordinary
item and cumulative effect of
accounting change 2,832 1,660 (6,156)
Income (loss) from discontinued
operations, net of income taxes
of $742, $366 and $145 (1,179) (582) 230
Loss on sale of discontinued operations,
net of income taxes of $15 (23) - -
--------- ---------- ----------
Net income (loss) before extraordinary
item and cumulative effect of
accounting change 1,630 1,078 (5,926)
Extraordinary loss on early
extinguishment of debt, net of income
taxes of $439 (696) - -
Cumulative effect of accounting change,
net of income taxes of $5,796 (14,429) - -
---------- ---------- ----------
Net income (loss) $ (13,495) $ 1,078 $ (5,926)
========== ========== ==========
- Continued -
See Notes to Consolidated Financial Statements.
37
Layne Christensen Company and Subsidiaries
Consolidated Statements of Income (Continued)
For the Years Ended January 31, 2003, 2002 and 2001
(in thousands, except per share data)
2003 2002 2001
-------- ---------- --------
Basic income (loss) per share:
Net income (loss) from continuing
operations $ 0.24 $ 0.14 $ (0.52)
Income (loss) from discontinued
operations, net of tax (0.10) (0.05) 0.02
---------- ---------- ----------
Net income (loss) before extraordinary
item and cumulative effect of
accounting change 0.14 0.09 (0.50)
Extraordinary loss, net of tax (0.06) - -
Cumulative effect of accounting
change, net of tax (1.22) - -
---------- -------- ----------
Net income (loss) per share $ (1.14) $ 0.09 $ (0.50)
========== ========== ==========
Diluted income (loss) per share:
Net income (loss) from continuing
operations $ 0.23 $ 0.14 $ (0.52)
Income (loss) from discontinued
operations, net of tax (0.09) (0.05) 0.02
---------- ---------- ----------
Net income (loss) before extraordinary
item and cumulative effect of
accounting change 0.14 0.09 (0.50)
Extraordinary loss, net of tax (0.06) - -
Cumulative effect of accounting
change, net of tax (1.19) - -
---------- ---------- ----------
Net income (loss) per share $ (1.11) $ 0.09 $ (0.50)
========== ========== ==========
Weighted average number of common
and dilutive equivalent shares outstanding:
Weighted average shares
outstanding - basic 11,823 11,758 11,758
Dilutive stock options 319 277 -
---------- ---------- ----------
Weighted average shares
outstanding - diluted 12,142 12,035 11,758
========== ========== ==========
- Concluded -
See Notes to Consolidated Financial Statements.
38
Layne Christensen Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Years Ended January 31, 2003, 2002 and 2001
(in thousands, except share data)
Notes
Accumulated Receivable
Common Stock Capital in Other from
------------------- Excess of Retained Comprehensive Management
Shares Amount Par Value Earnings Loss Stockholders Total
---------- ------ --------- -------- ------------- ------------ ---------
Balance, February 1, 2000 11,691,129 $117 $83,463 $29,150 $ (5,738) $(152) $106,840
Comprehensive loss:
Net loss - - - (5,926) - - (5,926)
Other comprehensive income
(loss):
Change in unrecognized
pension liability,
net of taxes of $234 - - - - (373) - (373)
Foreign currency
translation adjustments,
net of taxes of $3,979 - - - - (6,054) - (6,054)
Change in unrealized loss
on available for sale
investments, net of
taxes of $504 - - - - (748) - (748)
--------
Comprehensive loss (13,101)
--------
Issuance of stock for
incentive compensation program 1,181 - 50 - - - 50
Issuance of stock, net of
expenses 15,384 - 100 - - - 100
Payments on notes receivable - - - - - 36 36
---------- ---- ------- -------- -------- ----- --------
Balance, January 31, 2001 11,707,694 117 83,613 23,224 (12,913) (116) 93,925
Comprehensive income:
Net income - - - 1,078 - - 1,078
Other comprehensive income
(loss):
Change in unrecognized
pension liability,
net of taxes of $389 - - - - (617) - (617)
Foreign currency
translation adjustments,
net of taxes of $291 - - - - (377) - (377)
Change in unrealized loss
on available for sale
investments, net of
taxes of $1,248 - - - - 1,880 - 1,880
--------
Comprehensive income 1,964
--------
Issuance of stock, net of
expenses - - (8) - - - (8)
Payments on notes receivable - - - - - 11 11
---------- ---- ------- -------- -------- ----- --------
Balance, January 31, 2002 11,707,694 117 83,605 24,302 (12,027) (105) 95,892
Comprehensive income (loss):
Net loss - - - (13,495) - - (13,495)
Other comprehensive income
(loss):
Change in unrecognized
pension liability,
net of taxes of $570 - - - - (906) - (906)
Foreign currency
translation adjustments,
net of taxes of $754 - - - - 1,198 - 1,198
Change in unrealized gain
on available for sale
investments, net of
taxes of $26 - - - - (53) - (53)
Change in unrealized loss
on swap, net of taxes
of $84 - - - - (134) - (134)
--------
Comprehensive loss (13,390)
--------
Issuance of stock upon
exercise of options 144,956 2 809 - - - 811
Payments on notes receivable - - - - - 60 60
---------- ----- ------- -------- -------- ----- --------
Balance, January 31, 2003 11,852,650 $ 119 $84,414 $ 10,807 $(11,922) $ (45) $ 83,373
========== ===== ======= ======== ======== ===== ========
See Notes to Consolidated Financial Statements.
39
Layne Christensen Company and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended January 31, 2003, 2002 and 2001
(in thousands)
2003 2002 2001
--------- --------- --------
Cash flow from operating activities:
Net income (loss) $(13,495) $ 1,078 $ (5,926)
Adjustments to reconcile net income
(loss) to cash from operations:
Loss on sale of discontinued
operations, net of tax 23 - -
(Income) loss on discontinued
operations, net of tax 1,179 582 (230)
Loss on extinguishment of debt,
net of tax 696 - -
Cumulative effect of accounting change,
net of tax 14,429 - -
Depreciation and amortization 14,565 17,956 21,065
Deferred income taxes (534) 826 (4,712)
Equity in earnings of affiliates (842) (925) (894)
Dividends received from affiliates 1,974 904 1,033
Minority interest 188 107 (182)
Gain from disposal of property and
equipment (357) (325) (37)
Gain on purchase and sale of businesses (214) (3,991) -
(Gain) loss on sale of investments (901) 3,329 -
Changes in current assets and liabilities,
(exclusive of effects of acquisitions
and disposals):
(Increase) decrease in customer
receivables 2,348 8,876 (5,300)
Decrease in costs and
estimated earnings in excess of
billing on uncompleted contracts 2,547 60 1,236
Decrease in inventories 4,132 4,459 48
(Increase) decrease in other current
assets 725 (122) 2,378
Increase (decrease) in accounts payable
and accrued expenses (9,341) (1,790) 3,292
Increase (decrease) in billings in
excess of costs and estimated
earnings on uncompleted contracts (518) (2,360) 694
Other, net 1,047 (1,513) 1,934
-------- -------- --------
Cash from continuing operations 17,651 27,151 14,399
Cash from (used in) discontinued
operations 1,167 (1,642) (1,447)
-------- -------- --------
Cash from operating activities 18,818 25,509 12,952
-------- -------- --------
See Notes to Consolidated Financial Statements.
-Continued -
40
Layne Christensen Company and Subsidiaries
Consolidated Statements of Cash Flows - (Continued)
For the Years Ended January 31, 2003, 2002 and 2001
(in thousands)
2003 2002 2001
------- -------- --------
Cash flow from investing activities:
Additions to property and equipment $(13,960) $(11,186) $(14,126)
Additions to uncompleted wells, equipment
and facilities (3,176) - -
Additions to mineral interest in properties (369) - -
Proceeds from disposal of property and
equipment 3,762 4,083 2,256
Proceeds from sale of business 6,851 8,165 -
Acquisition of business (246) - -
Proceeds from sale of investment 500 - -
Investment in joint venture (1,059) - -
-------- -------- --------
Cash from (used in) continuing
operations (7,697) 1,062 (11,870)
Cash used in discontinued operations (10) (19) (176)
-------- -------- --------
Cash from (used in) investing
activities (7,707) 1,043 (12,046)
-------- -------- --------
Cash flow from financing activities:
Net (repayments) borrowings under
revolving facility 43,500 (24,000) 2,000
Repayments of long-term debt (45,487) (3,571) (3,572)
Prepayment penalty on early extinguishment
of debt(1,135) - -
Debt issuance costs (1,709) - -
Issuance of common stock 811 - -
Payments on notes receivable from
management stockholders 60 11 36
-------- -------- --------
Cash used in financing activities (3,960) (27,560) (1,536)
-------- -------- --------
Effects of exchange rate changes on cash 636 570 300
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents 7,787 (438) (330)
Cash and cash equivalents at beginning of year 2,983 3,421 3,751
-------- -------- --------
Cash and cash equivalents at end of year $ 10,770 $ 2,983 $ 3,421
======== ======== ========
See Notes to Consolidated Financial Statements.
