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, 2004
[ ] 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. [X]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act. Yes [X] No [ ]
The aggregate market value of the 11,173,480 shares of Common Stock of
the registrant held by non-affiliates of the registrant on January 31, 2004,
computed by reference to the closing sale price of such stock on the last
business day of the registrant's second fiscal quarter on the NASDAQ National
Market System was $93,175,650. The aggregate market value of the 11,116,702
shares of Common Stock of the Registrant held by non-affiliates of the
Registrant on March 23, 2004, computed by reference to the closing sale price of
such stock as reported on the NASDAQ National Market System, was $161,081,012.
At March 23, 2004, there were 12,533,818 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 2004
Annual Meeting of Stockholders to be filed with the Commission pursuant to
Regulation 14A Part III.
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 and energy. Layne Christensen's customers
include municipalities, industrial companies, mining companies, consulting and
engineering firms and oil and gas companies located principally in the United
States, Canada, Mexico, Australia, Africa and South America.
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 its
website as soon as reasonably practicable after such material is filed with or
furnished to the Securities and Exchange Commission.
Market Overview
The characteristics of each of the four markets in which the Company
operates vary, particularly with respect to the maturity and cyclicality of the
market in various geographic areas. In each of the 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 16 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. The Company's services are marketed on an individual and a turnkey
basis. For the design and construction of water treatment facilities and the
sale of products, 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. In addition, the Company's
environmental services related to the assessment and monitoring of groundwater
contaminants are included within 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
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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,
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
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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
would be economical to mine and to assist in mapping the mine layout. 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
The Company's 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 and vibratory ground improvement, 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
The Company's main energy operations include the acquisition,
development, and production activities associated with natural gas properties,
primarily focusing on coalbed methane projects located in the Midwestern United
States. The energy division also includes an oil and gas services sector
primarily focusing on resonance technology solutions for stuck tubulars.
Factors influencing the demand for coalbed methane gas include
consumption levels for natural gas, commodity prices, the economic feasibility
of gas exploration and production and the discovery rate of new gas reserves.
Demand for oil and gas services is driven by the demand for identifying,
defining and developing underground oil and gas reserves.
Business Strategy
The Company's growth strategy is to expand its current product and
service offerings and enter into new business lines that build on the Company's
core competencies. Key elements of this strategy are as follows:
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In the Water Resources Division, Expand Design and Build Services as well
as Water Treatment Products and 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
Company's growth strategy is to bundle its traditional products and service
offerings and market the combination downstream to 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. The Company is also actively seeking additional water treatment
technologies through acquisitions, partnerships and strategic alliances.
Maximize Benefit of Market Rebound in Mineral Exploration
The Company believes that it is positioned in strategic geographic
locations of the world, especially in Africa and South America, to take
advantage of a market rebound in mineral exploration created by rising prices of
gold and base metals. The Company's ability to maximize this opportunity is
created in part by leveraging the Company's local market expertise and technical
competence, combined with access to transferable drilling equipment and employee
training and safety programs.
Expand Presence in Geoconstruction
In the geoconstruction 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 and vibratory ground improvement
capabilities.
Develop Existing Coalbed Methane Opportunities and Expand Presence in
Coalbed Methane Markets
The Company expects to continue to develop its existing projects and to
consider other coalbed methane development and production opportunities within
the United States. The Company is actively developing its coalbed methane
properties as well as creating pipeline and gas gathering system infrastructure.
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. However, future revenue
and profits will be dependent upon a number of factors including consumption
levels for natural gas, commodity prices, the economic feasibility of gas
exploration and production and the discovery rate of new gas reserves.
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Services and Products
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 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 has the capability to design and build complete water
supply systems including products to treat various groundwater contaminants. The
Company provides a full range of services for the design and construction of
water supply and treatment facilities, including hydrological studies, site
selection, well field design and facilities construction. In addition to water
treatment plants, these services are provided in connection with surface water
intakes, pumping stations and well houses. The Company also offers nonrecourse
financing options for these services to its traditional municipal and industrial
customers.
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The Company has the capability to design and build complete water
supply systems including products to treat various groundwater contaminants. The
Company provides a full range of services for the design and construction of
water supply and treatment facilities, including hydrological studies, site
selection, well field design and facilities construction. In addition to water
treatment plants, these services are provided in connection with surface water
intakes, pumping stations and well houses. The Company also offers nonrecourse
financing options for these services to its traditional municipal and industrial
customers.
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.
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. In
addition, the Company sells miscellaneous supplies manufactured by third parties
for use in the water well drilling industry, including well casing, well screens
and well cleaning supplies.
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
7
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.
The Company also offers complete water treatment solutions for various
contaminants such as volatile organics, nitrates, iron, manganese, arsenic,
radium and radon. These solutions typically involve proprietary treatment media
and filtration methods, as well as treatment equipment installed at or near the
wellhead, including chlorinators, aerators, filters and controls.
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
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 sciences 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").
The Company also offers artificial ground-freezing capabilities,
typically utilized as an alternative method to dewatering large diameter
excavation and tunneling projects.
Mineral Exploration
The Company provides drilling services for exploratory and definitional
drilling. 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 by many of these producers to foreign markets
in search of economically minable orebodies, the Company has established mineral
exploration drilling operations in Mexico, Australia and Africa. The Company
also has an ownership interest in foreign affiliates operating in South America.
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Geoconstruction
Geoconstruction includes 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, vibratory ground improvement, drain hole drilling,
installation of ground anchors, tiebacks, 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.
Energy
The Company's main energy operations include the acquisition,
development, and production activities associated with natural gas properties,
primarily focusing on coalbed methane projects located in the Midwestern United
States. The energy division also includes an oil and gas services sector
primarily focusing on resonance technology solutions for stuck tubulars.
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 Australia, Africa, Mexico and Italy. In addition, the Company's
foreign affiliates operate out of locations in South America and Mexico.
The Company is primarily organized around division presidents
responsible for water resources, mineral exploration, geoconstruction and
energy. 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
the mineral division 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.
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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 2004, approximately 63% were
derived from municipalities and approximately 22% were derived from industrial
customers while the balance was derived from other customer groups. The term
"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, 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 product lines, 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.
The Company is marketing its coalbed methane production to large energy
pipeline companies and local industrial customers. In its oil and gas services
sector, the Company's customers are primarily oil and gas companies that conduct
exploration and production activities in the Gulf of Mexico region.
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 for its continuing operations was approximately $51,143,000 at
January 31, 2004, compared to approximately $49,677,000 at January 31, 2003.
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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
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 market is highly fragmented as a result of the
large area served, the wide range of techniques offered and the large number and
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variety of contractors. In this market, the Company competes based upon a
combination of reputation, innovation and price.
In the energy production market, principally coalbed methane gas, the
Company competes with many energy production companies, many of which have
greater capital and other resources than the Company. In its current operations,
the Company is not constrained by the availability of a market for its
production, but does compete with other exploration and production companies for
mineral leases and rights-of-way in its areas of interest. In the oil and gas
services market, the Company believes it has proprietary resonance technology
for removing stuck tubulars for oil and gas customers. The Company also believes
that it is the only company pursuing this type of technology.
Employees and Training
At January 31, 2004, the Company had 2,331 employees, 173 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 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
12
fines, suspension of operations and other penalties. In addition, these and
other laws and regulations affect the Company's mineral exploration customers
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 Company
is exposed to potential liability under foreign, federal, state and local laws
and regulations, contractual indemnification agreements or otherwise in
connection with its 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, the Company currently provides a
variety of services for individuals and entities that have either been ordered
by the Environmental Protection Agency or a comparable state agency to clean up
certain contaminated property, or are investigating whether a particular piece
of property contains any contaminants. These services include soil and
groundwater testing done in connection with environmental audits, investigative
13
drilling to determine the presence of hazardous substances, monitoring wells to
detect the extent of contamination present in the groundwater and recovery wells
to recover certain contaminants from the groundwater. A change in these laws, or
changes in governmental policies regarding the funding, implementation or
enforcement of the laws, could have a material 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, 2004, the Company (excluding foreign affiliates)
owned or leased approximately 560 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, 2004, the Company's foreign
affiliates owned or leased approximately 120 drill rigs.
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, 2004.
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.
14
Name Age Position
---- --- --------
Andrew B. Schmitt 55 President, Chief Executive Officer and Director
Gregory F. Aluce 48 Senior Vice President and Division President -
Water Resources
Eric R. Despain 55 Senior Vice President and Division President -
Mineral Exploration
Steven F. Crooke 47 Vice President, Secretary and General Counsel
Jerry W. Fanska 55 Vice President-Finance and Treasurer
Set forth below are the name, age and position of other significant
employees of the Company.
Name Age Position
---- --- --------
Pier L. Iovino 58 Division President - Geoconstruction
Colin B. Kinley 44 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.
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 and 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 Christensen
Boyles Corporation 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
15
geoconstruction services. Prior to becoming President of the Company's
geoconstruction 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 the Company's energy
division since September 1, 2001, and is responsible for the Company's energy
operations. Prior to becoming President of the Company's energy division, Mr.
Kinley also served as President of Layne Christensen Canada, a wholly-owned
subsidiary of the Company, from 1990 until January 30, 2004 when substantially
all of the assets of Layne Christensen Canada were sold.
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 2004 and 2003, as reported
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 2004 High Low
- ---------------- ---- ---
First Quarter $ 8.79 $ 7.00
Second Quarter 8.35 7.01
Third Quarter 10.25 8.06
Fourth Quarter 13.21 9.03
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
At March 23, 2004, there were 173 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 and LaSalle Bank National
Association, as agent, the Master Shelf Agreement between the Company and
Prudential Investment Management, Inc., The Prudential Insurance Company of
America, Pruco Life Insurance Company and Security Life of Denver Insurance
Company, and other
16
restrictions which may exist under other credit arrangements existing from time
to time. The Credit Agreement and the Master Shelf Agreement limit the cash
dividends payable by the Company.
Item 6. Selected Financial Data
The following selected historical financial information as of and for
each of the five fiscal years ended January 31, 2004, 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, "Goodwill and Other Intangible
Assets," and recorded a non-cash charge of $14,429,000, net of income taxes, as
a cumulative effect of a change in accounting principle (see Note 5 of the Notes
to Consolidated Financial Statements). The Company also sold various operating
companies during 2003 and 2004 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,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
Income Statement Data
(in thousands, except
per share data):
Revenues $ 272,053 $ 255,523 $ 266,614 $ 274,959 $ 258,410
Cost of revenues (exclusive of
depreciation shown below) 196,462 180,351 190,942 204,384 189,076
--------- --------- --------- --------- ---------
Gross profit 75,591 75,172 75,672 70,575 69,334
Selling, general and
administrative expenses 53,920 52,425 53,069 52,514 48,961
Depreciation and amortization 11,877 13,204 16,711 19,939 22,032
Other income (expense):
Equity in earnings (losses)
of affiliates 1,398 842 925 894 (27)
Interest (2,604) (2,490) (3,934) (6,205) (4,818)
Debt extinguishment costs (2,320) (1,135) - - -
Other, net 358 1,694 71 733 (128)
--------- --------- --------- --------- ---------
Income (loss) from
continuing operations
before income taxes 6,626 8,454 2,954 (6,456) (6,632)
Income tax expense (benefit) 4,265 5,084 1,837 (121) 238
Minority interest, net of
income taxes - (188) (70) 118 (255)
--------- --------- --------- --------- ---------
Net income (loss) from
continuing operations
before discontinued
operations and cumulative
effect of accounting change 2,361 3,182 1,047 (6,217) (7,125)
Income (loss) from discontinued
operations, net of income
taxes (1,456) (2,225) 31 291 (540)
Gain (loss) on sale of
discontinued operations,
net of income taxes 1,746 (23) - - -
--------- --------- --------- --------- ---------
Net income (loss) before
cumulative effect of
accounting change 2,651 934 1,078 (5,926) (7,665)
Cumulative effect of accounting
change, net of income taxes - (14,429) - - -
--------- --------- --------- --------- ---------
Net income (loss) $ 2,651 $ (13,495) $ 1,078 $ (5,926) $ (7,665)
========= ========= ========= ========= =========
Basic earnings (loss) per share $ 0.22 $ (1.14) $ 0.09 $ (0.50) $ (0.66)
========= ========= ========= ========= =========
Diluted earnings (loss) per
share $ 0.21 $ (1.11) $ 0.09 $ (0.50) $ (0.66)
========= ========= ========= ========= =========
18
At January 31,
------------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Balance Sheet Data
(in thousands):
Working capital,
excluding debt $ 52,406 $ 37,613 $ 35,584 $ 50,531 $ 48,816
Total assets 217,327 178,100 202,342 233,868 245,335
Total debt 42,000 32,370 34,357 61,928 63,500
Total stockholders'
equity 93,685 83,373 95,892 93,925 106,840
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 those concerning the strategic plans, expectations
and objectives for future operations and are generally 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
commodities, unanticipated slowdowns in the Company's major markets, the risks
and uncertainties normally incident to the exploration for and development and
production of oil and gas, 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.
