10-Q 1 l04375ae10vq.txt LAYNE CHRISTENSEN COMPANY 10-Q 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, 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 12,357,915 shares of common stock, $.01 par value per share, outstanding on November 20, 2003. PART I ITEM 1. Financial Statements LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
October 31, January 31, 2003 2003 -------- -------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 8,257 $ 10,770 Customer receivables, less allowance of $4,578 and $4,078, respectively 44,409 39,117 Costs and estimated earnings in excess of billings on uncompleted contracts 15,756 8,711 Inventories 14,250 12,738 Deferred income taxes 11,926 11,514 Income taxes receivable 1,758 463 Assets held for sale 3,027 - Other 4,344 4,867 -------- -------- Total current assets 103,727 88,180 -------- -------- Property and equipment: Land 6,821 6,801 Buildings 13,270 12,967 Machinery and equipment 166,151 167,043 Uncompleted wells, equipment and facilities 8,324 3,176 Mineral interest in property 865 369 -------- -------- 195,431 190,356 Less - Accumulated depreciation 134,294 132,167 -------- -------- Net property and equipment 61,137 58,189 Other assets: Investment in affiliates 18,732 18,587 Goodwill 2,449 1,659 Deferred income taxes 6,433 8,262 Other 2,670 3,223 -------- -------- Total other assets 30,284 31,731 -------- -------- $195,148 $178,100 ======== ========
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, 2003 2003 --------- --------- (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 20,660 $ 16,044 Current maturities of long-term debt - 3,938 Accrued compensation 10,490 10,874 Accrued insurance expense 7,397 7,845 Other accrued expenses 6,174 7,508 Income taxes payable 549 422 Billings in excess of costs and estimated earnings on uncompleted contracts 8,878 7,874 --------- --------- Total current liabilities 54,148 54,505 --------- --------- Noncurrent and deferred liabilities: Long-term debt 40,000 28,432 Accrued insurance expense 7,408 6,765 Other 5,186 5,025 --------- --------- Total noncurrent and deferred liabilities 52,594 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, 12,294,404 and 11,852,650 shares issued and outstanding, respectively 123 119 Capital in excess of par value 87,674 84,414 Retained earnings 11,517 10,807 Accumulated other comprehensive loss (10,880) (11,922) Notes receivable from management stockholders (28) (45) --------- --------- Total stockholders' equity 88,406 83,373 --------- --------- $ 195,148 $ 178,100 ========= =========
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) --------------------------- --------------------------- 2003 2002 2003 2002 --------- --------- --------- --------- Revenues $ 72,776 $ 66,630 $ 211,466 $ 203,355 Cost of revenues (exclusive of depreciation shown below) 53,571 47,622 153,217 145,555 --------- --------- --------- --------- Gross profit 19,205 19,008 58,249 57,800 Selling, general and administrative expenses 13,280 13,638 41,419 39,987 Depreciation and amortization 3,057 3,410 9,531 10,601 Other income (expense): Equity in earnings of affiliates 23 209 723 683 Interest (687) (631) (1,918) (1,899) Debt extinguishment costs - - (2,320) (1,135) Other income (expense), net (108) 830 442 1,179 --------- --------- --------- --------- Income from continuing operations before income taxes and minority interest 2,096 2,368 4,226 6,040 Income tax expense 1,186 1,468 2,878 3,738 Minority interest (163) (10) - (192) --------- --------- --------- --------- Net income from continuing operations before discontinued operations and cumulative effect of accounting change 747 890 1,348 2,110 Loss from discontinued operations, net of income taxes (206) (690) (638) (1,655) --------- --------- --------- --------- Net income before cumulative effect of accounting change 541 200 710 455 Cumulative effect of accounting change, net of income taxes of $5,796 - - - (14,429) --------- --------- --------- --------- Net income (loss) $ 541 $ 200 $ 710 $ (13,974) ========= ========= ========= ========= Basic income (loss) per share: Net income from continuing operations $ .06 $ .08 $ .11 $ .18 Loss from discontinued operations net of income taxes (.02) (.06) (.05) (.14) --------- --------- --------- --------- Income before cumulative effect of accounting change .04 .02 .06 .04 Cumulative effect of accounting change, net of income taxes - - - (1.22) --------- --------- --------- --------- Net income (loss) per share $ .04 $ .02 $ .06 $ (1.18) ========= ========= ========= =========
See Notes to Consolidated Financial Statements. - Continued - 4 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) ----------------------------------- ----------------------------------- 2003 2002 2003 2002 -------------- -------------- -------------- -------------- Diluted income (loss) per share: Net income from continuing operations $ .06 $ .07 $ .11 $ .17 Loss from discontinued operations, net of income taxes (.02) (.05) (.05) (.14) -------------- -------------- -------------- -------------- Income before cumulative effect of accounting change .04 .02 .06 .03 Cumulative effect of accounting change, net of income taxes - - - (1.19) -------------- -------------- -------------- -------------- Net income (loss) per share $ .04 $ .02 $ .06 $ (1.16) ============== ============== ============== ============== Weighted average shares outstanding 12,039,000 11,864,000 11,957,000 11,796,000 Dilutive stock options 266,000 299,000 230,000 334,000 -------------- -------------- -------------- -------------- 12,305,000 12,163,000 12,187,000 12,130,000 ============== ============== ============== ==============