- Concluded -
41
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
(1) Summary of Significant Accounting Policies
Description of Business - Layne Christensen Company and subsidiaries
(together, the "Company") provide comprehensive services and products to the
water resources, mineral exploration, geoconstruction and energy markets through
its four primary operating divisions (see Note 14). The Company operates
throughout North America as well as in Africa, Australia and Europe. Its
customers include municipalities, industrial companies, mining companies,
environmental consulting and engineering firms, heavy civil construction
contractors and, to a lesser extent, agribusiness. In mineral exploration, the
Company has ownership interest in certain foreign affiliates operating in South
America, with facilities in Chile and Peru (see Note 3).
Fiscal Year - References to years are to the fiscal years then ended.
Investment in Affiliated Companies - Investments in affiliates (20% to 50%
owned) in which the Company has the ability to exercise significant influence
over operating and financial policies are accounted for on the equity method.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its majority-owned subsidiaries. All significant
intercompany transactions have been eliminated. Financial information for the
Company's foreign affiliates and certain foreign subsidiaries is reported in the
Company's consolidated financial statements with a one-month lag in reporting
periods. The effect of this one-month lag on the Company's financial results is
not significant.
Use of Estimates in Preparing Financial Statements - 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.
Foreign Currency Transactions and Translation - The cash flows and
financing activities of the Company's Mexican and African operations are
primarily denominated in the U.S. dollar. Accordingly, these operations use the
U.S. dollar as their functional currency and translate monetary assets and
liabilities at year-end exchange rates while nonmonetary items are translated at
historical rates. Income and expense accounts are translated at the average
rates in effect during the year, except for depreciation, certain cost of
revenues and selling expenses which are translated at historical rates. Gains or
losses from changes in exchange rates are recognized in consolidated income in
the year of occurrence.
Other foreign subsidiaries and affiliates use local currencies as their
functional currency. Assets and liabilities have been translated to U.S. dollars
at year-end exchange rates. Income and expense items have been translated at
exchange rates which approximate the weighted average of the rates prevailing
during each year. Translation adjustments are reported as a separate component
of
42
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
accumulated other comprehensive loss. As a result of the acquisition of an
Australian company, Stanley Mining Services, during 1998, the Company has
reflected substantial changes in the cumulative translation account during 2001,
primarily attributed to the devaluation of the Australian dollar.
Net foreign currency transaction gains and losses for 2003, 2002 and 2001
were not significant.
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. 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.
Inventories - 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.
Property and Equipment and Related Depreciation - Property and equipment
(including major renewals and improvements) are recorded at cost. Depreciation
is provided using the straight-line method. Depreciation expense was
$14,565,000, $16,848,000 and $19,867,000 in fiscal 2003, 2002 and 2001,
respectively. The lives used for the items within each property classification
are as follows:
Years
-------
Buildings 15 - 35
Machinery and equipment 3 - 10
Through its Energy Services and Production 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. Costs associated with production and general corporate activities
are expensed in the period incurred. As of January 31, 2003, the Company has
capitalized $3,545,000 related to uncompleted wells, equipment and facilities
and land acquisition costs. These are unevaluated properties and therefore are
not being amortized and reserves have not yet been established.
Goodwill - Goodwill relates to acquisitions completed by the Company. In
fiscal year 2003, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets which resulted
in the Company
43
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
ceasing to amortize goodwill. Amortization expense for goodwill was $1,108,000
and $1,198,000 for 2002 and 2001, respectively. At least annually as of December
31, goodwill is tested for impairment by applying a fair value based test. In
assessing the value of goodwill, assets and liabilities are assigned to
reporting units and a discounted cash flow analysis is used to determine fair
value.
Investments - The Company, through its wholly-owned subsidiaries owns
certain common stock of publicly traded companies in Australia and Canada. The
Company classifies these investments as available-for-sale. The noncurrent
investments have a cost basis of $172,000 and $188,000 and are reported at their
fair values of approximately $12,000 and $107,000 at January 31, 2003 and 2002,
respectively. The gross unrealized losses of $160,000 and $81,000, net of taxes
of $62,000 and $36,000 at January 31, 2003 and 2002, respectively, have been
recorded as a component of accumulated other comprehensive loss.
Impairment of Long-Lived Assets - At each balance sheet date or as
circumstances indicate necessary, a determination is made by management as to
whether the value of long-lived assets, including assets to be disposed of, has
been impaired. The determination is based on several criteria, including, but
not limited to, revenue trends, undiscounted operating cash flows and other
operating factors. Effective February 1, 2002, the Company adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. The adoption of
SFAS No. 144 did not have a significant effect on the Company's impairment
policy.
Accrued Insurance Expense - Costs estimated to be incurred in the future
for employee medical benefits, workers' compensation benefits and casualty
insurance programs resulting from claims which have been incurred 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 (see
Note 13).
Fair Value of Financial Instruments - The carrying amounts of financial
instruments including cash and cash equivalents, customer receivables and
accounts payable approximate fair value at January 31, 2003 and 2002, because of
the relatively short maturity of those instruments. Investments in equity
securities are carried at quoted market values. See Note 11 for disclosure
regarding the fair value of indebtedness and the interest rate swap of the
Company.
Consolidated Statements of Cash Flows - Highly liquid investments with a
remaining maturity of three months or less at the time of purchase are
considered cash equivalents.
The amounts paid for income taxes and interest are as follows (in
thousands):
2003 2002 2001
------ ------ ------
Income taxes $3,348 $3,471 $ 582
Interest 2,498 4,092 5,632
44
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
Supplemental Noncash Transactions - In 2001, the Company issued 1,181
shares of common stock related to compensation awards and 15,384 shares of
common stock in connection with an acquisition made in 2000. In 2003 and 2002,
the Company did not issue shares of common stock or stock options related to
compensation awards.
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 (see Note 8).
Earnings Per Share - Earnings per common 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. Options to
purchase 390,900, 398,454 and 1,097,619 shares have been excluded from weighted
average shares in 2003, 2002 and 2001, respectively, as their effect was
antidilutive.
Stock-Based Compensation - 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 (see Note 12). Pro
forma net income (loss) and earnings per share for 2003, 2002 and 2001,
determined as if the SFAS 123 Method had been applied, is presented in the
following table (in thousands, except per share amounts):
2003 2002 2001
-------- ------- --------
Net income (loss), as reported $(13,495) $ 1,078 $(5,926)
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of tax (578) (566) (467)
-------- -------- -------
Pro forma net income $(14,073) $ 512 $(6,393)
======== ======== =======
Income (loss) per share:
Basic - as reported $ (1.14) $ 0.09 $ (0.50)
======== ======== =======
Basic - pro forma $ (1.19) $ 0.04 $ (0.54)
======== ======== =======
Diluted - as reported $ (1.11) $ 0.09 $ (0.50)
======== ======== =======
Diluted - pro forma $ (1.16) $ 0.04 $ (0.54)
======== ======== =======
45
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
Other Comprehensive Loss - Accumulated balances of Other Comprehensive Loss
are as follows (in thousands):
Accumulated
Cumulative Unrealized Unrecognized Unrealized Other
Translation Loss On Pension Loss on Comprehensive
Adjustment Investments Liability Swap Loss
----------- ----------- ------------ ----------- -------------
Balance,
February 1, 2001 $(10,615) $(1,925) $ (373) $ - $(12,913)
Period change (377) 1,880 (617) - 886
-------- ------- ------- --------- --------
Balance,
January 31, 2002 (10,992) (45) (990) - (12,027)
Period change 1,198 (53) (906) (134) 105
-------- -------- ------- --------- --------
Balance,
January 31, 2003 $ (9,794) $ (98) $(1,896) $ (134) $(11,922)
======== ======== ======= ========= ========
Reclassifications - Certain 2002 and 2001 amounts, primarily related to
discontinued operations, have been reclassified to conform with the 2003
presentation.
(2) Acquisitions
On December 13, 2002, the Company acquired the remaining 35% ownership in
International Directional Services ("IDS") from its joint venture partner Silver
States Survey, Inc. for approximately $246,000 in cash. The acquisition has been
accounted for using the purchase method of accounting and did not have a
significant effect on the Company's consolidated financial position.
Effective June 30, 2001, the Company acquired the remaining 50% ownership
in West African Drilling Services ("WADS") from its joint venture partner,
Ausdrill Limited ("Ausdrill"). The Company issued a twenty-five month promissory
note for $2,500,000 and surrendered, by way of an Ausdrill share repurchase
agreement, the 6,014,615 shares of Ausdrill that the Company owned. The
promissory note is included in other accrued expenses in the Consolidated
Balance Sheets. The shares had a fair value of approximately $206,000. The
acquisition has been accounted for using the purchase method of accounting. Had
this acquisition taken place as of February 1, 2001, pro forma operating results
would not have been significantly different from those reported.
