Layne Christensen Co. 10-Q/A
FORM 10-Q/A
(Amendment No. 2)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended April 30, 2005
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-20578
Layne Christensen Company
(Exact name of registrant as specified in its charter)
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Delaware
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48-0920712 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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1900 Shawnee Mission Parkway, Mission Woods, Kansas
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66205 |
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(Address of principal executive offices)
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(Zip Code)
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(Registrants 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 þ. No o.
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
There were 12,620,070 shares of common stock, $.01 par value per share, outstanding on May 31,
2005.
EXPLANATORY NOTE
In accordance with Exchange Act Rule 12b-5, this Amendment No. 2 on Form 10-Q/A amends
certain items of the Quarterly Report on Form 10-Q of Layne Christensen Company (the Company) for
the quarterly period ended April 30, 2005, filed with the Securities and Exchange Commission (the
SEC) on June 6, 2005, and presents the relevant text of the items amended. These amended items
do not restate the Companys consolidated financial statements previously filed in the Form 10-Q.
This Form 10-Q/A does not reflect events occurring after the filing of the original Form 10-Q or
modify or update those disclosures affected by subsequent events.
The changes reflected in this Form 10-Q/A relate solely to the Exhibit Index in Part II, Item 6 and
reflect the inclusion of corrected Section 302 Certifications of the Principal Executive Officer
and the Principal Financial Officer (Exhibits 31(1) and 31(2)), which are being filed in response
to comments received from the SEC Staff. The Exhibit Index is also amended to reflect the
inclusion, pursuant to Rule 12b-15, of updated Section 906 Certifications of certain executive
officers.
2
PART I
ITEM 1. Financial Statements
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
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April 30, |
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January 31, |
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2005 |
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2005 |
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(unaudited) |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
6,631 |
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$ |
14,408 |
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Customer receivables, less allowance
of $4,608 and $4,106, respectively |
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65,816 |
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54,280 |
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Costs and estimated earnings in excess of
billings on uncompleted contracts |
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19,493 |
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17,143 |
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Inventories |
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20,214 |
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18,098 |
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Deferred income taxes |
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11,739 |
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11,664 |
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Income taxes receivable |
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1,084 |
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1,186 |
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Other |
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4,486 |
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4,704 |
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Total current assets |
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129,463 |
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121,483 |
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Property and equipment: |
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Land |
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7,620 |
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6,842 |
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Buildings |
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13,893 |
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14,342 |
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Machinery and equipment |
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177,189 |
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176,141 |
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Gas transportation facilities and equipment |
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6,506 |
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6,413 |
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Oil and gas properties |
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21,833 |
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20,573 |
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Mineral interest in oil and gas properties |
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3,860 |
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3,671 |
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230,901 |
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227,982 |
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Less Accumulated depreciation and depletion |
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(139,594 |
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(138,526 |
) |
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Net property and equipment |
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91,307 |
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89,456 |
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Other assets: |
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Investment in affiliates |
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21,346 |
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20,558 |
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Goodwill |
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8,025 |
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8,025 |
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Deferred income taxes |
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3,393 |
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2,931 |
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Other |
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3,027 |
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2,927 |
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Total other assets |
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$ |
35,791 |
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$ |
34,441 |
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$ |
256,561 |
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$ |
245,380 |
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See Notes to Consolidated Financial Statements.
Continued
3
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except per share data)
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April 30, |
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January 31, |
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2005 |
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2005 |
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(unaudited) |
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(unaudited) |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
29,426 |
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$ |
25,758 |
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Accrued compensation |
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12,725 |
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14,397 |
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Accrued insurance expense |
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6,978 |
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5,781 |
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Other accrued expenses |
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9,174 |
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9,930 |
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Income taxes payable |
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5,456 |
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3,476 |
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Billings in excess of costs and estimated
earnings on uncompleted contracts |
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6,716 |
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7,686 |
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Total current liabilities |
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70,475 |
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67,028 |
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Noncurrent and deferred liabilities: |
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Long-term debt |
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65,300 |
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60,000 |
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Accrued insurance expense |
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7,799 |
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8,247 |
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Other |
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5,256 |
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4,945 |
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Total noncurrent and deferred liabilities |
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78,355 |
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73,192 |
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Minority interest |
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486 |
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463 |
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Contingencies |
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Stockholders equity: |
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Preferred stock, par value $.01 per share,
5,000,000 shares authorized, none issued and
outstanding |
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Common stock, par value $.01 per share, 30,000,000
shares authorized, 12,619,678 and 12,618,641
shares issued and outstanding, respectively |
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126 |
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126 |
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Capital in excess of par value |
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90,719 |
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90,707 |
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Retained earnings |
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25,965 |
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23,212 |
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Accumulated other comprehensive loss |
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(9,354 |
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(9,067 |
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Unearned compensation |
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(211 |
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(281 |
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Total stockholders equity |
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107,245 |
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104,697 |
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$ |
256,561 |
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$ |
245,380 |
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See Notes to Consolidated Financial Statements.
