FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-----
Commission File Number 33-48432
Layne Christensen Company
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 48-0920712
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1900 Shawnee Mission Parkway, Mission Woods, Kansas 66205
- --------------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (913) 362-0510
Not Applicable
- --------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]. No [ ].
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
There were 12,599,444 shares of common stock, $.01 par value per share,
outstanding on December 7, 2004.
PART I
ITEM 1. Financial Statements
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
October 31, January 31,
2004 2004
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 13,482 $ 21,602
Customer receivables, less allowance
of $4,512 and $4,104, respectively 61,291 55,336
Costs and estimated earnings in excess of
billings on uncompleted contracts 13,627 13,746
Inventories 16,093 13,947
Deferred income taxes 10,852 9,357
Income taxes receivable 285 724
Other 4,186 6,057
----------- -----------
Total current assets 119,816 120,769
----------- -----------
Property and equipment:
Land 7,580 7,861
Buildings 14,001 14,648
Machinery and equipment 174,896 160,327
Gas transportation facilities and equipment 5,809 2,267
Mineral interest in oil and gas properties 3,553 1,441
Oil and gas properties 19,035 10,376
----------- -----------
224,874 196,920
Less - Accumulated depreciation and depletion (136,583) (132,120)
----------- -----------
Net property and equipment 88,291 64,800
----------- -----------
Other assets:
Investment in affiliates 20,556 19,239
Goodwill 8,024 2,449
Deferred income taxes 7,554 7,717
Other 2,736 2,353
----------- -----------
Total other assets 38,870 31,758
----------- -----------
$ 246,977 $ 217,327
=========== ===========
See Notes to Consolidated Financial Statements.
- Continued -
2
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
(in thousands, except share and per share data)
October 31, January 31,
2004 2004
----------- -----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 23,977 $ 25,568
Accrued compensation 13,595 11,925
Accrued insurance expense 6,527 6,392
Other accrued expenses 10,008 8,511
Lease termination costs - 6,603
Income taxes payable 7,436 463
Billings in excess of costs and estimated
earnings on uncompleted contracts 9,230 8,901
----------- -----------
Total current liabilities 70,773 68,363
----------- -----------
Noncurrent and deferred liabilities:
Long-term debt 60,000 42,000
Accrued insurance expense 8,604 7,690
Other 5,148 5,589
----------- -----------
Total noncurrent and deferred liabilities 73,752 55,279
----------- -----------
Contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share,
5,000,000 shares authorized, none issued and
outstanding - -
Common stock, par value $.01 per share, 30,000,000
shares authorized, 12,599,444 and 12,533,818
shares issued and outstanding, respectively 126 125
Capital in excess of par value 90,515 89,759
Retained earnings 22,041 13,458
Accumulated other comprehensive loss (9,879) (9,629)
Unearned compensation (351) -
Notes receivable from management stockholders - (28)
----------- -----------
Total stockholders' equity 102,452 93,685
----------- -----------
$ 246,977 $ 217,327
=========== ===========
See Notes to Consolidated Financial Statements.
- Concluded -
3
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
Three Months Nine Months
Ended October 31, Ended October 31,
(unaudited) (unaudited)
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues $ 91,480 $ 69,860 $ 253,875 $ 199,793
Cost of revenues (exclusive
of depreciation shown below) 66,201 50,812 184,523 143,075
------------ ------------ ------------ ------------
Gross profit 25,279 19,048 69,352 56,718
Selling, general and
administrative expenses 15,048 13,066 43,444 40,689
Depreciation, depletion and
amortization 3,592 2,788 10,115 8,799
Other income (expense):
Equity in earnings of affiliates 449 23 2,138 723
Interest (841) (687) (2,257) (1,918)
Debt extinguishment costs - - - (2,320)
Other income (expense), net 86 (42) 1,235 445
------------ ------------ ------------ ------------
Income from continuing operations
before income taxes and
minority interest 6,333 2,488 16,909 4,160
Income tax expense 2,827 1,488 8,116 3,015
Minority interest 1 (163) 1 -
------------ ------------ ------------ ------------
Net income from continuing operations
before discontinued operations 3,507 837 8,794 1,145
Loss from discontinued operations,
net of income tax benefit of $29 and
$194 for the three months ended
October 31, 2004 and 2003, respectively,
and $125 and $301 for the nine
months ended October 31,
2004 and 2003, respectively (49) (333) (211) (472)
Gain on sale of discontinued
operations, net of income taxes
of $23 - 37 - 37
------------ ------------ ------------ ------------
Net income $ 3,458 $ 541 $ 8,583 $ 710
============ ============ ============ ============
Basic income (loss) per share:
Net income from continuing
operations $ 0.28 $ 0.07 $ 0.70 $ 0.10
Loss from discontinued operations,
net of income taxes - (0.03) (0.02) (0.04)
------------ ------------ ------------ ------------
Net income per share $ 0.28 $ 0.04 $ 0.68 $ 0.06
============ ============ ============ ============
Diluted income (loss) per share:
Net income from continuing
operations $ 0.27 $ 0.07 $ 0.68 $ 0.09
Loss from discontinued operations,
net of income taxes - (0.03) (0.02) (0.03)
------------ ------------ ------------ ------------
Net income per share $ 0.27 $ 0.04 $ 0.66 $ 0.06
============ ============ ============ ============
Weighted average shares outstanding 12,574,000 12,039,000 12,556,000 11,957,000
Dilutive stock options 335,000 266,000 352,000 230,000
------------ ------------ ------------ ------------
12,909,000 12,305,000 12,908,000 12,187,000
============ ============ ============ ============
See Notes to Consolidated Financial Statements.
4
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
Nine Months
Ended October 31,
--------------------
2004 2003
-------- --------
(unaudited)
Cash flow from operating activities:
Net income $ 8,583 $ 710
Adjustments to reconcile net income to cash
from operations:
Loss on discontinued operations, net of tax 211 435
Depreciation, depletion and amortization 10,115 8,799
Deferred income taxes (849) 365
Equity in earnings of affiliates (2,138) (723)
Dividends received from foreign affiliates 1,043 605
Minority interest (1) -
Loss on extinguishment of debt - 2,320
Gain from disposal of property and equipment (1,574) (199)
Changes in current assets and liabilities:
Increase in customer receivables (14,945) (4,794)
(Increase) decrease in costs and estimated
earnings in excess of billings on uncompleted
contracts 242 (5,516)
Increase in inventories (1,528) (1,471)
(Increase) decrease in other current assets 1,710 (2,388)
Increase in accounts payable and accrued expenses 13,703 3,424
Increase in billings in excess of costs and
estimated earnings on uncompleted contracts 359 844
Other, net 25 462
-------- --------
Cash from continuing operations 14,956 2,873
Cash from (used in) discontinued operations (3,277) 837
-------- --------
Cash from operating activities 11,679 3,710
-------- --------
Cash flow used in investing activities:
Additions to property and equipment (12,444) (6,007)
Additions to gas transportation facilities and equipment (1,757) (37)
Additions to mineral interest in properties (1,003) (496)
Additions to oil and gas properties (7,083) (5,112)
Proceeds from disposal of property and equipment 2,945 117
Proceeds from sale of business 300 -
Acquisition of business (14,743) (1,150)
Acquisition of gas transportation facilities and
equipment (654) -
Acquisition of oil and gas working interest (2,728) -
Investment in joint ventures (274) (40)
-------- --------
Cash used in investing activities from continuing
operations (37,441) (12,725)
Cash used in discontinued operations - (2,778)
-------- --------
Cash used in investing activities (37,441) (15,503)
-------- --------
Cash flow from financing activities:
Net repayments under revolving facility (2,000) -
Issuance of long-term debt 20,000 40,000
Repayment of long-term debt - (32,370)
Prepayment penalty on early extinguishment of debt - (671)
Debt issuance costs - (160)
Payments on DrillCorp promissory note (1,380) -
Payments on notes receivable from management
stockholders 28 17
Issuance of common stock 239 1,403
-------- --------
Cash from financing activities 16,887 8,219
-------- --------
Effects of exchange rate changes on cash 755 1,061
-------- --------
Net decrease in cash and cash equivalents (8,120) (2,513)
Cash and cash equivalents at beginning of period 21,602 10,770
-------- --------
Cash and cash equivalents at end of period $ 13,482 $ 8,257
======== ========
See Notes to Consolidated Financial Statements.