The 2002 acquisition had the following effect on the Company's consolidated
financial position (in thousands):
2002
-------
Property and equipment $(3,906)
Working capital (1,389)
Intangible and other assets (548)
Noncurrent and deferred liabilities 5,843
-------
Total purchase price, net of cash acquired $ -
=======
46
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
(3) Investments in Affiliates
The Company's investments in affiliates are carried at the Company's equity
in the underlying net assets plus an additional $4,607,000 as a result of
purchase accounting. This additional amount was being amortized over lives
ranging from 20 to 35 years, however, amortization was ceased effective February
1, 2002 upon adoption of SFAS No. 142. These affiliates, which generally are
engaged in mineral exploration drilling and the manufacture and supply of
drilling equipment, parts and supplies, are as follows at January 31, 2003:
Percentage
Owned
----------
Christensen Chile, S.A. (Chile) 49.99%
Christensen Commercial, S.A. (Chile) 50.00%
Geotec Boyles Bros., S.A. (Chile) 49.75%
Boyles Bros. Diamantina, S.A. (Peru) 29.49%
Christensen Commercial, S.A. (Peru) 50.00%
Geotec, S.A. (Peru) 35.38%
Boytec, S.A. (Panama) 49.99%
Plantel Industrial S.A. (Chile) 50.00%
Boytec Sondajes de Mexico, S.A. de C.V. (Mexico) 49.99%
Geoductos Chile, S.A. (Chile) 50.00%
In 2003, the Company sold its investment in Technidrill, Ltd and
Christensen Boyles GmbH for $860,000. At the time of sale, the investment had a
cost basis of $845,000.
Financial information from foreign affiliates is reported with a one-month
lag in the reporting period. Summarized financial information of the Company's
foreign affiliates, as of January 31, 2003, 2002 and 2001, and for the years
then ended, was as follows (in thousands):
2003 2002 2001
------- ------- -------
Total assets $52,332 $51,146 $60,526
Total liabilities 17,039 13,442 21,741
Revenues 51,629 61,720 66,217
Gross profit 8,318 8,401 10,423
Operating income 3,839 3,905 5,393
Net income 2,206 1,988 2,392
The Company has transactions and balances with foreign affiliates which
resulted in the following amounts being included in the Consolidated Financial
Statements as of January 31, 2003, 2002 and 2001, and for the years then ended
(in thousands):
2003 2002 2001
------ ------ ------
Accounts receivable $ 77 $ 282 $1,563
Notes receivable - - 149
Revenues 167 2,691 3,231
47
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
Undistributed equity in earnings of foreign affiliates totaled $2,820,000,
$3,925,000 and $3,904,000 as of January 31, 2003, 2002 and 2001, respectively.
In September 2002, the Company invested in a joint venture with a
privately-held limited partnership to develop a water storage bank on property
located in California. The Company invested $1,059,000 to acquire 10% ownership
in the joint venture. The joint venture had total assets of $10,294,000 as of
January 31, 2003. The investment will be accounted for using the equity method
as the Company exercises significant influence over the operating and financial
policies of the venture.
(4) Discontinued Operations
On December 10, 2002, the Company sold its Ranney(R) collector well
business to Reynolds, Inc. for $1,575,000. The Ranney(R) business was a
component of the Company's Water Resources Division (see Note 14). The Company
recorded a gain on the sale of approximately $827,000, net of taxes of $520,000,
for the year ended January 31, 2003.
On January 23, 2003, the Company sold its Drilling Equipment Supply, Inc.
("DESI") division to Boart Longyear. DESI was a supply operation that
distributed drilling equipment, parts and supplies and was the last remaining
component of the Company's products segment (see Note 14). The Company recorded
a loss on the disposal of $850,000, net of taxes of $535,000, for the year ended
January 31, 2003.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets the results of operations for Ranney(R) and DESI have been
classified as discontinued operations. Revenues and net income (loss) from
discontinued operations for 2003, 2002, and 2001 were as follows (in thousands):
2003 2002 2001
---- ---- ----
Revenues:
Ranney(R) $ 2,379 $ 2,686 $ 5,321
DESI 8,064 15,744 14,706
------ ------- -------
Total $10,443 $18,430 $20,027
======= ======= =======
Net income (loss):
Ranney(R) $ (446) $ (563) $ (200)
DESI (733) (19) 430
------- ------- -------
Total $(1,179) $ (582) $ 230
======= ======= =======
(5) Goodwill
Effective February 1, 2002, the Company adopted SFAS No. 142. SFAS No. 142
requires that upon adoption and at least annually thereafter, goodwill be tested
for impairment by applying a fair value based test. Periodic amortization of
goodwill is no longer permitted under SFAS No. 142. Thus, the Company's
Consolidated Statements of Income for fiscal year 2003 include no periodic
amortization of goodwill.
48
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
SFAS 142 requires companies to make an initial assessment of goodwill for
impairment for each of its reporting units within six months after adoption. The
Company completed this initial assessment of goodwill during the second quarter
of fiscal year 2003 and determined a transitional impairment charge was
required. At February 1, 2002, the Company had $21,884,000 of goodwill recorded
in its consolidated balance sheet, consisting primarily of goodwill associated
with its mineral exploration segment. In assessing goodwill, the Company
assigned assets and liabilities to its reporting units and developed a
discounted cash flow analysis to determine the fair value of the reporting
units. Based on this model, the Company determined that the mineral exploration
goodwill was impaired. As a result, the Company recorded a non-cash charge of
$14,429,000, net of taxes of $5,796,000, as a cumulative effect of a change in
accounting principle at February 1, 2002, in accordance with SFAS No. 142. The
Company completed its annual impairment test as of December 31, 2002 and no
further impairment was indicated.
The carrying amount of goodwill attributed to each operating segment with
goodwill balances follows (in thousands):
Impairment
February 1, 2002 Adjustment January 31, 2003
---------------- ---------- ----------------
Geoconstruction Services $ 1,499 $ - $ 1,499
Energy Services and Production 160 - 160
Mineral Exploration 20,225 (20,225) -
------- --------- -------
$21,884 $ (20,225) $ 1,659
======= ========= =======
Proforma results of operations for 2002 and 2001 had the Company applied the
nonamortization provisions of SFAS No. 142 in those periods follows (in
thousands, except per share amounts):
Years ended January 31,
2003 2002 2001
--------- -------- -------
Reported net income (loss) $(13,495) $1,078 $(5,926)
Add back: Goodwill amortization,
net of related tax effects - 862 934
-------- ------ -------
Adjusted net income (loss) $(13,495) $1,940 $(4,992)
======== ====== =======
Diluted earnings per share:
Reported net income (loss) $ (1.11) $ .09 $ (.50)
Add back: Goodwill amortization,
net of related tax effects - .07 .07
-------- ------ -------
Adjusted net income (loss) $ (1.11) $ .16 $ (.43)
======== ====== =======
49
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
(6) Other Income (Expense)
Other income (expense) consisted of the following for the fiscal years
ended January 31 (in thousands):
2003 2002 2001
------- ------- -------
Gain from disposal of property and equipment $ 357 $ 325 $ 87
Gain from purchase or sale of businesses 214 3,991 -
Gain (loss) from sale of investments 901 (3,329) -
Gain (loss) from business closures 517 (1,697) (50)
Exchange gains (losses) (52) 112 193
Miscellaneous, net 152 822 824
------- ------- -------
$ 2,089 $ 224 $ 1,054
======= ======= =======
The gain from disposal of property and equipment for 2003 includes gains of
approximately $1,419,000 as a result of a Company initiative to monetize excess
property and equipment, as well as gains from disposals in the ordinary course
of business. These gains were partially offset by a $1,800,000 write-down of the
Company's former Christensen Products plant to reflect current estimates of net
realizable value.
In 2003, the Company, through its wholly-owned subsidiary Layne Christensen
Australia Pty Limited ("Layne Australia"), recognized a gain of $901,000 on the
sale of its investment in a gold exploration project in Africa.
In 2002, the Company sold its Christensen Products business to a subsidiary
of Atlas Copco. The Company received $8,165,000 and recorded a gain on the sale
of $3,991,000. Approximately $1,800,000 in additional cash was received on
February 1, 2002 upon the sale of certain additional assets and inventory at
book value.
In 2002, the Company, through Layne Australia, sold its investment in
Ausdrill Limited, a publicly traded company on the Australian Stock Exchange.
The investment was classified as available-for-sale and had a cost basis of
$3,535,000. The Company recorded a loss on the sale of $3,329,000 and removed
the related net of tax loss of $1,880,000 from accumulated other comprehensive
income in the Consolidated Statement of Stockholders' Equity.
In 2002, the Company closed certain unprofitable locations and recognized a
loss of $1,697,000. In 2003 the Company received higher than expected proceeds
from the final settlement of certain of the assets and recorded a gain of
$517,000.
50
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
(7) Costs and Estimated Earnings on Uncompleted Contracts (in thousands):
2003 2002
-------- --------
Costs incurred on uncompleted contracts $ 76,236 $ 81,057
Estimated earnings 37,744 36,178
-------- --------
113,980 117,235
Less: Billings to date 113,143 113,742
-------- --------
$ 837 $ 3,493
======== ========
Included in accompanying balance
sheets under the following captions:
Costs and estimated earnings in
excess of billings on uncompleted
contracts $ 8,711 $ 11,912
Billings in excess of costs and
estimated earnings on uncompleted
contracts (7,874) (8,419)
-------- --------
$ 837 $ 3,493
======== ========
The Company generally does not bill contract retainage amounts until the
contract is completed. The Company bills its customers based on specific
contract terms. Substantially all billed amounts are collectible within one
year.