Concluded
4
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
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Three Months |
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Ended April 30, |
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(unaudited) |
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2005 |
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2004 |
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Revenues |
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$ |
96,658 |
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$ |
76,209 |
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Cost of revenues (exclusive of
depreciation shown below) |
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71,080 |
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56,153 |
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Gross profit |
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25,578 |
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20,056 |
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Selling, general and administrative expenses |
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16,890 |
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13,925 |
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Depreciation, depletion and amortization |
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4,013 |
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3,185 |
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Other income (expense): |
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Equity in earnings of affiliates |
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1,119 |
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469 |
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Interest |
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(970 |
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(683 |
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Other, net |
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520 |
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344 |
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Income from continuing operations
before income taxes and minority interest |
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5,344 |
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3,076 |
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Income tax expense |
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2,567 |
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1,538 |
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Minority interest |
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(23 |
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Net income from continuing operations
before discontinued operations |
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2,754 |
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1,538 |
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Loss from discontinued operations, net of
income taxes of ($0) and ($95) |
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(1 |
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(66 |
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Net income |
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$ |
2,753 |
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$ |
1,472 |
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Basic income (loss) per share: |
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Net income from continuing operations |
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$ |
0.22 |
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$ |
0.12 |
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Loss from discontinued operations,
net of tax |
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(0.01 |
) |
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Net income |
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$ |
0.22 |
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$ |
0.11 |
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Diluted income (loss) per share: |
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Net income from continuing operations |
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$ |
0.21 |
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$ |
0.12 |
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Loss from discontinued operations,
net of tax |
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(0.01 |
) |
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Net income |
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$ |
0.21 |
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$ |
0.11 |
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Weighted average shares outstanding |
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12,595,000 |
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12,535,000 |
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Dilutive stock options |
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405,000 |
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326,000 |
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13,000,000 |
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12,861,000 |
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See Notes to Consolidated Financial Statements.
5
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
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Three Months |
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Ended April 30, |
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(unaudited) |
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2005 |
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2004 |
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Cash flow used in operating activities: |
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Net income |
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$ |
2,753 |
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$ |
1,472 |
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Adjustments to reconcile net income to cash
used in operations: |
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Loss on discontinued operations, net of tax |
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1 |
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66 |
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Depreciation, depletion and amortization |
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4,013 |
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3,185 |
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Deferred income taxes |
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(595 |
) |
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(1,049 |
) |
Equity in earnings of affiliates |
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(1,119 |
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(469 |
) |
Dividends received from foreign affiliates |
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354 |
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|
422 |
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Minority interest |
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23 |
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Gain from disposal of property and equipment |
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(443 |
) |
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(479 |
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Changes in current assets and liabilities: |
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(Increase) decrease in customer receivables |
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(11,631 |
) |
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|
975 |
|
Increase in costs and estimated earnings in
excess of billings on uncompleted contracts |
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(2,373 |
) |
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(2,789 |
) |
Increase in inventories |
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(2,258 |
) |
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(1,929 |
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Decrease in other current assets |
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208 |
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|
1,387 |
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Increase in accounts payable and accrued expenses |
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4,689 |
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|
1,081 |
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Decrease in billings in excess of costs and
estimated earnings on uncompleted contacts |
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(970 |
) |
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(1,845 |
) |
Other, net |
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46 |
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(371 |
) |
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Cash used in continuing operations |
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(7,302 |
) |
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(343 |
) |
Cash provided from (used in) discontinued
operations |
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25 |
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(4,178 |
) |
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Cash used in operating activities |
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(7,277 |
) |
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(4,521 |
) |
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Cash flow used in investing activities: |
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Additions to property and equipment |
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(4,368 |
) |
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(4,646 |
) |
Additions to oil and gas properties |
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(1,261 |
) |
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(2,639 |
) |
Additions to gas transportation facilities and
equipment |
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(93 |
) |
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(1,145 |
) |
Additions to mineral interest in oil and gas
properties |
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(189 |
) |
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|
(79 |
) |
Proceeds from disposal of property and equipment |
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|
515 |
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|
962 |
|
Proceeds from sale of business |
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|
300 |
|
Acquisition of oil and gas working interest |
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(1,000 |
) |
Investment in joint venture |
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(38 |
) |
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|
|
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Cash used in investing activities |
|
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(5,396 |
) |
|
|
(8,285 |
) |
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|
|
|
|
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|
Cash flow from (used in) financing activities: |
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|
|
|
|
|
|
|
Net borrowings (repayments) under revolving credit |
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|
5,300 |
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(2,000 |
) |
facilities
Payments on notes receivable from management
stockholders |
|
|
|
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|
28 |
|
Payments on DrillCorp promissory note |
|
|
(360 |
) |
|
|
(660 |
) |
Issuance of common stock |
|
|
12 |
|
|
|
54 |
|
|
|
|
|
|
|
|
Cash provided from (used in) financing activities |
|
|
4,952 |
|
|
|
(2,578 |
) |
|
|
|
|
|
|
|
Effects of exchange rate changes on cash |
|
|
(56 |
) |
|
|
(71 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(7,777 |
) |
|
|
(15,455 |
) |
Cash and cash equivalents at beginning of period |
|
|
14,408 |
|
|
|
21,602 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
6,631 |
|
|
$ |
6,147 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
6
LAYNE CHRISTENSEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
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 by 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, 2005 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.