Management Overview of Reportable Operating Segments
The Company is a multinational company which provides sophisticated
services and related products to a variety of markets. Management defines the
Company's operational organizational structure into 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 office's 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 division. Should an office's primary responsibility move from
19
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 the design and construction of water treatment
facilities and the manufacture and sale of products to treat volatile organics
and other contaminants such as nitrates, iron, manganese, arsenic, radium and
radon in groundwater. The division also offers environmental services to assess
and monitor groundwater contaminants. Effective February 1, 2003, the Company's
ground freezing services were included in the division on a prospective basis
due to a change in reporting responsibility.
The division's operations rely heavily on the municipal sector as
approximately 63% of the division's fiscal 2004 revenues were derived from the
municipal market. The municipal sector has been adversely impacted by the slow
U.S. economy. Reduced tax revenues have limited spending and new development by
local municipalities. Generally, spending levels in the municipal sector lag an
economic recovery and are expected to remain at reduced levels for the first
half of next year.
In addition to the reduced spending levels in the municipal market, the
Company has also experienced reduced demand for its services in the industrial
markets. The soft markets have increased the competitive challenges for the
division as competitors have been very aggressive on pricing. The division's
margins have been adversely affected as the result of a focused effort to
maintain market share in a difficult environment. As the U.S. economy begins to
recover, the Company expects activity levels within the water markets to improve
along with pricing. The division is also expanding its water treatment product
offerings and expects to see growth in water treatment sales in fiscal 2005.
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.
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 could have a material adverse effect on the
Company.
In fiscal 2004, the mineral exploration division experienced the first
increase in worldwide exploration spending since 1997, driven primarily by
increased gold and base metals prices. The division relies heavily on mining
activity in Africa as 57% of total division revenues for fiscal 2004 were
20
generated in Africa. The Company believes this concentration of risk is
mitigated by working for larger international mining companies and the
establishment of permanent operating facilities in Africa. Operating
difficulties in Africa, including but not limited to, political instability,
workforce instability, harsh environment, disease and remote locations, all
create natural barriers to entry in this market by competitors. The Company
believes it has positioned itself as the market leader in Africa and has
established the infrastructure to operate effectively. The division expects to
experience continued growth next year as mining activity accelerates.
Geoconstruction Division
This division focuses on services that improve soil stability,
primarily jet grouting, grouting, vibratory ground improvement, drilled
micropiles, stone columns, anchors and tie backs. The division also manufactures
a line of high-pressure pumping equipment used in grouting operations and
geotechnical drilling rigs used for directional drilling. Effective February 1,
2003, the division no longer includes the Company's ground freezing services due
to a change in reporting responsibility.
The geoconstruction division frequently acts as a subcontractor to
heavy civil construction contractors and governmental agencies. In many cases,
circumstances outside of the Company's control are inherent in a subcontractor
relationship. Consequently, the division could experience delays on projects
that could have a material adverse effect on the division. The Company expects
the volume of large, construction-type projects utilizing the Company's services
to improve next year in conjunction with the U.S. economic recovery.
Energy Division
This division primarily focuses on exploration and production of
coalbed methane ("CBM") properties in the United States. To date it has been
concentrated on projects in the mid-continent region of the United States.
Historically, the division has also included service businesses in shallow gas
and tar sands exploration drilling, conventional oilfield fishing services and
coil tubing fishing services. During fiscal 2004, the division's strategy
shifted to focus mainly on resource development rather than providing services
to external customers. Accordingly, in January 2004, the Company sold its
Canadian drilling unit to Ensign Drilling and its oilfield fishing services to
Smith International. The results of operations for these units have been
reclassified to discontinued operations for all years presented (see Note 4 of
the Notes to Consolidated Financial Statements). The division is now composed of
the Company's CBM development activities and two small, specialty energy service
companies.
Upon the sale of the two businesses in fiscal 2004, the Company has
re-positioned the division to focus mainly on exploration and production
activities associated with its CBM properties. The expansion of the Company's
energy segment is contingent upon significant cash investments to develop the
Company's unproved acreage. As of January 31, 2004, the Company has invested
$14,084,000 in oil and gas related assets and expects to spend approximately
$8,000,000 in development activities associated with its CBM efforts in fiscal
2005. The production curve for a typical CBM well is generally 15-20 years.
Accordingly, the Company expects to earn a return on its investment through
production
21
proceeds over the next 15-20 years. However, future revenues and profits will be
dependent upon a number of factors including consumption levels for natural gas,
commodity prices, the economic feasibility of gas exploration and production and
the discovery rate of new gas reserves. The Company expects to have
approximately 80 gross producing wells on-line by the end of the first quarter
of fiscal 2005. Operating losses in the division are expected through the third
quarter of fiscal 2005 until sufficient production volumes are generated to
offset the division's level of fixed costs.
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
operation to Boart Longyear. Upon the sale, the results of operations were
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).
22
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, 2004 2003
----------------------------- vs. vs.
2004 2003 2002 2003 2002
---- ---- ---- ---- ----
Revenues:
Water resources 62.3% 65.4% 64.8% 1.5% (3.3)%
Mineral exploration 25.1 21.8 21.7 22.3 (3.8)
Geoconstruction 11.5 11.6 10.1 5.6 9.7
Energy 1.1 1.0 1.4 11.5 (28.6)
Products and other 0.0 0.2 2.0 * (91.6)
----- ----- -----
Total revenues 100.0% 100.0% 100.0% 6.5 (4.2)
Cost of revenues (exclusive of
depreciation shown below) 72.2% 70.6% 71.6% 8.9 (5.5)
----- ----- -----
Gross profit 27.8 29.4 28.4 0.6 (0.7)
Selling, general and
administrative expenses 19.8 20.5 19.9 2.8 (1.2)
Depreciation and amortization 4.4 5.2 6.3 (10.0) (21.0)
Other income (expense):
Equity in earnings of affiliates 0.5 0.3 0.3 66.0 (9.0)
Interest (1.0) (1.0) (1.5) 4.6 (36.7)
Debt extinguishment costs (0.8) (0.5) 0.0 * *
Other, net 0.1 0.8 0.0 (78.8) *
----- ----- -----
Income from continuing operations
before income taxes 2.4 3.3 1.1 (21.6) *
Income tax expense 1.5 2.0 0.7 (16.1) *
Minority interest, net of
income taxes 0.0 0.0 0.0 * *
----- ----- -----
Net income from continuing
operations before discontinued
operations and cumulative
effect of accounting change 0.9 1.3 0.4 (25.8) *
Income (loss) from discontinued
operations, net of income taxes (0.5) (0.9) 0.0 (34.5) *
Gain (loss) from sale of
discontinued operations,
net of income taxes 0.6 (0.0) 0.0 * *
----- ----- -----
Net income before cumulative
effect of accounting change 1.0 0.4 0.4 * (13.4)
Cumulative effect of accounting
change, net of income taxes 0.0 (5.7) 0.0 * *
----- ----- -----
Net income (loss) 1.0% (5.3)% 0.4% * *
===== ===== =====
* Not meaningful
23
Comparison of Fiscal 2004 to Fiscal 2003
Revenues for fiscal 2004 increased $16,530,000, or 6.5%, to
$272,053,000 compared to $255,523,000 for fiscal 2003. The increase was
primarily the result of increases in the Company's mineral exploration division.
See further discussion of results of operations by division presented below.
Gross profit as a percentage of revenues was 27.8% for fiscal 2004
compared to 29.4% for fiscal 2003. The decrease in gross profit percentage for
the year was primarily related to the negative impact of competitive pricing
pressures on the Company's water resources division. The municipal, industrial,
energy and agricultural market segments were weak throughout the year. Decreases
in gross profit in the water resources division were partially offset by
improved margins in the Company's mineral exploration division due to increased
activity levels associated with higher gold and base metal prices.
Selling, general and administrative expenses increased to $53,920,000
for fiscal 2004 compared to $52,425,000 for fiscal 2003 (19.8% and 20.5% of
revenues, respectively). The increase for the year was primarily the result of
severance-related benefits of $1,244,000 accrued during the second quarter (see
Note 7 of the Notes to Consolidated Financial Statements), start-up expenses
related to the Company's groundwater transfer project in Texas and increased
insurance costs. These expenses were partially offset by lower incentive
compensation expense and cost savings associated with the workforce reductions
completed during the second quarter.
Depreciation and amortization decreased to $11,877,000 for fiscal 2004
compared to $13,204,000 for fiscal 2003. The decrease in depreciation and
amortization was the result of assets becoming fully depreciated in prior
periods primarily in the geoconstruction and mineral exploration divisions.
Interest expense increased to $2,604,000 for fiscal 2004 compared to
$2,490,000 for fiscal 2003. The increase was a result of an increase in the
Company's average borrowings during the year.
The Company recorded debt extinguishment costs of $2,320,000 for fiscal
2004 and $1,135,000 for fiscal 2003. The losses for the periods represent
prepayment penalties and the write-off of associated deferred fees in connection
with refinancing of the Company's credit facilities.
Other, net was income of $358,000 for fiscal 2004 compared to income of
$1,694,000 for fiscal 2003. The variance in income from last year was primarily
due to gains from insurance proceeds, fixed asset sales, and investment sales
that have not recurred at the same levels in the current year.
Income tax expense related to continuing operations of $4,265,000 was
recorded for fiscal 2004 (an effective rate of 64.4%), compared to $5,084,000
for the same period last year (an effective rate of 60.1%). Exclusive of the
impact of the debt extinguishment costs, the effective rate would have been
57.7% compared to 57.6% for the twelve months ended January 31, 2004 and 2003,
respectively. The remaining difference in the effective rate versus the
statutory federal rate was due primarily to the impact of nondeductible expenses
and the tax treatment of certain foreign operations.
24
Net income for fiscal 2004 included income related to discontinued
operations of $290,000. During the fourth quarter of fiscal 2004, the Company
sold its Layne Christensen Canada and Toledo Oil and Gas subsidiaries. Both
entities were historically reported as part of the Company's energy segment. In
connection with the sales, the Company recorded a gain of $1,746,000, net of
income taxes of $1,034,000. The gains related to the sale of these operations
were offset by operating losses of $1,456,000, net of income taxes of $215,000
(see Note 4 of the Notes to Consolidated Financial Statements).
Water Resources Division
(in thousands)
Year ended January 31,
----------------------
2004 2003
-------- --------
Revenues $169,631 $167,080
Income from continuing operations 20,942 28,654
Water resources revenues increased 1.5% to $169,631,000 for the year
ended January 31, 2004, from $167,080,000 for the year ended January 31, 2003.
The increase in revenues was primarily the result of a concerted effort to
maintain market share in the division's markets, especially the soft municipal
market where activity has been impacted by competitive pressures and reduced
spending. The increase is also attributable to increased infrastructure needs as
a result of population expansion in certain areas of the United States,
especially metropolitan areas in California and Illinois.
Income from continuing operations for the water resources division
decreased 26.9% to $20,942,000 for the year ended January 31, 2004, compared to
$28,654,000 last year. The decrease in income from continuing operations for the
twelve months ended January 31, 2004, was primarily attributable to competitive
pricing pressures in the municipal, industrial, energy and agricultural market
segments, reduced margins due to a difficult winter drilling season and earnings
from a large, multi-divisional project in the prior year which was not replaced
in fiscal 2004.
Mineral Exploration Division
(in thousands)
Year ended January 31,
----------------------
2004 2003
-------- --------
Revenues $ 68,218 $ 55,769
Income (loss) from continuing operations 3,343 (1,082)
Mineral exploration revenues increased 22.3% to $68,218,000 for the
year ended January 31, 2004, compared to revenues of $55,769,000 for the year
ended January 31, 2003. The increase in revenues was attributable to increased
exploration activity in the Company's markets as a result of higher gold and
base metals prices. The increased activity levels had the greatest impact at the
Company's locations in Africa.
Income from continuing operations for the mineral exploration division
was $3,343,000 for the year ended January 31, 2004, compared to a loss from
continuing operations of $1,082,000 for the year ended January 31, 2003. The
improved profitability in the division was primarily due to the increased
activity levels noted above. The division also benefited from improved earnings
25
by its Latin American affiliates and lower depreciation from assets that were
fully depreciated in prior periods. These items were partially offset by
increased expenses in Australia to bring equipment into compliance with changes
in transportation regulations.
Geoconstruction Division
(in thousands)
Year ended January 31,
----------------------
2004 2003
------- -------
Revenues $31,285 $29,621
Income from continuing operations 2,246 2,631
Geoconstruction revenues increased 5.6% to $31,285,000 for the year
ended January 31, 2004, compared to $29,621,000 for the year ended January 31,
2003. The increase in revenues was primarily a result of a large project in the
northwest United States for the Department of Energy and increased sales at the
Company's manufacturing unit in Italy. The increased sales in Italy were
primarily the result of the weakened value of the U.S. dollar against the euro,
the functional currency of the subsidiary. The movement of the euro versus the
dollar resulted in an increase of approximately $1,000,000 upon conversion to
the Company's reporting currency.