(8) Income Taxes
Income (loss) before income taxes is as follows (in thousands):
2003 2002 2001
-------- -------- --------
Domestic $ 13,453 $ 15,251 $ 5,196
Foreign (5,262) (11,023) (11,232)
-------- -------- --------
$ 8,191 $ 4,228 $ (6,036)
======== ======== ========
Components of income tax expense are (in thousands):
2003 2002 2001
-------- -------- -------
Currently due:
U.S. federal $ 4,387 $ 775 $ 69
State and local 1,079 316 215
Foreign (124) 1,644 1,344
------- ------- -------
5,342 2,735 1,628
------- ------- -------
Deferred:
U.S. federal (1,756) (896) 2,531
State and local 576 (230) (193)
Foreign 1,009 889 (3,728)
------- ------- -------
(171) (237) (1,390)
------- ------- -------
$ 5,171 $ 2,498 $ 238
======= ======= =======
Deferred income taxes result from temporary differences between the
financial statement and tax bases of the Company's assets and liabilities. The
sources of these differences and their cumulative tax effects are (in
thousands):
51
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
2003 2002
---------------------------------- ----------------------------------
Assets Liabilities Total Assets Liabilities Total
------- ----------- ------ ------ ----------- -------
Contract income $ 3,974 - $ 3,974 $ 2,846 - $ 2,846
Accrued insurance
expense 1,982 - 1,982 1,271 - 1,271
Employee compensation 1,326 - 1,326 1,125 - 1,125
Bad debts 1,473 - 1,473 1,215 - 1,215
Inventory 2,926 $ (566) 2,360 1,825 $ (1,293) 532
Other 1,715 (1,316) 399 3,865 (673) 3,192
-------- -------- -------- -------- -------- --------
Current 13,396 (1,882) 11,514 12,147 (1,966) 10,181
-------- -------- -------- -------- -------- --------
Accelerated depreciation 466 (4,903) (4,437) 281 (5,445) (5,164)
Cumulative translation
adjustment 6,168 - 6,168 6,939 - 6,939
Accrued insurance
expense 2,853 - 2,853 2,620 - 2,620
Unrealized loss on
investments 52 - 52 36 - 36
Employee compensation 1,654 (540) 1,114 1,041 (618) 423
Tax deductible goodwill 5,450 - 5,450 - - -
Tax loss carryforward 545 - 545 317 - 317
Unremitted foreign
earnings - (838) (838) - - -
Other 674 (3,319) (2,645) 1,466 (2,367) (901)
-------- -------- -------- -------- -------- --------
Noncurrent 17,862 (9,600) 8,262 12,700 (8,430) 4,270
-------- -------- -------- -------- -------- --------
$ 31,258 $(11,482) $ 19,776 $ 24,847 $(10,396) $ 14,451
======== ======== ======== ======== ======== ========
The Company has several Australian and African subsidiaries which have
generated tax losses. The majority of these losses have been utilized to reduce
the Company's federal and state income tax expense. The Company has tax loss
carryforwards from its Mexican subsidiary of $1,800,000 which expire between
2010 and 2013.
At January 31, 2003, undistributed earnings of foreign subsidiaries and
certain foreign affiliates included $10,300,000 for which no federal income or
foreign withholding taxes have been provided. These earnings, which are
considered to be invested indefinitely, become subject to income tax if they
were remitted as dividends or if the Company were to sell its stock in the
affiliates or subsidiaries. It is not practicable to determine the amount of
income or withholding tax that would be payable upon remittance of these
earnings.
Deferred taxes were provided on undistributed earnings of certain foreign
affiliates where the earnings are not considered to be invested indefinitely.
Income taxes and foreign withholding taxes were also provided on dividends
received and gains recognized on the sale of certain affiliates during the year.
A reconciliation of the total income tax expense to the statutory federal
rate is as follows (in thousands):
52
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
2003 2002 2001
--------------------- ---------------------- ----------------------
Effective Effective Effective
Amount Rate Amount Rate Amount Rate
------- --------- ------ --------- ------ --------
Income tax at statutory
rate $ 2,785 34.0% $ 1,438 34.0% $(2,052) 34.0%
State income tax, net 424 5.2 57 1.4 14 (0.2)
Difference in tax expense
resulting from:
Nondeductible expenses 417 5.1 420 9.9 465 (7.7)
Taxes on foreign
affiliates 1,295 15.8 (53) (1.2) 3 (0.0)
Taxes on foreign
operations (96) (1.2) 484 11.4 1,752 (29.0)
Other, net 346 4.2 152 3.6 56 (1.0)
------- ---- ------- ---- ------- ----
$ 5,171 63.1% $ 2,498 59.1% $ 238 (3.9)%
======= ==== ======= ==== ======= ====
(9) Leases
Future minimum rental payments required under operating leases that have
initial or remaining noncancellable lease terms in excess of one year from
January 31, 2003 are as follows (in thousands):
2004 $5,975
2005 3,408
2006 3,149
2007 2,013
2008 1,253
Operating leases are primarily for automobiles, light trucks, and office
and shop facilities. Rent expense under operating leases (including
insignificant amounts of contingent rental payments) was $10,632,000, $6,475,000
and $5,972,000 in 2003, 2002 and 2001, respectively.
(10) 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. Assets of the plan consist primarily of
stocks, bonds and government securities.
The following table sets forth the plan's funded status as of December 31,
2002 and 2001 (the measurement dates) and the amounts recognized in the
Company's Consolidated Balance Sheets at January 31, 2003 and 2002 (in
thousands):
53
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
2003 2002
-------- -------
Benefit obligation at beginning of year $ 5,921 $ 5,411
Service cost 167 163
Interest cost 409 391
Actuarial loss 527 295
Benefits paid (320) (339)
------- -------
Benefit obligation at end of year 6,704 5,921
------- -------
Fair value of plan assets at beginning of year 4,849 5,037
Actual return on plan assets (463) (297)
Employer contribution 847 448
Benefits paid (320) (339)
------- -------
Fair value of plan assets at end of year 4,913 4,849
------- -------
Funded status (1,791) (1,072)
Unrecognized actuarial loss 2,944 1,614
Unrecognized prior services cost 30 40
Contributions between measurement date and
fiscal year end 145 -
------- -------
Net amount recognized $ 1,328 $ 582
======= =======
Amounts recognized in the Company's Consolidated Balance Sheets at January
31, 2003 and 2002 (in thousands) consist of:
2003 2002
-------- --------
Prepaid benefit cost $ 1,328 $ 582
Accrued benefit liability (3,120) (1,654)
Intangible asset 30 40
Accumulated other comprehensive loss 3,090 1,614
------- -------
Net amount recognized $ 1,328 $ 582
======= =======
Net periodic pension cost for 2003, 2002 and 2001 includes the following
components (in thousands):
2003 2002 2001
------- ------ ------
Service cost $ 167 $ 163 $ 141
Interest cost 409 391 404
Expected return on assets (398) (398) (371)
Net amortization 68 (7) 3
------ ------ ------
Net periodic pension cost $ 246 $ 149 $ 177
====== ====== ======
The Company has recognized the full amount of its actuarially determined
pension liability and the related intangible asset. The unrecognized pension
cost has been recorded as a charge to consolidated stockholders' equity after
giving effect to the related future tax benefit.
The projected benefit obligation for 2003, 2002 and 2001 was computed using
a discount rate of 6.5%, 7.25% and 7.75%, respectively, and an estimated
long-term rate of return on assets of 8.0%, 8.75% and 8.75%, respectively.
Benefit level assumptions for 2003, 2002 and 2001 are based on fixed amounts per
year of credited service.
54
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
The Company also participates in a number of defined benefit,
multi-employer plans. These plans are union-sponsored, and the Company makes
contributions equal to the amounts accrued for pension expense. Total union
pension expense for these plans was $1,316,000, $1,285,000 and $1,236,000 in
2003, 2002 and 2001, respectively. Information regarding assets and accumulated
benefits of these plans has not been made available to the Company.
The Company's salaried and certain hourly employees participate in
Company-sponsored, defined contribution plans. Total expense for the Company's
portion of these plans was $1,560,000, $1,205,000 and $1,178,000 in 2003, 2002
and 2001, respectively.
(11) Indebtedness
On July 9, 2002, the Company entered into a new credit facility
("Credit Agreement") with General Electric Capital Corporation as agent for a
group of banks. The Credit Agreement was used to refinance borrowings
outstanding under the Company's previous revolving credit facility ("Previous
Credit Agreement") and to pay the outstanding balance under the Company's note
agreement ("Senior Notes"). The Credit Agreement provides a $35,000,000
revolving credit facility that is available for working capital, capital
expenditures, and for other general corporate purposes. The maximum available
under the revolving credit facility is $35,000,000, less any outstanding letter
of credit commitments (which are subject to a $15,000,000 sublimit).
Availability under the revolving credit facility is dependent on a borrowing
base consisting primarily of domestic customer receivables and inventories. As
of January 31, 2003, availability under the revolving credit facility was
$26,381,000, less outstanding letters of credit of $6,911,000, although no
borrowings were outstanding. The Credit Agreement also includes a $35,000,000
term loan ("Term Loan") that is payable in increasing quarterly installments
that began October, 2002 and end in July, 2007. The Credit Agreement includes a
penalty of 2% in the event of prepayment prior to the first anniversary of the
agreement, 1% after the first anniversary but prior to the second anniversary,
and no prepayment penalty thereafter.