5
LAYNE CHRISTENSEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies and Basis of Presentation
The consolidated financial statements include the accounts of Layne Christensen
Company and its subsidiaries (together, the "Company"). All significant
intercompany transactions have been eliminated. Investments in affiliates (20%
to 50% owned) in which the Company exercises influence over operating and
financial policies are accounted for on the equity method. The unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements of the Company for the year ended January 31,
2004 as filed in its Annual Report on Form 10-K.
The accompanying unaudited consolidated financial statements include all
adjustments (consisting only of normal recurring accruals) which, in the opinion
of management, are necessary for a fair presentation of financial position,
results of operations and cash flows. Results of operations for interim periods
are not necessarily indicative of results to be expected for a full year.
Revenue is recognized on large, long-term contracts using the percentage of
completion method based upon materials installed and labor costs incurred.
Changes in job performance, job conditions, and estimated profitability,
including those arising from contract penalty provisions, and final contract
settlements may result in revisions to costs and income and are recognized in
the period in which the revisions are determined. Revenue is recognized on
smaller, short-term contracts using the completed contract method. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The Company values inventories at the lower of cost (first in, first out) or
market. Allowances are recorded for inventory considered to be excess or
obsolete. Inventories consist primarily of parts and supplies.
Through its energy division, the Company engages in the operation, development,
production and acquisition of oil and gas properties, principally focusing on
coalbed methane gas projects. The Company follows the full-cost method of
accounting for these properties. Under this method, all productive and
nonproductive costs incurred in connection with the exploration for and
development of oil and gas reserves are capitalized. Such capitalized costs
include lease acquisition, geological and geophysical work, delay rentals,
drilling, completing and equipping oil and gas wells, including salaries,
benefits and other internal costs directly attributable to these activities. The
capitalized costs associated with the Company's oil and gas properties are
depleted using the units of production method. Costs associated with production
and general corporate activities are expensed in the period incurred. As of
October 31, 2004 and January 31, 2004, the Company has capitalized $22,588,000
and $11,817,000, respectively, related to oil and gas properties and mineral
interest acquisition costs. The Company has also capitalized $5,809,000 and
6
$2,267,000 as of October 31, 2004 and January 31, 2004, respectively, related to
gas transportation facilities and equipment.
The Company follows SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"), as amended, which requires all derivative
financial instruments to be recorded on the balance sheet at fair value and
establishes criteria for designation and effectiveness of hedging relationships.
Under SFAS 133, the Company accounts for its hedges of forecasted costs as cash
flow hedges, such that changes in fair value for the effective portion of hedge
contracts, if material, are recorded in accumulated other comprehensive income
in stockholders' equity. Changes in the fair value of the effective portion of
hedge contracts are recognized in accumulated other comprehensive income until
the hedged item is recognized in operations. The ineffective portion of the
derivatives change in fair value, if any, is immediately recognized in
operations (see Note 5 for disclosure regarding the fair value of foreign
currency derivative instruments).
Income taxes are provided using the asset/liability method, in which deferred
taxes are recognized for the tax consequences of temporary differences between
the financial statement carrying amounts and tax bases of existing assets and
liabilities. Deferred tax assets are reviewed for recoverability and valuation
allowances are provided as necessary. Provision for U.S. income taxes on
undistributed earnings of foreign subsidiaries and foreign affiliates is made
only on those amounts in excess of those funds considered to be invested
indefinitely.
Earnings per share are based upon the weighted average number of common and
dilutive equivalent shares outstanding. Options to purchase common stock are
included based on the treasury stock method for dilutive earnings per share,
except when their effect is antidilutive.
Stock-based compensation may be accounted for either based on the estimated fair
value of the awards at the date they are granted (the "SFAS 123 Method") or
based on the difference, if any, between the market price of the stock at the
date of grant and the amount the employee must pay to acquire the stock (the
"APB 25 Method"). The Company uses the APB 25 Method to account for its
stock-based compensation programs. Pro forma net income and earnings per share
for the three and nine months ended October 31, 2004 and 2003, determined as if
the SFAS 123 Method had been applied, are presented in the following table (in
thousands, except per share amounts):
Three Months Nine Months
Ended October 31, Ended October 31,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income, as reported $ 3,458 $ 541 $ 8,583 $ 710
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of tax (14) (21) (48) (111)
---------- ---------- ---------- ----------
Pro forma net income $ 3,444 $ 520 $ 8,535 $ 599
========== ========== ========== ==========
Income per share:
Basic - as reported $ 0.28 $ 0.04 $ 0.68 $ 0.06
========== ========== ========== ==========
Basic - pro forma $ 0.27 $ 0.04 $ 0.68 $ 0.05
========== ========== ========== ==========
Diluted - as reported $ 0.27 $ 0.04 $ 0.66 $ 0.06
========== ========== ========== ==========
Diluted - pro forma $ 0.27 $ 0.04 $ 0.66 $ 0.05
========== ========== ========== ==========
7
The amounts paid for income taxes, net of refunds, and interest are as follows
(in thousands):
Nine Months Ended October 31,
-----------------------------
2004 2003
------- --------
Income taxes $ 1,099 $ 2,801
Interest 2,132 1,771
Supplemental Non-cash Transactions - The Company issued 217,504 shares of common
stock at fair market value related to compensation awards during the nine months
ended October 31, 2003. In connection with the Beylik acquisition (see Note 4),
the Company issued 24,576 shares of restricted common stock during the nine
months ended October 31, 2004. The shares have a fair market value of $375,000
and vest over two years. The value will be recognized as compensation expense
over the vesting period.
Reclassifications - Certain fiscal 2004 amounts, primarily related to
discontinued operations and segment allocation of incentive compensation, have
been reclassified to conform with the fiscal 2005 presentation.