The geoconstruction division had income from continuing operations of
$2,246,000 for the year ended January 31, 2004, compared to $2,631,000 for the
year ended January 31, 2003. The decrease in income from continuing operations
was attributable to delays and work suspensions on certain public sector
projects partially offset by reduced depreciation expense from assets that were
fully depreciated in prior periods.
Energy Division
(in thousands)
Year ended January 31,
----------------------
2004 2003
------- -------
Revenues $ 2,919 $ 2,617
Loss from continuing operations (1,500) (1,223)
Energy division revenues increased 11.5% to $2,919,000 for the year
ended January 31, 2004, compared to revenues of $2,617,000 for the year ended
January 31, 2003. The increase in revenues for the division was primarily
attributable to increased market penetration of the Company's resonance
technology process. Revenues for the division in fiscal 2004 include
approximately $73,000 related to the Company's coalbed methane projects in the
mid-continent region of the United States.
The division had a loss from continuing operations of $1,500,000 for
the year ended January 31, 2004, compared to a loss from continuing operations
of $1,223,000 for the year ended January 31, 2003. The increased loss for the
division is the result of increased expenses related to the Company's coalbed
methane development activities.
26
Corporate Expenses
Corporate expenses not allocated to individual divisions, primarily
included in selling, general and administrative expenses, were $13,481,000 and
$14,759,000 for the years ended January 31, 2004 and 2003, respectively. The
decrease in Corporate expenses for the year ended January 31, 2004, was
primarily the result of lower division incentive-related accruals for the year,
workforce reductions in the second quarter (see Note 7 of the Notes to
Consolidated Financial Statements), and cost reduction measures implemented late
in fiscal 2003. The decreases noted above were partially offset by
severance-related costs (see Note 7 of the Notes to Consolidated Financial
Statements) of approximately $800,000 incurred during the second quarter.
Comparison of Fiscal 2003 to Fiscal 2002
The financial comparison and discussion of fiscal 2003 versus fiscal
2002 has been reclassified to reflect discontinued operations.
Results of Operations
Revenues for fiscal 2003 decreased $11,091,000, or 4.2%, to
$255,523,000 compared to $266,614,000 for fiscal 2002. The decrease was
primarily the result of decreases in the Company's water resources and products
divisions. See further discussion of results of operations by division presented
below.
Gross profit as a percentage of revenues was 29.4% for fiscal 2003
compared to 28.4% 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 $52,425,000
for fiscal 2003 compared to $53,069,000 for fiscal 2002 (20.5% and 19.9% of
revenues, respectively). The decrease was primarily a result of lower
incentive-related accruals partially offset by start-up expenses related to a
water development and storage venture 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 the
water development and storage venture and the relative level of fixed costs in
the Company's operating divisions.
Depreciation and amortization decreased to $13,204,000 for fiscal 2003
compared to $16,711,000 for fiscal 2002. The decrease in depreciation and
amortization was the result of assets becoming fully depreciated in prior
periods in the mineral exploration division and ceasing to amortize goodwill
upon adoption of SFAS No. 142 (see Note 5 of 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.
The Company recorded debt extinguishment costs of $1,135,000 for the
year ended January 31, 2003, for prepayment penalties associated with the
refinancing
27
of the Company's credit facilities. The loss was initially recorded in fiscal
2003 as an extraordinary item and was reclassified to income from continuing
operations in fiscal 2004 upon adoption of SFAS No. 145, "Rescission of FASB
Statement No. 4, 44 and 64, Amendment to FASB Statement No. 13 and Technical
Corrections."
Other, net increased to income of $1,694,000 for the year ended January
31, 2003, compared to income of $71,000 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 $5,084,000 was
recorded for the year ended January 31, 2003 (an effective rate of 60.1%),
compared to $1,837,000 (an effective rate of 62.2%) for the same period last
year. 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.
The net loss for fiscal 2003 included losses related to discontinued
operations of $2,248,000 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.
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, multi-divisional 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.
28
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 that
were 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).
Geoconstruction Division
(in thousands)
Year ended January 31,
----------------------
2003 2002
------- --------
Revenues $29,621 $27,006
Income from continuing operations 2,631 1,194
Geoconstruction 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 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.
29
Energy Division
(in thousands)
Year ended January 31,
----------------------
2003 2002
------- --------
Revenues $ 2,617 $ 3,667
Loss from continuing operations (1,223) (260)
Energy revenues decreased 28.6% to $2,617,000 for the year ended
January 31, 2003, compared to revenues of $3,667,000 for the year ended January
31, 2002. Revenues for the division were negatively impacted by 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 $1,223,000 for
the year ended January 31, 2003, compared to a loss from continuing operations
of $260,000 for the year ended January 31, 2002. The increased loss was the
result of expenses related to the Company's energy exploration activities and
coalbed methane development efforts and reduced income 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.
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 of the Notes to Consolidated Financial Statements).
Corporate Expenses
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.
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
30
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
Management exercises discretion regarding the liquidity and capital
resource needs of its business segments. This includes the ability to prioritize
the use of capital and debt capacity, to determine cash management policies and
to make decisions regarding capital expenditures.
The Company's primary sources of liquidity have historically been cash
from operations, supplemented by borrowings under its credit facilities. Cash
from operating activities was $4,770,000, $19,083,000 and $25,509,000 in fiscal
2004, 2003 and 2002, respectively. Cash from operations and borrowings under the
credit facilities in 2004 were used to fund capital spending of $20,628,000
during the year. In fiscal 2005, the Company expects to continue its expansion
into the production of coalbed methane gas. Capital expenditure estimates for
fiscal 2005 include approximately $8,000,000 related to coalbed methane
development and $14,000,000 to upgrade equipment and facilities in the Company's
other divisions. As of January 31, 2004, the Company had no material commitments
outstanding for capital assets.
31
The Company maintains an agreement (the "Master Shelf Agreement")
whereby it can issue up to $60,000,000 in unsecured notes. The Company also
holds a revolving credit facility (the "Credit Agreement") composed of an
unsecured $30,000,000 revolving facility. Borrowings under the Master Shelf and
Credit Agreements were used to refinance borrowings outstanding under the
Company's previous credit facilities. At January 31, 2004, the Company had
outstanding notes of $40,000,000 under the Master Shelf Agreement and borrowings
of $2,000,000 under the Credit Agreement (see Note 12 of the Notes to
Consolidated Financial Statements). The remaining $20,000,000 of notes under the
Master Shelf Agreement are available for issuance at market rates until July
2005. Issuance of the notes is contingent on, among other things, compliance
with financial covenants in the Master Shelf and Credit Agreements. The Company
was in compliance with its financial covenants at January 31, 2004 and expects
to remain in compliance through the foreseeable future.
The Company's working capital as of January 31, 2004, 2003 and 2002,
was $52,406,000, $33,675,000 and $15,513,000, respectively. A portion of the
reason for the increases in working capital at January 31, 2004 and 2003 was the
receipt of proceeds from the sale of businesses near the end of January in each
year. Excluding cash and cash equivalents, working capital as of January 31,
2004, 2003 and 2002 would have been $30,804,000, $22,905,000 and $12,530,000,
respectively. Working capital was also comparatively lower at January 31, 2002
due to $16,500,000 in current maturities under then existing credit facilities,
which were refinanced on a long-term basis in fiscal 2003. The increased working
capital at January 31, 2004 is discussed in more detail below. The Company
believes it will have sufficient cash from operations and access to credit
facilities to meet the Company's operating cash requirements and to fund its
budgeted capital expenditures for fiscal 2005.
Operating Activities
Cash from operating activities, including discontinued operations,
decreased $14,313,000 to $4,770,000 for the year ended January 31, 2004. The
decrease in cash from operations in 2004 was primarily attributable to increased
working capital, primarily caused by increased receivable balances in the
Company's operating divisions. The increased receivables for fiscal 2004 were
primarily a result of increased balances related to Layne Canada due to a busier
winter drilling season compared to last year, increased activity levels in the
mineral exploration division, and a slowing of collections from water resources
and geoconstruction division customers. The increased receivables were also
attributable to receivables from our joint interest partners on coalbed methane
projects. The increased receivable balances were partially offset by an increase
in accounts payable due to increased activity levels in the minerals division,
costs related to the Company's pipeline construction on a CBM project in the
Midwest and closing accruals and lease termination liabilities associated with
the sale of Layne Canada.
Investing Activities
The Company's capital expenditures of $20,628,000 for fiscal 2004 were
directed primarily toward the Company's expansion into coalbed methane
exploration and production, including the construction of gas pipeline
infrastructure near the Company's development projects. Expenditures related to
the Company's CBM efforts totaled $10,539,000 during fiscal 2004. The remaining
32
capital expenditures were directed towards expansion and upgrading of the
Company's equipment and facilities primarily in the water resources and mineral
exploration divisions.
Investing activities for fiscal 2004 also include the proceeds from the
sale of businesses of $18,114,000 and business acquisitions of $1,150,000. The
Company sold Layne Canada on January 30, 2004, and received $15,914,000 upon
closing. On January 6, 2004, the Company sold Toledo Oil and Gas and received
$2,200,000 upon closing. An additional payment of $300,000 related to the sale
of Toledo was received in February 2004. During fiscal 2004, the Company
acquired Mohajir Engineering Group for $1,150,000 (see Note 2 of the Notes to
Consolidated Financial Statements). The acquisition positioned the Company to
take advantage of growth opportunities in the coalbed methane development
market.
Financing Activities
The Company's financing activities primarily related to the issuance of
$40,000,000 in notes under the Master Shelf Agreement, borrowings of $2,000,000
under the Company's revolving credit facility and proceeds from the issuance of
common stock related to the exercise of stock options during the year. Proceeds
from option exercises were unusually high in fiscal 2004 due to increases in the
Company's stock price and a large number of options with impending expiration
dates. The proceeds from issuance of the notes were used to pay the outstanding
borrowings under the Company's previous credit facilities, a prepayment penalty
related to the previous loan facilities and issuance costs related to the Master
Shelf Agreement and the Company's new revolving credit facility. Financing
activities also include note payments related to the Company's acquisition of
the DrillCorp assets in November 2003 (see Note 2 of the Notes to Consolidated
Financial Statements).
Contractual Obligations and Commercial Commitments
The Company's contractual obligations and commercial commitments are
summarized as follows (in thousands):
Payments/Expiration by Period
Less than More than
Total 1 year 1-3 years 4-5 years 5 years
------- --------- --------- --------- ---------
Contractual Obligations and Other
Commercial Commitments
Credit facilities $42,000 $ - $ 2,000 $13,333 $26,667
Operating leases 17,174 5,326 7,322 3,808 718
Lease termination costs 6,603 6,603 - - -
Mineral interest obligations 315 128 51 39 97
DrillCorp Promissory Note 2,820 1,740 1,080 - -
------- ------- ------- ------- -------
Total contractual cash
obligations 68,912 13,797 10,453 17,180 27,482
------- ------- ------- ------- -------
Standby letters of credit 8,958 8,958 - - -
Asset retirement obligations 96 - - - 96
------- ------- ------- ------- -------
Total contractual obligations
and commercial commitments $77,966 $22,755 $10,453 $17,180 $27,578
======= ======= ======= ======= =======
The Company expects to meet its contractual cash obligations in the
ordinary course of operations, and that the standby letters of credit will be
renewed in connection with its annual insurance renewal process.
33
The Company incurs additional obligations in the ordinary course of
operations. These obligations, including but not limited to, interest payments
on debt, income tax payments and pension fundings are expected to be met in the
normal course of operations.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, management evaluates
its estimates and judgments, which are based on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Accounting policies are more fully described in Note 1 of the Notes to
the Consolidated Financial Statements, located elsewhere in this Annual Report
on Form 10-K. The Company believes that the following represents the more
critical estimates and assumptions used in the preparation of its 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 changed 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. The Company performs its annual impairment test as of December 31
each year. 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 believes 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.
34
Other Long-lived Assets - In evaluating the fair value and future benefits of
long-lived assets, including the Company's coalbed methane assets, the Company
performs an analysis of the anticipated future net cash flows of the related
long-lived assets and reduce their carrying value by the excess, if any, of the
result of such calculation. The Company believes at January 31, 2004, that the
long-lived assets' carrying values and useful lives continue to be appropriate.
Accrued Insurance Expense - The Company maintains insurance programs where it is
responsible for a certain amount of each claim up to a self-insured limit.
Estimates are recorded for health and welfare, property and casualty insurance
costs that are associated with these programs. These costs are estimated based
on actuarially determined projections of future payments under these programs.
Should a greater amount of claims occur compared to what was estimated or costs
of the medical profession increase beyond what was anticipated, reserves
recorded may not be sufficient and additional costs to the consolidated
financial statements could be required.
Costs estimated to be incurred in the future for employee medical benefits,
property 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 15 of the Notes to 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 9 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 17 of the Notes to Consolidated Financial Statements for a
discussion of new accounting pronouncements and their impact on the Company.
35
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 and foreign exchange rate risk that could give
rise to translation and transaction gains and losses.