Revenues are recognized on large, long-term contracts using the percentage of completion method
based upon the ratio of costs incurred to total estimated costs at completion. Contract prices and
costs estimates are reviewed periodically as work progresses and adjustments proportionate to the
percentage of completion are reflected in contract revenues and gross profit in the reporting
period when such estimates are revised. Changes in job performance, job conditions, and estimated
profitability, including those arising from contract settlements may result in revisions to costs
and income and are recognized in the period in which the revisions are determined. Revenues are
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.
Through its energy division, the Company engages in the operation, development, production and
acquisition of oil and gas properties, principally focusing on coalbed methane gas projects. The
Company follows the full-cost method of accounting for these properties. Under this method, all
productive and nonproductive costs incurred in connection with the exploration for and development
of oil and gas reserves are capitalized. Such capitalized costs include lease acquisition,
geological and geophysical work, delay rentals, drilling, completing and equipping oil and gas
wells, including salaries, benefits and other internal costs directly attributable to these
activities. The capitalized costs associated with the Companys oil and gas properties are
depleted using the units of production method. Costs associated with production and general
corporate activities are expensed in the period incurred. As of April 30, 2005 and January 31,
2005, the Company has capitalized $25,693,000 and $24,244,000, respectively, related to oil and gas
properties and mineral interest acquisition costs. Depletion expense was $333,000 and $30,000 for
the three months ended April 30, 2005 and 2004, respectively.
The Company is required to review the carrying value of its oil and gas properties each quarter
under the full cost accounting rules of the SEC. Under these rules, capitalized costs of proved
oil and gas properties as adjusted for asset retirement obligations, may not exceed the present
value of estimated
7
future net revenues from proved reserves, discounted at 10%. Application of the
ceiling test generally requires pricing future revenues at the unescalated prices in effect as of
the last day of the quarter, with effect given to the Companys cash flow hedge positions, and
requires a write-down for accounting purposes if the ceiling is exceeded. Unproved oil and gas
properties are not amortized, but are assessed for impairment either individually or on an
aggregated basis using a comparison of the carrying values of the unproved properties to net future
cash flows.
The Company follows SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS 133), as amended, which requires all derivative financial instruments to be recorded on the
balance sheet at fair value and establishes criteria for designation and effectiveness of hedging
relationships. Under SFAS 133, the Company accounts for its unrealized hedges of forecasted costs
as cash flow hedges, such that changes in fair value for the effective portion of hedge contracts,
if material, are recorded in accumulated other comprehensive income in stockholders equity.
Changes in the fair value of the effective portion of hedge contracts are recognized in accumulated
other comprehensive income until the hedged item is recognized in operations. The ineffective
portion of the derivatives change in fair value, if any, is immediately recognized in operations.
The Companys fixed-price natural gas contracts result in the physical delivery of gas, and as a
result, are exempt from the requirements of SFAS 133 under the normal purchases and sales
exception. Accordingly, the contracts are not reflected in the balance sheet at fair value and
revenues from the contracts are recognized as the natural gas is delivered under the terms of the
contracts (see Note 4 for disclosure regarding the fair value of derivative instruments).
Income taxes are provided using the asset/liability method, in which deferred taxes are recognized
for the tax consequences of temporary differences between the financial statement carrying amounts
and tax bases of existing assets and liabilities. Deferred tax assets are reviewed for
recoverability and valuation allowances are provided as necessary. Provision for U.S. income taxes
on undistributed earnings of foreign subsidiaries and affiliates is made only on those amounts in
excess of those funds considered to be invested indefinitely.
Earnings per common share are based upon the weighted average number of common and dilutive
equivalent shares outstanding. Options to purchase common stock are included based on the treasury
stock method for dilutive earnings per share, except when their effect is antidilutive.
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 and recognized no compensation expense under this method for the
three months ended April 30, 2005 and 2004.
Pro forma net income and earnings per share for the three months ended April 30, 2005 and 2004,
determined as if the SFAS 123 Method had been applied, are presented in the following table (in
thousands, except per share amounts):
8
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30, |
|
|
|
2005 |
|
|
2004 |
|
Net income, as reported |
|
$ |
2,753 |
|
|
$ |
1,472 |
|
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of tax |
|
|
(114 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
2,639 |
|
|
$ |
1,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30, |
|
|
|
2005 |
|
|
2004 |
|
Income per share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.21 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
Basic pro forma |
|
$ |
0.21 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.21 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
Diluted pro forma |
|
$ |
0.20 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
The amounts paid for income taxes, net of refunds, and interest are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30, |
|
|
|
2005 |
|
|
2004 |
|
Income taxes |
|
$ |
972 |
|
|
$ |
79 |
|
Interest |
|
|
351 |
|
|
|
1,280 |
|
2. Discontinued Operations
During the third quarter of fiscal 2004, the Company reclassified the results of operations of its
Toledo Oil and Gas (Toledo) business to discontinued operations. Toledo was historically
reported in the Companys energy segment and offered conventional oilfield fishing services and
coil tubing fishing services.