2. Discontinued Operations
During the third quarter of fiscal 2004, the Company reclassified the results of
operations of its Toledo Oil and Gas ("Toledo") business to discontinued
operations. Toledo was historically reported in the Company's energy segment and
offered conventional oilfield fishing services and coil tubing fishing services
(see Note 9). On January 6, 2004, the Company sold the Toledo operation for
$2,500,000 and recorded a gain on the sale of $57,000, net of income taxes of
$30,000, for the year ended January 31, 2004. The Company received $2,200,000
upon the sale and an additional $300,000 in February 2004 at the end of a
contingency period.
In connection with the sale of Toledo, the Company recorded a contract
termination liability for a long-term lease of the Toledo facilities. The
contract termination liability represents the present value of the rental
payments specified in the lease reduced by an estimate for sublease rentals
(based on market value of similar properties). The Company will record accretion
expense due to the passage of time for the difference between the expected lease
obligations, net of sublease rentals, and the present value of such operations
as a loss from discontinued operations. The present value liability was adjusted
during the nine months ended October 31, 2004 to reflect lower than anticipated
sublease rentals during June and July netted against higher than anticipated
sublease rentals during February and March. A summary of the lease liability
follows (in thousands):
Amounts
-------
February 1, 2004 $ 117
Payments (19)
Accretion 5
Adjustments 25
-------
October 31, 2004 $ 128
=======
Lease obligations of $163,000, net of sublease rentals, are expected to be paid
over the term of the lease which extends to 2008. Payments for the nine months
ended October 31, 2004 totaled approximately $14,000.
8
On January 30, 2004, the Company sold its Layne Christensen Canada Ltd. ("Layne
Canada") subsidiary for $15,914,000. Layne Canada was a component of the
Company's energy segment (see Note 9) and provided drilling services to the
shallow gas and unconventional oil and gas markets. The Company recorded a gain
on the sale of $1,652,000, net of income taxes of $994,000 for the year ended
January 31, 2004.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the results of operations for Toledo and Layne Canada have
been classified as discontinued operations. Revenues and net income (loss) from
discontinued operations for the three and nine months ended October 31, 2004 and
2003 were as follows (in thousands):
Three Months Ended Nine Months Ended
October 31, October 31, October 31, October 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues:
Canada $ - $ 2,916 $ - $ 11,673
Toledo - 781 - 1,980
----------- ----------- ----------- -----------
Total $ - $ 3,697 $ - $ 13,653
=========== =========== =========== ===========
Income (loss) from
discontinued operations
before income taxes:
Canada $ (78) $ (392) $ (294) $ 65
Toledo - (135) (42) (838)
----------- ----------- ----------- -----------
Total $ (78) $ (527) $ (336) $ (773)
=========== =========== =========== ===========
3. Indebtedness
On July 31, 2003, the Company entered into an agreement ("Master Shelf
Agreement") whereby it could issue up to $60,000,000 in unsecured notes. Upon
closing, the Company issued $40,000,000 of notes ("Senior Notes") under the
Master Shelf Agreement. The Senior Notes bear a fixed interest rate of 6.05% and
are due on July 31, 2010, with annual principal payments of $13,333,000
beginning July 31, 2008. Proceeds from issuance of the Senior Notes were used to
refinance borrowings outstanding under the Company's previous term loan and
revolving credit facility ("Previous Loan Facilities"). The Company issued an
additional $20,000,000 of notes under the Master Shelf Agreement in October
2004. The additional Senior Notes bear a fixed interest rate of 5.40% and are
due on September 29, 2011 with annual principal payments of $6,667,000 beginning
September 29, 2009. Proceeds of the issuance were used to finance the
acquisition of Beylik Drilling and Pump Services, Inc. (see Note 4) and general
corporate purposes.
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 October 31, 2004, there
were letters of credit of $10,976,000 outstanding on the Credit Agreement.
9
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 October 31, 2004.
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
variable rate 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
terminated on September 9, 2004 and is no longer outstanding. Debt outstanding
as of October 31, 2004 and January 31, 2004 was as follows (in thousands):
October 31, January 31,
2004 2004
----------- -----------
Long-term debt:
Credit Agreement $ - $ 2,000
Senior Notes 60,000 40,000
----------- -----------
Total long-term debt $ 60,000 $ 42,000
=========== ===========
In connection with refinancing the Previous Loan Facilities on July 31, 2003,
the Company recorded debt extinguishment costs of $2,320,000. The costs included
a prepayment penalty of $671,000, the write-off of deferred loan costs related
to the Previous Loan Facilities of $1,447,000 and the write-off of the
unrealized loss on the Company's interest rate swap of $202,000.
4. Acquisitions
On October 1, 2004, the Company acquired substantially all the assets of Beylik
Drilling and Pump Service, Inc. ("Beylik"), a water drilling business located in
California, for cash of $13,750,000 plus acquisition costs of $993,000. Working
in conjunction with the Company's current California locations, the acquisition
significantly strengthened the Company's water resources presence on the West
Coast. Based on the Company's preliminary allocation of the purchase price, the
acquisition had the following effect on the Company's consolidated financial
position (in thousands):
Amounts
-------
Property, plant and equipment $ 8,383
Inventories 659
Costs and estimated earnings in
excess of billings on uncompleted contracts 126
Goodwill 5,575
-------
Total purchase price $14,743
=======
Assuming Beylik had been acquired as of the beginning of the period and included
in the accompanying consolidated statements of income, unaudited pro forma
10
consolidated revenues, net income from continuing operations, net income (loss)
and net income per share would have been as follows (in thousands, except per
share amounts):
Three Months Ended Nine Months Ended
October 31, October 31, October 31, October 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues $ 96,550 $ 73,465 $ 267,221 $ 213,415
Net income from
continuing operations 3,313 721 8,655 416
Net income (loss) 3,264 425 8,444 (19)
Basic earnings per share
from continuing
operations $ 0.26 $ 0.06 $ 0.69 $ 0.03
=========== =========== =========== ===========
Diluted earnings per share
from continuing
operations $ 0.26 $ 0.06 $ 0.67 $ 0.03
=========== =========== =========== ===========
Basic earnings per share $ 0.26 $ 0.04 $ 0.67 $ -
=========== =========== =========== ===========
Diluted earnings per share $ 0.25 $ 0.03 $ 0.65 $ -
=========== =========== =========== ===========
The pro forma information provided above is not necessarily indicative of the
results of operations that would actually have resulted if the acquisition were
made as of those dates or of results that may occur in the future. Pro forma
results includes adjustments for interest expense on the portion of the
$20,000,000 additional Senior Notes issued under the Master Shelf Agreement to
fund the acquisition and depreciation on acquisition adjustments related to
acquired property, plant and equipment.
In September 2004, the Company purchased 75% of various gas wells, saltwater
disposal wells and a pipeline from a working interest partner. As consideration
for the purchase, the Company paid approximately $2,382,000 in cash. Concurrent
with the acquisition in September, the Company contributed the acquired pipeline
assets and $685,000 of existing gas gathering assets to a newly formed pipeline
company, owned 75% by the Company and 25% by the working interest partner. The
Company consolidates the newly formed entity and accordingly recorded an initial
minority interest liability of $446,000.