The Company centrally manages its debt portfolio considering overall
financing strategies and tax consequences. A description of the Company's debt
is included in Notes 12 of the Notes to Consolidated Financial Statements of
this Form 10-K. As of January 31, 2004, the $40,000,000 of the Company's debt
outstanding is fixed-rate debt and $2,000,000 is variable rate debt.
Accordingly, an instantaneous change in interest rates of one percentage point
would not significantly impact the Company's annual interest expense.
Operating in international markets involves exposure to possible
volatile movements in currency exchange rates. Currently, the Company's primary
international operations are in Australia, Africa, Mexico and Italy. The
operations are described in Notes 1 and 16 to the Consolidated Financial
Statements. The Company's affiliates also operate in South America and Mexico
(see Note 3 of 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. The Company also may
utilize various hedge instruments, primarily foreign currency option contracts,
to manage the exposures associated with fluctuating currency exchange rates (see
Note 13 of the Notes to Consolidated Financial Statements). As of January 31,
2004, the Company held option contracts with an aggregate U.S. dollar notional
value of $16,140,000.
As currency exchange rates change, translation of the income statements
of the Company's international operations into U.S. dollars may affect
year-to-year comparability of operating results. We estimate that a 10% change
in foreign exchange rates would impact income from continuing operations
approximately $240,000, $45,000 and $184,000 for the years ended January 31,
2004, 2003 and 2002, respectively. This represents approximately ten percent of
the international segment operating income after adjusting for primarily U.S.
dollar-based operations. 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
the years ended January 31, 2004, 2003 and 2002, were $(232,000), $(52,000) and
$112,000, respectively.
36
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 ...................................................... 38
Financial Statements:
Consolidated Balance Sheets as of January 31, 2004 and 2003..................... 39
Consolidated Statements of Income for the Years
Ended January 31, 2004, 2003 and 2002...................................... 41
Consolidated Statements of Stockholders' Equity for the Years
Ended January 31, 2004, 2003 and 2002...................................... 43
Consolidated Statements of Cash Flows for the Years Ended
January 31, 2004, 2003 and 2002 ........................................... 45
Notes to Consolidated Financial Statements...................................... 47
Financial Statement Schedule II................................................. 74
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.
37
INDEPENDENT AUDITORS' REPORT
Layne Christensen Company:
We have audited the accompanying consolidated balance sheets of Layne
Christensen Company and subsidiaries as of January 31, 2004 and 2003, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended January 31, 2004. 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 companies as of January
31, 2004 and 2003, and the results of their operations and their cash flows for
each of the three years in the period ended January 31, 2004, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Notes 1 and 5 to the financial statements, in fiscal
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
April 12, 2004
38
Layne Christensen Company and Subsidiaries
Consolidated Balance Sheets
As of January 31, 2004 and 2003
(in thousands)
January 31, January 31,
ASSETS 2004 2003
------ ----------- -----------
Current assets:
Cash and cash equivalents $ 21,602 $ 10,770
Customer receivables, less allowance
of $4,104 and $4,078, respectively 55,336 39,117
Costs and estimated earnings in excess of
billings on uncompleted contracts 13,746 8,711
Inventories 13,947 12,738
Deferred income taxes 9,357 11,514
Income taxes receivable 724 463
Other 6,057 4,867
--------- ---------
Total current assets 120,769 88,180
--------- ---------
Property and equipment:
Land 7,861 6,801
Buildings 14,648 12,967
Machinery and equipment 160,327 167,043
Gas transportation facilities and equipment 2,267 -
Oil and gas properties 10,376 3,176
Mineral interest in oil and gas properties 1,441 369
--------- ---------
196,920 190,356
Less-accumulated depreciation (132,120) (132,167)
--------- ---------
Net property and equipment 64,800 58,189
--------- ---------
Other assets:
Investment in affiliates 19,239 18,587
Goodwill 2,449 1,659
Deferred income taxes 7,717 8,262
Other 2,353 3,223
--------- ---------
Total other assets 31,758 31,731
--------- ---------
$ 217,327 $ 178,100
========= =========
See Notes to Consolidated Financial Statements.
- Continued -
39
Layne Christensen Company and Subsidiaries
Consolidated Balance Sheets(Continued)
As of January 31, 2004 and 2003
(in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003
------------------------------------ ------------ ------------
Current liabilities:
Accounts payable $ 25,568 $ 16,044
Current maturities of long-term debt - 3,938
Accrued compensation 11,925 10,874
Accrued insurance expense 6,392 7,845
Other accrued expenses 8,511 7,508
Lease termination costs 6,603 -
Income taxes payable 463 422
Billings in excess of costs and estimated
earnings on uncompleted contracts 8,901 7,874
------------ ------------
Total current liabilities 68,363 54,505
------------ ------------
Noncurrent and deferred liabilities:
Long-term debt 42,000 28,432
Accrued insurance expense 7,690 6,765
Other 5,589 5,025
------------ ------------
Total noncurrent and deferred liabilities 55,279 40,222
------------ ------------
Contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share,
5,000,000 shares authorized, none issued
and outstanding - -
Common stock, par value $.01 per share,
30,000,000 shares authorized, 12,533,818
and 11,852,650 shares issued and outstanding 125 119
Capital in excess of par value 89,759 84,414
Retained earnings 13,458 10,807
Accumulated other comprehensive loss (9,629) (11,922)
Notes receivable from management stockholders (28) (45)
------------ ------------
Total stockholders' equity 93,685 83,373
------------ ------------
$ 217,327 $ 178,100
============ ============
See Notes to Consolidated Financial Statements.
- Concluded -
40
Layne Christensen Company and Subsidiaries
Consolidated Statements of Income
For the Years Ended January 31, 2004, 2003 and 2002
(in thousands, except per share data)
2004 2003 2002
--------- --------- ---------
Revenues $ 272,053 $ 255,523 $ 266,614
Cost of revenues (exclusive of
depreciation shown below) 196,462 180,351 190,942
--------- --------- ---------
Gross profit 75,591 75,172 75,672
Selling, general and administrative
expenses 53,920 52,425 53,069
Depreciation and amortization 11,877 13,204 16,711
Other income (expense):
Equity in earnings of affiliates 1,398 842 925
Interest (2,604) (2,490) (3,934)
Debt extinguishment costs (2,320) (1,135) -
Other, net 358 1,694 71
--------- --------- ---------
Income from continuing operations
before income taxes 6,626 8,454 2,954
Income tax expense 4,265 5,084 1,837
Minority interest, net of income taxes
of $0, $0 and $37 - (188) (70)
--------- --------- ---------
Net income from continuing
operations before discontinued
operations and cumulative effect
of accounting change 2,361 3,182 1,047
Income (loss) from discontinued
operations, net of income taxes of
$(215), $(1,094) and $295 (1,456) (2,225) 31
Gain (loss) on sale of discontinued
operations, net of income taxes of
$1,034, $15 and $0 1,746 (23) -
--------- --------- ---------
Net income before cumulative effect
of accounting change 2,651 934 1,078
Cumulative effect of accounting change,
net of income taxes of$5,796 - (14,429) -
--------- --------- ---------
Net income (loss) $ 2,651 $ (13,495) $ 1,078
========= ========= =========
- Continued -
See Notes to Consolidated Financial Statements.
41
Layne Christensen Company and Subsidiaries
Consolidated Statements of Income (Continued)
For the Years Ended January 31, 2004, 2003 and 2002
(in thousands, except per share data)
2004 2003 2002
---------- ---------- ----------
Basic income (loss) per share:
Net income from continuing operations $ 0.20 $ 0.27 $ 0.09
Income (loss) from discontinued
operations, net of income taxes 0.02 (0.19) -
---------- ---------- ----------
Net income before cumulative
effect of accounting change 0.22 0.08 0.09
Cumulative effect of accounting
change, net of income taxes - (1.22) -
---------- ---------- ----------
Net income (loss) per share $ 0.22 $ (1.14) $ 0.09
========== ========== ==========
Diluted income (loss) per share:
Net income from continuing operations $ 0.19 $ 0.26 $ 0.09
Income (loss) from discontinued
operations, net of income taxes 0.02 (0.18) -
---------- ---------- ----------
Net income before cumulative
effect of accounting change 0.21 0.08 0.09
Cumulative effect of accounting
change, net of income taxes - (1.19) -
---------- ---------- ----------
Net income (loss) per share $ 0.21 $ (1.11) $ 0.09
========== ========== ==========
Weighted average number of common and
dilutive equivalent shares outstanding:
Weighted average shares
outstanding - basic 12,202 11,823 11,758
Dilutive stock options 211 319 277
---------- ---------- ----------
Weighted average shares
outstanding - diluted 12,413 12,142 12,035
========== ========== ==========
- Concluded -
See Notes to Consolidated Financial Statements.
42
Layne Christensen Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Years Ended January 31, 2004, 2003 and 2002
(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, 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 income taxes
of $389 - - - - (617) - (617)
Foreign currency
translation adjustments,
net of income taxes
of $291 - - - - (377) - (377)
Change in unrealized loss
on available for sale
investments, net of
income 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 loss:
Net loss - - - (13,495) - - (13,495)
Other comprehensive income
(loss):
Change in unrecognized
pension liability,
net of income taxes
of $570 - - - - (906) - (906)
Foreign currency
translation adjustments,
net of income taxes
of $754 - - - - 1,198 - 1,198
Change in unrealized gain
on available for sale
investments, net of
income taxes of $26 - - - - (53) - (53)
Change in unrealized loss
on swap, net of income
taxes of $84 - - - - (134) - (134)
-----------
Comprehensive loss (13,390)
-----------
Issuance of stock upon
exercise of options 144,956 2 544 - - - 546
Income tax benefit on exercise
of options - - 265 - - - 265
Payments on notes receivable - - - - - 60 60
----------- ------ -------- -------- ------------- ------------ -----------
Balance, January 31, 2003 11,852,650 119 84,414 10,807 (11,922) (45) 83,373
Comprehensive income:
Net income - - - 2,651 - - 2,651
- Continued-
See Notes to Consolidated Financial Statements.
43
Layne Christensen Company and Subsidiaries
Consolidated Statements of Stockholders' Equity (Continued)
For the Years Ended January 31, 2004, 2003 and 2002
(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
---------- ------ ---------- -------- ------------- ------------ -----------
Other comprehensive income:
Change in unrecognized
pension liability,
net of income taxes
of $71 - - - - 112 - 112
Foreign currency
translation adjustments,
net of income taxes
of $1,330 - - - - 1,093 - 1,093
Change in unrealized loss
on available for sale
investments, net of
income taxes of $62 - - - - 98 - 98
Change in unrealized loss
on swap, net of income
taxes of $84 - - - - 134 - 134
Change in unrealized gain on
exchange contracts, net of
income taxes of $539 - - - - 856 - 856
----------
Comprehensive income 4,944
----------
Issuance of stock for incentive
compensation program 217,504 2 1,701 - - - 1,703
Issuance of acquisition escrow
shares 50,761 - 500 - - - 500
Issuance of stock upon
exercise of options 412,903 4 2,742 - - - 2,746
Income tax benefit on exercise
of options - - 402 - - - 402
Payments on notes receivable - - - - - 17 17
---------- ------ ---------- -------- ------------- ------------ ----------
Balance, January 31, 2004 12,533,818 $ 125 $ 89,759 $ 13,458 $ (9,629) $ (28) $ 93,685
========== ====== ========== ======== ============= ============ ==========
- Concluded -
See Notes to Consolidated Financial Statements.
44
Layne Christensen Company and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended January 31, 2004, 2003 and 2002
(in thousands)
2004 2003 2002
-------- -------- --------
Cash flow from operating activities:
Net income (loss) $ 2,651 $(13,495) $ 1,078
Adjustments to reconcile net income
(loss) to cash from operations:
(Gain) loss on sale of discontinued
operations, net of income taxes (1,746) 23 -
(Income) loss on discontinued
operations, net of income taxes 1,456 2,225 (31)
Loss on extinguishment of debt 2,320 1,135 -
Cumulative effect of accounting change,
net of income taxes - 14,429 -
Depreciation and amortization 11,877 13,204 16,711
Deferred income taxes 2,431 (565) 752
Equity in earnings of affiliates (1,398) (842) (925)
Dividends received from affiliates 843 1,974 904
Minority interest - 188 107
Gain from disposal of property and
equipment (146) (47) (325)
Gain on purchase and sale of businesses - (214) (3,991)
(Gain) loss on sale of investments (8) (901) 3,329
Changes in current assets and liabilities,
(exclusive of effects of acquisitions
and disposals):
(Increase) decrease in customer
receivables (11,352) 2,446 6,471
(Increase) decrease in costs and
estimated earnings in excess of
billing on uncompleted contracts (6,654) 2,158 866
(Increase) decrease in inventories (1,909) 4,430 4,591
(Increase) decrease in other current
assets (377) 758 (104)
Increase (decrease) in accounts payable
and accrued expenses 3,481 (10,223) (2,346)
Increase (decrease) in billings in
excess of costs and estimated
earnings on uncompleted contracts 1,109 (537) (1,675)
Other, net 1,896 1,046 (1,585)
-------- -------- --------
Cash from continuing operations 4,474 17,192 23,827
Cash from discontinued operations 296 1,891 1,682
-------- -------- --------
Cash from operating activities 4,770 19,083 25,509
-------- -------- --------
See Notes to Consolidated Financial Statements.