On January 30, 2004, the Company sold its Layne Christensen Canada Ltd. (Layne Canada) subsidiary
for $15,914,000. Layne Canada was a component of the Companys energy segment and provided
drilling services to the shallow, unconventional oil and gas market.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
the results of operations for Toledo and Layne Canada have been classified as discontinued
operations. Revenues and loss from discontinued operations for the three months ended April 30,
2005 and 2004 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30, |
|
|
|
2005 |
|
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
Canada |
|
$ |
|
|
|
$ |
|
|
Toledo |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
before income taxes: |
|
|
|
|
|
|
|
|
Canada |
|
$ |
(1 |
) |
|
$ |
(152 |
) |
Toledo |
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(1 |
) |
|
$ |
(161 |
) |
|
|
|
|
|
|
|
9
3. Indebtedness
On July 31, 2003, the Company entered into an agreement (Master Shelf Agreement) whereby it could
issue up to $60,000,000 in unsecured notes. Upon closing, the Company issued $40,000,000 of notes
(Senior Notes) under the Master Shelf Agreement. The Senior Notes bear a fixed interest rate of
6.05% and are due on July 31, 2010, with annual principal payments of $13,333,000 beginning July
31, 2008. Proceeds from issuance of the Senior Notes were used to refinance borrowings outstanding
under the Companys previous term loan and revolving credit facility (Previous Loan Facilities).
The Company issued an additional $20,000,000 of notes under the Master Shelf Agreement in October
2004. The additional Senior Notes bear a fixed interest rate of 5.40% and are due on September 29,
2009. Proceeds of the issuance were used to finance the acquisition of Beylik Drilling and Pump
Services, Inc. and general corporate purposes.
Concurrent with the signing of the Master Shelf Agreement, the Company closed on a new bank
revolving credit facility (Credit Agreement). The Credit Agreement is an unsecured $30,000,000
revolving facility to be used for working capital requirements and general corporate purposes. The
maximum available under the Credit Agreement is $30,000,000, less any outstanding letter of credit
commitments (which are subject to a $15,000,000 sublimit). The Credit Agreement provides interest
at variable rates equal to, at the Companys option, a Eurodollar rate plus 1.75% to 2.75%
(depending upon certain ratios) or an alternative reference rate as defined in the Credit
Agreement. The Credit Agreement will be due and payable on July 31, 2006. On April 30, 2005,
there were letters of credit of $10,470,000 outstanding on the Credit Agreement and $5,300,000 of
borrowings.
The Master Shelf Agreement and the Credit Agreement contain certain covenants including
restrictions on the incurrence of additional indebtedness and liens, investments, acquisitions,
transfer or sale of assets, transactions with affiliates, payment of dividends and certain
financial maintenance covenants, including among others, fixed charge coverage, maximum debt to
EBITDA, minimum tangible net worth and minimum asset coverage. The Company was in compliance with
its covenants as of April 30, 2005.
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
|
January 31, |
|
|
|
2005 |
|
|
2005 |
|
Long-term debt: |
|
|
|
|
|
|
|
|
Senior Notes |
|
$ |
60,000 |
|
|
$ |
60,000 |
|
Credit Agreement |
|
|
5,300 |
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
65,300 |
|
|
$ |
60,000 |
|
|
|
|
|
|
|
|
4. Derivatives
The Companys energy division is exposed to fluctuations in the price of natural gas and has
entered into fixed-price physical delivery collar contracts to manage natural gas price risk for a
portion of its production. As of April 30, 2005, the Company had committed to deliver 738,000
million British Thermal Units (MMBtu), of natural gas through March 2006. The floor and ceiling
prices on these contracts range from $6.30 to $8.45 per MMBtu.
10
The fixed-price physical delivery contracts will result in the physical delivery of natural gas,
and as a result, are exempt from the requirements of SFAS 133 under the normal purchases and sales
exception. Accordingly, the contracts are not reflected in the balance sheet at fair value and
revenues from the contracts are recognized as the natural gas is delivered under the terms of the
contracts. The estimated fair value of such contracts at April 30, 2005 and January 31, 2005 was
$(74,000) and $213,000, respectively.
Additionally, the Company has foreign operations that have significant costs denominated in foreign
currencies, and thus is exposed to risks associated with changes in foreign currency exchange
rates. At any point in time, the Company might use various hedge instruments, primarily foreign
currency option contracts, to manage the exposures associated with forecasted expatriate labor
costs and purchases of operating supplies. The Company does not enter into foreign currency
derivative financial instruments for speculative or trading purposes.