In April 2004, the Company acquired the remaining 50% working interest in oil
and gas properties, including mineral interests, held by a working interest
partner under an August 2002 development agreement for $1,000,000 cash and
forgiveness of approximately $489,000 in joint interest receivables from such
partner.
The September and April acquisitions further the Company's expansion of its
energy presence in the mid-continent region of the United States. The
acquisitions did not have significant effect on the Company's results of
operations or cash flows. The acquisitions had the following effect on the
Company's consolidated financial position (in thousands):
Amounts
-------
Gas transportation facilities and equipment $ 654
Mineral interest in oil and gas properties 1,110
Oil and gas properties 2,107
-------
Total purchase price $ 3,871
=======
11
On June 3, 2003, the Company acquired substantially all the assets of Mohajir
Engineering Group, Inc., a full service engineering, geophysical, and geological
consulting firm serving the energy industry. The acquisition did not have a
significant effect on the Company's financial position, results of operations or
cash flows.
5. 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 October 31, 2004, the Company held option contracts with an aggregate U.S.
dollar notional value of $6,000,000 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 $89,000 at October 31, 2004, is recorded in other current
assets and, net of income taxes of $33,000, in accumulated other comprehensive
income. Aggregate losses of $179,000 on foreign currency hedging transactions
were recognized for the nine months ended October 31, 2004 as the forecasted
transactions being hedged occurred and were recorded primarily in cost of
revenues in the Company's Consolidated Statements of Income.
Additionally, the Company's energy division is exposed to fluctuations in the
price of natural gas and has entered into fixed-price physical delivery collar
contracts to manage natural gas price risk for a portion of its production. As
of October 31, 2004, the Company had committed to deliver 608,000 million
British Thermal Units ("MMBtu") of natural gas through October 2005. The floor
and ceiling prices on these contracts range from $6.30 to $9.65 per MMBtu.
In accordance with SFAS 133, the fixed-price physical delivery contracts will
result in the physical delivery of natural gas, and as a result, are exempt from
the requirements of SFAS 133 under the normal purchases and sales exception.
Accordingly, the contracts are not reflected in the balance sheet at fair value
and revenues on the contracts are recognized as the natural gas is delivered
under the terms of the contracts.
6. Severance Costs
During the second quarter of fiscal 2004, the Company announced involuntary
workforce reductions of 189 employees. The actions were primarily necessary to
align the Company's cost structure with current market conditions. As of July
31, 2003, the Company had notified all applicable employees affected by these
actions.
The Company recorded severance and benefit charges of approximately $530,000
related to these actions in the second quarter of fiscal 2004 in accordance with
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." As of October 31, 2004, the Company had paid all costs associated
with these workforce reductions. A summary of the severance costs and related
activity follows:
12
Number of Amount
Employees (in 000's)
--------- ---------
Balance February 1, 2003 - $ -
Charges 189 530
Payments (187) (502)
--------- ---------
Balance January 31, 2004 2 28
Payments (2) (28)
--------- ---------
Balance October 31, 2004 - $ -
========= =========
7. Other Comprehensive Income (Loss)
Components of other comprehensive income (loss) are summarized as follows (in
thousands):
Three Months Nine Months
Ended October 31, Ended October 31,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Net income $ 3,458 $ 541 $ 8,583 $ 710
Other comprehensive income (loss),
net of taxes:
Foreign currency translation
adjustments 2,685 528 549 866
Unrealized gain on available
for sale investments - 55 - 42
Reclassification of unrealized
loss on swap - - - 134
Unrealized loss on exchange contracts (3) - (799) -
------- ------- ------- -------
Other comprehensive income $ 6,140 $ 1,124 $ 8,333 $ 1,752
======= ======= ======= =======
The components of accumulated other comprehensive income (loss) for the nine
months ended October 31, 2004 are as follows (in thousands):
Unrealized Accumulated
Cumulative Unrecognized Gain (loss) Other
Translation Pension on Exchange Comprehensive
Adjustment Liability Contracts Loss
----------- ------------ ------------ --------------
Balance,
February 1, 2004 $ (8,701) $ (1,784) $ 856 $ (9,629)
Period change 550 - (800) (250)
----------- ------------ ------------ --------------
Balance,
October 31, 2004 $ (8,151) $ (1,784) $ 56 $ (9,879)
=========== ============ ============ ==============
8. Employee Benefit Plans
The Company sponsors a pension plan covering certain hourly employees not
covered by union-sponsored, multi-employer plans. Benefits are computed based
mainly on years of service. The Company makes annual contributions to the plan
substantially equal to the amounts required to maintain the qualified status of
the plans. Contributions are intended to provide for benefits related to past
and current service with the Company. Effective December 31, 2003, the Company
froze the pension plan and recorded a curtailment loss of approximately $20,000
for the year ended January 31, 2004. Benefit levels were frozen as of 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.
13
Net periodic pension cost for the three and nine months ended October 31, 2004
and 2003 includes the following components (in thousands):
Three Months Nine Months
Ended October 31, Ended October 31,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Service cost $ 17 $ 53 $ 51 $ 159
Interest cost 110 105 330 315
Expected return on assets (113) (104) (339) (312)
Net amortization 48 48 144 144
-------- -------- -------- --------
Net periodic pension cost $ 62 $ 102 $ 186 $ 306
======== ======== ======== ========
The Company has recognized the full amount of its actuarially determined pension
liability and the related intangible asset (if applicable). The unrecognized
pension cost has been recorded as a charge to consolidated stockholders' equity
after giving effect to the related future tax benefit.
The Company also provides supplemental retirement benefits to its chief
executive officer. Benefits are computed based on the compensation earned during
the highest five consecutive years of employment reduced for a portion of Social
Security benefits and an annuity equivalent of the chief executive's defined
contribution plan balance. The Company does not contribute to the plan or
maintain any investment assets related to the expected benefit obligation. The
Company has recognized the full amount of its actuarially determined pension
liability. Net periodic pension cost of the supplemental retirement benefits for
the three and nine months ended October 31, 2004 and 2003 include the following
components (in thousands):
Three Months Nine Months
Ended October 31, Ended October 31,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Service cost $ 25 $ 25 $ 75 $ 75
Interest cost 18 17 54 51
------- ------- ------- -------
Net periodic pension cost $ 43 $ 42 $ 129 $ 126
======= ======= ======= =======
9. Operating Segments
The Company is a multinational company which provides sophisticated services and
related products to a variety of markets. The Company is organized into discrete
divisions based on its primary product lines. The Company's reportable segments
are defined as follows:
Water Resources Division
This division provides a full line of water-related services and products
including hydrological studies, site selection, well design, drilling and well
development, pump installation, and repair and maintenance. The division's
offerings include design and construction of water treatment facilities and the
manufacture and sale of products to treat volatile organics and other
contaminants such as nitrates, iron, manganese, arsenic, radium and radon in
groundwater. The division also offers environmental services to assess and
monitor groundwater contaminants.