See Notes to Consolidated Financial Statements. - Concluded - 5 LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands)
Nine Months Ended October 31, ----------------------- 2003 2002 -------- -------- (unaudited) Cash flow from operating activities: Net income (loss) $ 710 $(13,974) Adjustments to reconcile net income (loss) to cash from operations: Loss on discontinued operations, net of tax 638 1,655 Cumulative effect of accounting change, net of tax - 14,429 Depreciation and amortization 9,531 10,601 Deferred income taxes 359 (1,510) Equity in earnings of affiliates (723) (683) Dividends received from foreign affiliates 605 1,751 Loss on extinguishment of debt 2,320 1,135 Minority interest - 192 Gain from disposal of property and equipment (199) (926) Changes in current assets and liabilities: Increase in customer receivables (7,256) (1,261) Increase in costs and estimated earnings in excess of billings on uncompleted contracts (6,762) (3,787) (Increase) decrease in inventories (1,544) 1,946 (Increase) decrease in other current assets (129) 822 Increase (decrease) in accounts payable and accrued expenses 3,389 (36) Increase in billings in excess of costs and estimated earnings on uncompleted contracts 1,011 1,533 Other, net 461 (624) -------- -------- Cash from continuing operations 2,411 11,263 Cash from (used in) discontinued operations 1,299 (1,086) -------- -------- Cash from operating activities 3,710 10,177 -------- -------- Cash flow used in investing activities: Additions to property and equipment (8,786) (6,103) Additions to uncompleted wells, equipment, and facilities (5,148) (1,778) Additions to mineral interest in properties (496) - Proceeds from disposal of property and equipment 117 1,362 Proceeds from sale of business - 1,800 Acquisition of business (1,150) - Investment in joint venture (40) (1,059) -------- -------- Cash used in investing activities from continuing operations (15,503) (5,778) Cash from (used in) discontinued operations - (1,321) -------- -------- Cash used in investing activities (15,503) (7,099) -------- -------- Cash flow from (used in) financing activities: Net borrowings under revolving facility - 8,500 Issuance of long-term debt 40,000 35,000 Repayment of long-term debt (32,370) (43,732) Prepayment penalty on early extinguishment of debt (671) (1,135) Debt issuance costs (160) (1,709) Payments on notes receivable from management stockholders 17 60 Issuance of common stock 1,403 513 -------- -------- Cash from (used in) financing activities 8,219 (2,503) -------- -------- Effects of exchange rate changes on cash 1,061 (687) -------- -------- Net decrease in cash and cash equivalents (2,513) (112) Cash and cash equivalents at beginning of period 10,770 2,983 -------- -------- Cash and cash equivalents at end of period $ 8,257 $ 2,871 ======== ========
See Notes to Consolidated Financial Statements. 6 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, 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, 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 October 31, 2003 and January 31, 2003, the Company has capitalized $9,189,000 and $3,545,000 related to uncompleted wells, equipment and facilities and land acquisition costs. These are unevaluated properties and therefore are not being amortized as reserves have not yet been established. 7 The Company records asset retirement obligations at estimated fair value in accordance with Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting For Asset Retirement Obligations." Under SFAS No. 143, those liabilities are recognized at fair value as incurred and capitalized as part of the cost of the related long-lived asset. Accretion of the liabilities due to the passage of time is recorded as an operating expense. As of October 31, 2003, the Company recorded an initial asset retirement obligation of $94,000 for plugging and abandonment obligations related to its oil and gas properties. 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 rates in excess of the statutory federal rate for the three and nine months ended October 31, 2003 and 2002 were a result of the impact of certain non-deductible expenses, the tax treatment of certain foreign operations and the discrete period tax treatment related to the debt extinguishment costs recorded in the second quarter of each year. 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 and nine months ended October 31, 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 Nine Months Ended October 31, Ended October 31, ---------------------- ------------------------ 2003 2002 2003 2002 -------- -------- -------- ---------- Net income (loss), as reported $ 541 $ 200 $ 710 $ (13,974) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax (21) (144) (111) (434) -------- -------- -------- ---------- Pro forma net income (loss) $ 520 $ 56 $ 599 $ (14,408) ======== ======== ======== ========== Income (loss) per share: Basic - as reported $ .04 $ .02 $ .06 $ (1.18) ======== ======== ======== ========== Basic - pro forma $ .04 $ - $ .05 $ (1.22) ======== ======== ======== ========== Diluted - as reported $ .04 $ .02 $ .06 $ (1.16) ======== ======== ======== ========== Diluted - pro forma $ .04 $ - $ .05 $ (1.19) ======== ======== ======== ==========
8 The amounts paid (refunded) for income taxes and interest are as follows (in thousands):
Nine Months Ended October 31, -------------------- 2003 2002 ------- ------- Income taxes $ 2,801 $ (571) Interest 1,771 2,049
