10-Q 1 l01191ae10vq.txt LAYNE CHRISTENSEN COMPANY 10-Q/QTR END 4-30-03 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 2003 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 12,070,154 shares of common stock, $.01 par value per share, outstanding on May 22, 2003. PART I ITEM 1. Financial Statements LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
April 30, January 31, 2003 2003 ---------- ----------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 6,504 $ 10,770 Customer receivables, less allowance of $4,024 and $4,078, respectively 42,887 39,117 Costs and estimated earnings in excess of billings on uncompleted contracts 15,045 8,711 Inventories 13,612 12,738 Deferred income taxes 11,892 11,514 Income taxes receivable 474 463 Other 4,946 4,867 -------- -------- Total current assets 95,360 88,180 -------- -------- Property and equipment: Land 6,833 6,801 Buildings 13,155 12,967 Machinery and equipment 164,527 167,043 Uncompleted wells, equipment and facilities 3,473 3,176 Mineral interest in property 700 369 -------- -------- 188,688 190,356 Less - Accumulated depreciation 129,944 132,167 -------- -------- Net property and equipment 58,744 58,189 Other assets: Investment in affiliates 18,393 18,587 Goodwill 1,659 1,659 Deferred income taxes 8,606 8,262 Other 2,954 3,223 -------- -------- Total other assets 31,612 31,731 -------- -------- $185,716 $178,100 ======== ========
See Notes to Consolidated Financial Statements. - Continued - 2 LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - (Continued) (in thousands, except per share data)
April 30, January 31, 2003 2003 ---------- ----------- (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 21,326 $ 16,044 Current maturities of long-term debt 4,156 3,938 Accrued compensation 8,702 10,874 Accrued insurance expense 7,114 7,845 Other accrued expenses 6,681 7,508 Income taxes payable 1,640 422 Billings in excess of costs and estimated earnings on uncompleted contracts 7,628 7,874 --------- --------- Total current liabilities 57,247 54,505 --------- --------- Noncurrent and deferred liabilities: Long-term debt 30,846 28,432 Accrued insurance expense 6,810 6,765 Other 5,046 5,025 --------- --------- Total noncurrent and deferred liabilities 42,702 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, 12,070,154 and 11,852,650 shares issued and outstanding, respectively 121 119 Capital in excess of par value 86,113 84,414 Retained earnings 11,426 10,807 Accumulated other comprehensive loss (11,848) (11,922) Notes receivable from management stockholders (45) (45) --------- --------- Total stockholders' equity 85,767 83,373 --------- --------- $ 185,716 $ 178,100 ========= =========
See Notes to Consolidated Financial Statements. - Concluded - 3 LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)
Three Months Ended April 30, (unaudited) ---------------------- 2003 2002 -------- -------- Revenues $ 66,347 $ 68,184 Cost of revenues (exclusive of depreciation shown below) 48,143 49,324 -------- -------- Gross profit 18,204 18,860 Selling, general and administrative expenses 13,257 13,653 Depreciation and amortization 3,386 3,826 Other income (expense): Equity in earnings of affiliates 92 272 Interest (559) (601) Other, net 279 (51) -------- -------- Income from continuing operations before income taxes 1,373 1,001 Income tax expense 810 528 Minority interest 56 (33) -------- -------- Net income from continuing operations before discontinued operations and cumulative effect of accounting change 619 440 Loss from discontinued operations, net of income taxes of ($119) - (189) -------- -------- Net income before cumulative effect of accounting change 619 251 Cumulative effect of accounting change, net of income taxes of $5,796 - (14,429) -------- -------- Net income (loss) $ 619 $(14,178) ======== ======== Basic income (loss) per share: Net income from continuing operations $ 0.05 $ 0.04 Loss from discontinued operations, net of tax - (0.02) -------- -------- Net income before cumulative effect of accounting change 0.05 0.02 Cumulative effect of accounting change, net of tax - (1.23) -------- -------- Net income (loss) per share $ 0.05 $ (1.21) ======== ========
- Continued - See Notes to Consolidated Financial Statements. 4 Layne Christensen Company and Subsidiaries Consolidated Statements of Income (Continued) For the Three Months Ended April 30, 2003 and 2002 (in thousands, except per share data)
Three Months Ended April 30, (unaudited) ------------------------------- 2003 2002 ------------ ------------- Diluted income (loss) per share: Net income from continuing operations $ 0.05 $ 0.04 Loss from discontinued operations, net of tax - (0.02) ------------ ------------- Net income before cumulative effect of accounting change 0.05 0.02 Cumulative effect of accounting change, net of tax - (1.19) ------------ ------------- Net income (loss) per share $ 0.05 $ (1.17) ============ ============= Weighted average shares outstanding 11,903,000 11,758,000 Dilutive stock options 259,000 383,000 ------------ ------------- 12,162,000 12,141,000 ============ =============