During the first quarter of fiscal 2005, the Company held option contracts to hedge the risks
associated with forecasted Australian dollar denominated costs in its African operations. As of
April 30, 2005 and January 31, 2005, the option contracts were no longer outstanding. Aggregate
gains were $5,000 for the three months ended April 30, 2004. The hedging gains were recognized as
the forecasted transactions being hedged occurred and were recorded primarily in cost of revenues
in the Companys Consolidated Statements of Income.
5. Other Comprehensive Income (Loss)
Components of other comprehensive income (loss) are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended April 30, |
|
|
|
2005 |
|
|
2004 |
|
Net income |
|
$ |
2,753 |
|
|
$ |
1,472 |
|
Other comprehensive loss, net of taxes;
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(133 |
) |
|
|
(1,277 |
) |
Change in unrecognized pension liability |
|
|
(154 |
) |
|
|
|
|
Unrealized loss on foreign exchange contracts |
|
|
|
|
|
|
(616 |
) |
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
$ |
2,466 |
|
|
$ |
(421 |
) |
|
|
|
|
|
|
|
The components of accumulated other comprehensive loss as of April 30, 2005 and 2004 are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Accumulated |
|
|
|
Cumulative |
|
|
Unrecognized |
|
|
Gain (loss) |
|
|
Other |
|
|
|
Translation |
|
|
Pension |
|
|
on Exchange |
|
|
Comprehensive |
|
|
|
Adjustment |
|
|
Liability |
|
|
Contracts |
|
|
Loss |
|
Balance,
February 1, 2005 |
|
$ |
(7,165 |
) |
|
$ |
(1,902 |
) |
|
$ |
|
|
|
$ |
(9,067 |
) |
Period change |
|
|
(133 |
) |
|
|
(154 |
) |
|
|
|
|
|
|
(287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
April 30, 2005 |
|
$ |
(7,298 |
) |
|
$ |
(2,056 |
) |
|
$ |
|
|
|
$ |
(9,354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Accumulated |
|
|
|
Cumulative |
|
|
Unrecognized |
|
|
Gain (loss) |
|
|
Other |
|
|
|
Translation |
|
|
Pension |
|
|
on Exchange |
|
|
Comprehensive |
|
|
|
Adjustment |
|
|
Liability |
|
|
Contracts |
|
|
Loss |
|
Balance,
February 1, 2004 |
|
$ |
(8,701 |
) |
|
$ |
(1,784 |
) |
|
$ |
856 |
|
|
$ |
(9,629 |
) |
Period change |
|
|
(1,277 |
) |
|
|
|
|
|
|
(616 |
) |
|
|
(1,893 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
April 30, 2004 |
|
$ |
(9,978 |
) |
|
$ |
(1,784 |
) |
|
$ |
240 |
|
|
$ |
(11,522 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Employee Benefit Plans
The Company sponsors a pension plan covering certain hourly employees not covered by
union-sponsored, multi-employer plans. Benefits are computed based mainly on years of service.
The Company makes annual contributions to the plan substantially equal to the amounts required to
maintain the qualified status of the plans. Contributions are intended to provide for benefits
related to past and current service with the Company. Effective December 31, 2003, the Company
froze the pension plan. Accordingly, benefits will no longer accrue after December 31, 2003, and
no further employees will be added to the Plan. The Company expects to maintain the assets of the
Plan to pay normal benefits accrued through December 31, 2003. Assets of the plan consist primarily
of stocks, bonds and government securities.
Net periodic pension cost for the three months ended April 30, 2005 and 2004 includes the following
components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended April 30, |
|
|
|
2005 |
|
|
2004 |
|
Service cost |
|
$ |
8 |
|
|
$ |
17 |
|
Interest cost |
|
|
109 |
|
|
|
110 |
|
Expected return on assets |
|
|
(121 |
) |
|
|
(113 |
) |
Net amortization |
|
|
67 |
|
|
|
48 |
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
73 |
|
|
$ |
62 |
|
|
|
|
|
|
|
|
The Company has recognized the full amount of its actuarially determined pension liability and the
related intangible asset (if applicable). The unrecognized pension cost has been recorded as a
charge to consolidated stockholders equity after giving effect to the related future tax benefit.
The Company also provides supplemental retirement benefits to its chief executive officer.