Supplemental Non-cash Transactions - The Company issued 217,504 shares of common stock related to compensation awards during the nine months ended October 31, 2003. Reclassifications - Certain 2002 amounts have been reclassified to conform with the 2003 presentation. 2. Discontinued Operations During the third quarter of 2003, the Company reclassified the results of operations of its Toledo Oil and Gas ("Toledo") business to discontinued operations. The Company continues to shift the energy division's focus to the resource development side of the business. Toledo was historically reported in the Company's Energy Services and Production segment and offered conventional oilfield fishing services and coil tubing fishing services. The net loss from discontinued operations for the three and nine months ended October 31, 2003 includes a goodwill impairment charge of $160,000. 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. 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. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the results of operations for Toledo, Ranney(R) and DESI have been classified as discontinued operations. Revenues and pre-tax net loss from discontinued operations for the three and nine months ended October 31, 2003 and 2002 were as follows (in thousands):
Three Months Nine Months Ended October 31, Ended October 31, ----------------------- ----------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Revenues: Toledo $ 781 $ 661 $ 1,980 $ 2,281 Ranney(R) - 360 - 2,303 DESI - 2,006 - 6,359 -------- -------- -------- -------- Total $ 781 $ 3,027 $ 1,980 $ 10,943 ======== ======== ======== ======== Pre-tax net loss: Toledo $ (296) $ (535) $ (999) $ (1,345) Ranney(R) - (222) - (486) DESI - (368) - (861) -------- -------- -------- -------- Total $ (296) $ (1,125) $ (999) $ (2,692) ======== ======== ======== ========
9 As of October 31, 2003, the Toledo assets of $3,027,000 were reclassified to assets held for sale in the Company's Consolidated Balance Sheets. The major classes of those assets classified as held for sale are presented below (in thousands).
As of October 31, 2003 ---------------- Customer receivables $ 647 Costs and estimated earnings in excess of billings on uncompleted contracts 71 Inventories 85 Net property and equipment 2,224 ------ Total assets held for sale $3,027 ======
3. Goodwill Effective February 1, 2002, the Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets." 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 No. 142 required companies to make an initial assessment of goodwill for impairment for each of its reporting units within six months after adoption. The Company completed this initial assessment of goodwill during the second quarter of fiscal year 2003 and determined a transitional impairment charge was required. At February 1, 2002, the Company had $21,884,000 of goodwill recorded in its consolidated balance sheet, consisting primarily of goodwill associated with its mineral exploration segment. In assessing goodwill, the Company assigned assets and liabilities to its reporting units and developed a discounted cash flow analysis to determine the fair value of the reporting units. Based on this model, the Company determined that the mineral exploration goodwill was impaired. As a result, the Company recorded a non-cash charge of $20,225,000, net of taxes of $5,796,000, as a cumulative effect of a change in accounting principle at February 1, 2002, in accordance with SFAS No. 142. The Company completed its annual impairment test as of December 31, 2002 and no further impairment was indicated. The carrying amount of goodwill attributed to each operating segment follows (in thousands):
January 31, Impairment October 31, 2003 Adjustment Addition 2003 ------- ------- ------- ------- Geoconstruction services $ 1,499 $ - $ - $ 1,499 Energy services and production 160 (160) 950 950 ------- ------- ------- ------- $ 1,659 $ (160) $ 950 $ 2,449 ======= ======= ======= =======
4. Indebtedness On July 31, 2003, the Company entered into an agreement ("Master Shelf Agreement") whereby it could issue up to $60,000,000 in unsecured notes. Upon closing, the Company issued $40,000,000 of notes ("Senior Notes") under the Master Shelf Agreement. The remaining $20,000,000, subject to terms and conditions and acceptance by the lender, is available for issuance by the Company at market rates until July 31, 2005. The Senior Notes bear a fixed interest rate 10 of 6.05% and will be 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"). 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. As of October 31, 2003, there were no borrowings outstanding on the Credit Agreement and outstanding letters of credit were $9,444,000. Debt outstanding as of October 31, 2003 and January 31, 2003, whose carrying value approximates fair market value, was as follows (in thousands):
October 31, January 31, 2003 2003 ----------- ----------- Current maturities of long-term debt: Term Loan $ - $ 3,938 ------- ------- Long-term debt: Senior Notes 40,000 - Term Loan - 28,432 ------- ------- Total debt $40,000 $32,370 ======= =======