14
Mineral Exploration Division
This division provides a complete range of drilling services for the mineral
exploration industry. Its aboveground and underground drilling activities
include all phases of core drilling, diamond, reverse circulation, dual tube,
hammer and rotary air-blast methods.
Geoconstruction Division
This division focuses on services that improve soil stability, primarily jet
grouting, grouting, vibratory ground improvement, drilled micropiles, stone
columns, anchors and tiebacks. The division also manufactures a line of
high-pressure pumping equipment used in grouting operations and geotechnical
drilling rigs used for directional drilling.
Energy Division
This division primarily focuses on exploration and production of coalbed methane
("CBM") properties in the United States. To date it has been concentrated on
projects in the mid-continent region of the United States. Historically, the
division has also included Layne Canada, Toledo and two small specialty energy
service companies. During fiscal 2004, the division's strategy shifted to focus
mainly on resource development rather than providing services to external
customers. Accordingly, in January 2004, the Company sold Layne Canada and
Toledo. The results of operations for these units have been reclassified to
discontinued operations for all periods presented (see Note 2). The division is
now composed of the Company's CBM development activities and the two small
specialty energy service companies.
Revenues and income from continuing operations pertaining to the Company's
operating segments are presented below. Intersegment revenues are accounted for
based on the fair market value of the services provided. Unallocated corporate
expenses primarily consist of general and administrative functions. Previously,
the unallocated corporate expenses included incentive compensation expenses for
division-level personnel; however, beginning in the second quarter of fiscal
2005, the incentive compensation has been allocated to the segments to reflect a
change in division performance evaluation. All periods presented have been
reclassified to conform to the current presentation. Operating segment revenues
and income from continuing operations are summarized as follows (in thousands):
Three Months Nine Months
Ended October 31, Ended October 31,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenues
Water resources $ 51,852 $ 43,818 $145,058 $127,191
Mineral exploration 27,448 18,353 77,690 49,245
Geoconstruction 10,475 6,921 27,514 21,273
Energy 1,705 768 3,613 2,084
-------- -------- -------- --------
Total revenues $ 91,480 $ 69,860 $253,875 $199,793
======== ======== ======== ========
15
Three Months Nine Months
Ended October 31, Ended October 31,
-------------------- ----------------------
2004 2003 2004 2003
-------- -------- --------- ---------
Income (loss) from
continuing operations
Water resources $ 7,167 $ 5,128 $ 17,497 $ 14,642
Mineral exploration 3,027 754 10,254 1,798
Geoconstruction 918 167 2,437 1,440
Energy (625) (270) (1,644) (978)
Unallocated corporate
expenses (3,313) (2,604) (9,378) (8,504)
Debt extinguishment costs - - - (2,320)
Interest (841) (687) (2,257) (1,918)
-------- -------- --------- ---------
Total income from
continuing operations $ 6,333 $ 2,488 $ 16,909 $ 4,160
======== ======== ========= =========
Geographic Information:
Revenues
North America $ 72,711 $ 56,713 $ 197,771 $ 163,073
Africa/Australia 17,240 11,645 50,623 31,762
Other foreign 1,529 1,502 5,481 4,958
-------- -------- --------- ---------
Total revenues $ 91,480 $ 69,860 $ 253,875 $ 199,793
======== ======== ========= =========
10. Contingencies
The Company's drilling activities involve certain operating hazards that can
result in personal injury or loss of life, damage and destruction of property
and equipment, damage to the surrounding areas, release of hazardous substances
or wastes and other damage to the environment, interruption or suspension of
drill site operations and loss of revenues and future business. The magnitude of
these operating risks is amplified when the Company, as is frequently the case,
conducts a project on a fixed-price, "turnkey" basis where the Company delegates
certain functions to subcontractors but remains responsible to the customer for
the subcontracted work. In addition, the Company is exposed to potential
liability under foreign, federal, state and local laws and regulations,
contractual indemnification agreements or otherwise in connection with its
provision of services and products. Litigation arising from any such occurrences
may result in the Company being named as a defendant in lawsuits asserting large
claims. Although the Company maintains insurance protection that it considers
economically prudent, there can be no assurance that any such insurance will be
sufficient or effective under all circumstances or against all claims or hazards
to which the Company may be subject or that the Company will be able to continue
to obtain such insurance protection. A successful claim for damage resulting
from a hazard for which the Company is not fully insured could have a material
adverse effect on the Company. In addition, the Company does not maintain
political risk insurance with respect to its foreign operations.
The Company is involved in various matters of litigation, claims and disputes
which have arisen in the ordinary course of the Company's business. While the
resolution of any of these matters may have an impact on the financial results
for the period in which the matter is resolved, the Company believes that the
ultimate disposition of these matters will not, in the aggregate, have a
material adverse effect upon its business or consolidated financial position,
results of operations or cash flows.
16
11. New Accounting Pronouncements
On April 30, 2004, the FASB staff issued FASB Staff Position (FSP) FAS 141-1 and
FAS 142-1, which amends FASB Statement No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets." The FSP clarifies that mineral
rights in oil and gas properties should be classified as tangible assets. This
amendment is effective for the first reporting period beginning after April 29,
2004. The adoption of this amendment did not have a significant impact on the
Company's results of operations or financial position as the Company's mineral
interests in oil and gas properties are recorded as tangible assets.
In September 2004, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 106 ("SAB 106") regarding the application of FASB
Statement No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"),
by oil and gas producing companies following the full cost accounting method.
SAB 106 provides interpretive responses related to (1) computing the full cost
ceiling to avoid double-counting the expected future outflows associated with
asset retirement obligations, (2) required disclosures relating to the
interaction of SFAS 143 and the full cost rules and (3) the impact of SFAS 143
on the calculation of depreciation and amortization. SAB 106 is effective as of
the beginning of the first fiscal quarter beginning after October 4, 2004. The
adoption of SAB 106 is not expected to have a significant impact on the
Company's results of operations or financial position.
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Cautionary Language Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934.
Such statements are 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.
Demand for the Company's mineral exploration drilling services and products
depends upon the level of mineral exploration and development activities
conducted by mining companies, particularly with respect to gold and copper.
Mineral exploration is highly speculative and is influenced by a variety of
factors, including the prevailing prices for various metals that often fluctuate
widely.
17
Results of Operations
The following table presents, for the periods indicated, the percentage
relationship which certain items reflected in the Company's consolidated
statements of income bear to revenues and the percentage increase or decrease in
the dollar amount of such items period to period.