- Concluded - See Notes to Consolidated Financial Statements. 5 LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands)
Three Months Ended April 30, (unaudited) -------------------- 2003 2002 -------- -------- Cash flow from operating activities: Net income (loss) $ 619 $(14,178) Adjustments to reconcile net income to cash used in operations: Loss on discontinued operations, net of tax - 189 Cumulative effect of accounting change, net of tax - 14,429 Depreciation and amortization 3,386 3,826 Deferred income taxes (1,022) (896) Equity in earnings of affiliates (92) (272) Dividends received from foreign affiliates 273 333 Minority interest (56) 33 Gain from disposal of property and equipment (224) (129) Changes in current assets and liabilities: Increase in customer receivables (6,061) (9,675) Increase in costs and estimated earnings in excess of billings on uncompleted contracts (6,202) (702) (Increase) decrease in inventories (1,096) 142 Decrease in other current assets 1,605 1,780 Increase in accounts payable and accrued expenses 4,457 191 Increase (decrease) in billings in excess of costs and estimated earnings on uncompleted contracts (269) 2,198 Other, net 637 (859) -------- -------- Cash used in continuing operations (4,045) (3,590) Cash from discontinued operations 1,014 67 -------- -------- Cash used in operating activities (3,031) (3,523) -------- -------- Cash flow from (used in) investing activities: Additions to property and equipment (3,505) (1,973) Additions to uncompleted wells, equipment, and facilities (297) - Additions to mineral interest in properties (331) - Proceeds from disposal of property and equipment 77 431 Proceeds from sale of business - 1,800 -------- -------- Cash from (used in) investing activities (4,056) 258 -------- -------- Cash flow from financing activities: Net borrowings under revolving facility 4,000 7,500 Repayment of long-term debt (1,368) (3,572) Payments on notes receivable from management stockholders - 60 -------- -------- Cash from financing activities 2,632 3,988 -------- -------- Effects of exchange rate changes on cash 189 (246) -------- -------- Net increase (decrease) in cash and cash equivalents (4,266) 477 Cash and cash equivalents at beginning of period 10,770 2,983 -------- -------- Cash and cash equivalents at end of period $ 6,504 $ 3,460 ======== ========
See Notes to Consolidated Financial Statements. 6 LAYNE CHRISTENSEN COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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, 2003 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 Services and Production division, the Company engages in the operation, development, production and acquisition of natural gas properties, principally focusing on coalbed methane 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, 7 benefits and other internal costs directly attributable to these activities. Costs associated with production and general corporate activities are expensed in the period incurred. As of April 30, 2003, the Company has capitalized $4,173,000 related to uncompleted wells, equipment and facilities and land acquisition costs. These are unevaluated properties and therefore are not being amortized and reserves have not yet been established. Income taxes are provided using the asset/liability method, in which deferred taxes are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and tax bases of existing assets and liabilities. The effective tax rate in excess of the statutory federal rate for the three months ended April 30, 2003 and 2002 was a result of the impact of non-deductible expenses and the tax treatment of certain foreign operations. Earnings per share are based upon the weighted average number of common and dilutive equivalent shares outstanding. Options to purchase common stock are included based on the treasury stock method for dilutive earnings per share, except when their effect is antidilutive. 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 (loss) and earnings per share for the three months ended April 30, 2003 and 2002, determined as if the SFAS 123 Method had been applied, is presented in the following table (in thousands, except per share amounts):
Three Months Ended April 30, ---------------------------- 2003 2002 ---------- ----------- Net income (loss), as reported $ 619 $ (14,178) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax (147) (145) --------- ---------- Pro forma net income $ 472 $ (14,323) ========= ========== Income (loss) per share: Basic - as reported $ 0.05 $ (1.21) ========= ========== Basic - pro forma $ 0.04 $ (1.22) ========= ========== Diluted - as reported $ 0.05 $ (1.17) ========= ========== Diluted - pro forma $ 0.04 $ (1.18) ========= ==========
The amounts (refunded) paid for income taxes and interest are as follows (in thousands):
Three Months Ended April 30, ---------------------------- 2003 2002 ------- -------- Income taxes $ 337 $(2,111) Interest 459 831