In connection with refinancing the Previous Loan Facilities on July 31, 2003, the Company recorded debt extinguishment costs of $2,320,000. The costs included a prepayment penalty of $671,000, the write-off of deferred loan costs related to the Previous Loan Facilities of $1,447,000 and the write-off of the unrealized loss on the Company's interest rate swap of $202,000. The debt extinguishment costs of $1,135,000 recorded in July 2002 was the result of the refinancing of a previous credit facility. The July 2002 loss, which was previously reported as an extraordinary item, was reclassified to income from continuing operations upon adoption of SFAS No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment to FASB Statement No. 13, and Technical Corrections," as of February 1, 2003. 5. Acquisitions On June 3, 2003, the Company acquired substantially all the assets of Mohajir Engineering Group, Inc., a full service engineering, geophysical, and geological consulting firm serving the energy industry. The acquisition did not have a significant effect on the Company's financial position, results of operations or cash flows. 6. Severance Costs During the second quarter of fiscal year 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 year 2004 in 11 accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The severance costs are recorded in the Company's Consolidated Statements of Income as selling, general and administrative expenses for the nine months ended October 31, 2003. A reconciliation of the severance costs by segment follows (in thousands):
Nine Months Ended October 31, 2003 ----------------- Water resources $ 90 Mineral exploration 289 Energy Services and Production 25 Corporate 126 ----------------- Total $ 530 =================
As of October 31, 2003, the Company had paid $475,000 in costs associated with these workforce reductions. A summary of the severance costs and related activity follows:
Number of Amount Employees (in 000's) --------- ---------- Balance January 31, 2003 - $ - 2003 Charges 189 530 2003 Payments (186) (475) -------- --------- Balance October 31, 2003 3 $ 55 ======== =========
The Company also provided termination benefits to certain employees in exchange for employees' voluntary termination of service. These benefits were offered to align the Company's cost structure with current market conditions. The Company recorded charges of approximately $714,000 as selling, general and administrative expenses in the Consolidated Statements of Income related to the voluntary termination benefits in accordance with SFAS No. 88, "Employers Accounting for Settlement and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." 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, ---------------------- ---------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Net income (loss) $ 541 $ 200 $ 710 $(13,974) Other comprehensive income (loss), net of taxes: Foreign currency translation adjustments 528 83 866 403 Unrealized gain (loss) on available for sale investments 55 (4) 42 (40) Reclassification of unrealized loss on swap - (110) 134 (110) -------- -------- -------- -------- Other comprehensive income (loss) $ 1,124 $ 169 $ 1,752 $(13,721) ======== ======== ======== ========
12 The components of accumulated other comprehensive loss for the nine months ended October 31, 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 866 42 - 134 1,042 ----------- ---------- ----------- --------- ----------- Balance, October 31, 2003 $ (8,928) $ (56) $ (1,896) $ - $ (10,880) =========== ========== =========== ========= ===========
8. 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 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 were included in the division on a prospective basis due to a change in reporting responsibility. Mineral Exploration Division This division provides a complete range of drilling services for the mineral exploration industry. Its aboveground and underground drilling activities include all phases of core drilling, diamond, reverse circulation, dual tube, hammer and rotary air-blast methods. 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, 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. 13 Products and Other This grouping has historically included the Company's supply operation, Drilling Equipment Supply ("DESI"), which distributed drilling equipment and parts and supplies, a manufacturing operation ("Christensen Products") which produced diamond drilling rigs, diamond bits, core barrels and drill rods and other miscellaneous operations which did not fall into the above divisions. On January 23, 2003, the Company sold its DESI operations. Upon the sale of DESI, the results of operations were reclassified to discontinued operations for fiscal year 2003. On August 8, 2001, the Company sold its Christensen Products business. Revenues and income from continuing operations pertaining to the Company's operating segments are presented below. Unallocated corporate expenses consist primarily of general and administrative functions and incentive compensation. Operating segment revenues and income from continuing operations are summarized as follows (in thousands):
Three Months Nine Months Ended October 31, Ended October 31, ------------------------- ------------------------- 2003 2002 2003 2002 --------- --------- --------- --------- Revenues Water resources $ 43,817 $ 43,164 $ 127,193 $ 128,463 Mineral exploration 18,353 13,888 49,245 41,821 Geoconstruction services 6,921 6,750 21,273 22,673 Energy services and production 3,685 2,848 13,755 9,962 Products and other - (20) - 436 --------- --------- --------- --------- Total revenues $ 72,776 $ 66,630 $ 211,466 $ 203,355 ========= ========= ========= ========= Income (loss) from continuing operations Water resources $ 5,551 $ 7,190 $ 16,684 $ 20,429 Mineral exploration 1,066 (926) 2,123 (1,117) Geoconstruction services 221 291 1,599 2,204 Energy services and production (658) (63) (729) (1,067) Products and other - (51) - (651) Unallocated corporate expenses (3,397) (3,443) (11,213) (10,724) Debt extinguishment costs - - (2,320) (1,135) Interest (687) (630) (1,918) (1,899) --------- --------- --------- --------- Total income from continuing operations $ 2,096 $ 2,368 $ 4,226 $ 6,040 ========= ========= ========= ========= Geographic Information: Revenues North America $ 59,629 $ 56,367 $ 174,746 $ 171,539 Africa/Australia 11,645 8,724 31,762 27,429 Other foreign 1,502 1,539 4,958 4,387 --------- --------- --------- --------- Total revenues $ 72,776 $ 66,630 $ 211,466 $ 203,355 ========= ========= ========= =========