Benefits are computed based on the compensation earned during the highest five consecutive years of
employment reduced for a portion of Social Security benefits and an annuity equivalent of the chief
executives defined contribution plan balance. The Company does not contribute to the plan nor
maintain any investment assets related to the expected benefit obligation. The Company has
recognized the full amount of its actuarially determined pension liability. Net periodic pension
cost of the supplemental retirement benefits for the three months ended April 30, 2005 and 2004
include the following components (in thousands):
12
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended April 30, |
|
|
|
2005 |
|
|
2004 |
|
Service cost |
|
$ |
30 |
|
|
$ |
25 |
|
|
|
|
|
|
|
|
Interest cost |
|
|
19 |
|
|
|
18 |
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
49 |
|
|
$ |
43 |
|
|
|
|
|
|
|
|
7. 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 Companys 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 divisions offerings include design and construction of water treatment
facilities and the manufacture and sale of products to treat volatile organics and other
contaminants such as nitrates, iron, manganese, arsenic, radium and radon in groundwater. The
division also offers environmental services to assess and monitor groundwater contaminants.
Mineral Exploration Division
This division provides a complete range of drilling services for the mineral exploration industry.
Its aboveground and underground drilling activities include all phases of core drilling, diamond,
reverse circulation, dual tube, hammer and rotary air-blast methods.
Geoconstruction Division
This division focuses on services that improve soil stability, primarily jet grouting, grouting,
vibratory ground improvement, drilled micropiles, stone columns, anchors and tiebacks. The
division also manufactures a line of high-pressure pumping equipment used in grouting operations
and geotechnical drilling rigs used for directional drilling.
Energy Division
This division focuses on exploration and production of coalbed methane (CBM) properties in the
mid-continent region of the United States. Historically, the division has also included two small
specialty energy services companies. The divisions strategy has changed to focus entirely on CBM
exploration and development. As a result, the energy service companies have been classified in
other below.
Other
Other includes two small specialty energy service companies previously classified in the energy
division and any other specialty operations not included in one of the other divisions.
13
Revenues and income from continuing operations pertaining to the Companys operating segments are
presented below. Intersegment revenues are accounted for based on the fair market value of the
services provided. Unallocated corporate expenses primarily consist of general and administrative
functions. Previously, the unallocated corporate expenses included incentive compensation expenses
for division-level personnel; however, beginning in the second quarter of fiscal 2005, the
incentive compensation has been allocated to the segments to reflect a change in the evaluation of
divisional performance. In addition, two small specialty service companies that were previously
reported in the energy division have been reclassified as Other below. All periods presented
have been reclassified to conform to the current presentation. Operating segment revenues and
income from continuing operations are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended April 30, |
|
|
|
2005 |
|
|
2004 |
|
Revenues |
|
|
|
|
|
|
|
|
Water resources |
|
$ |
55,611 |
|
|
$ |
45,283 |
|
Mineral exploration |
|
|
30,559 |
|
|
|
24,089 |
|
Geoconstruction |
|
|
8,056 |
|
|
|
6,090 |
|
Energy |
|
|
1,778 |
|
|
|
289 |
|
Other |
|
|
654 |
|
|
|
458 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
96,658 |
|
|
$ |
76,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of affiliates
|
|
|
|
|
|
|
|
|
Mineral exploration |
|
$ |
792 |
|
|
$ |
469 |
|
Geoconstruction |
|
|
327 |
|
|
|
|
|
|
|
|
|
|
|
|
Total equity in earnings
of affiliates |
|
$ |
1,119 |
|
|
$ |
469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
before income taxes
|
|
|
|
|
|
|
|
|
Water resources |
|
$ |
4,599 |
|
|
$ |
4,031 |
|
Mineral exploration |
|
|
4,117 |
|
|
|
3,522 |
|
Geoconstruction |
|
|
648 |
|
|
|
(135 |
) |
Energy |
|
|
65 |
|
|
|
(735 |
) |
Other |
|
|
10 |
|
|
|
(283 |
) |
Unallocated corporate expenses |
|
|
(3,125 |
) |
|
|
(2,641 |
) |
Interest |
|
|
(970 |
) |
|
|
(683 |
) |
|
|
|
|
|
|
|
Total income from continuing
operations before income taxes |
|
$ |
5,344 |
|
|
$ |
3,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Information: |
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
North America |
|
$ |
75,165 |
|
|
$ |
58,908 |
|
Africa/Australia |
|
|
19,126 |
|
|
|
16,250 |
|
Other foreign |
|
|
2,367 |
|
|
|
1,051 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
96,658 |
|
|
$ |
76,209 |
|
|
|
|
|
|
|
|
8. Contingencies
The Companys 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
14
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 Companys 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.
9. New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R (revised December 2004), Share-Based Payment
which requires the recognition of all share-based payments in the financial statements and
establishes a fair-value measurement of the associated costs. SFAS No. 123R will be effective for
the first quarter of fiscal 2007 and the Company is currently evaluating the impact on its results
of operations and financial position.
In December 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4. SFAS No. 151 clarifies that the allocation of fixed production overhead to inventory
is based on normal capacity. Abnormal amounts of idle facility, excess freight, handling costs and
spoilage should be recognized as a current period charge. SFAS No. 151 is effective February 1,
2006 and is not expected to have a significant impact on the results of operations or financial
position of the Company.