8 Supplemental Non-cash Transactions - The Company issued 217,504 shares of common stock related to compensation awards during the three months ended April 30, 2003. The Company did not issue shares of common stock related to compensation awards in the same period last year. Reclassifications - Certain 2002 amounts have been reclassified to conform with the 2003 presentation. 2. Discontinued Operations On December 10, 2002, the Company sold its Ranney(R) collector well business. The Ranney(R) business was a component of the Company's water resources division (see Note 6). On January 23, 2003, the Company sold its Drilling Equipment Supply, Inc. ("DESI") division. 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 6). In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the results of operations for Ranney(R) and DESI have been classified as discontinued operations. Revenues and net income (loss) from discontinued operations for the three months ended April 30, 2002 were as follows (in thousands):
Three Months Ended April 30, 2002 -------------------- Revenues: Ranney(R) $ 1,280 DESI 2,378 ------- Total $ 3,658 ======= Net Loss: Ranney(R) $ (42) DESI (147) ------- Total $ (189) =======
3. 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. SFAS 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 fiscal year 2003 and determined a transitional impairment charge was required. At February 1, 2002, the Company had $21,884,000 of goodwill recorded in its consolidated balance sheet, consisting primarily of goodwill associated with its mineral exploration segment. In assessing goodwill, the Company assigned assets 9 and liabilities to its reporting units and developed a discounted cash flow analysis to determine the fair value of the reporting units. Based on this model, the Company determined that the mineral exploration goodwill was impaired. As a result, the Company recorded a non-cash charge of $14,429,000, net of taxes of $5,796,000, as a cumulative effect of a change in accounting principle at February 1, 2002, in accordance with SFAS No. 142. The Company completed its annual impairment test as of December 31, 2002 and no further impairment was indicated. 4. Indebtedness On July 9, 2002, the Company established a new credit facility ("Credit Agreement") with General Electric Capital Corporation as agent for a group of banks. The Credit Agreement was used to refinance borrowings outstanding under the Company's previous revolving credit facility ("Previous Credit Agreement") and to pay the outstanding balance under the Company's note agreement ("Senior Notes"). The Credit Agreement provides a $35,000,000 revolving credit facility that is available for working capital, capital expenditures, and for other general corporate purposes. The maximum available under the revolving credit facility is $35,000,000, less any outstanding letter of credit commitments (which are subject to a $15,000,000 sublimit). Availability under the revolving credit facility is dependent on a borrowing base consisting primarily of domestic customer receivables and inventories. The Credit Agreement also includes a $35,000,000 term loan ("Term Loan") that is payable in increasing quarterly installments beginning October, 2002 and end in July, 2007. The Credit Agreement includes a penalty of 2% in the event of prepayment prior to the first anniversary of the agreement, 1% after the first anniversary but prior to the second anniversary, and no prepayment penalty thereafter. The Credit Agreement is secured by a majority of the assets of the Company and certain of its subsidiaries, including but not limited to, accounts receivable, inventory and equipment. The Credit Agreement contains certain covenants including restrictions on the incurrence of additional indebtedness and liens, transactions with affiliates, sale of assets or other dispositions, lease transactions and certain financial maintenance covenants, including among others, maximum capital expenditures, minimum EBITDA, minimum interest coverage and maximum leverage. The Credit Agreement provides for interest at variable rates equal to, at the Company's option, a Libor rate plus 2.75% to 3.25% (depending upon leverage ratios), or an alternate reference rate as defined in the Credit Agreement. The Company's floating rate debt exposes it to changes in interest rates going forward. During September 2002, the Company entered into an interest rate swap agreement (the "Swap Agreement"), which has been designated and is accounted for as a cash flow hedge to effectively convert a portion of the Term Loan to a fixed rate basis, thus reducing the impact of interest rate changes. The Company will pay the counterparties interest at 2.53% and receive interest based on a variable Libor rate (1.29% as of April 30, 2003). The notional principal is reduced each quarter based on 50% of the scheduled principal payments on the Company's Term Loan. The notional principal was $16,187,500 as of April 30, 10 2003. The Swap Agreement calls for quarterly interest payments which commenced on October 1, 2002, and will terminate September 9, 2004.