Income from continuing operations of the energy services and production segment for the three and nine months ended October 31, 2002 include $15,000 and $813,000, respectively, of expenses related to the Company's oil and gas exploration activities in the Gulf of Mexico region of the United States. These 14 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. 9. 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. 10. 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. 148, "Accounting for Stock-Based Compensation," amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments and Hedging Activities Summary" amends and clarifies financial reporting for derivative instruments, including certain derivative instruments embedded in other contacts and for hedging activities under 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 15 for financial instruments entered into or modified after May 31, 2003. 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 SFAS No. 148, 149 and 150 and FIN 46 did not have significant impacts on the Company's results of operations or financial position. 11. Subsequent Events On November 10, 2003, the Company acquired certain assets and inventory of DrillCorp Tanzania Ltd ("DrillCorp"), a mineral exploration drilling operation in Tanzania, for $3,500,000. The Company issued a non-interest bearing promissory note for $3,500,000 to a related entity of DrillCorp to finance the acquisition. The acquisition will be accounted for using the purchase method of accounting. ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Cautionary Language Regarding Forward-Looking Statements This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Such statements are indicated by words or phrases such as "anticipate," "estimate," "project," "believe," "intend," "expect," "plan" and similar words or phrases. Such statements are based on current expectations and are subject to certain risks, uncertainties and assumptions, including but not limited to prevailing prices for various metals, unanticipated slowdowns in the Company's major markets, the impact of competition, the effectiveness of operational changes expected to increase efficiency and productivity, worldwide economic and political conditions and foreign currency fluctuations that may affect worldwide results of operations. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially and adversely from those anticipated, estimated or projected. These forward-looking statements are made as of the date of this filing, and the Company assumes no obligation to update such forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements. Demand for the Company's mineral exploration drilling services and products depends upon the level of mineral exploration and development activities conducted by mining companies, particularly with respect to gold and copper. Mineral exploration is highly speculative and is influenced by a variety of factors, including the prevailing prices for various metals that often fluctuate widely. In this connection, the volatility 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. 16
Three Months Nine Months Ended Ended Period-to-Period October 31, October 31, Change ----------------- ---------------- ------------------ 2003 2002 2003 2002 Three Nine ---- ---- ---- ---- Months Months ------ ------ Revenues: Water resources 60.2% 64.8% 60.1% 63.2% 1.5 (1.0) Mineral exploration 25.2 20.8 23.3 20.6 32.2 17.8 Geoconstruction services 9.5 10.1 10.1 11.1 2.5 (6.2) Energy services and production 5.1 4.3 6.5 4.9 29.4 38.1 Products and other - - - 0.2 * * ----- ----- ----- ----- Total net revenues 100.0% 100.0% 100.0% 100.0% 9.2 4.0 Cost of revenues 73.6 71.5 72.5 71.6 12.5 5.3 ----- ----- ----- ----- Gross profit 26.4 28.5 27.5 28.4 1.0 0.8 Selling, general and administrative expenses 18.2 20.5 19.6 19.7 (2.6) 3.6 Depreciation and amortization 4.2 5.1 4.5 5.2 (10.4) (10.1) Other income (expense): Equity in earnings of affiliates - 0.3 0.3 0.3 * 5.9 Interest (0.9) (0.9) (0.9) (0.9) 8.9 1.0 Debt extinguishment costs - - (1.1) (0.6) * * Other income (expense), net (0.2) 1.3 0.3 0.6 * * ----- ----- ----- ----- Income from continuing operations before income taxes and minority interest 2.9 3.6 2.0 2.9 (11.5) (30.0) Income tax expense 1.7 2.3 1.4 1.8 (19.2) (23.0) Minority interest (0.2) - - (0.1) * * ----- ----- ----- ----- Net income from continuing operations before discontinued operations and cumulative effect of accounting change 1.0 1.3 0.6 1.0 (16.1) (36.1) Loss from discontinued operations, net of income taxes (0.3) (1.0) (0.3) (0.8) * * ----- ----- ----- ----- Net income before cumulative effect of accounting change 0.7 0.3 0.3 0.2 * * Cumulative effect of accounting change, net of income taxes - - - (7.1) * * ----- ----- ----- ----- Net income (loss) 0.7% 0.3% 0.3% (6.9)% * * ===== ===== ===== =====