Three Months Nine Months
Ended Ended Period-to-Period
October 31, October 31, Change
----------------- ----------------- ----------------
Three Nine
2004 2003 2004 2003 Months Months
------ ------ ------ ------ ------ ------
Revenues:
Water resources 56.7% 62.7% 57.1% 63.7% 18.3 14.0
Mineral exploration 30.0 26.3 30.6 24.7 49.6 57.8
Geoconstruction 11.4 9.9 10.9 10.6 51.4 29.3
Energy 1.9 1.1 1.4 1.0 122.0 73.4
------ ------ ------ ------
Total net revenues 100.0% 100.0% 100.0% 100.0% 30.9 27.1
Cost of revenues 72.4 72.7 72.7 71.6 30.3 29.0
------ ------ ------ ------
Gross profit 27.6 27.3 27.3 28.4 32.7 22.3
Selling, general and
administrative expenses 16.4 18.7 17.1 20.4 15.2 6.8
Depreciation and amortization 3.9 4.0 4.0 4.4 28.8 15.0
Other income (expense):
Equity in earnings of affiliates 0.5 - 0.8 0.4 * *
Interest (0.9) (1.0) (0.8) (0.9) 22.4 17.7
Debt extinguishment costs - - - (1.2) * *
Other income (expense), net - - 0.5 0.2 * *
------ ------ ------ ------
Income from continuing operations
before income taxes and
minority interest 6.9 3.6 6.7 2.0 * *
Income tax expense 3.1 2.2 3.2 1.5 * *
Minority interest - (0.2) - - * *
------ ------ ------ ------
Net income from continuing
operations before discontinued
operations 3.8 1.2 3.5 0.5 * *
Loss from discontinued operations,
net of income taxes - (0.4) (0.1) (0.1) * *
------ ------ ------ ------
Net income (loss) 3.8% 0.8% 3.4% 0.4% * *
====== ====== ====== ======
- ------------------
* Not meaningful.
Results of Operations
Revenues for the three months ended October 31, 2004 increased $21,620,000, or
30.9%, to $91,480,000 while revenues for the nine months ended October 31, 2004
increased $54,082,000, or 27.1%, to $253,875,000 from the same periods last
year. See further discussion of results of operations by division below.
Gross profit as a percentage of revenues was 27.6% and 27.3% for the three and
nine months ended October 31, 2004 compared to 27.3% and 28.4% for the three and
nine months ended October 31, 2003. The decrease in gross profit percentage for
the nine-month period was primarily attributable to continued pricing pressures
in the water resources division along with reduced margins associated with the
promotion of certain new water treatment products. The decrease in the water
18
resources division margins was partially offset by increased margins in the
mineral exploration division due to increased activity because of higher gold
and base metal prices.
Selling, general and administrative expenses were $15,048,000 for the three
months ended October 31, 2004 and $43,444,000 for the nine months ended October
31, 2004 (16.4% and 17.1% of revenues, respectively) compared to $13,066,000 and
$40,689,000 for the three and nine months ended October 31, 2003 (18.7% and
20.4% of revenues, respectively). The increase in selling, general and
administrative expenses for the periods was primarily related to the Company's
expansion of its water treatment capabilities, increased expenses associated
with the Company's CBM development efforts and incremental costs of
approximately $275,000 for the three months and $925,000 for the nine months
associated with the implementation of Sarbanes-Oxley requirements.
Depreciation, depletion and amortization increased to $3,592,000 and $10,115,000
for the three and nine months ended October 31, 2004 compared to $2,788,000 and
$8,799,000 for the same periods last year. The increases were primarily a result
of increased depletion associated with the expansion of Company's CBM operations
and increased depreciation from new asset additions in the mineral exploration
division due to increased demand and the water resources division to expand its
water treatment capabilities.
The Company recorded a loss on extinguishment of debt of $2,320,000 for the nine
months ended October 31, 2003. The loss represents prepayment penalties and the
write-off of associated deferred fees in connection with refinancing of the
Company's debts.
Other income (expense), net was income of $86,000 for the three months ended
October 31, 2004, compared to an expense of $42,000 in the prior year, and
income of $1,235,000 for the nine months ended October 31, 2004, compared to
income of $445,000 in the prior year. The increase in income for both periods
was primarily due to gains on sales of property, plant and equipment in fiscal
2005.
Income tax expense for continuing operations of $2,827,000 and $8,116,000 was
recorded for the three and nine months ended October 31, 2004 compared to
$1,488,000 and $3,015,000 for the same periods last year. The expense for the
three months ended October 31, 2004, was impacted by a reduction in the
Company's estimate of its effective tax rate for the year from 50% to 48%. The
effective rate was 48.0% for the nine months ended October 31, 2004 compared to
72.5% for the same period last year. The improvement in the effective rate was
primarily attributable to improved earnings, especially in international
operations, and the treatment of debt extinguishment costs as discrete period
items in the second quarter of fiscal 2004. The remaining difference between the
effective rate of 48% and the statutory federal rate of 34% was a result of the
impact of nondeductible expenses and the tax treatment of certain foreign
operations.
WATER RESOURCES DIVISION
(in thousands)
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenues $ 51,852 $ 43,818 $145,058 $127,191
Income from continuing operations 7,167 5,128 17,497 14,642
19
Water resources revenue increased 18.3% to $51,852,000 for the three months
ended October 31, 2004 and 14.0% to $145,058,000 for the nine months ended
October 31, 2004 compared to $43,818,000 and $127,191,000 for the three and nine
months ended October 31, 2003. The increases were primarily attributable to the
improvements in municipal spending, results from the Company's water treatment
initiatives and increased infrastructure needs in metropolitan areas, primarily
in the western United States.
Income from continuing operations for the water resources division was
$7,167,000 and $17,497,000 for the three and nine months ended October 31, 2004
compared to $5,128,000 and $14,642,000 for the three and nine months ended
October 31, 2003. The increase in income from continuing operations for the
three and nine months ended October 31, 2004 was primarily the combination of
increased gross profit associated with the increase in revenues and essentially
flat selling, general and administrative expenses. The impact of the relatively
fixed selling, general and administrative expenses was a higher income from
continuing operations as a percentage of revenues in both the three and nine
month periods.
MINERAL EXPLORATION DIVISION
(in thousands)
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenues $ 27,448 $ 18,353 $ 77,690 $ 49,245
Income from continuing operations 3,027 754 10,254 1,798
Mineral exploration revenues increased 49.6% to $27,448,000 and 57.8% to
$77,690,000 for the three and nine months ended October 31, 2004 compared to
revenues of $18,353,000 and $49,245,000 for the three and nine months ended
October 31, 2003. The increases for the periods were primarily the result of
increased exploration activity in the Company's markets due to higher gold and
base metal prices.
Income from continuing operations for the mineral exploration division was
$3,027,000 and $10,524,000 for the three and nine months ended October 31, 2004,
compared to $754,000 and $1,798,000 for the three and nine months ended October
31, 2003. The improved earnings in the division were primarily attributable to
the increased activity levels noted above and increased earnings by the
Company's Latin American affiliates. The improvements in earnings were partially
offset by increased incentive compensation costs and additional depreciation on
new asset additions.
GEOCONSTRUCTION DIVISION
(in thousands)
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenues $ 10,475 $ 6,921 $ 27,514 $ 21,273
Income from continuing operations 918 167 2,437 1,440
Geoconstruction revenues increased 51.4% to $10,475,000 and 29.3% to $27,514,000
for the three and nine months ended October 31, 2004 compared to $6,921,000 and
$21,273,000 for the three and nine months ended October 31, 2003. The increases
in revenues were primarily attributable to certain larger than normal domestic
projects and increased product sales by the Company's manufacturing unit in
Italy.