-Continued -
45
Layne Christensen Company and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
For the Years Ended January 31, 2004, 2003 and 2002
(in thousands)
2004 2003 2002
-------- -------- --------
Cash flow from (used in) investing activities:
Additions to property and equipment $(10,089) $(11,809) $ (9,809)
Additions to oil and gas properties (9,467) (3,176) -
Additions to mineral interest in oil and
gas properties (1,072) (369) -
Proceeds from disposal of property and
equipment 349 3,264 4,073
Proceeds from sale of businesses
18,114 6,851 8,165
Acquisition of business (1,150) (246) -
Proceeds from sale of investment 167 500 -
Investment in joint venture (111) (1,059) -
-------- -------- --------
Cash from (used in) continuing
operations (3,259) (6,044) 2,429
Cash used in discontinued operations (2,976) (1,663) (1,386)
-------- -------- --------
Cash from (used in) investing
activities (6,235) (7,707) 1,043
-------- -------- --------
Cash flow from (used in) financing activities:
Net borrowings (repayments) under
revolving credit facilities 2,000 8,500 (24,000)
Issuance of long-term debt 40,000 35,000 -
Repayments of long-term debt (32,370) (45,487) (3,571)
Prepayment penalty on early extinguishment
of debt (671) (1,135) -
Debt issuance costs (160) (1,709) -
Payments on DrillCorp promissory note (680) - -
Issuance of common stock 2,746 546 -
Payments on notes receivable from
management stockholders 17 60 11
-------- -------- --------
Cash from (used in) financing activities 10,882 (4,225) (27,560)
-------- -------- --------
Effects of exchange rate changes on cash 1,415 636 570
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents 10,832 7,787 (438)
Cash and cash equivalents at beginning
of year 10,770 2,983 3,421
-------- -------- --------
Cash and cash equivalents at end of year $ 21,602 $ 10,770 $ 2,983
======== ======== ========
See Notes to Consolidated Financial Statements.
-Concluded-
46
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
(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 16). 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
47
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
during each year. Translation adjustments are reported as a separate component
of accumulated other comprehensive loss.
Net foreign currency transaction gains and (losses) for 2004, 2003 and
2002 were $(232,000), $(52,000) and $112,000, respectively.
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 $11,877,000, $13,204,000 and $15,672,000 in 2004, 2003 and 2002,
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 division, the Company engages in the operation,
development, production and acquisition of oil and gas properties, principally
focusing on coalbed methane gas projects. The Company follows the full-cost
method of accounting for these properties. Under this method, all productive and
nonproductive costs incurred in connection with the exploration for and
development of oil and gas reserves are capitalized. Such capitalized costs
include lease acquisition, geological and geophysical work, delay rentals,
drilling, completing and equipping oil and gas wells, including salaries,
benefits and other internal costs directly attributable to these activities. The
capitalized costs associated with the Company's oil and gas properties are
depleted using the units of production method. Costs associated with production
and general corporate activities are expensed in the period incurred. As of
January 31, 2004 and 2003, the Company has capitalized $11,817,000 and
$3,545,000, respectively, related to oil and gas properties and land acquisition
costs. The company has also capitalized $2,267,000 as of January 31, 2004,
related to gas transportation facilities and equipment. The Company's projects
are in the early stages of completion and the Company does not have sufficient
production information by which reserves can be established.
48
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
Goodwill - Goodwill relates to acquisitions completed by the Company.
In 2003, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets," which resulted in the
Company ceasing to amortize goodwill. Amortization expense for goodwill was
$1,039,000 for 2002. 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 owned
certain common stock of publicly traded companies in Australia and Mexico. The
Company classified these investments as available-for-sale. The noncurrent
investments had a cost basis of $172,000 and were reported at their fair values
of approximately $12,000 at January 31, 2003. During 2004, the Company sold
certain investments for $167,000 and recorded a net gain of $138,000. The gain
was included in Other, net in the Company's Consolidated Statements of Income
for the year ended January 31, 2004.
During the year, management determined that the Company's remaining
investments had no fair value and that such decline in value was
other-than-temporary. Accordingly, the Company recognized an impairment loss of
$130,000 on these investments which is included in Other, net in the Company's
Consolidated Statements of Income.
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, property 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
15).
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, 2004 and 2003, because of
the relatively short maturity of those instruments. Investments in equity
securities are carried at quoted market values. See Note 12 for disclosure
regarding the fair value of indebtedness and the interest rate swap of the
Company.
The Company follows SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), as amended, which requires all
derivative
49
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
financial instruments to be recorded on the balance sheet at fair value and
establishes criteria for designation and effectiveness of hedging relationships.
Under SFAS 133, the Company accounts for its unrealized hedges of forecasted
costs as cash flow hedges, such that changes in fair value for the effective
portion of hedge contracts, if material, are recorded in accumulated other
comprehensive income in stockholders' equity. Changes in the fair value of the
effective portion of hedge contracts are recognized in accumulated other
comprehensive income until the hedged item is recognized in operations. The
ineffective portion of the derivatives change in fair value, if any, is
immediately recognized in operations (see Note 13 for disclosure regarding the
fair value of foreign currency derivative instruments).
Consolidated Statements of Cash Flows - Highly liquid investments with
an original maturity of three months or less at the time of purchase are
considered cash equivalents. As of January 31, 2004, cash and cash equivalents
included approximately $8,000,000 related to the sale of Layne Canada which was
held in escrow pending final settlement of the lease termination costs incurred
in connection with the sale (see Note 4).
The amounts paid for income taxes and interest are as follows (in
thousands):
2004 2003 2002
------ ------ ------
Income taxes $4,157 $3,348 $3,471
Interest 1,903 2,498 4,092
Supplemental Noncash Transactions - In 2004, the Company issued 217,504
shares of common stock related to compensation awards and 50,761 shares in
connection with an acquisition made in 1999. 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 9).
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 313,597, 390,900 and 398,454 shares have been excluded from
weighted average shares in 2004, 2003 and 2002, 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
50
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
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 14). Pro
forma net income (loss) and earnings per share for 2004, 2003 and 2002,
determined as if the SFAS 123 Method had been applied, are presented in the
following table (in thousands, except per share amounts):
2004 2003 2002
--------- --------- ---------
Net income (loss), as reported $ 2,651 $ (13,495) $ 1,078
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of income
taxes (134) (578) (566)
--------- --------- ---------
Pro forma net income (loss) $ 2,517 $ (14,073) $ 512
========= ========= =========
Net income (loss) per share:
Basic - as reported $ 0.22 $ (1.14) $ 0.09
========= ========= =========
Basic - pro forma $ 0.21 $ (1.19) $ 0.04
========= ========= =========
Diluted - as reported $ 0.21 $ (1.11) $ 0.09
========= ========= =========
Diluted - pro forma $ 0.20 $ (1.16) $ 0.04
========= ========= =========
Other Comprehensive Loss - Accumulated balances, net of income taxes,
of Other Comprehensive Loss are as follows (in thousands):
Unrealized Accumulated
Cumulative Unrealized Unrecognized Unrealized Gain on Other
Translation Loss On Pension Loss on Exchange Comprehensive
Adjustment Investments Liability Swap Contracts Loss
----------- ----------- ------------ ---------- ---------- -------------
Balance,
February 1, 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)
Period change 1,093 98 112 134 856 2,293
----------- ----------- ------------ ---------- ---------- -------------
Balance,
January 31, 2004 $ (8,701) $ - $ (1,784) $ - $ 856 $ (9,629)
=========== =========== ============ ========== ========== =============
Reclassifications - Certain 2003 and 2002 amounts, primarily related to
discontinued operations, have been reclassified to conform with the 2004
presentation.
(2) Acquisitions
On June 3, 2003, the Company acquired substantially all the assets of
Mohajir Engineering Group, Inc., a full service engineering, geophysical, and
geological consulting firm serving the energy industry for $1,150,000. The
acquisition was made to enhance the Company's internal coalbed methane
resources.
On November 10, 2003, the Company acquired certain assets and inventory
of DrillCorp Tanzania Ltd ("DrillCorp"), a mineral exploration drilling
operation in Tanzania, for $3,500,000. The Company issued a non-interest bearing
promissory note for $3,500,000 to a related entity of DrillCorp to finance the
51
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
acquisition. The acquisition was made to expand the Company's capital equipment
resources and to assist in meeting the needs of recently awarded drilling
contracts.
Had the 2004 acquisitions taken place as of February 1, 2003, pro forma
operating results would not have been significantly different from those
reported. The 2004 acquisitions had the following effect on the Company's
consolidated financial position (in thousands):
2004
-------
Property and equipment $ 3,066
Inventory 500
Working capital (2,076)
Intangible and other assets 1,100
Noncurrent and deferred liabilities (1,440)
-------
Total purchase price, net of cash acquired $ 1,150
=======
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 or results
of operations.
(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, 2004:
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.
52
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
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, 2004, 2003 and 2002, and for the
years then ended, was as follows (in thousands):
2004 2003 2002
------- ------- -------
Total assets $52,800 $52,332 $51,146
Total liabilities 17,807 17,039 13,442
Revenues 58,601 51,629 61,720
Gross profit 9,103 8,318 8,401
Operating income 4,110 3,839 3,905
Net income 3,268 2,206 1,988
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, 2004, 2003 and 2002, and for the years
then ended (in thousands):
2004 2003 2002
------- ------- -------
Accounts receivable $ - $ 77 $ 282
Revenues 336 167 2,691
Undistributed equity in earnings of foreign affiliates totaled
$3,419,000, $2,820,000 and $3,925,000 as of January 31, 2004, 2003 and 2002,
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 $10,824,000 as of
January 31, 2004. The investment was accounted for using the equity method until
June 2003 as the Company exercised significant influence over the joint venture
through a management contract. After June 2003, the investment is accounted for
using the cost method as the management contract terminated and the Company no
longer exercises significant influence over the joint venture.
(4) Discontinued Operations
During the third quarter of 2004, the Company reclassified the results
of operations of its Toledo Oil and Gas ("Toledo") business to discontinued
operations. Toledo was historically reported in the Company's energy segment and
offered conventional oilfield fishing services and coil tubing fishing services
(see Note 16). On January 6, 2004, the Company sold the Toledo operation for
$2,500,000 and recorded a gain on the sale of $57,000, net of income taxes of
$30,000, for the year ended January 31, 2004. The Company received $2,200,000
upon the sale and an additional $300,000 in February 2004 at the end of a
contingency period.
In connection with the sale of Toledo, the Company recorded a contract
termination liability for a long-term lease of the Toledo facilities. The
contract termination liability represents the present value of the rental
payments specified in the lease reduced by an estimate for sublease rentals
(based
53
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
on market value of similar properties). The Company will record accretion
expense due to the passage of time for the difference between the expected lease
obligations, net of sublease rentals, and the present value of such operations.
The contract termination costs are included in the Loss from Discontinued
Operations in the Company's Consolidated Statements of Income. A summary of the
lease liability follows (in thousands):
Amounts
----------
January 31, 2003 $ -
2004 Charges 117
----------
January 31, 2004 $ 117
==========
Lease obligations of $135,000, net of sublease rentals, are expected to
be paid over the term of the lease which extends to 2008.
On January 30, 2004, the Company sold its Layne Christensen Canada
Ltd. ("Layne Canada") subsidiary for $15,914,000. Layne Canada was a component
of the Company's energy segment (see Note 16) and provided drilling services to
the shallow, unconventional oil and gas market. The Company recorded a gain on
the sale of $1,652,000, net of income taxes of $994,000 for the year ended
January 31, 2004.
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 16). The Company
recorded a gain on the sale of approximately $827,000, net of income 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 for $2,616,000. 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 16). The
Company recorded a loss on the disposal of $850,000, net of income 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 Layne Canada,
Toledo, Ranney(R) and DESI have been classified as discontinued operations.
Revenues and income (loss) from discontinued operations before income taxes for
2004, 2003 and 2002 were as follows (in thousands):
2004 2003 2002
---- ---- ----
Revenues:
Canada $20,083 $11,301 $18,802
Toledo 2,701 3,098 4,542
Ranney(R) - 2,379 2,686
DESI - 8,064 15,744
------- ------- -------
Total $22,784 $24,842 $41,774
======= ======= =======
54
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
2004 2003 2002
---- ---- ----
Income (loss) from discontinued
operations before income taxes:
Canada $ (473) $ 179 $ 1,441
Toledo (1,273) (1,577) (168)
Ranney(R) - (726) (918)
DESI 75 (1,195) (29)
------- ------- -------
Total $(1,671) $(3,319) $ 326
======= ======= =======
(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 2004 and 2003 include no periodic
amortization of goodwill.