ITEM 2. Managements 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
15
Companys major markets, the impact of
competition, the effectiveness of operational changes expected to increase efficiency and
productivity, worldwide economic and political conditions and foreign currency fluctuations that
may affect worldwide results of operations. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results may vary materially
and adversely from those anticipated, estimated or projected. These forward-looking statements are
made as of the date of this filing, and the Company assumes no obligation to update such
forward-looking statements or to update the reasons why actual results could differ materially from
those anticipated in such forward-looking statements.
Results of Operations
The following table presents, for the periods indicated, the percentage relationship which certain
items reflected in the Companys 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 |
|
Period-to-Period |
|
|
April 30, |
|
Change |
|
|
2005 |
|
2004 |
|
Three Months |
Revenues: |
|
|
|
|
|
|
|
|
|
|
Water resources |
|
|
57.5 |
% |
|
|
59.4 |
% |
|
22.8% |
Mineral exploration |
|
|
31.6 |
|
|
|
31.6 |
|
|
26.9 |
Geoconstruction |
|
|
8.4 |
|
|
|
8.0 |
|
|
32.3 |
Energy |
|
|
1.8 |
|
|
|
0.4 |
|
|
515.2 |
Other |
|
|
0.7 |
|
|
|
0.6 |
|
|
42.8 |
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
26.8 |
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
73.5 |
|
|
|
73.7 |
|
|
26.6 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
26.5 |
|
|
|
26.3 |
|
|
27.5 |
Selling, general and administrative
expenses |
|
|
17.5 |
|
|
|
18.3 |
|
|
21.3 |
Depreciation, depletion and amortization |
|
|
4.2 |
|
|
|
4.2 |
|
|
26.0 |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
Equity in earnings of affiliates |
|
|
1.2 |
|
|
|
0.6 |
|
|
138.6 |
Interest |
|
|
(1.0 |
) |
|
|
(0.9 |
) |
|
(42.0) |
Other, net |
|
|
0.5 |
|
|
|
0.5 |
|
|
51.2 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes and minority
interest |
|
|
5.5 |
|
|
|
4.0 |
|
|
* |
Income tax expense |
|
|
2.7 |
|
|
|
2.0 |
|
|
* |
Minority interest |
|
|
0.0 |
|
|
|
0.0 |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
before discontinued operations |
|
|
2.8 |
|
|
|
2.0 |
|
|
* |
Loss from discontinued operations,
net of tax |
|
|
0.0 |
|
|
|
(0.1 |
) |
|
* |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
2.8 |
% |
|
|
1.9 |
% |
|
* |
|
|
|
|
|
|
|
|
|
|
|
Revenues and income from continuing operations pertaining to the Companys operating segments are
presented below. Intersegment revenues are accounted for based on the fair market value of the
services provided. Unallocated corporate expenses primarily consist of general and administrative
functions. Previously,
16
the unallocated corporate expenses included incentive compensation expenses
for division-level personnel; however, beginning in the second quarter of fiscal 2005, the
incentive compensation has been allocated to the segments to reflect a change in the evaluation of
divisional performance. In addition, two small specialty service companies that were previously
reported in the energy division have been reclassified as Other below. All periods presented
have been reclassified to conform to the current presentation. Operating segment revenues and
income from continuing operations are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended April 30, |
|
|
|
2005 |
|
|
2004 |
|
Revenues |
|
|
|
|
|
|
|
|
Water resources |
|
$ |
55,611 |
|
|
$ |
45,283 |
|
Mineral exploration |
|
|
30,559 |
|
|
|
24,089 |
|
Geoconstruction |
|
|
8,056 |
|
|
|
6,090 |
|
Energy |
|
|
1,778 |
|
|
|
289 |
|
Other |
|
|
654 |
|
|
|
458 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
96,658 |
|
|
$ |
76,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of affiliates |
|
|
|
|
|
|
|
|
Mineral exploration |
|
$ |
792 |
|
|
$ |
469 |
|
Geoconstruction |
|
|
327 |
|
|
|
|
|
|
|
|
|
|
|
|
Total equity in earnings of
affiliates |
|
$ |
1,119 |
|
|
$ |
469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
before income taxes |
|
|
|
|
|
|
|
|
Water resources |
|
$ |
4,599 |
|
|
$ |
4,031 |
|
Mineral exploration |
|
|
4,117 |
|
|
|
3,522 |
|
Geoconstruction |
|
|
648 |
|
|
|
(135 |
) |
Energy |
|
|
65 |
|
|
|
(735 |
) |
Other |
|
|
10 |
|
|
|
(283 |
) |
Unallocated corporate expenses |
|
|
(3,125 |
) |
|
|
(2,641 |
) |
Interest |
|
|
(970 |
) |
|
|
(683 |
) |
|
|
|
|
|
|
|
Total income from continuing
operations before income taxes |
|
$ |
5,344 |
|
|
$ |
3,076 |
|
|
|
|
|
|
|
|
Results of Operations
Revenues for the three months ended April 30, 2005 increased $20,449,000, or 26.8%, to $96,658,000
compared to $76,209,000 for the same period last year. See further discussion of results of
operations by division below.