------------------ * Not meaningful. Results of Operations --------------------- Revenues for the three months ended October 31, 2003 increased $6,146,000, or 9.2%, to $72,776,000 while revenues for the nine months ended October 31, 2003 increased $8,111,000, or 4.0%, to $211,466,000 from the same periods last year. See further discussion of results of operations by division below. Gross profit as a percentage of revenues was 26.4% and 27.5% for the three and nine months ended October 31, 2003 compared to 28.5% and 28.4% for the three and nine months ended October 31, 2002. The decrease in gross profit percentage for the periods was primarily related to the continued negative impact of competitive pricing pressures at the Company's domestic water locations due to reduced municipal spending. The decrease for the periods was partially offset by improved margins in the Company's mineral exploration division due to increased activity levels associated with higher gold prices. 17 Selling, general and administrative expenses were $13,280,000 for the three months ended October 31, 2003 and $41,419,000 for the nine months ended October 31, 2003 (18.2% and 19.6% of revenues, respectively) compared to $13,638,000 and $39,987,000 for the three and nine months ended October 31, 2002 (20.5% and 19.7% of revenues, respectively). The decrease in selling, general and administrative expenses for the three months ended October 31, 2003 was primarily the result of workforce reductions completed during the second quarter of fiscal 2004 partially offset by increased insurance costs. The increase in selling, general and administrative expenses for the nine months ended October 31, 2003 was primarily a result of severance-related benefits of $1.2 million accrued during the second quarter (see Note 6 to the Financial Statements), start-up expenses related to the Company's groundwater transfer project in Texas, and increased insurance costs. Depreciation and amortization decreased to $3,057,000 and $9,531,000 for the three and nine months ended October 31, 2003 compared to $3,410,000 and $10,601,000 for the same periods last year. The decreases in depreciation and amortization were the result of less depreciation from assets fully depreciated in prior periods primarily in the mineral exploration and geoconstruction services divisions. The Company recorded a loss on extinguishment of debt of $2,320,000 for the nine months ended October 31, 2003 and $1,135,000 for the nine months ended October 31, 2002. The losses for the periods represent prepayment penalties and the write-off of associated deferred fees in connection with refinancing of the Company's debts. The prior year loss was accounted for as an extraordinary item last year and was reclassed to income from continuing operations upon adoption of SFAS No. 145, "Rescission of FASB Statement No. 4, 44 and 64, Amendment to FASB No. 13 and Technical Corrections." Other income (expense), net was an expense of $108,000 for the three months ended October 31, 2003, compared to income of $830,000 in the prior year, and income of $442,000 for the nine months ended October 31, 2003, compared to income of $1,179,000 in the prior year. The variance in income from both prior periods is primarily due to gains from insurance proceeds and fixed asset sales in the prior year which have not recurred at the same levels in the current year. Income tax expense for continuing operations of $1,186,000 and $2,878,000 was recorded for the three and nine months ended October 31, 2003 compared to $1,468,000 and $3,738,000 for the same periods last year. The debt extinguishment costs recorded in the second quarter of 2003 and 2002 were treated as discrete period items for interim tax accounting purposes which resulted in the recording of a tax benefit during the periods at the statutory tax rate. Exclusive of the impact of the discrete period treatment, the effective rate would have been 57.7% compared to 58.2% for the nine months ended October 31, 2003 and 2002. The remaining difference in the effective rate versus the statutory federal rate was due primarily to the impact of nondeductible expenses and the tax treatment of certain foreign operations. WATER RESOURCES DIVISION (in thousands)
Three Months Ended Nine Months Ended October 31, October 31, ---------------------- ---------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Revenues $ 43,817 $ 43,164 $127,193 $128,463 Income from continuing operations 5,551 7,190 16,684 20,429
18 Water resources revenue increased 1.5% to $43,817,000 for the three months ended October 31, 2003 and decreased 1.0% to $127,193,000 for the nine months ended October 31, 2003 compared to $43,164,000 and $128,463,000 for the three and nine months ended October 31, 2002. The increase for the three months ended October 31, 2003 was primarily the result of a focused effort to maintain market share in the division's markets, especially the soft municipal market where pricing has been impacted by competitive pressures and reduced demand. The decrease in revenues for the nine months ended October 31, 2003 was primarily attributable to a large multi-divisional project performed last year. Excluding the impact of this project, the division's revenues for the nine months ended October 31, 2003 increased 2.4% as a result of the same factors discussed above for the quarter. Income from continuing operations for the water resources division decreased 22.8% to $5,551,000 for the three months ended October 31, 2003 and 18.3% to $16,684,000 for the nine months ended October 31, 2003 compared to $7,190,000 and $20,429,000 for the three and nine months ended October 31, 2002. The decrease in operating income for the three and nine months ended October 31, 2003 was primarily attributable to pricing pressures associated with a soft municipal market and reduced activity on the multi-divisional project discussed above. MINERAL EXPLORATION DIVISION (in thousands)
Three Months Ended Nine Months Ended October 31, October 31, ---------------------- ---------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Revenues $ 18,353 $ 13,888 $ 49,245 $ 41,821 Income (loss) from continuing operations 1,066 (926) 2,123 (1,117)