April 30, January 31, 2003 2003 --------- ----------- Current maturities of long-term debt: Term loan $ 4,156 $ 3,938 ------- ------- Long-term debt: Term loan 26,846 28,432 Revolving credit facility 4,000 - ------- ------- Total long-term debt 30,846 28,432 ------- ------- Total debt $35,002 $32,370 ======= =======
5. Other Comprehensive Income (Loss) Components of other comprehensive income (loss) are summarized as follows (in thousands):
Three Months Ended April 30, ----------------------- 2003 2002 -------- -------- Net income (loss) $ 619 $(14,178) Other comprehensive income (loss), net of taxes; Foreign currency translation adjustments 101 938 Unrealized loss on available for sale investments (4) - Unrealized loss on Swap (23) (35) -------- -------- Other comprehensive income (loss) $ 693 $(13,275) ======== ========
The components of accumulated other comprehensive loss for the three months ended April 30, 2003 are as follows (in thousands):
Accumulated Cumulative Unrealized Unrecognized Unrealized Other Translation Loss On Pension Loss on Comprehensive Adjustment Investments Liability Swap Loss ----------- ----------- ------------ ---------- ------------- Balance, February 1, 2003 $ (9,794) $ (98) $ (1,896) $ (134) $(11,922) Period change 101 (4) - (23) 74 -------- -------- -------- -------- -------- Balance, April 30, 2003 $ (9,693) $ (102) $ (1,896) $ (157) $(11,848) ======== ======== ======== ======== ========
6. 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: 11 Water Resources Division This division provides a full line of water-related services and products including hydrological studies, site selection, well design, drilling and well development, pump installation, and repair and maintenance. The division's offerings include design and construction of water treatment facilities and the manufacture and sale of products to treat volatile inorganics in groundwater. The division also offers environmental services to assess and monitor groundwater contaminants. Effective February 1, 2003, the Company's ground-freezing services will be 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. Geoconstruction Services Division This division focuses on services that improve soil stability, primarily jet grouting, grouting and vibratory ground improvement. 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 Services and Production Division This division offers a variety of specialized services including shallow gas and tar sands exploration drilling, conventional oilfield fishing services, coil tubing fishing services, resonance technology solutions for stuck tubulars and land-based oil and gas search and development. The division's land-based oil and gas search and development activities focus primarily on natural gas properties, principally coalbed methane projects located in the Midwest region of the United States. Products and Other This grouping has historically included the Company's supply operation which distributed drilling equipment, parts and supplies, a manufacturing operation producing diamond drilling rigs, diamond bits, core barrels and drill rods ("Christensen Products") and other miscellaneous operations which did not fall into the above divisions. On January 23, 2003, the Company sold its supply operations to Boart Longyear. Upon the sale of the supply operations, the results of operations were reclassified to discontinued operations for fiscal year 2003. On August 8, 2001, the Company sold its Christensen Products business to a subsidiary of Atlas Copco. 12 Revenues and operating income pertaining to the Company"s operating segments are presented below. The Corporate operating loss consists of unallocated corporate expenses, primarily general and administrative functions and incentive compensation. Operating segment revenues and operating income are summarized as follows (in thousands):
Three Months Ended April 30, ---------------------- 2003 2002 -------- -------- Revenues Water resources $ 38,769 $ 40,998 Mineral exploration 14,056 12,904 Geoconstruction services 6,131 8,415 Energy services and production 7,391 5,502 Products and other - 365 -------- -------- Total revenues $ 66,347 $ 68,184 ======== ======== Income (loss) from continuing operations Water resources $ 5,400 $ 5,958 Mineral exploration (178) (485) Geoconstruction services 262 1,341 Energy services and production (319) (847) Products and other - (377) Corporate (3,233) (3,988) Interest (559) (601) -------- -------- Total income from continuing operations $ 1,373 $ 1,001 ======== ======== Geographic Information: Revenues North America $ 55,620 $ 57,927 Africa/Australia 9,357 9,075 Other foreign 1,370 1,182 -------- -------- Total revenues $ 66,347 $ 68,184 ======== ========