The Credit Agreement is secured by a majority of the assets of the
Company and certain of its subsidiaries, including but not limited to, accounts
receivable, inventory and equipment. The Credit Agreement contains certain
covenants including restrictions on the incurrence of additional indebtedness
and liens, transactions with affiliates, sale of assets or other dispositions,
lease transactions and certain financial maintenance covenants, including among
others, maximum capital expenditures, minimum EBITDA, minimum interest coverage
and maximum leverage. The Company was in compliance with its covenants as of
January 31, 2003. The Credit Agreement provides for interest at variable rates
equal to, at the Company' option, a Libor rate plus 2.75% to 3.25% (depending
upon leverage ratios), or an alternate reference rate as defined in the Credit
Agreement. As of January 31, 2003, outstanding borrowings under the Credit
Agreement were at an average interest rate of 4.18%.
The Company's floating rate debt exposes it to changes in interest
rates going forward. During September 2002, the Company entered into an interest
rate
55
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
swap agreement (the "Swap Agreement"), which has been designated and is
accounted for as a cash flow hedge to effectively convert a portion of the Term
Loan to a fixed rate basis, thus reducing the impact of interest rate changes.
The Company will pay the counterparties interest at 2.53% and receive interest
based on a variable Libor rate (1.38% as of January 31, 2003). The notional
principal of the swap was $16,625,000 as of January 31, 2003. The notional
principal is reduced each quarter based on 50% of the scheduled principal
payments on the Company's Term Loan. 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
$219,000 as of January 31, 2003.
Maximum borrowings outstanding under the Company's then-existing credit
agreements during 2003, 2002 and 2001 were $37,000,000, $47,000,000 and
$53,000,000, respectively, and the average outstanding borrowings were
$30,062,000, $33,292,000 and $47,708,000, respectively. The weighted average
interest rates were 6.6%, 7.0% and 9.0%, respectively.
Loan costs incurred for securing long-term financing are amortized over
the term of the respective loan agreement. Amortization of these costs for 2003,
2002 and 2001 was $345,000, $312,000 and $351,000, respectively. Amortization of
loan costs is included in interest expense in the Consolidated Statements of
Income.
The Company recorded an extraordinary loss of $696,000, net of taxes or
$0.06 per share, as a result of the early redemption of the balance outstanding
under the Senior Notes. The loss consisted of a prepayment penalty and
unamortized fees associated with the Senior Notes, net of tax benefits of
$439,000.
Debt outstanding as of January 31, 2003 and 2002, whose carrying value
approximates fair market value, was as follows (in thousands):
2003 2002
------- -------
Current maturities of long-term debt:
Term Loan $ 3,938 $ --
Senior Notes -- 3,571
Revolving credit facility -- 16,500
------- -------
Total current maturities of long-term debt 3,938 20,071
------- -------
Long-term debt:
Term Loan 28,432 --
Senior Notes -- 14,286
------- -------
Total long-term debt 28,432 14,286
------- -------
Total debt $32,370 $34,357
======= =======
56
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
As of January 31, 2003, debt outstanding will mature as follows (in
thousands):
2004 $ 3,938
2005 4,813
2006 6,125
2007 7,438
2008 10,056
(12) Stock and Stock Option Plans
In October 1998, the Company adopted a Rights Agreement whereby the
Company has authorized and declared a dividend of one preferred share purchase
right ("Right") for each outstanding common share of the Company. Subject to
limited exceptions, the Rights are exercisable if a person or group acquires or
announces a tender offer for 25% or more of the Company's common stock. Each
Right will entitle shareholders to buy one one-hundredth of a share of a newly
created Series A Junior Participating Preferred Stock of the Company at an
exercise price of $45.00. The Company is entitled to redeem the Right at $.01
per Right at any time before a person has acquired 25% or more of the Company's
outstanding common stock. The Rights expire 10 years from the date of grant.
The Company has reserved 500,000 shares of common stock for issuance
under Employee Incentive Compensation Plans. Issuance of shares under the Plans
is based on performance as determined annually by a committee appointed by the
Company's Board of Directors.
The Company also has two stock option plans which provide for the
granting of options to purchase up to an aggregate of 1,250,000 shares of common
stock at a price fixed by the Board of Directors or a committee.
Significant option groups outstanding at January 31, 2003 and related
weighted average price and life information follows:
Average Remaining
Options Options Exercise Life
Grant Date Outstanding Exercisable Price (Months)
- ---------- ----------- ----------- --------- ---------
12/93 257,603 257,603 6.420 11
5/94 39,000 39,000 6.375 16
2/96 135,500 135,500 10.500 37
4/97 10,246 10,246 11.400 51
2/98 227,500 227,500 14.000 61
4/98 17,654 14,123 10.290 63
4/99 330,414 242,199 5.130 75
7/99 5,000 3,750 6.063 78
2/00 35,000 26,250 5.500 85
4/00 35,971 14,388 3.495 87
8/00 10,000 5,000 5.125 91
9/00 75,000 37,500 4.000 32
5/01 55,000 13,750 7.105 100
57
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
All options were granted at an exercise price equal to the fair market
value of the Company's common stock at the date of grant. The options have terms
of five to ten years from the date of grant and vest ratably over periods of
four to five years. For purposes of pro forma disclosure, the weighted average
fair value at the date of grant for options granted during 2002 and 2001 were
$4.16 and $2.21 per option, respectively. No options were granted during 2003.
The fair value of options at date of grant was estimated using the Black-Scholes
model. The fair values are based on an expected life in years equal to the full
option term, no dividend yield and the following weighted average assumptions:
2002 2001
---- ----
Interest rate 4.9% 5.0%
Volatility 38% 39%
Shares Under Option Shares Exercisable
---------------------- ----------------------
Weighted Weighted
Number Average Number Average
of Shares Price of Shares Price
--------- -------- --------- --------
Stock Option Activity Summary:
Outstanding, February 1, 2000 1,333,598 $7.862 709,425 $7.858
Granted 167,532 4.286 --
Canceled (158,401) 7.157 (73,033)
Vested -- -- 175,834
--------- ---------
Outstanding, January 31, 2001 1,342,729 7.352 812,226 7.862
Granted 55,000 7.105 --
Canceled (17,561) 6.069 (3,027)
Vested -- -- 171,983
--------- ---------
Outstanding, January 31, 2002 1,380,168 7.358 981,182 7.780
Granted -- --
Exercised (144,956) 3.773 (144,956)
Canceled (1,324) 3.640 (945)
Vested -- -- 191,528
--------- ---------
Outstanding, January 31, 2003 1,233,888 $7.776 1,026,809 $8.289
========= =========
(13) Contingencies
The Company's drilling activities involve certain operating hazards
that can result in personal injury or loss of life, damage and destruction of
property and equipment, damage to the surrounding areas, release of hazardous
substances or wastes and other damage to the environment, interruption or
suspension of drill site operations and loss of revenues and future business.
The magnitude of these operating risks is amplified when the Company, as is
frequently the case, conducts a project on a fixed-price, "turnkey" basis where
the Company delegates certain functions to subcontractors but remains
responsible to the customer for the subcontracted work. In addition, the Company
is exposed to potential liability under foreign, federal, state and local laws
and regulations, contractual indemnification agreements or otherwise in
connection with its provision of services and products. Litigation arising from
any such occurrences may result in the Company being named as a defendant in
lawsuits asserting large claims. Although the Company maintains insurance
protection that it considers economically
58
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
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 or 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.
(14) Operating Segments and Foreign Operations
The Company is organized around discrete divisions based on its primary
product lines. Each division comprises a combination of individual district
offices, which primarily offer similar types of services and serve similar types
of markets. Although individual offices within a division may periodically
perform services normally provided by another division, the results of those
services are recorded in the offices' own division. For example, if a water
resources division office performed geoconstruction services, the revenues would
be recorded in the water resources division rather than the geoconstruction
services division. Should an office's primary responsibility move from one
division president to another, that office's results going forward would be
reclassified between divisions at that time. The Company's reportable segments
are defined as follows:
Water Resources Division
This division provides a full line of water-related services and
products including hydrological studies, site selection, well design, drilling
and well development, pump installation, and repair and maintenance. The
division's offerings include design and construction of water treatment
facilities and the manufacture and sale of products to treat volatile inorganics
in groundwater. The division also offers environmental services to assess and
monitor groundwater contaminants.
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.
59
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
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. The division's
land-based oil and gas search and development activities focus primarily on
natural gas properties, principally coalbed methane projects located in the
Midwest region of the United States.
Products and Other
This grouping has historically included the Company's supply operation
which distributes drilling equipment, parts and supplies, a manufacturing
operation producing diamond drilling rigs, diamond bits, core barrels and drill
rods ("Christensen Products") and other miscellaneous operations which do not
fall into the above divisions. On January 23, 2003, the Company sold its supply
operations to Boart Longyear. Upon the sale, the results of operations were
reclassified to discontinued operations (see Note 4 to the Notes to Consolidated
Financial Statements). On August 8, 2001, the Company sold its Christensen
Products business to a subsidiary of Atlas Copco.
Financial information for the Company's operating segments is presented
below (in thousands). Intersegment revenues are accounted for based on the fair
market value of the products sold or services provided. The Corporate loss from
continuing operations consists of unallocated corporate expenses, primarily
general and administrative functions and incentive compensation. Corporate
assets are all assets of the Company not directly associated with an operating
segment, and consist primarily of cash and deferred income taxes.