Mineral exploration revenues increased 32.2% to $18,353,000 and increased 17.8% to $49,245,000 for the three and nine months ended October 31, 2003 compared to revenues of $13,888,000 and $41,821,000 for the three and nine months ended October 31, 2002. The increases for the three and nine months ended October 31, 2003 was attributable to increased exploration activity in the Company's markets as a result of higher gold prices. Income from continuing operations for the mineral exploration division was $1,066,000 for the three months ended October 31, 2003 and $2,123,000 for the nine months ended October 31, 2003 compared to losses from continuing operations of $926,000 and $1,117,000 for the three and nine months ended October 31, 2002. The improved profitability in the division for the three months ended October 31, 2003 was primarily due to the increased activity levels noted above. The increase for the nine months ended October 31, 2003 was attributable to increased activity levels noted above and lower depreciation from assets fully depreciated in prior periods, partially offset by severance-related accruals in the second quarter and 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 Nine Months Ended October 31, October 31, -------------------- -------------------- 2003 2002 2003 2002 ------- ------- ------- ------- Revenues $ 6,921 $ 6,750 $21,273 $22,673 Income from continuing operations 221 291 1,599 2,204
19 Geoconstruction services revenues increased 2.5% to $6,921,000 and decreased 6.2% to $21,273,000 for the three and nine months ended October 31, 2003 compared to $6,750,000 and $22,673,000 for the three and nine months ended October 31, 2002. The increase in revenue for the three months ended October 31, 2003 was primarily the result of beginning certain public sector projects that had been previously delayed. The decrease for the nine months ended October 31, 2003 was attributable to delays on the public sector projects and the non-replacement of a multi-divisional project performed in the prior year. The geoconstruction services division had income from continuing operations of $221,000 for the three months ended October 31, 2003 and income from continuing operations of $1,599,000 for the nine months ended October 31, 2003 compared to $291,000 for the three months ended October 31, 2002 and $2,204,000 for the nine months ended October 31, 2002. The decrease for the three months ended October 31, 2003 was primarily the result of problems encountered on certain projects partially offset by reduced depreciation expense from assets fully depreciated in prior periods. The decrease for the nine months ended October 31, 2003 was primarily due to a slow start to the year due to delays on certain public sector projects partially offset by reduced depreciation expense. ENERGY SERVICES AND PRODUCTION DIVISION (in thousands)
Three Months Ended Nine Months Ended October 31, October 31, ----------------------- ----------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Revenues $ 3,685 $ 2,848 $ 13,755 $ 9,962 Loss from continuing operations (658) (63) (729) (1,067)
Energy services and production revenues increased 29.4% to $3,685,000 and 38.1% to $13,755,000 for the three and nine months ended October 31, 2003 compared to revenues of $2,848,000 and $9,962,000 for the three and nine months ended October 31, 2002. The increase for the three months ended October 31, 2003 was primarily the result of increased drilling services for a large shallow gas project in the northwest region of the United States and third-party coalbed methane exploration drilling. The increase for the nine months ended October 31, 2003 was also attributable to an increase in tar sands activity in Canada. Losses from continuing operations for the energy services and production division were $658,000 and $729,000 for the three and nine months ended October 31, 2003 compared to $63,000 and $1,067,000 for the three and nine months ended October 31, 2002. The increased loss for the three months ended October 31, 2003 was primarily the result of increased maintenance expenses at the Company's Canadian drilling unit in preparation for the winter drilling season and start-up expenses related to the Company's coalbed methane development efforts. The decreased loss for the nine months ended October 31, 2003 was primarily the result of reduced expenses associated with certain energy exploration activities in the prior year, partially offset by the increases in the quarter discussed above. Corporate expenses not allocated to individual divisions were $3,397,000 and $13,533,000 for the three and nine months ended October 31, 2003 compared to $3,443,000 and $11,859,000 for the three and nine months ended October 31, 2002. The decrease in unallocated corporate expenses for the three months ended October 31, 2003 was primarily the result of workforce reductions completed in the second quarter. The increase for the nine months ended October 31, 2003 was primarily the result of debt extinguishment costs of $2,320,000 (compared to $1,135,000 20 last year) and severance-related costs of approximately $800,000 partially offset by the workforce reductions noted above and cost reduction measures implemented late in fiscal 2003. Changes in Financial Condition ------------------------------ Cash from operations was $3,710,000 for the nine months ended October 31, 2003 compared to cash from operations of $10,177,000 for the same period last year. The decrease in cash from operations is primarily attributable to increased customer receivables and other working capital