Income from continuing operations of the energy services and production segment for the three months ended April 30, 2002 includes $595,000 of expenses related to the Company's oil and gas exploration activities in the Gulf of Mexico region of the United States. These activities are unrelated to the Company's coalbed methane exploration and development efforts and were charged to expense as no reserves were identified. The Company is no longer pursuing these exploration activities. 7. 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, 13 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. 8. New Accounting Pronouncements The Financial Accounting Standards Board has issued several statements which were effective in the current fiscal year or will be effective in future fiscal years. SFAS No. 143, "Accounting for Asset Retirement Obligations," establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. SFAS No. 143 was effective for the Company's fiscal year beginning February 1, 2003. The adoption of SFAS No. 143 did not have a significant effect on the Company's financial position or results of operations. SFAS No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment to FASB Statement No. 13, and Technical Corrections," provides new guidance on accounting for early extinguishments of debt as extraordinary items and other specific technical changes to existing literature. SFAS No. 145 was effective for the Company's fiscal year beginning February 1, 2003. SFAS No. 145 will require reclassification of the $696,000 extraordinary loss recognized in the second quarter of fiscal 2003 to income from continuing operations. SFAS No. 148, "Accounting for Stock-Based Compensation," amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Management is currently assessing the impact SFAS No. 148 will have on the Company's financial position or results of operations. SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments and Hedging Activities Summary" amends 14 and clarifies financial reporting for derivative instruments, including certain derivative instruments embedded in other contacts and for hedging activities under FASB Statement 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. Management is currently assessing the impact SFAS No. 149 and 150 will have on the Company's results of operations. Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46") requires consolidation of certain variable interest entities if certain conditions are met. The adoption of FIN 46 did not have a significant impact on the Company's results of operations. 9. Subsequent Events On June 3, 2003, the Company acquired 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. ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Cautionary Language Regarding Forward-Looking Statements This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Such statements are indicated by words or phrases such as "anticipate," "estimate," "project," "believe," "intend," "expect," "plan" and similar words or phrases. Such statements are based on current expectations and are subject to certain risks, uncertainties and assumptions, including but not limited to prevailing prices for various metals, unanticipated slowdowns in the Company's major markets, the impact of competition, the effectiveness of operational changes expected to increase efficiency and productivity, worldwide economic and political conditions and foreign currency fluctuations that may affect worldwide results of operations. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially and adversely from those anticipated, estimated or projected. These forward-looking statements are made as of the date of this filing, and the Company assumes no obligation to update such forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements. Demand for the Company's mineral exploration drilling services and products depends upon the level of mineral exploration and development activities conducted by mining companies, particularly with respect to gold and copper. Mineral exploration is highly speculative and is influenced by a variety of factors, including the prevailing prices for various metals that often fluctuate 15 widely. In this connection, the decline in the prices of various metals has continued to adversely impact the level of mineral exploration and development activities conducted by mining companies and has had, and could continue to have, a material adverse effect on the Company. Results of Operations The following table presents, for the periods indicated, the percentage relationship which certain items reflected in the Company's consolidated statements of income bear to revenues and the percentage increase or decrease in the dollar amount of such items period to period.