20
The geoconstruction division had income from continuing operations of $918,000
and $2,437,000 for the three and nine months ended October 31, 2004 compared to
$167,000 and $1,440,000 for the three and nine months ended October 31, 2003.
The increases were primarily a result of the income from the larger domestic
projects noted above, improved gross profit margins and increased income from
the product sales of the manufacturing unit in Italy.
ENERGY DIVISION
(in thousands)
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenues $ 1,705 $ 768 $ 3,613 $ 2,084
Loss from continuing operations (625) (270) (1,644) (978)
Energy revenues increased 122.0% to $1,705,000 and 73.4% to $3,613,000 for the
three and nine months ended October 31, 2004 compared to revenues of $768,000
and $2,084,000 for the three and nine months ended October 31, 2003. Increased
production from the Company's CBM projects resulted in the increases in revenues
compared to the same periods last year.
Losses from continuing operations for the energy division were $625,000 and
$1,644,000 for the three and nine months ended October 31, 2004 compared to
$270,000 and $978,000 for the three and nine months ended October 31, 2003. The
increase in the loss from continuing operations for each period was primarily a
result of increased expenses associated with exploration and development
activities For the Company's CBM properties. The loss for the nine-month period
ended October 31, 2004 was partially offset by a gain on the sale of exploration
equipment of approximately $906,000.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate expenses were $3,313,000 and $9,378,000 for the three and
nine months ended October 31, 2004 compared to $2,604,000 and $8,504,000 for the
three and nine months ended October 31, 2003. The increase in the three month
period was primarily due to increased costs of approximately $275,000 associated
with the implementation of Sarbanes-Oxley requirements and other increases in
professional fees. The increase for the nine months was primarily due to
increased costs of approximately $925,000 associated with the Sarbanes-Oxley
implementation and higher travel expenses.
Operating segment revenues and income from continuing operations are summarized
as follows (in thousands):
21
Three Months Nine Months
Ended October 31, Ended October 31,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenues
Water resources $ 51,852 $ 43,818 $ 145,058 $ 127,191
Mineral exploration 27,448 18,353 77,690 49,245
Geoconstruction 10,475 6,921 27,514 21,273
Energy 1,705 768 3,613 2,084
--------- --------- --------- ---------
Total revenues $ 91,480 $ 69,860 $ 253,875 $ 199,793
========= ========= ========= =========
Income (loss) from
continuing operations
Water resources $ 7,167 $ 5,128 $ 17,497 $ 14,642
Mineral exploration 3,027 754 10,254 1,798
Geoconstruction 918 167 2,437 1,440
Energy (625) (270) (1,644) (978)
Unallocated corporate
expenses (3,313) (2,604) (9,378) (8,504)
Debt extinguishment costs - - - (2,320)
Interest (841) (687) (2,257) (1,918)
--------- --------- --------- ---------
Total income from
continuing operations $ 6,333 $ 2,488 $ 16,909 $ 4,160
========= ========= ========= =========
Changes in Financial Condition
Management exercises discretion regarding the liquidity and capital resource
needs of its business segments. This includes the ability to prioritize the use
of capital and debt capacity, to determine cash management policies and to make
decisions regarding capital expenditures. The Company's primary sources of
liquidity have historically been cash from operations, supplemented by
borrowings under its credit facilities.
The Company maintains an agreement (the "Master Shelf Agreement") whereby it can
issue up to $60,000,000 in unsecured notes. The Company also holds a revolving
credit facility (the "Credit Agreement") composed of an unsecured $30,000,000
revolving facility. Borrowings under the Master Shelf and Credit Agreements were
used to refinance borrowings outstanding under the Company's previous credit
facilities. At October 31, 2004, the Company had outstanding notes of
$60,000,000 under the Master Shelf Agreement (see Note 3 of the Notes to
Consolidated Financial Statements). The Company was in compliance with its
financial covenants at October 31, 2004 and expects to remain in compliance
through the foreseeable future.
The Company's working capital as of October 31, 2004 and January 31, 2004 was
$48,916,000 and $52,406,000, respectively. The decrease in working capital at
October 31, 2004 was primarily attributable to the use of available cash to fund
capital expenditures and an increase in current income taxes payable as a result
of the Company's increased profitability. The Company believes it will have
sufficient cash from operations and access to credit facilities to meet the
Company's operating cash requirements and to fund its budgeted capital
expenditures for fiscal 2005. At October 31, 2004, the Company had no material
commitments outstanding for capital assets.
22
Operating Activities
Cash from operating activities, including discontinued operations, increased to
$11,679,000 for the nine months ended October 31, 2004 from $3,710,000 for the
same period last year. The cash from operating activities for the nine months
ended October 31, 2004 included $3,277,000 used in discontinued operations. This
was primarily attributable to the payment of lease termination liabilities and
closing costs related to the sale of Layne Canada, partially offset by
collection of receivables related to Layne Canada. Proceeds from the sale of
Layne Canada of approximately $16,000,000 had been received on January 31, 2004.
Cash from continuing operations increased to $14,956,000 for the nine months
ended October 31, 2004 compared to cash from operations of $2,873,000 for the
same period in the prior year. The increase in cash from continuing operations
was primarily a result of the improved earnings from operations for the nine
months ended October 31, 2004 compared to the same period last year.
Investing Activities
The Company's capital expenditures of $22,287,000 for the nine months ended
October 31, 2004 were directed primarily toward the Company's expansion into
coalbed methane ("CBM") exploration and production including acquisitions of two
CBM oil and gas projects totaling $2,728,000 and the acquisition of a 75%
interest in gas transportation facilities and equipment for $654,000. In
addition, the Company acquired the assets of Beylik Drilling and Pump Service,
Inc. ("Beylik") for total proceeds of $14,743,000. The remaining expenditures
were directed towards expansion and upgrading of the Company's equipment and
facilities primarily in the water resources and mineral exploration divisions.
Additionally, the Company sold certain equipment for total proceeds of
$2,945,000, which were reinvested in the Company for ongoing working capital
requirements and capital expenditures.
Financing Activities
The Company's financing activities primarily related to borrowings of
$20,000,000 from the issuance of Senior Notes under the Master Shelf Agreement
to fund the acquisitions of Beylik and CBM-related assets totaling $18,125,000.
In addition, the borrowings were used for working capital requirements, capital
expenditures and the payment of $1,380,000 for the DrillCorp promissory note.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates its
estimates and judgments, which are based on historical experience and on various
other factors that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
23
Our accounting policies are more fully described in Note 1 to the
financial statements, located elsewhere in this Form 10-Q and in Note 1 of our
Annual Report on Form 10-K for the year ended January 31, 2004. We believe that
the following represent our more critical estimates and assumptions used in the
preparation of our consolidated financial statements, although not all
inclusive.
Revenue Recognition - Revenue is recognized on large, long-term contracts using
the percentage of completion method based upon materials installed and labor
costs incurred. Changes in job performance, job conditions and estimated
profitability, including those arising from contract penalty provisions, and
final contract settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined.