requirements during the period which were funded by borrowings under the Company's available credit agreements. The increase in receivables for the nine months ended October 31, 2003 was primarily a result of a slowing of collections from Water Resources division customers, increased activity in the mineral exploration division, and receivables from our joint interest partners on coalbed methane projects. The Company believes it has adequately reserved for potential uncollectable accounts. The Company believes that borrowings from its available credit agreements and cash from operations will be sufficient for the Company's seasonal cash requirements and to fund its budgeted capital expenditures for the balance of the fiscal year. Critical Accounting Policies and Estimates ------------------------------------------ Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and 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. Our accounting policies are more fully described in Note 1 and 10 to the financial statements, located elsewhere in this Form 10-Q and in 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 SFAS No. 142, which was effective for the Company as of February 1, 21 2002. SFAS No. 142 substantially changes the accounting for goodwill, requiring that goodwill and other intangible assets with indefinite useful lives cease to be amortized, but instead periodically tested for impairment. The Company had goodwill of $21,884,000 at February 1, 2002. The goodwill was primarily attributable to the Company's Mineral Exploration Division. The process of evaluating goodwill for impairment involves the determination of the fair value of the Company's reporting units. Inherent in such fair value determinations are certain judgments and estimates, including the interpretation of current economic indicators and market valuations, and assumptions about the Company's strategic plans with regard to its operations. The Company completed the initial assessment of goodwill during the second quarter of fiscal year 2003 and determined a transitional impairment charge was required. As a result, the Company recorded a non-cash charge of $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. In connection with the decision to reclassify its Toledo Oil and Gas business as discontinued operations in the third quarter of fiscal 2004, the Company reassessed the recoverability of the goodwill associated with that business and recorded an impairment charge of $160,000. 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 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. 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 22 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 000's):
Payments/Expiration by Period Less than Total 1 year 1-3 years 4-5 years ----- ------ --------- --------- Contractual Obligations and Other Commercial Commitments Debt $40,000 $ - $ - $13,333 Operating leases 14,376 5,659 5,980 2,737 ------- ------- ------- ------- Total contractual cash obligations 54,376 5,659 5,890 16,070 Standby letters of credit 9,444 9,444 - - ------- ------- ------- ------- Total contractual obligations and commercial commitments $63,820 $15,103 $ 5,980 $16,070 ======= ======= ======= =======
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 debt is in Note 11 to the Consolidated Financial Statements appearing in the Company's January 31, 2003 Form 10-K and in Note 4 to the Consolidated Financial Statements appearing in this Form 10-Q. 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 expenses by $152,000 and $157,000 at October 31, 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 8 of this Form 10-Q. The majority of the Company's contracts in Africa and Mexico are U.S. dollar based, providing a natural reduction in exposure to currency fluctuations. As currency exchange rates change, translation of the income statements of the Company's international operations into U.S. dollars may affect year-to-year comparability of operating results. We estimate that a ten percent change in foreign exchange rates would not significantly impact operating income for the nine months ended October 31, 2003 and 2002. This quantitative measure has inherent limitations, as it does not take into account any governmental actions, changes in customer purchasing patterns or changes in the Company's financing and operating strategies. 23 ITEM 4. Controls and Procedures As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in alerting them on a timely basis to material information required to be included in our periodic filing with the SEC. In addition, there were no significant changes in our internal control over financial reporting or in other factors that have materially affected or are reasonably likely to materially affect these internal controls over financial reporting subsequent to the date of our most recent evaluation. 24 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(2) - Amended and Restated Bylaws of the Registrant (filed as Exhibit 99.2 to the Registrant's Form 8-K dated December 5, 2003, and incorporated herein by reference) 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 December 3, 2003, related to the Company's third quarter press release. Form 8-K filed on December 5, 2003, related to the Company's election of directors and amendment to bylaws. 25 * * * * * * * * * * 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, 2003 /s/A.B. Schmitt -------------------------------- A.B. Schmitt, President and Chief Executive Officer DATE: December 9, 2003 /s/Jerry W. Fanska ------------------------------- Jerry W. Fanska, Vice President Finance and Treasurer 26