SFAS No. 142 required companies to make an initial assessment of
goodwill for impairment for each of its reporting units within six months after
adoption. The Company completed this initial assessment of goodwill during the
second quarter of 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 income 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 on the remaining goodwill
of its other businesses as of December 31, 2002, and no further impairment was
indicated.
In connection with the decision to reclassify its Toledo Oil and Gas
business as discontinued operations in the third quarter of 2004, the Company
reassessed the recoverability of the goodwill associated with that business and
recorded an impairment charge of $160,000. The Company completed its annual
impairment test on the remaining goodwill of its other businesses as of December
31, 2003, and no further impairment was indicated.
The carrying amount of goodwill attributed to each operating segment
with goodwill balances follows (in thousands):
55
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
January 31, Impairment January 31,
2003 Adjustment Additions 2004
----------- ---------- --------- -----------
Geoconstruction $ 1,499 $ - $ - $ 1,499
Energy 160 (160) 950 950
----------- --------- --------- -----------
$ 1,659 $ (160) $ 950 $ 2,449
=========== ========= ========= ===========
Pro forma results of operations for 2004, 2003 and 2002 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,
2004 2003 2002
----------- ----------- ----------
Reported net income (loss) $ 2,651 $ (13,495) $ 1,078
Add back: Goodwill amortization,
net of income taxes - - 862
---------- ---------- ----------
Adjusted net income (loss) $ 2,651 $ (13,495) $ 1,940
========== ========== ==========
Diluted earnings per share:
Reported net income (loss) $ 0.21 $ (1.11) $ 0.09
Add back: Goodwill amortization,
net of income taxes - - 0.07
---------- ---------- ----------
Adjusted net income (loss) $ 0.21 $ (1.11) $ 0.16
========== ========== ==========
(6) Other Income (Expense)
Other income (expense) consisted of the following for the years ended
January 31 (in thousands):
2004 2003 2002
------- ------- -------
Gain from disposal of property and equipment $ 146 $ 47 $ 325
Gain from purchase or sale of businesses - 214 3,991
Gain (loss) from sale of investments 8 901 (3,329)
Gain (loss) from business closures - 517 (1,697)
Exchange gains (losses) (232) (52) 112
Miscellaneous, net 436 67 669
------- ------- -------
$ 358 $ 1,694 $ 71
======= ======= =======
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
56
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
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 loss of $1,880,000, net of income taxes, 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.
(7) Severance Costs
During the second quarter of 2004, the Company announced involuntary
workforce reductions of 189 employees. The actions were primarily necessary to
align the Company's cost structure with current market conditions. As of July
31, 2003, the Company had notified all applicable employees affected by these
actions. The Company recorded severance and benefit charges of approximately
$530,000 related to these actions in the second quarter of 2004 in accordance
with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." The severance costs are recorded in the Company's Consolidated
Statements of Income as selling, general and administrative expenses for the
year ended January 31, 2004. A reconciliation of the severance costs by segment
follows (in thousands):
2004
--------
Water resources $ 90
Mineral exploration 289
Energy 25
Corporate 126
--------
Total $ 530
========
As of January 31, 2004, the Company had paid $502,000 in costs
associated with these workforce reductions. A summary of the severance costs and
related activity follows:
Number of Amount
Employees (in 000's)
--------- ----------
Balance January 31, 2003 - $ -
2004 Charges 189 530
2004 Payments (187) (502)
-------- ---------
Balance January 31, 2004 2 $ 28
======== =========
The Company also provided termination benefits to certain employees in
exchange for employees' voluntary termination of service. These benefits were
57
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
offered to align the Company's cost structure with current market conditions.
The Company recorded charges of approximately $714,000 as selling, general and
administrative expenses in the Consolidated Statements of Income related to the
voluntary termination benefits in accordance with SFAS No. 88, "Employers
Accounting for Settlement and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits."
(8) Costs and Estimated Earnings on Uncompleted Contracts (in thousands):
2004 2003
-------- --------
Costs incurred on uncompleted contracts $ 77,932 $ 76,236
Estimated earnings 35,377 37,744
-------- --------
113,309 113,980
Less: Billings to date 108,464 113,143
-------- --------
$ 4,845 $ 837
======== ========
Included in accompanying balance sheets
under the following captions:
Costs and estimated earnings in
excess of billings on uncompleted contracts $ 13,746 $ 8,711
Billings in excess of costs and
estimated earnings on uncompleted contracts (8,901) (7,874)
-------- --------
$ 4,845 $ 837
======== ========
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.
(9) Income Taxes
Income (loss) from continuing operations before income taxes is as
follows (in thousands):
2004 2003 2002
------- -------- --------
Domestic $ 9,060 $ 13,895 $ 15,420
Foreign (2,434) (5,441) (12,466)
------- -------- --------
$ 6,626 $ 8,454 $ 2,954
======= ======== ========
Components of income tax expense are as follows (in thousands):
2004 2003 2002
------- ------- -------
Currently due:
U.S. federal $ 940 $ 4,750 $ 849
State and local 363 1,079 316
Foreign 2,034 (198) 1,062
------- ------- -------
3,337 5,631 2,227
------- ------- -------
58
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
2004 2003 2002
------- ------- -------
Deferred:
U.S. federal 2,651 (2,036) (947)
State and local (51) 576 (231)
Foreign (1,672) 913 788
------- ------- -------
928 (547) (390)
------- ------- -------
$ 4,265 $ 5,084 $ 1,837
======= ======= =======
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 as follows (in
thousands):
2004 2003
---------------------------------- -----------------------------------
Assets Liabilities Total Assets Liabilities Total
------ ----------- ----- ------ ----------- -----
Contract income $ 4,084 $ - $ 4,084 $ 3,974 $ - $ 3,974
Accrued insurance expense 1,982 - 1,982 1,982 - 1,982
Employee compensation 1,279 - 1,279 1,326 - 1,326
Bad debts 1,728 - 1,728 1,473 - 1,473
Inventory 2,377 (150) 2,227 2,926 (566) 2,360
Tax loss carryforward 503 - 503 - - -
Unrealized gain on exchange contracts - (539) (539) - - -
Other 1,314 (3,221) (1,907) 1,715 (1,316) 399
------- -------- ------- ------- -------- -------
Current 13,267 (3,910) 9,357 13,396 (1,882) 11,514
------- -------- ------- ------- ------- -------
Accelerated depreciation 287 (4,192) (3,905) 466 (4,903) (4,437)
Cumulative translation
adjustment 4,838 - 4,838 6,168 - 6,168
Accrued insurance expense 3,287 - 3,287 2,853 - 2,853
Unrealized loss on investments 69 - 69 52 - 52
Employee compensation 1,659 (665) 994 1,654 (540) 1,114
Mineral interests and oil and
gas properties - (2,264) (2,264) - (338) (338)
Tax deductible goodwill 5,094 - 5,094 5,450 - 5,450
Tax loss carryforward 1,769 - 1,769 545 - 545
Unremitted foreign earnings - (885) (885) - (838) (838)
Other 864 (2,144) (1,280) 674 (2,981) (2,307)
------- -------- ------- ------- -------- -------
Noncurrent 17,867 (10,150) 7,717 17,862 (9,600) 8,262
------- -------- ------- ------- -------- -------
$31,134 $(14,060) $17,074 $31,258 $(11,482) $19,776
======= ======== ======= ======= ======== =======
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 $1,500,000 which expire between
2010 and 2013, and from its Canadian subsidiary of $800,000 which expires in
2011.
59
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
At January 31, 2004, undistributed earnings of foreign subsidiaries and
certain foreign affiliates included $9,460,000 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 income 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.
The Company's Federal income tax returns for the years ended January
31, 2000 and 2001, are currently under examination by the Internal Revenue
Service ("IRS"). The Company has received a notice of proposed adjustments from
the IRS for the years under examination and is in the process of challenging
these adjustments. The Company believes the ultimate outcome of the examination
will not result in a material impact on the Company's consolidated results of
operations or financial position.
A reconciliation of the total income tax expense to the statutory
federal rate is as follows (in thousands):
2004 2003 2002
------------------------- ------------------------- -------------------------
Effective Effective Effective
Amount Rate Amount Rate Amount Rate
------- --------- ------ --------- ------ ---------
Income tax at statutory rate $ 2,253 34.0% $ 2,874 34.0% $ 1,004 34.0%
State income tax, net 230 3.5 382 4.5 57 1.9
Difference in tax expense
resulting from:
Nondeductible expenses 429 6.5 390 4.6 399 13.5
Taxes on foreign affiliates (163) (2.5) 1,295 15.3 (53) (1.8)
Taxes on foreign operations 1,251 18.9 (205) (2.4) 292 9.9
Other, net 265 4.0 348 4.1 138 4.7%
------- ---- ------- ---- ------- ----
$ 4,265 64.4% $ 5,084 60.1% $ 1,837 62.2%
======= ==== ======= ==== ======= ====
(10) Operating 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, 2004, are as follows (in thousands):
60
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
2005 $5,326
2006 4,179
2007 3,143
2008 2,335
2009 1,473
Thereafter 718
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 $12,383,000,
$10,632,000 and $6,475,000 in 2004, 2003 and 2002, respectively.
(11) Employee Benefit Plans
The Company sponsors a pension plan covering certain hourly employees
not covered by union-sponsored, multi-employer plans. Benefits are computed
based mainly on years of service. The Company makes annual contributions to the
plan substantially equal to the amounts required to maintain the qualified
status of the plans. Contributions are intended to provide for benefits related
to past and current service with the Company. Effective December 31, 2003, the
Company froze the pension plan and recorded a curtailment loss of approximately
$20,000. Benefits will no longer be accrued after December 31, 2003, and no
further employees will be added to the Plan. The Company expects to maintain the
assets of the Plan to pay normal benefits accrued through December 31, 2003.
Assets of the plan consist primarily of stocks, bonds and government securities.
The following table sets forth the plan's funded status as of December
31, 2003 and 2002 (the measurement dates) and the amounts recognized in the
Company's Consolidated Balance Sheets at January 31, 2004 and 2003 (in
thousands):
2004 2003
------- -------
Benefit obligation at beginning of year $ 6,704 $ 5,921
Service cost 210 167
Interest cost 421 409
Actuarial loss 366 527
Benefits paid (334) (320)
------- -------
Benefit obligation at end of year 7,367 6,704
------- -------
Fair value of plan assets at beginning of year 4,913 4,849
Actual return on plan assets 779 (463)
Employer contribution 824 847
Benefits paid (334) (320)
------- -------
Fair value of plan assets at end of year 6,182 4,913
------- -------
Funded status (1,185) (1,791)
Unrecognized actuarial loss 2,785 2,944
Unrecognized prior services cost - 30
Contributions between measurement date and year-end 122 145
------- -------
Net amount recognized $ 1,722 $ 1,328
======= =======
61
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
Amounts recognized in the Company's Consolidated Balance Sheets at
January 31, 2004 and 2003 (in thousands) consist of:
2004 2003
------- -------
Prepaid benefit cost $ 1,722 $ 1,328
Accrued benefit liability (2,907) (3,120)
Intangible asset - 30
Accumulated other comprehensive loss 2,907 3,090
------- -------
Net amount recognized $ 1,722 $ 1,328
======= =======
Net periodic pension cost for 2004, 2003 and 2002 includes the
following components (in thousands):
2004 2003 2002
------ ------ ------
Service cost $ 210 $ 167 $ 163
Interest cost 421 409 391
Expected return on assets (414) (398) (398)
Net amortization 190 68 (7)
------ ------ ------
Net periodic pension cost $ 407 $ 246 $ 149
====== ====== ======
The Company has recognized the full amount of its actuarially
determined pension liability and the related intangible asset (if applicable).
The unrecognized pension cost has been recorded as a charge to consolidated
stockholders' equity after giving effect to the related future tax benefit.
The weighted average assumptions used to determine the benefit
obligation and the net periodic pension cost for the years ending January 31,
2004, 2003 and 2002, are as follows:
2004 2003 2002
-------------- -------------- --------------
Discount rate 6.0% 6.5% 7.25%
Expected long-term return on plan assets 7.5% 8.0% 8.75%
Rate of compensation increase N/A N/A N/A
Health care cost trend on covered charges N/A N/A N/A
Market-related value of assets N/A N/A N/A
Expected return on assets Smoothed value Smoothed value Smoothed value
The estimated long-term rate of return on assets was developed based on
the historical returns and the future expectations for returns for each asset
class, as well as the target asset allocation of the pension portfolio. Benefit
level assumptions for 2004, 2003 and 2002 are based on fixed amounts per year of
credited service.