2003 2002 2001
-------- --------- ---------
Revenues
Water resources $167,080 $ 172,806 $ 164,883
Mineral exploration 55,769 57,945 66,153
Geoconstruction services 29,621 27,006 38,010
Energy services and production 17,016 27,011 21,232
Products and other 436 9,168 9,528
Intersegment products
and supply revenues -- (3,978) (5,840)
-------- --------- ---------
Total revenues $269,922 $ 289,958 $ 293,966
======== ========= =========
60
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
2003 2002 2001
-------- -------- --------
Income (loss) from continuing
operations
Water resources $ 28,654 $ 27,474 $ 20,650
Mineral exploration (1,082) (7,313) (6,898)
Geoconstruction services 2,631 1,194 5,926
Energy services and production (2,621) 1,014 (1,866)
Products and other (2,142) 1,389 (2,454)
Corporate (14,759) (15,596) (15,189)
Interest (2,490) (3,934) (6,205)
-------- -------- --------
Total income (loss) from
continuing operations $ 8,191 $ 4,228 $ (6,036)
======== ======== ========
Total Assets
Water resources $ 54,244 $ 60,802 $ 63,888
Mineral exploration 60,903 87,739 102,674
Geoconstruction services 20,122 18,274 23,008
Energy services and production 16,183 11,352 13,083
Products and other 1,804 14,165 22,686
Corporate 24,844 10,010 8,529
-------- -------- --------
Total assets $178,100 $202,342 $233,868
======== ======== ========
Capital Expenditures
Water resources $ 4,189 $ 2,959 $ 4,157
Mineral exploration 4,315 5,263 5,144
Geoconstruction services 2,082 986 2,275
Energy services and production 6,567 1,611 2,373
Products and other -- 18 11
Corporate 352 349 166
-------- -------- --------
Total $ 17,505 $ 11,186 $ 14,126
======== ======== ========
Depreciation and Amortization
Water resources $ 4,739 $ 5,087 $ 5,683
Mineral exploration 5,978 8,731 11,273
Geoconstruction services 1,980 2,127 2,015
Energy services and production 1,702 1,665 1,437
Products and other 13 209 490
Corporate 153 137 167
-------- -------- --------
Total $ 14,565 $ 17,956 $ 21,065
======== ======== ========
Geographic Information:
Revenues
North America $227,647 $242,832 $248,677
Africa/Australia 36,182 42,613 39,347
Other foreign 6,093 4,513 5,942
-------- -------- --------
Total revenues $269,922 $289,958 $293,966
======== ======== ========
Of the Products and other sales to unaffiliated customers,
approximately $640,000 and $1,884,000 in 2002 and 2001, respectively, were
export sales, principally to Latin America.
61
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
Income from continuing operations of the energy services and production
segment for 2003, 2002 and 2001, respectively, includes $815,000, $53,000 and
$2,313,000 of expenses related to the Company's energy exploration activities in
the Gulf of Mexico region of the United States. These activities are unrelated
to the Company's coalbed methane exploration and development efforts and were
charged to expense as no reserves were identified. The Company is no longer
pursuing these exploration activities.
(15) New Accounting Pronouncements
The Financial Accounting Standards Board has issued several statements
which will be effective in future fiscal years. SFAS No. 143, "Accounting for
Asset Retirement Obligations establishes accounting standards for recognition
and measurement of a liability for an asset retirement obligation and the
associated asset retirement cost. SFAS No. 143 is effective for the Company's
fiscal year beginning February 1, 2003. Management does not expect a significant
effect on the Company's financial position or results of operations upon the
adoption of SFAS 143. SFAS No. 145, "Rescission of FASB Statement No. 4, 44, and
64, Amendment to FASB Statement No. 13, and Technical Corrections provides new
guidance on accounting for early extinguishments of debt as extraordinary items
and other specific technical changes to existing literature. SFAS no. 145 is
effective for the Company's fiscal year beginning February 1, 2003. Upon
adoption as of February 1, 2003, SFAS No. 145 will require reclassification of
the $696,000 extraordinary loss recognized in fiscal 2003 to income from
continuing operations. SFAS No. 148, "Accounting for Stock-Based Compensation
amends SFAS No. 123 to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS No. 148
is effective for the Company's fiscal year beginning February 1, 2004.
Management is currently assessing the impact SFAS No. 148 will have on the
Company's financial position or results of operations. Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46") requires consolidation
of certain variable interest entities if certain conditions are met. Management
is currently assessing the impact FIN 46 will have on the Company's results of
operations.
62
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2003, 2002 and 2001
(16) Quarterly Results (Unaudited)
Unaudited quarterly financial data are as follows (thousands of
dollars, except per share data):
2003: First Second Third Fourth
------- ------- ------- -------
Revenues $68,184 $70,161 $67,291 $64,286
Gross profit 18,860 20,690 19,325 19,064
Net income from
continuing operations 440 979 562 851
Net income (loss) (14,178) 5 200 478
Basic income per share
from continuing operations 0.04 0.08 0.05 0.07
Diluted income per share
from continuing operations 0.04 0.08 0.05 0.07
Basic income (loss) per share (1.21) 0.00 0.02 0.04
Diluted income (loss)
per share (1.17) 0.00 0.02 0.04
2002: First Second Third Fourth
------- ------- ------- -------
Revenues $75,522 $76,044 $70,660 $67,732
Gross profit 20,025 20,706 20,599 19,516
Net income (loss) from
continuing operations 256 650 756 (2)
Net income (loss) 162 639 698 (421)
Basic income (loss) per share
from continuing operations 0.02 0.06 0.06 0.00
Diluted income per share
from continuing operations 0.02 0.05 0.06 0.00
Basic income (loss) per share 0.01 0.05 0.06 (0.04)
Diluted income (loss)
per share 0.01 0.05 0.06 (0.04)
In the fourth quarter of 2003, the Company sold certain operations and
classified the results of those operations as discontinued operations (see Note
4). Revenues for the first three quarters of 2003 have been reduced by
$3,658,000, $2,638,000 and $2,366,000, respectively, related to the discontinued
operations. Gross profit for the first three quarters of 2003 have been reduced
by $689,000, $469,000 and $488,000, respectively, related to the discontinued
operations. Revenues for the four quarters of 2002 have been reduced by
$4,310,000, $4,070,000, $5,557,000 and $4,493,000, respectively, related to the
discontinued operations. Gross profit for the four quarters of 2002 have been
reduced by $871,000, $937,000, $938,000 and $345,000, respectively, related to
the discontinued operations.
63
SCHEDULE II
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Addition
-----------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
of Period Expenses Accounts Deductions Other of Period
--------- ---------- ---------- ---------- ----- ---------
Allowance for customer
receivables:
Fiscal year ended
January 31, 2001 $3,437 $1,098 $ 730 $(1,755) -- $3,510
Fiscal year ended
January 31, 2002 3,510 1,932 726 (2,572) -- 3,596
Fiscal year ended
January 31, 2003 3,596 1,105 1,026 (1,649) -- 4,078
Reserves for Inventories:
Fiscal year ended
January 31, 2001 3,481 250 -- (58) -- 3,673
Fiscal year ended
January 31, 2002 3,673 3,210 -- (1,686) -- 5,197
Fiscal year ended
January 31, 2003 5,197 3,244 -- (802) -- 7,639
64
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Registrant's Proxy Statement to be used in connection with the
Annual Meeting of Stockholders to be held on June 5, 2003, (i) contains, under
the caption "Election of Directors," certain information required by Item 10 of
Form 10-K and such information is incorporated herein by this reference (except
that the information set forth under the following subcaptions thereunder is
expressly excluded from such incorporation: "Compensation of Directors" and
"Meetings of the Board and Committees"), and (ii) contains, under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance,? certain information
required by Item 10 of Form 10-K and such information is incorporated herein by
this reference. The information required by Item 10 of Form 10-K as to executive
officers is set forth in Item 4A of Part I hereof.
Item 11. Executive Compensation
The Registrant's Proxy Statement to be used in connection with the
Annual Meeting of Stockholders to be held June 5, 2003, contains, under the
caption "Executive Compensation and Other Information," the information required
by Item 11 of Form 10-K and such information is incorporated herein by this
reference (except that the information set forth under the following subcaptions
is expressly excluded from such incorporation: "Report of Board of Directors and
Compensation Committee on Executive Compensation" and "Company Performance").
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Registrant's Proxy Statement to be used in connection with the
Annual Meeting of Stockholders to be held on June 5, 2003, contains, under the
captions "Ownership of Layne Christensen Common Stock," and "Equity Compensation
Plan Information the information required by Item 12 of Form 10-K and such
information is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
The Registrant's Proxy Statement to be used in connection with the
Annual Meeting of Stockholders to be held on June 5, 2003, contains, under the
captions "Executive Compensation and Other Information-Certain Change-In-Control
Agreements," and "Certain Transactions -- Transactions with Management," the
information required by Item 13 of Form 10-K and such information is
incorporated herein by this reference.
Item 14. Controls and Procedures
Based on an evaluation of disclosure controls and procedures for the
period ended January 31, 2003 conducted by our Chief Executive Officer and Chief
65
Financial Officer within the last ninety (90) days, we concluded that our
disclosure controls and procedures are effective.
Based on an evaluation of our internal controls conducted by management
within the last ninety (90) days, no significant deficiencies or material
weaknesses were identified and we have not made any significant changes in our
internal controls or in other factors that could significantly affect internal
controls since such evaluation.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits:
1. Financial Statements:
The financial statements are listed in the index for Item 8 of this
Form 10-K.