Other Long-lived assets - In evaluating the fair value and future benefits of
long-lived assets, including the Company's coalbed methane assets, the Company
performs an analysis of the anticipated future net cash flows of the related
long-lived assets and reduce their carrying value by the excess, if any, of the
result of such calculation. The Company believes at this time that the
long-lived assets' carrying values and useful lives continue to be appropriate.
Accrued Insurance Expense - The Company maintains insurance programs where it is
responsible for a certain amount of each claim up to a self-insured limit.
Estimates are recorded for health and welfare, property and casualty insurance
costs that are associated with these programs. These costs are estimated based
on actuarially determined projections of future payments under these programs.
Should a greater amount of claims occur compared to what was estimated or costs
of the medical profession increase beyond what was anticipated, reserves
recorded may not be sufficient and additional costs to the consolidated
financial statements could be required.
Costs estimated to be incurred in the future for employee medical benefits,
workers' compensation and casualty insurance programs resulting from claims
which have occurred are accrued currently. Under the terms of the Company's
agreement with the various insurance carriers administering these claims, the
Company is not required to remit the total premium until the claims are actually
paid by the insurance companies. These costs are not expected to significantly
impact liquidity in future periods.
Income Taxes - Income taxes are provided using the asset/liability method, in
which deferred taxes are recognized for the tax consequences of temporary
differences between the financial statement carrying amounts and tax bases of
existing assets and liabilities. Deferred tax assets are reviewed for
recoverability and valuation allowances are provided as necessary. Provision for
U.S. income taxes on undistributed earnings of foreign subsidiaries and foreign
affiliates is made only on those amounts in excess of those funds considered to
be invested indefinitely.
Litigation and Other Contingencies - The Company is involved in litigation
incidental to its business, the disposition of which is expected to have no
material effect on the Company's financial position or results of operations. It
is possible, however, that future results of operations for any particular
quarterly or annual period could be materially affected by changes in the
Company's assumptions related to these proceedings. The Company accrues its best
24
estimate of the probable cost for the resolution of legal claims. Such estimates
are developed in consultation with outside counsel handling these matters and
are based upon a combination of litigation and settlement strategies. To the
extent additional information arises or the Company's strategies change, it is
possible that the Company's best estimate of its probable liability in these
matters may change.
The Company's contractual obligations and commercial commitments are summarized
as follows (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 $ 60,000 $ - $ - $ 33,332 $ 26,668
Operating leases 21,454 10,001 6,989 3,628 836
Mineral interest
obligations 441 64 96 80 201
DrillCorp promissory note 1,440 1,440 - - -
--------- --------- --------- --------- ---------
Total contractual cash
obligations 83,335 11,505 7,085 37,040 27,705
Standby letters of credit 10,976 10,976 - - -
Asset retirement
obligations 248 - - - 248
--------- --------- --------- --------- ---------
Total contractual
obligations and
commercial commitments $ 94,559 $ 22,481 $ 7,085 $ 37,040 $ 27,953
========= ========= ========= ========= =========
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The principal market risks to which the Company is exposed are interest rates on
variable rate debt, foreign exchange rates giving rise to translation and
transaction gains and losses and fluctuations in the price of natural gas.
The Company centrally manages its debt portfolio considering overall financing
strategies and tax consequences. A description of the Company's variable rate
debt is in Note 12 of the Notes to Consolidated Financial Statements appearing
in the Company's January 31, 2004 Form 10-K. As of October 31, 2004, the
$60,000,000 of the Company's debt outstanding is fixed-rate debt. Accordingly,
an instantaneous change in interest rates of one percentage point would not
significantly impact the Company's annual interest expense.
Operating in international markets involves exposure to possible volatile
movements in currency exchange rates. Currently, the Company's primary
international operations are in Australia, Africa, Mexico and Italy. The
operations are described in Note 1 of the Notes to Consolidated Financial
Statements appearing in the Company's January 31, 2004 Form 10-K and Note 9 of
this Form 10-Q. The majority of the Company's contracts in Africa and Mexico are
U.S. dollar based, providing a natural reduction in exposure to currency
fluctuations. The Company also may utilize various hedge instruments, primarily
foreign currency option contracts, to manage the exposures associated with
fluctuating currency exchange rates (see Note 5 of the Notes to Consolidated
Financial Statements). As of October 31, 2004, the Company held option contracts
with an aggregate U.S. dollar notional value of $6,000,000.
25
As currency exchange rates change, translation of the income statements of the
Company's international operations into U.S. dollars may affect year-to-year
comparability of operating results. We estimate that a ten percent change in
foreign exchange rates would not significantly impact income from continuing
operations for the three and nine months ended October 31, 2004 and 2003. This
quantitative measure has inherent limitations, as it does not take into account
any governmental actions, changes in customer purchasing patterns or changes in
the Company's financing and operating strategies.
The Company is also exposed to fluctuations in the price of natural gas, which
result from the sale of the energy division's natural gas production. The price
of natural gas is volatile and the Company has entered into fixed-price physical
contracts covering a portion of its production to manage price fluctuations and
to achieve a more predictable cash flow. As of October 31, 2004, the Company
held contracts for physical delivery of 608,000 million British Thermal Units
("MMBtu") of natural gas at prices ranging from $6.30 to $9.65 per MMBtu.
We estimate that a ten percent change in the price of natural gas would not
significantly impact income from continuing operations for the three and nine
months ended October 31, 2004 and 2003.
ITEM 4. Controls and Procedures
Based on an evaluation of disclosure controls and procedures for the period
ended October 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 over financial reporting conducted
by management for the period ended October 31, 2004, we have concluded these
controls are effective. There have been no significant changes in internal
controls or in other factors that could significantly affect these controls
since such evaluation.
26
PART II
ITEM 1 - Legal Proceedings
NONE
ITEM 2 - Changes in Securities
NOT APPLICABLE
ITEM 3 - Defaults Upon Senior Securities
NOT APPLICABLE
ITEM 4 - Submission of Matters to a Vote of Security Holders
NONE
ITEM 5 - Other Information
NONE
ITEM 6 - Exhibits and Reports on Form 8-K
a) Exhibits
31(1) - Section 302 Certification of Chief Executive Officer of the
Company
31(2) - Section 302 Certification of Chief Financial Officer of the
Company
32(1) - Section 906 Certification of Chief Executive Officer of the
Company
32(2) - Section 906 Certification of Chief Financial Officer of the
Company
b) Reports on Form 8-K
Form 8-K filed on October 4, 2004, related to the Company's acquisition of
certain assets of Beylik Drilling and Pump Service, Inc.
Form 8-K filed on December 7, 2004, related to the Company's third quarter
press release.
27
* * * * * * * * * *
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Layne Christensen Company
--------------------------------------
(Registrant)
DATE: December 9, 2004 /s/ A.B. Schmitt
--------------------------------------
A.B. Schmitt, President
and Chief Executive Officer
DATE: December 9, 2004 /s/ Jerry W. Fanska
--------------------------------------
Jerry W. Fanska, Vice President
Finance and Treasurer
28