The percentage of the fair value of total plan assets for each major
category of plan assets as of the measurement date follows:
62
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
As of December 31,
--------------------------
2003 2002
---- ----
Equity securities 55% 47%
Debt securities 37% 43%
Cash and cash equivalents 8% 10%
--- ---
Total 100% 100%
=== ===
The Company's investment policy includes the following asset allocation
guidelines and were effective for both periods presented:
Normal Policy
Weighting Range
--------- ------
Equity securities 60% 40-70%
Debt securities 35% 20-60%
Cash and cash equivalents 5% 0-15%
The asset allocation policy was developed in consideration of the
following long-term investment objectives: to achieve long-term
inflation-adjusted growth in asset values through investments in common stock
and fixed income obligations, to minimize risk by maintaining an allocation to
cash equivalents, to manage the portfolio to conform to ERISA requirements, to
manage plan assets on a total return basis, and to maximize total returns
consistent with an appropriate level of risk. Risk is to be controlled via
diversification of investments among and within asset classes.
The Company contracts with a financial institution to provide
investment management services. Full discretion in portfolio investments is
given to the investment manager subject to the asset allocation guidelines and
the following additional guidelines:
- Equity Securities - Allowable equity securities include common
stocks listed on any U.S. stock exchange or over-the-counter
common stocks, preferred and convertible securities. The equity
holdings of any single issuer should aggregate to no more than 10%
of the total market value of the Plan.
- International Securities - Allowable international securities
include common stocks, preferred stocks, warrants, convertible
securities, as well as government and corporate debt securities.
- Mutual Funds - Mutual funds may be utilized for investments in
fixed income, equity and international securities to enhance
diversification and performance.
- Fixed Income Securities - Allowable fixed income securities
include U.S. Treasury securities, U.S. Agency securities and
corporate bonds. All fixed income securities shall be rated "A" or
better at the time of purchase. No fixed income security shall
continue to be held if its rating falls below "BBB." The
securities of any single issuer, with
63
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
the exception of U.S. Treasuries and Agencies, should
aggregate to no more than 10% of the total market value of the
Plan. The fixed income segment of the portfolio will generally
have an intermediate average maturity (five to ten years) and a
maximum permitted maturity for an individual issue of fifteen
years.
The Company's policy with respect to funding the qualified pension plan
is to fund at least the minimum required by ERISA and not more than the maximum
deductible for tax purposes. No contribution is expected to be required by ERISA
for the January 1 to December 31, 2004 plan year. The Company expects calendar
year 2004 contributions to the plan will be approximately $850,000.
The Company also provides supplemental retirement benefits to the chief
executive officer. Benefits are computed based on the compensation earned during
the highest five consecutive years of employment reduced for a portion of Social
Security benefits and an annuity equivalent of the chief executive's defined
contribution plan balance. The Company does not contribute to the plan or
maintain any investment assets related to the expected benefit obligation. The
Company has recognized the full amount of its actuarially determined pension
liability as of January 31, 2004 and 2003, respectively. The amounts recognized
in the Company's Consolidated Balance Sheets at January 31, 2004 and 2003, were
$1,190,000 and $1,023,000. Net periodic pension cost of the supplemental
retirement benefits for 2004, 2003 and 2002 include the following components (in
thousands):
2004 2003 2002
------- ------- -------
Service cost $ 100 $ 38 $ 50
Interest cost 67 67 62
------- ------- -------
Net periodic pension cost $ 167 $ 105 $ 112
======= ======= =======
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 $1,368,000, $1,316,000 and $1,285,000 in
2004, 2003 and 2002, 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 $1,576,000, $1,560,000 and $1,205,000 in 2004, 2003
and 2002, respectively.
(12) Indebtedness
On July 31, 2003, the Company entered into an agreement ("Master Shelf
Agreement") whereby it could issue up to $60,000,000 in unsecured notes. Upon
closing, the Company issued $40,000,000 of notes ("Senior Notes") under the
Master Shelf Agreement. The remaining $20,000,000, subject to terms and
conditions and acceptance by the lender, is available for issuance by the
Company at market rates until July 31, 2005. The Senior Notes bear a fixed
interest rate of 6.05% and will be due on July 31, 2010, with annual principal
payments of
64
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
$13,333,000 beginning July 31, 2008. Proceeds from issuance of the Senior Notes
were used to refinance borrowings outstanding under the Company's previous term
loan and revolving credit facility ("Previous Loan Facilities").
Concurrent with the signing of the Master Shelf Agreement, the Company
closed on a new bank revolving credit facility ("Credit Agreement"). The Credit
Agreement is an unsecured $30,000,000 revolving facility to be used for working
capital requirements and general corporate purposes. The maximum available under
the Credit Agreement is $30,000,000, less any outstanding letter of credit
commitments (which are subject to a $15,000,000 sublimit). The Credit Agreement
provides interest at variable rates equal to, at the Company's option, a
Eurodollar rate plus 1.75% to 2.75% (depending upon certain ratios) or an
alternative reference rate as defined in the Credit Agreement. The Credit
Agreement will be due and payable on July 31, 2006. On January 31, 2004, there
were loans of $2,000,000, at an average interest rate of 4.0%, and letters of
credit of $8,958,000 outstanding on the Credit Agreement.
The Master Shelf Agreement and the Credit Agreement contain certain
covenants including restrictions on the incurrence of additional indebtedness
and liens, investments, acquisitions, transfer or sale of assets, transactions
with affiliates, payment of dividends and certain financial maintenance
covenants, including among others, fixed charge coverage, maximum debt to
EBITDA, minimum tangible net worth and minimum asset coverage. The Company was
in compliance with its covenants as of January 31, 2004.
In connection with refinancing the Previous Loan Facilities on July 31,
2003, the Company recorded debt extinguishment costs of $2,320,000. The costs
included a prepayment penalty of $671,000, the write-off of deferred loan costs
related to the Previous Loan Facilities of $1,447,000 and the write-off of the
unrealized loss on the Company's interest rate swap of $202,000. The debt
extinguishment costs of $1,135,000 recorded in July 2002 were the result of
refinancing a previous credit facility. The July 2002 loss, which was previously
reported as an extraordinary item, was reclassified to income from continuing
operations upon adoption of SFAS No. 145, "Rescission of FASB Statement No. 4,
44, and 64, Amendment to FASB Statement No. 13, and Technical Corrections," as
of February 1, 2003.
The Company's previous floating rate debt exposed it to changes in
interest rates going forward. During September 2002, the Company entered into an
interest rate swap agreement (the "Swap Agreement"), as required by the Previous
Loan Facilities. The Swap Agreement effectively converted a portion of the
previous term loan to a fixed rate basis, thus reducing the impact of interest
rate changes. Upon entering the Master Shelf Agreement, a fixed interest rate
contract, the Swap Agreement no longer qualified for hedge accounting and gains
and losses related to the Swap Agreement were included in Other, net in the
Company's Consolidated Statements of Income as incurred. The Swap Agreement
calls for quarterly interest payments which commenced on October 1, 2002, and
will terminate September 9, 2004. The Swap Agreement is recorded at its fair
market value of $127,000 as of January 31, 2004, in Other accrued expenses in
the Company's Consolidated Balance Sheets.
65
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
Maximum borrowings outstanding under the Company's then-existing credit
agreements during 2004, 2003 and 2002 were $42,000,000, $37,000,000 and
$47,000,000, respectively, and the average outstanding borrowings were
$37,838,000, $30,062,000 and $33,292,000, respectively. The weighted average
interest rates were 5.7%, 6.6% and 7.0%, respectively.
Loan costs incurred for securing long-term financing are amortized
using a method that approximates the effective interest method over the term of
the respective loan agreement. Amortization of these costs for 2004, 2003 and
2002 was $205,000, $345,000 and $312,000, respectively. Amortization of loan
costs is included in Interest expense in the Consolidated Statements of Income.
Debt outstanding as of January 31, 2004 and 2003, whose carrying value
approximates fair market value, was as follows (in thousands):
2004 2003
------- -------
Current maturities of long-term debt:
Previous Loan Facilities $ - $ 3,938
------- -------
Total current maturities of long-term debt - 3,938
------- -------
Long-term debt:
Previous Loan Facilities - 28,432
Revolving Credit Facility 2,000 -
Senior Notes 40,000 -
------- -------
Total long-term debt 42,000 28,432
------- -------
Total debt $42,000 $32,370
======= =======
As of January 31, 2004, debt outstanding will mature as follows (in
thousands):
2005 $ -
2006 -
2007 2,000
2008 -
2009 13,333
(13) Foreign Currency Derivatives
The Company has foreign operations that have significant costs
denominated in foreign currencies, and thus is exposed to risks associated with
changes in foreign currency exchange rates. At any point in time, the Company
might use various hedge instruments, primarily foreign currency option
contracts, to manage the exposures associated with forecasted expatriate labor
costs and purchases of operating supplies. The Company does not enter into
foreign currency derivative financial instruments for speculative or trading
purposes.
As of January 31, 2004, the Company held option contracts with an
aggregate U.S. dollar notional value of $16,140,000 to hedge the risks
associated with forecasted Australian dollar denominated costs in its African
operations. The contracts settle in various increments through January 2005. The
fair value of the instruments of $1,395,000 at January 31, 2004, is recorded in
other current
66
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
assets, and net of income taxes of $539,000, in accumulated other comprehensive
income. Aggregate gains of $219,000 on foreign currency hedging transactions
were recognized during 2004 as the forecasted transactions being hedged occurred
and were recorded primarily in cost of revenues in the Company's Consolidated
Statements of Income.
(14) 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 stock option plans which provide for the granting
of options to purchase up to an aggregate of 2,500,000 shares of common stock at
a price fixed by the Board of Directors or a committee. As of January 31, 2004,
there are 784,981 shares available to be granted under the plans.
Significant option groups outstanding at January 31, 2004, and related
weighted average price and life information follows:
Average Remaining
Options Options Exercise Life
Grant Date Outstanding Exercisable Price (Months)
- ---------- ----------- ----------- -------- ----------
2/96 89,500 89,500 $10.500 25
4/97 8,943 8,943 11.400 39
2/98 197,500 197,500 14.000 49
4/98 17,654 17,654 10.290 51
4/99 262,614 255,131 5.130 63
7/99 5,000 5,000 6.063 66
2/00 35,000 35,000 5.500 73
4/00 34,122 19,473 3.495 75
8/00 10,000 7,500 5.125 79
9/00 75,000 56,250 4.000 20
5/01 55,000 27,500 7.105 88
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
67
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
to five years. For purposes of pro forma disclosure, the weighted average fair
value at the date of grant for options granted during 2002 was $4.16 per option.
No options were granted during 2004 and 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
----
Interest rate 4.9%
Volatility 38%
Shares Under Option Shares Exercisable
----------------------- -----------------------
Weighted Weighted
Number Average Number Average
of Shares Price of Shares Price
--------- -------- --------- --------
Stock Option Activity Summary:
Outstanding, February 1, 2001 1,343,380 $ 7.352 812,226 $7.862
Granted 55,000 7.105 -
Canceled (17,561) 6.069 (3,027)
Vested - - 172,113
--------- ---------
Outstanding, January 31, 2002 1,380,819 7.358 981,312 7.780
--------- ---------
Granted - -
Exercised (144,956) 3.773 (144,956)
Canceled (1,324) 3.640 (945)
Vested - - 191,658
--------- ---------
Outstanding, January 31, 2003 1,234,539 7.776 1,027,069 8.289
--------- ---------
Granted - - -
Exercised (412,903) 6.475 (412,903)
Canceled (31,303) 13.892 (31,303)
Vested - - 136,588
--------- ------ ---------
Outstanding, January 31, 2004 790,333 8.118 719,451 8.410
========= ====== =========
(15) 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 services and products. Litigation arising from any such
occurrences may result in the Company being named as a defendant in lawsuits
asserting large claims. Although the Company maintains insurance protection that
it considers economically prudent, there can be no assurance that any such
insurance will be sufficient or effective under all circumstances or against all
claims or hazards to which the Company may
68
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
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.
(16) Operating Segments and Foreign Operations
The Company is a multinational company which provides sophisticated
services and related products to a variety of markets. Management defines the
Company's operational organizational structure into 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 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 the design and construction of water treatment
facilities and the manufacture and sale of products to treat volatile organics
and other contaminants such as nitrates, iron, manganese, arsenic, radium and
radon in groundwater. The division also offers environmental services to assess
and monitor groundwater contaminants. Effective February 1, 2003, the Company's
ground freezing services were included in the division on a prospective basis
due to a change in reporting responsibility.
Mineral Exploration Division
This division provides a complete range of drilling services for the
mineral exploration industry. Its aboveground and underground drilling
activities include all phases of core drilling, diamond, reverse circulation,
dual tube, hammer and rotary air-blast methods.
69
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
Geoconstruction Division
This division focuses on services that improve soil stability,
primarily jet grouting, grouting, vibratory ground improvement, drilled
micropiles, stone columns, anchors and tiebacks. The division also manufactures
a line of high-pressure pumping equipment used in grouting operations and
geotechnical drilling rigs used for directional drilling. Effective February 1,
2003, the division no longer includes the Company's ground freezing services due
to a change in reporting responsibility.
Energy Division
This division primarily focuses on exploration and production of
coalbed methane ("CBM") properties in the United States. To date it has been
concentrated on projects in the Midwest region of the United States.