2. Financial Statement Schedules:
The applicable financial statement schedule is listed in the index for
Item 8 of this Form 10-K.
3. Exhibits:
The exhibits filed with or incorporated by reference in this report are
listed below:
Exhibit No. Description
4(1) - Restated Certificate of Incorporation of the Registrant (filed
with the Registrant's Annual Report on Form 10-K for the fiscal
year ended January 31, 1996 (File No. 0-20578), as Exhibit 3(1)
and incorporated herein by this reference)
4(2) - Bylaws of the Registrant (filed with Amendment No. 2 to the
Registrant's Registration Statement (File No. 33-48432) as Exhibit
3(2) and incorporated herein by reference)
4(3) - Specimen Common Stock Certificate (filed with Amendment No. 3 to
the Registrant's Registration Statement (File No. 33-48432) as
Exhibit 4(1) and incorporated herein by reference)
4(4) - Rights Agreement, dated October 12, 1998, between Layne
Christensen Company and National City Bank, which includes the
Form of Certificate of Designations of Series A Junior
Participating Preferred Stock of Layne Christensen Company as
Exhibit A, the Form of Right Certificate as Exhibit B and the
Summary of Rights to Purchase Preferred Shares as Exhibit C (filed
with the Company's Form 8-K dated October 12, 1998
66
(File No. 0-20578) as Exhibit 4(1) and incorporated herein by
reference)
4(5) - Credit Agreement dated as of July 9, 2002, among the Company,
Boyles Bros. Drilling Company, Christensen Boyles Corporation,
Layne Water Development & Storage LLC, Layne Texas, Incorporated,
Mid-Continent Drilling Company, Shawnee Oil & Gas, LLC,
Stamm-Scheele, Incorporated, Toledo Oil & Gas Services, Inc.,
Vibration Technology Inc., various financial institutions, LaSalle
Bank National Association, as revolving credit agent, lender and
letter of credit issuer, and General Electric Capital Corporation,
as agent and lender (filed with the Company's Form 10-Q for the
quarter ended October 31, 2002 (File No. 0-20578) and incorporated
herein by reference)
10(1) - Tax Liability Indemnification Agreement between the Registrant
and The Marley Company (filed with Amendment No. 3 to the
Registrant's Registration Statement (File No. 33-48432) as Exhibit
10(2) and incorporated herein by reference)
10(2) - Lease Agreement between the Registrant and Parkway Partners,
L.L.C. dated December 21, 1994 (filed with the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 31, 1995
(File No. 0-20578) as Exhibit 10(2) and incorporated herein by
reference)
10(2.1) - First Modification & Ratification of Lease, dated as of February
26, 1996, between Parkway Partners, L.L.C. and the Registrant
(filed with the Registrant's Annual Report on Form 10-K for the
fiscal year ended January 31, 1996 (File No. 0-20578), as Exhibit
10(2.1) and incorporated herein by this reference)
10(2.2) - Second Modification and Ratification of Lease Agreement between
Parkway Partners, L.L.C. and Layne Christensen Company dated April
28, 1997 (filed with the Registrant's Annual Report on Form 10-K
for the fiscal year ended January 31, 1999 (File No. 0-20578), as
Exhibit 10(2.2) and incorporated herein by this reference)
10(2.3) - Third Modification and Extension Agreement between Parkway
Partners, L.L.C. and Layne Christensen Company dated November 3,
1998 (filed with the Company's 10-Q for the quarter ended October
31, 1998 (File No. 0-20578) as Exhibit 10(1) and incorporated
herein by reference)
10(2.4) - Fourth Modification and Extension Agreement between Parkway
Partners, L.L.C. and Layne Christensen Company executed May 17,
2000, effective as of December 29, 1998 (filed with the Company's
10-Q for the quarter ended July 31, 2000 (File No. 0-20578) as
Exhibit 10.1 and incorporated herein by reference)
67
10(2.5) - Fifth Modification and extension Agreement between Parkway
Partners, L.L.C. and Layne Christensen Company dated March 1,
2003.
**10(3) - Form of Stock Option Agreement between the Company and
management of the Company (filed with Amendment No. 3 to the
Registrant's Registration Statement (File No. 33-48432) as Exhibit
10(7) and incorporated herein by reference)
**10(4) - Form of Non Qualified Stock Option Agreement (Spin-Off Options)
between the Company and Robert J. Dineen (filed with Amendment No.
3 to the Registrant's Registration Statement (File No. 33-48432)
as Exhibit 10(9) and incorporated herein by reference)
10(5) - Insurance Liability Indemnity Agreement between the Company and
The Marley Company (filed with Amendment No. 3 to the Registrant's
Registration Statement (File No. 33-48432) as Exhibit 10(10) and
incorporated herein by reference)
**10(6) - Form of the Layne, Inc. Executive Incentive Compensation Plan
(filed with the Registrant's Form 10-Q for the quarterly period
ended July 31, 1994 (File No. 33-48432) as Exhibit 10(2) and
incorporated herein by reference)
10(7) - Agreement between The Marley Company and the Company relating to
tradename (filed with the Registrant's Registration Statement
(File No.33-48432) as Exhibit 10(10) and incorporated herein by
reference)
**10(8) - Form of Subscription Agreement for management of the Company
(filed with Amendment No. 3 to the Registrant's Registration
Statement (File No. 33-48432) as Exhibit 10(16) and incorporated
herein by reference)
**10(9) - Form of Subscription Agreement between the Company and Robert J.
Dineen (filed with Amendment No. 3 to the Registrant's
Registration Statement (File No. 33-48432) as Exhibit 10(17) and
incorporated herein by reference)
10(10) - Credit Agreement dated as of July 9, 2002, among the Company,
Boyles Bros. Drilling Company, Christensen Boyles Corporation,
Layne Water Development & Storage LLC, Layne Texas, Incorporated,
Mid-Continent Drilling Company, Shawnee Oil & Gas, LLC,
Stamm-Scheele, Incorporated, Toledo Oil & Gas Services, Inc.,
Vibration Technology Inc., various financial institutions, LaSalle
Bank National Association, as revolving credit agent, lender and
letter of credit issuer, and General Electric Capital Corporation,
as agent and lender (filed with the Company's Form 10-Q for the
quarter ended October 31, 2002 (File No. 0-20578) and incorporated
herein by reference)
**10(11) - Letter Agreement between Andrew B. Schmitt and the Company dated
October 12, 1993 (filed with the Company's Annual Report
68
on Form 10-K for the fiscal year ended January 31, 1995 (File No.
0-20578) as Exhibit 10(13) and incorporated herein by reference)
**10(12) - Form of Incentive Stock Option Agreement between the Company and
management of the Company (filed with the Company's Annual Report
on Form 10-K for the fiscal year ended January 31, 1996 (File No.
0-20578), as Exhibit 10(15) and incorporated herein by this
reference)
10(13) - Registration Rights Agreement, dated as of November 30, 1995,
between the Company and Marley Holdings, L.P. (filed with the
Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 1996 (File No. 0-20578), as Exhibit 10(17) and
incorporated herein by this reference)
**10(14) - Form of Stock Option Agreement between the Company and
Management of the Company effective February 1, 1998 (filed with
the Company's Form 10-Q for the quarter ended April 30, 1998 (File
No. 0-20578) as Exhibit 10(1) and incorporated herein by
reference)
**10(15) - Form of Incentive Stock Option Agreement between the Company and
Management of the Company effective April 20, 1999 (filed with the
Company's Form 10-Q for the quarter ended April 30, 1999 (File No.
0-20578) as Exhibit 10(2) and incorporated herein by reference)
**10(16) - Form of Non Qualified Stock Option Agreement between the Company
and Management of the Company effective as of April 20, 1999
(filed with the Company's Form 10-Q for the quarter ended April
30, 1999 (File No. 0-20578) as Exhibit 10(3) and incorporated
herein by reference)
**10(17) - Layne Christensen Company District Incentive Compensation Plan
(revised effective February 1, 2000)
**10(18) - Layne, Inc. Corporate Staff Incentive Compensation Plan
11(1) - Statement regarding Computation of per share earnings
21(1) - List of Subsidiaries
23(1) - Consent of Deloitte & Touche LLP
99(1) - Section 906 Certification of Chief Executive Officer of the
Company
99(2) - Section 906 Certification of Chief Financial Officer of the
Company
- ------------
** Management contracts or compensatory plans or arrangements required to be
identified by Item 14(a)(3).
69
(b) Reports on Form 8-K:
Form 8-K filed on December 6, 2002 related to the Company's Section
906 certifications.
(c) Exhibits
The exhibits filed with this report on Form 10-K are identified above
under Item 14(a)(3).
(d) Financial Statement Schedules
The financial statement schedule filed with this report on Form 10-K
is identified above under Item 14(a)(2).