Three Months Ended April 30, Period-to-Period ----------------- Change 2003 2002 Three Months ------ ------ ---------------- Revenues: Water resources 58.4% 60.1% (5.4)% Mineral exploration 21.2 18.9 8.9 Geoconstruction services 9.3 12.4 (27.1) Energy services and production 11.1 8.1 34.3 Products and other 0.0 0.5 (100.0) ----- ----- Total net revenues 100.0% 100.0% (2.7) ===== ===== Cost of revenues 72.6 72.3 (2.4) ----- ----- Gross profit 27.4 27.7 (3.5) Selling, general and administrative expenses 20.0 20.0 (2.9) Depreciation and amortization 5.1 5.6 (11.5) Other income (expense): Equity in earnings of affiliates 0.1 0.4 (66.2) Interest (0.8) (0.9) (7.0) Other, net 0.4 (0.1) * ----- ----- Income from continuing operations before income taxes and minority interest 2.0 1.5 37.2 Income tax expense 1.2 0.8 53.4 Minority interest 0.1 (0.1) * ----- ----- Net income from continuing operations before discontinued operations and cumulative effect of accounting change 0.9 0.6 40.7 Loss from discontinued operations, net of tax 0.0 (0.3) * ----- ----- Net income before cumulative effect of accounting change 0.9 0.3 * Cumulative effect of accounting change, net of tax 0.0 (21.1) * ----- ----- Net income (loss) 0.9% (20.8)% * ===== =====
----------------- * Not meaningful. 16 Results of Operations Revenues for the three months ended April 30, 2003 decreased $1,837,000, or 2.7%, to $66,347,000 compared to $68,184,000 the same period last year. See further discussion of results of operations by division below. Gross profit as a percentage of revenues was 27.4% for the three months ended April 30, 2003 compared to 27.7% for the three months ended April 30, 2002. The decrease in gross profit percentage was primarily attributable to pricing pressures associated with increased competition in certain markets served by the Company. Selling, general and administrative expenses decreased to $13,257,000 for the three months ended April 30, 2003 compared to $13,653,000 for the three months ended April 30, 2002. The decrease was primarily the result of cost control measures implemented late in fiscal year 2003. Depreciation and amortization decreased to $3,386,000 for the three months ended April 30, 2003 compared to $3,826,000 for the same period last year. The decrease was primarily the result of less depreciation from assets fully depreciated in prior periods primarily in the mineral exploration division. Interest expense decreased to $559,000 for the three months ended April 30, 2003 compared to $601,000 for the three months ended April 30, 2002. The decrease was primarily a result of decreases in the Company's average borrowings and in interest rates for the period. Income tax expense of $810,000 (an effective rate of 59.0%) was recorded for the three months ended April 30, 2003, compared to $528,000 (an effective rate of 52.7%) for the same period last year. The effective rate in excess of the statutory federal rate for the periods was a result of the impact of nondeductible expenses and the tax treatment of certain foreign operations. WATER RESOURCES DIVISION (in thousands)
Three months ended April 30, -------------------- 2003 2002 -------- -------- Revenues $ 38,769 $ 40,998 Income from continuing operations 5,400 5,958
Water resources revenue decreased 5.4% to $38,769,000 from $40,998,000 for the three months ended April 30, 2003 and 2002. The decrease in revenue was primarily attributable to the continued impact of reduced municipal spending and the resulting competitive pressures in the Company's markets. Income from continuing operations for the water resources division decreased 9.4% to $5,400,000 for the three months ended April 30, 2003, compared to $5,958,000 for the three months ended April 30, 2002. The decrease in income from continuing operations was the result of the impact of competitive pressures on 17 job margins and start-up expenses related to the Company's groundwater transfer project in Texas. MINERAL EXPLORATION DIVISION (in thousands)
Three months ended April 30, --------------------- 2003 2002 -------- -------- Revenues $ 14,056 $ 12,904 Loss from continuing operations (178) (485)
Mineral exploration revenues increased 8.9% to $14,056,000 from $12,904,000 for the three months ended April 30, 2003 and 2002. The increase was primarily attributable to increased exploration activity in North America and West Africa due to higher precious metal prices, partially offset by downsizing the Company's operations in Zambia. The loss from continuing operations for the mineral exploration division was $178,000 for the three months ended April 30, 2003, compared to a loss from continuing operations of $485,000 for the three months ended April 30, 2002. The reduced loss in the division reflects the increased activity levels noted above and lower depreciation related to assets fully depreciated in prior periods, partially offset by increased expenses in Australia to bring equipment into compliance with recently enacted changes to local transportation requirements. GEOCONSTRUCTION SERVICES DIVISION (in thousands)
Three months ended April 30, ------------------ 2003 2002 ------- ------- Revenues $6,131 $8,415 Income from continuing operations 262 1,341
Geoconstruction services revenues decreased 27.1% to $6,131,000 for the three months ended April 30, 2003, compared to $8,415,000 for the three months ended April 30, 2002. The decrease was attributable to delays in commencing work on certain public sector projects. The geoconstruction services division had income from continuing operations of $262,000 for the three months ended April 30, 2003, compared to $1,341,000 for the three months ended April 30, 2002. The decrease in income from continuing operations was primarily the result of reduced profit associated with lower volume. 18 ENERGY SERVICES AND PRODUCTION DIVISION (in thousands)
Three months ended April 30, ------------------- 2003 2002 ------- ------- Revenues $ 7,391 $ 5,502 Loss from continuing operations (319) (847)