Historically, the division has also included service businesses in shallow gas
and tar sands exploration drilling, conventional oilfield fishing services and
coil tubing fishing services. During fiscal 2004, the division's strategy
shifted to focus mainly on resource development rather than providing services
to external customers. Accordingly, in January 2004, the Company sold its
Canadian drilling unit to Ensign Drilling and its oilfield fishing services to
Smith International. The results of operations for these units have been
reclassified to discontinued operations for all years presented (see Note 4).
The division is now composed of the Company's CBM development activities and two
small, specialty energy service companies.
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
operation to Boart Longyear. Upon the sale, the results of operations were
reclassified to discontinued operations (see Note 4). 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.
70
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
2004 2003 2002
--------- --------- ---------
Revenues
Water resources $ 169,631 $ 167,080 $ 172,806
Mineral exploration 68,218 55,769 57,945
Geoconstruction 31,285 29,621 27,006
Energy 2,919 2,617 3,667
Products and other - 436 9,168
Intersegment products and supply revenues - - (3,978)
--------- --------- ---------
Total revenues $ 272,053 $ 255,523 $ 266,614
========= ========= =========
Income (loss) from continuing operations
Water resources $ 20,942 $ 28,654 $ 27,474
Mineral exploration 3,343 (1,082) (7,313)
Geoconstruction 2,246 2,631 1,194
Energy (1,500) (1,223) (260)
Products and other - (2,142) 1,389
Unallocated corporate expenses (13,481) (14,759) (15,596)
Debt extinguishment costs (2,320) (1,135) -
Interest (2,604) (2,490) (3,934)
--------- --------- ---------
Total income from continuing operations $ 6,626 $ 8,454 $ 2,954
========= ========= =========
Total Assets
Water resources $ 63,800 $ 54,244 $ 60,802
Mineral exploration 54,375 60,903 87,739
Geoconstruction 21,951 20,122 18,274
Energy 40,646 16,183 11,352
Products and other - 1,804 14,165
Corporate 36,555 24,844 10,010
--------- --------- ---------
Total assets $ 217,327 $ 178,100 $ 202,342
========= ========= =========
Capital Expenditures
Water resources $ 3,659 $ 4,189 $ 2,959
Mineral exploration 5,087 4,315 5,263
Geoconstruction 1,070 2,082 986
Energy 10,754 4,416 234
Products and other - - 18
Corporate 58 352 349
--------- --------- ---------
Total capital expenditures $ 20,628 $ 15,354 $ 9,809
========= ========= =========
71
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
2004 2003 2002
---------- --------- ---------
Depreciation and Amortization
Water resources $ 4,543 $ 4,739 $ 5,087
Mineral exploration 5,652 5,978 8,731
Geoconstruction 1,228 1,980 2,127
Energy 286 341 420
Products and other - 13 209
Corporate 168 153 137
---------- --------- ---------
Total depreciation and amortization $ 11,877 $ 13,204 $ 16,711
========== ========= =========
Geographic Information:
Revenues
North America $ 219,978 $ 213,248 $ 219,488
Africa/Australia 44,784 36,182 42,613
Other foreign 7,291 6,093 4,513
---------- --------- ---------
Total revenues $ 272,053 $ 255,523 $ 266,614
========== ========= =========
Income from continuing operations of the energy segment for 2003 and
2002, respectively, includes $815,000 and $53,000 of expenses related to the
Company's energy exploration activities in the Gulf of Mexico region of the
United States. No such expenses were incurred in 2004. 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.
(17) New Accounting Pronouncements
The Financial Accounting Standards Board has issued several statements
which were effective in the current year or will be effective in future years.
SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments and Hedging
Activities Summary" amends and clarifies financial reporting for derivative
instruments, including certain derivative instruments embedded in other contacts
and for hedging activities under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003. SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity" establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003. Interpretation No. 46 Revised, "Consolidation of Variable Interest
Entities" ("FIN 46R") requires consolidation of certain variable interest
entities if certain conditions are met. The adoption of SFAS No. 149 and 150 and
FIN 46R did not have significant impacts on the Company's results of operations
or financial position. The Company adopted the disclosure requirements of SFAS
No. 132 Revised, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" during 2004 related to pensions and other postretirement benefits (see
Note 11).
72
Layne Christensen Company and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 31, 2004, 2003 and 2002
(18) Quarterly Results (Unaudited)
Unaudited quarterly financial data are as follows (thousands of
dollars, except per share data):
First Second Third Fourth
------- ------- ------- -------
2004:
Revenues $59,745 $70,189 $69,861 $72,258
Gross profit 17,252 20,421 19,048 18,870
Net income (loss) from continuing operations 693 (372) 988 1,052
Net income (loss) 619 (450) 541 1,941
Basic net income (loss) per share from continuing
operations 0.06 (0.03) 0.08 0.08
Diluted net income (loss) per share from continuing
operations 0.06 (0.03) 0.08 0.08
Basic net income (loss) per share 0.05 (0.04) 0.04 0.16
Diluted net income (loss) per share 0.05 (0.04) 0.04 0.15
First Second Third Fourth
------- ------- ------- -------
2003:
Revenues $ 63,388 $67,557 $64,466 $60,112
Gross profit 17,914 20,155 18,727 18,376
Net income from continuing operations 696 516 889 1081
Net income before cumulative effect of accounting change 251 5 200 478
Net income (loss) (14,178) 5 200 478
Basic net income per share from continuing operations 0.06 0.05 0.07 0.09
Diluted net income per share from continuing operations 0.06 0.05 0.07 0.09
Basic net income per share before cumulative effect of
accounting change 0.02 0.00 0.02 0.04
Diluted net income per share before cumulative effect
of accounting change 0.02 0.00 0.02 0.04
Basic net income (loss) per share (1.20) 0.00 0.02 0.04
Diluted net income (loss) per share (1.17) 0.00 0.02 0.04
During 2004 and 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 2004 have been reduced by
$6,602,000, $3,353,000 and $2,915,000, respectively, related to the discontinued
operations. Gross profit for the first three quarters of 2004 have been reduced
by $952,000, $893,000 and $157,000, respectively, related to the discontinued
operations. Revenues for the four quarters of 2003 have been reduced by
$4,796,000, $2,604,000, $2,164,000 and $4,174,000, respectively, related to the
discontinued operations. Gross profit for the four quarters of 2003 have been
reduced by $946,000, $535,000, $281,000 and $688,000, respectively, related to
the discontinued operations.
73
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, 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
Fiscal year ended January 31, 2004 4,078 1,050 336 (1,360) - 4,104
Reserves for Inventories:
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
Fiscal year ended January 31, 2004 7,639 426 - (1,823) - 6,242
74
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Based on an evaluation of disclosure controls and procedures for the
period ended January 31, 2004 conducted under the supervision and with the
participation of the Company's management, including the Principal Executive
Officer and the Principal Financial Officer, the Company concluded that its
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
Based on an evaluation of internal controls conducted by management for
the period ended January 31, 2004, no significant deficiencies or material
weaknesses were identified and the Company has not made any significant changes
in internal controls or in other factors that could significantly affect
internal controls since such evaluation.
However, it should be noted that any system of controls, however well
designed and operated, can provide only reasonable assurance regarding
management's control objectives. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control systems, there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions, regardless of how remote.
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 3, 2004, (i) contains, under
the caption "Election of Directors," certain information relating to the
Company's directors and its Audit Committee financial experts 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 subcaption "Compensation of
Directors" is expressly excluded from such incorporation), (ii) contains, under
the caption "Other Corporate Governance Matters", certain information relating
to the Company's Code of Ethics required by Item 10 of Form 10-K and such
information is incorporated herein by this reference, and (iii) 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.
75
Item 11. Executive Compensation
The Registrant's Proxy Statement to be used in connection with the
Annual Meeting of Stockholders to be held June 3, 2004, 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 3, 2004, 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 3, 2004, 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. Principal Accounting Fees and Services
The Registrant's Proxy Statement to be used in connection with the
Annual Meeting of Stockholders to be held on June 3, 2004, contains, under the
caption "Principal Accounting Fees and Services," the information required by
Item 14 of Form 10-K and such information is incorporated herein by this
reference.
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.
76
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) - Amended and Restated Bylaws of the Registrant (filed with
Exhibit 99.2 to the Registrant's Form 8-K dated December 5, 2003
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) - Loan Agreement, dated as of July 31, 2003, by and among Layne
Christensen Company, LaSalle Bank National Association, as
administrative agent and a lender and certain other lenders
named in the Loan Agreement (filed with the Registrant's 10-Q
for the quarter ended July 31, 2003 (File No. 0-20578) as
Exhibit 4(5) and incorporated herein by reference)
4(5) - Master Shelf Agreement, dated as of July 31, 2003, by and
among Layne Christensen Company, Prudential Investment
Management, Inc., The Prudential Insurance Company of America,
Pruco Life Insurance Company, Security Life of Denver Insurance
Company and such other Purchasers of the Notes as may be named
in the Master Shelf Agreement from time to time (filed with the
Registrant's 10-Q for the quarter ending July 31, 2003 (File No.
0-20578) as Exhibit 4(6) 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)
77
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 (filed as Exhibit 10(2.5) to the Registrant's Annual Report
on Form 10-K for the fiscal year ended January 31, 2003 (File
No. 0-20578) and incorporated herein by this reference)
**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) - 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(5) - 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(6) - 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(7) - 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(8) - Loan Agreement, dated as of July 31, 2003, by and among Layne
Christensen Company, LaSalle Bank National Association, as
administrative agent and a lender and certain other lenders
78
named in the Loan Agreement (filed with the Registrant's 10-Q
for the quarter ended July 31, 2003 (File No. 0-20578) as
Exhibit 4(5) and incorporated herein by reference)
10(9) - Master Shelf Agreement, dated as of July 31, 2003, by and
among Layne Christensen Company, Prudential Investment
Management, Inc., The Prudential Insurance Company of America,
Pruco Life Insurance Company, Security Life of Denver Insurance
Company and such other Purchasers of the Notes as may be named
in the Master Shelf Agreement from time to time (filed with the
Registrant's 10-Q for the quarter ending July 31, 2003 (File No.
0-20578) as Exhibit 4(6) and incorporated herein by reference)
**10(10) - 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(11) - 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(12) - 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(13) - Form of Incentive 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(14) - 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(15) - 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(16) - Layne Christensen Company District Incentive Compensation Plan
(revised effective February 1, 2000)(filed as Exhibit 10(17) to
the Registrant's Annual Report on Form 10-K for the fiscal
79
year ended January 31, 2003 (File No. 0-20578) and incorporated
herein by this reference)
10(17) - Layne Christensen Company Executive Incentive Compensation
Plan (revised effective May 1, 1997)
**10(18) - Layne Christensen Company Corporate Staff Incentive
Compensation Plan (revised effective October 10, 2003)
10(19) - Standstill Agreement, dated March 26, 2004, by and among Layne
Christensen Company, Wynnefield Partners Small Cap Value, L.P.,
Wynnefield Small Cap Value Offshore Fund, Ltd., Wynnefield
Partners Small Cap Value L.P.I., Channel Partnership II, L.P.,
Wynnefield Capital Management, LLC, Wynnefield Capital, Inc.,
Wynnefield Capital, Inc. Profit Sharing's Money Purchase Plan,
Nelson Obus and Joshua Landes
21(1) - List of Subsidiaries
23(1) - Consent of Deloitte & Touche LLP
31(1) - Section 302 Certification of Principal Executive Officer of
the Company
31(2) - Section 302 Certification of Principal Financial Officer of
the Company
32(1) - Section 906 Certification of Principal Executive Officer of
the Company
32(2) - Section 906 Certification of Principal Financial Officer of
the Company
- ---------------------------
** Management contracts or compensatory plans or arrangements required to be
identified by Item 14(a)(3).
(b) Reports on Form 8-K:
Form 8-K filed on February 17, 2004 related to the Company's press
release reporting a blackout period under certain of its employee benefit plans.
(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).
80
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 13, 2004 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 13, 2004
- -------------------------------------------
Andrew B. Schmitt
President, Chief Executive Officer
and Director(Principal Executive Officer)
/s/ Jerry W. Fanska April 13, 2004
- -------------------------------------------
Jerry W. Fanska
Vice President-Finance and Treasurer
(Principal Financial and Accounting Officer)
/s/ Robert J. Dineen April 13, 2004
- -------------------------------------------
Robert J. Dineen
Director
/s/ Donald K. Miller April 13, 2004
- -------------------------------------------
Donald K. Miller
Director
/s/ David A. B. Brown April 13, 2004
- -------------------------------------------
David A. B. Brown
Director
/s/ J. Samuel Butler April 13, 2004
- -------------------------------------------
J. Samuel Butler
Director
/s/ Anthony B. Helfet April 13, 2004
- -------------------------------------------
Anthony B. Helfet
Director
/s/ Warren G. Lichtenstein April 13, 2004
- -------------------------------------------
Warren G. Lichtenstein
Director
/s/ Nelson Obus April 13, 2004
- -------------------------------------------
Nelson Obus
Director
81