70
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ Andrew B. Schmitt
----------------------------
Andrew B. Schmitt
President and
Dated: April 3, 2003 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature and Title Date
/s/ Andrew B. Schmitt April 3, 2003
- -------------------------------------------------------
Andrew B. Schmitt
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Jerry W. Fanska April 3, 2003
- -------------------------------------------------------
Jerry W. Fanska
Vice President-Finance and Treasurer
(Principal Financial and Accounting Officer)
/s/ Robert J. Dineen April 3, 2003
- -------------------------------------------------------
Robert J. Dineen
Director
/s/ Edward A. Gilhuly April 3, 2003
- -------------------------------------------------------
Edward A. Gilhuly
Director
/s/ Todd A. Fisher April 3, 2003
- -------------------------------------------------------
Todd A. Fisher
Director
/s/ Donald K. Miller April 3, 2003
- -------------------------------------------------------
Donald K. Miller
Director
/s/ Sheldon R. Erikson April 3, 2003
- -------------------------------------------------------
Sheldon R. Erikson
Director
71
CERTIFICATIONS
I, Andrew B. Schmitt, certify that:
1. I have reviewed this annual report on Form 10-K of Layne Christensen
Company
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 3, 2003
/s/ A.B. Schmitt
-------------------------------
A.B. Schmitt, President
and Chief Executive Officer
72
I, Jerry W. Fanska, certify that:
1. I have reviewed this annual report on Form 10-K of Layne Christensen
Company
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
d) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
e) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 3, 2003
/s/ Jerry W. Fanska
--------------------------------
Jerry W. Fanska, Vice President
Finance -- Treasurer
73
Exhibit Index
Exhibit No. Description Page
4(1) - Restated Certificate of Incorporation of the
Registrant (filed with the Registrant's Annual Report
on Form 10-K for the fiscal year ended January 31, 1996
(File No. 0-20578), as Exhibit 3(1) and incorporated
herein by this reference) *
4(2) - Bylaws of the Registrant (filed with Amendment No. 2
to the Registrant's Registration Statement (File No.
33-48432) as Exhibit 3(2) and incorporated herein by
reference) *
4(3) - Specimen Common Stock Certificate (filed with
Amendment No. 3 to the Registrant's Registration
Statement (File No. 33-48432) as Exhibit 4(1) and
incorporated herein by reference) *
4(4) - Rights Agreement, dated October 12, 1998, between
Layne Christensen Company and National City Bank, which
includes the Form of Certificate of Designations of
Series A Junior Participating Preferred Stock of Layne
Christensen Company as Exhibit A, the Form of Right
Certificate as Exhibit B and the Summary of Rights to
Purchase Preferred Shares as Exhibit C (filed with the
Company's Form 8-K dated October 12, 1998 (File No.
0-20578) as Exhibit 4(1) and incorporated herein by
reference) *
4(5) - Credit Agreement dated as of July 9, 2002, among the
Company, Boyles Bros. Drilling Company, Christensen
Boyles Corporation, Layne Water Development & Storage
LLC, Layne Texas, Incorporated, Mid-Continent Drilling
Company, Shawnee Oil & Gas, LLC, Stamm-Scheele,
Incorporated, Toledo Oil & Gas Services, Inc.,
Vibration Technology Inc., various financial
institutions, LaSalle Bank National Association, as
revolving credit agent, lender and letter of credit
issuer, and General Electric Capital Corporation, as
agent and lender (filed with the Company's Form 10-Q
for the quarter ended October 31, 2002 (File No.
0-20578) and incorporated herein by reference) *
10(1) - Tax Liability Indemnification Agreement between the
Registrant and The Marley Company (filed with Amendment
No. 3 to the Registrant's Registration Statement (File
No. 33-48432) as Exhibit 10(2) and incorporated herein
by reference) *
10(2) - Lease Agreement between the Registrant and Parkway
Partners, L.L.C. dated December 21, 1994 (filed with
the Registrant's Annual Report on Form 10-K for the
fiscal year ended January 31, 1995 (File No. 0-20578)
as Exhibit 10(2) and incorporated herein by reference) *
74
10(2.1) - First Modification & Ratification of Lease,
dated as of February 26, 1996, between Parkway
Partners, L.L.C. and the Registrant (filed with
the Registrant's Annual Report on Form 10-K for
the fiscal year ended January 31, 1996 (File No.
0-20578), as Exhibit 10(2.1) and incorporated
herein by this reference) *
10(2.2) - Second Modification and Ratification of Lease
Agreement between Parkway Partners, L.L.C. and
Layne Christensen Company dated April 28, 1997
(filed with the Registrant's Annual Report on Form
10-K for the fiscal year ended January 31, 1999
(File No. 0-20578), as Exhibit 10(2.2) and
incorporated herein by this reference) *
10(2.3) - Third Modification and Extension Agreement
between Parkway Partners, L.L.C. and Layne
Christensen Company dated November 3, 1998 (filed
with the Company's 10-Q for the quarter ended
October 31, 1998 (File No. 0-20578) as Exhibit
10(1) and incorporated herein by reference) *
10(2.4) - Fourth Modification and Extension Agreement
between Parkway Partners, L.L.C. and Layne
Christensen Company executed May 17, 2000,
effective as of December 29, 1998 (filed with the
Company's 10-Q for the quarter ended July 31, 2000
(File No. 0-20578) as Exhibit 10.1 and
incorporated herein by reference) *
10(2.5) - Fifth Modification and extension Agreement
between Parkway Partners, L.L.C. and Layne
Christensen Company dated March 1, 2003. 78
**10(3) - Form of Stock Option Agreement between the
Company and management of the Company (filed with
Amendment No. 3 to the Registrant's Registration
Statement (File No. 33-48432) as Exhibit 10(7) and
incorporated herein by reference) *
**10(4) - Form of Non Qualified Stock Option Agreement
(Spin-Off Options) between the Company and Robert
J. Dineen (filed with Amendment No. 3 to the
Registrant's Registration Statement (File No.
33-48432) as Exhibit 10(9) and incorporated herein
by reference) *
10(5) - Insurance Liability Indemnity Agreement between
the Company and The Marley Company (filed with
Amendment No. 3 to the Registrant's Registration
Statement (File No. 33-48432) as Exhibit 10(10)
and incorporated herein by reference) *
**10(6) - Form of the Layne, Inc. Executive Incentive
Compensation Plan (filed with the Registrant's
Form 10-Q for the quarterly period ended July 31,
1994 (File No. 33-48432) as Exhibit 10(2) and
incorporated herein by reference) *
75
10(7) - Agreement between The Marley Company and the
Company relating to tradename (filed with the
Registrant's Registration Statement (File
No.33-48432) as Exhibit 10(10) and incorporated
herein by reference) *
**10(8) - Form of Subscription Agreement for management of
the Company (filed with Amendment No. 3 to the
Registrant's Registration Statement (File No.
33-48432) as Exhibit 10(16) and incorporated
herein by reference) *
**10(9) - Form of Subscription Agreement between the
Company and Robert J. Dineen (filed with Amendment
No. 3 to the Registrant's Registration Statement
(File No. 33-48432) as Exhibit 10(17)and
incorporated herein by reference) *
10(10) - Credit Agreement dated as of July 9, 2002, among
the Company, Boyles Bros. Drilling Company,
Christensen Boyles Corporation, Layne Water
Development & Storage LLC, Layne Texas,
Incorporated, Mid-Continent Drilling Company,
Shawnee Oil & Gas, LLC, Stamm-Scheele,
Incorporated, Toledo Oil & Gas Services, Inc.,
Vibration Technology Inc., various financial
institutions, LaSalle Bank National Association,
as revolving credit agent, lender and letter of
credit issuer, and General Electric Capital
Corporation, as agent and lender (filed with the
Company's Form 10-Q for the quarter ended October
31, 2002 (File No. 0-20578) and incorporated
herein by reference) *
**10(11) - Letter Agreement between Andrew B. Schmitt and
the Company dated October 12, 1993 (filed with the
Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1995 (File No.
0-20578) as Exhibit 10(13) and incorporated herein
by reference) *
**10(12) - Form of Incentive Stock Option Agreement between
the Company and management of the Company (filed
with the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1996 (File No.
0-20578), as Exhibit 10(15) and incorporated
herein by this reference) *
10(13) - Registration Rights Agreement, dated as of
November 30, 1995, between the Company and Marley
Holdings, L.P. (filed with the Company's Annual
Report on Form 10-K for the fiscal year ended
January 31, 1996 (File No. 0-20578), as Exhibit
10(17) and incorporated herein by this reference) *
**10(14) - Form of Stock Option Agreement between the
Company and Management of the Company effective
February 1, 1998 (filed with the Company's Form
10-Q for the quarter ended April 30, 1998 (File
No. 0-20578) as Exhibit 10(1) and incorporated
herein by reference) *
76
**10(15) - Form of Incentive Stock Option Agreement between
the Company and Management of the Company
effective April 20, 1999 (filed with the Company's
Form 10-Q for the quarter ended April 30, 1999
(File No. 0-20578) as Exhibit 10(2) and
incorporated herein by reference) *
**10(16) - Form of Non Qualified Stock Option Agreement
between the Company and Management of the Company
effective as of April 20, 1999 (filed with the
Company's Form 10-Q for the quarter ended April
30, 1999 (File No. 0-20578) as Exhibit 10(3) and
incorporated herein by reference) *
**10(17) - Layne Christensen Company District Incentive
Compensation Plan (revised effective February 1,
2000) 85
**10(18) - Layne, Inc. Corporate Staff Incentive Compensation Plan 91
11(1) - Statement regarding Computation of per share earnings 95
21(1) - List of Subsidiaries 96
23(1) - Consent of Deloitte & Touche LLP 97
99(1) - Section 906 Certification of Chief Executive Officer
of the Company 98
99(2) - Section 906 Certification of Chief Financial Officer
of the Company 99
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* Incorporated herein by reference.
77