Energy services revenues increased 34.3% to $7,391,000 for the three months ended April 30, 2003, compared to revenues of $5,502,000 for the three months ended April 30, 2002. The increase in revenue was primarily attributable to an increase in tar sands activity in Canada and increased third-party coalbed methane exploration drilling in the United States. The loss from continuing operations for the energy services and production division was $319,000 for the three months ended April 30, 2003, compared to a loss from continuing operations of $847,000 for the three months ended April 30, 2002. The continued loss, despite higher revenues, was the result of costs associated with complications on a drilling project in Canada and a still weak energy service market in the Gulf of Mexico region. Corporate expenses not allocated to individual divisions were $3,233,000 for the three months ended April 30, 2003 compared to $3,988,000 for the three months ended April 30, 2002. The decrease in unallocated corporate expenses was attributable to cost reduction measures implemented late in fiscal 2003 and lower incentive-related accruals for the period. Changes in Financial Condition Cash used in operations was $3,031,000 for the three months ended April 30, 2003 compared to $3,523,000 used for the same period last year. Cash used in operations was primarily attributable to increased receivables in Canada and the water division which were funded by increased accounts payable and available cash. Borrowings under the Company's available credit agreement were used to fund capital expenditures during the period. The Company believes that borrowings from its available credit agreement and cash from operations will be sufficient for the Company's working capital requirements for at least the balance of the fiscal year. Critical Accounting Policies and Estimates Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its 19 estimates and judgements, which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our accounting policies are more fully described in Notes 1 and 8 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, 2003. We believe that the following represent our more critical estimates and assumptions used in the preparation of our consolidated financial statements, although not all inclusive. Revenue Recognition - Revenue is recognized on large, long-term contracts using the percentage of completion method based upon materials installed and labor costs incurred. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Goodwill and Other Intangibles - In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which was effective for the Company as of February 1, 2002. SFAS No. 142 substantially changes the accounting for goodwill, requiring that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead periodically be tested for impairment. The Company had goodwill in the amount of $21,884,000 at January 31, 2002. The goodwill was primarily attributable to the Company's Mineral Exploration Division. The process of evaluating goodwill for impairment involves the determination of the fair value of the Company's reporting units. Inherent in such fair value determinations are certain judgments and estimates, including the interpretation of current economic indicators and market valuations, and assumptions about the Company's strategic plans with regard to its operations. The Company completed the initial assessment of goodwill during the second quarter of fiscal year 2003 and determined a transitional impairment charge was required. As a result, the Company took a non-cash charge of $20,225,000, which was recorded, net of taxes of $5,796,000, as a cumulative effect of a change in accounting principle in accordance with SFAS No. 142. To the extent additional information arises or the Company's strategies change, it is possible that the Company's conclusions regarding impairment of the remaining goodwill could change and result in a material effect on its financial position or results of operations. Other Long-lived assets - In evaluating the fair value and future benefits of long-lived assets, we perform an analysis of the anticipated future net cash flows of the related long-lived assets and reduce their carrying value by the excess, if any, of the result of such calculation. We believe at this time that 20 the long-lived assets' carrying values and useful lives continue to be appropriate. Accrued Insurance Expense - We record estimates for certain health and welfare, workers' compensation, and casualty insurance costs that are self-insured programs. Should a greater amount of claims occur compared to what was estimated or costs of the medical profession increase beyond what was anticipated, reserves recorded may not be sufficient and additional costs to the consolidated financial statements could be required. Costs estimated to be incurred in the future for employee medical benefits, workers' compensation and casualty insurance programs resulting from claims which have occurred are accrued currently. Under the terms of the Company's agreement with the various insurance carriers administering these claims, the Company is not required to remit the total premium until the claims are actually paid by the insurance companies. These costs are not expected to significantly impact liquidity in future periods. Income Taxes - Income taxes are provided using the asset/liability method, in which deferred taxes are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and tax bases of existing assets and liabilities. Deferred tax assets are reviewed for recoverability and valuation allowances are provided as necessary. Provision for U.S. income taxes on undistributed earnings of foreign subsidiaries and foreign affiliates is made only on those amounts in excess of those funds considered to be invested indefinitely. Litigation and Other Contingencies - The Company is involved in litigation incidental to its business, the disposition of which is expected to have no material effect on the Company's financial position or results of operations. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in the Company's assumptions related to these proceedings. The Company accrues its best estimate of the probable cost for the resolution of legal claims. Such estimates are developed in consultation with outside counsel handling these matters and are based upon a combination of litigation and settlement strategies. To the extent additional 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: 21
Payments/Expiration by Period Less than Total 1 year 1-3 years 4-5 years ------- ------- --------- --------- Contractual Obligations and Other Commercial Commitments Debt $35,002 $ 4,156 $19,250 $11,596 Operating leases 16,443 6,141 6,939 3,363 Ausdrill promissory note 600 600 - - ------- ------- ------- ------- Total contractual cash obligations 52,045 10,897 26,189 14,959 ------- ------- ------- ------- Standby letters of credit 9,439 9,439 - - ------- ------- ------- ------- Total contractual obligations and commercial commitments $61,484 $20,336 $26,189 $14,959 ======= ======= ======= ========
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The principal market risks to which the Company is exposed are interest rates on variable rate debt, equity risk on investments, and foreign exchange rates giving rise to translation and transaction gains and losses. The Company centrally manages its debt and investment portfolios considering overall financing strategies and tax consequences. A description of the Company's variable rate debt and associated interest rate swap is in Note 11 to the Consolidated Financial Statements appearing in the Company's January 31, 2003 Form 10-K. Assuming then existing debt levels and the Swap Agreement, an instantaneous change in interest rates of one percentage point would impact the Company's annual interest expense by $188,000 and $157,000 at April 30, 2003 and January 31, 2003, respectively. The Company's investments are described in Note 1 to the Consolidated Financial Statements appearing in the Company's January 31, 2003 Form 10-K. The investments are carried at market value and are held for long-term investing purposes rather than trading purposes. Operating in international markets involves exposure to possible volatile movements in currency exchange rates. Currently, the Company's primary international operations are in Australia, Africa, Mexico, Canada, and Italy. The operations are described in Note 1 to the Consolidated Financial Statements appearing in the Company's January 31, 2003 Form 10-K and Note 6 of this Form 10-Q. The majority of the Company's contracts in Africa and Mexico are U.S. dollar based, providing a natural reduction in exposure to currency fluctuations. As currency exchange rates change, translation of the income statements of the Company's international operations into U.S. dollars may affect year-to-year comparability of operating results. We estimate that a ten percent change in foreign exchange rates would not significantly impact income from continuing operations for the three months ended April 30, 2003 and 2002. This quantitative measure has inherent limitations, as it does not take into account any governmental actions, changes in customer purchasing patterns or changes in the Company's financing and operating strategies. 22 ITEM 4. Controls and Procedures (a) Based on an evaluation of disclosure controls and procedures for the period ended April 30, 2003 conducted by our Chief Executive Officer and Chief Financial Officer within the last ninety (90) days, we conclude that our disclosure controls and procedures are effective. (b) Based on an evaluation of our internal controls conducted by management within the last ninety (90) days, no significant deficiencies or material weaknesses were identified and we have not made any significant changes in our internal controls or in other factors that could significantly affect internal controls since such evaluation. 23 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 4(5.1) - First Amendment to the Credit Agreement dated April 30, 2003. 99(1) - Section 906 Certification of Chief Executive Officer of the Company. 99(2) - Section 906 Certification of Chief Financial Officer of the Company. b) Reports on Form 8-K Form 8-K filed on May 29, 2003 related to the Company's first quarter press release. 24 * * * * * * * * * * 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: June 4, 2003 /s/ A.B. Schmitt ---------------------------------- A.B. Schmitt, President and Chief Executive Officer DATE: June 4, 2003 /s/ Jerry W. Fanska ---------------------------------- Jerry W. Fanska, Vice President Finance and Treasurer CERTIFICATIONS I, Andrew B. Schmitt, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Layne Christensen Company 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within 25 those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 4, 2003 /s/ A.B. Schmitt ---------------------------------- A.B. Schmitt, President and Chief Executive Officer I, Jerry W. Fanska, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Layne Christensen Company 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as 26 defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): d. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and e. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 4, 2003 /s/ Jerry W. Fanska ---------------------------------- Jerry W. Fanska, Vice President Finance - Treasurer 27 Exhibit Index
Exhibit No. Description Page 4(5.1) - First Amendment to the Credit Agreement dated April 30, 2003 99(1) - Section 906 Certification of Chief Executive Officer of the Company 99(2) - Section 906 Certification of Chief Financial Officer of the Company
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