Gross profit as a percentage of revenues was 26.5% for the three months ended April 30, 2005
compared to 26.3% for the three months ended April 30, 2004.
Selling, general and administrative expenses increased 21.3% to $16,890,000 for the three months
ended April 30, 2005 compared to $13,925,000 for the three months ended April 30, 2004. The
increase was primarily due to the acquisition of Beylik Drilling and Pump Service, Inc. (Beylik)
in October 2004, which significantly strengthened the Companys water resources presence on the
west coast. The increase was also the result of additional accrued incentive compensation expense
from increased profitability in the quarter.
17
Equity in earnings of affiliates increased $650,000 to $1,119,000 for the three months ended April
30, 2005 from $469,000 in the prior year. The increase reflects additional earnings in Latin
America from increased mineral exploration activity and income from a joint venture in the
geoconstruction division.
Depreciation, depletion and amortization increased to $4,013,000 for the three months ended April
30, 2005 compared to $3,185,000 for the same period last year. The increase was primarily the
result of increased depreciation associated with the property and equipment purchased in the Beylik
acquisition and increased depletion expense resulting from the increase in production of natural
gas from the Companys CBM operations.
Interest expense increased to $970,000 for the three months ended April 30, 2005 compared to
$683,000 for the three months ended April 30, 2004. The increase was primarily a result of
increases in the Companys average borrowings for the period. The average borrowings increased due
mainly to the issuance of an additional $20,000,000 in notes under the Master Shelf Agreement in
October of 2004 associated primarily with the Beylik acquisition.
Other, net was income of $520,000 for the three months ended April 30, 2005 compared to $344,000
for the same period in the prior year and primarily related to gains on sales of non-strategic
assets.
Income tax expense of $2,567,000 (an effective rate of 48.0%) was recorded for the three months
ended April 30, 2005, compared to $1,538,000 (an effective rate of 50.0%) for the same period last
year. The improvement in the effective rate is primarily attributable to improved pre-tax
earnings, especially in international operations. The effective rate in excess of the statutory
federal rate for the periods 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 |
|
|
|
April 30, |
|
|
|
2005 |
|
|
2004 |
|
Revenues |
|
$ |
55,611 |
|
|
$ |
45,283 |
|
Income from continuing operations
before income taxes |
|
|
4,599 |
|
|
|
4,031 |
|
Water resources revenues increased 22.8% to $55,611,000 from $45,283,000 for the three months ended
April 30, 2005 and 2004. The increase in revenues was primarily attributable to the Companys
acquisition of Beylik and from the Companys continued expansion into water treatment markets.
Income from continuing operations for the water resources division increased 14.1% to $4,599,000
for the three months ended April 30, 2005, compared to $4,031,000 for the three months ended April
30, 2004. The increase in income from continuing operations is attributable to the acquisition of
Beylik, the Companys water treatment initiatives and gains on sales of non-strategic assets. The
increase was partially offset by increased accrued incentive compensation expense as a result of
the improved profitability of the division.
18
Mineral Exploration Division
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
April 30, |
|
|
|
2005 |
|
|
2004 |
|
Revenues |
|
$ |
30,559 |
|
|
$ |
24,089 |
|
Income from continuing operations
before income taxes |
|
|
4,117 |
|
|
|
3,522 |
|
Mineral exploration revenues increased 26.9% to $30,559,000 from $24,089,000 for the three months
ended April 30, 2005 and 2004, respectively. The increase was primarily attributable to continued
strength in worldwide exploration activity due to relatively high gold and base metal prices.
Income from continuing operations for the mineral exploration division was $4,117,000 for the three
months ended April 30, 2005, compared to $3,522,000 for the three months ended April 30, 2004. The
improved earnings in the division were primarily attributable to the impact of increased
exploration activity on the Company and its Latin American affiliates, partially offset by
increased accrued incentive compensation expense due to higher profitability in the current year.
Included in the prior year was a gain on sale of non-strategic assets of $473,000.
Geoconstruction Division
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
April 30, |
|
|
|
2005 |
|
|
2004 |
|
Revenues |
|
$ |
8,056 |
|
|
$ |
6,090 |
|
Income (loss) from continuing operations
before income taxes |
|
|
648 |
|
|
|
(135 |
) |
Geoconstruction revenues increased 32.3% to $8,056,000 for the three months ended April 30, 2005,
compared to $6,090,000 for the three months ended April 30, 2004. The increase in revenues was a
result of work performed on a significant public sector project in the current year and improved
sales at the Companys manufacturing unit in Italy.
Income from continuing operations for the geoconstruction division was $648,000 for the three
months ended April 30, 2005, compared to a loss from continuing operations of $135,000 for the
three months ended April 30, 2004. The increase in income from continuing operations was primarily
the result of additional margins from the increased revenues noted above and incremental earnings
from the divisions equity in a joint venture entered into in the second quarter of last year.
Energy Division
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
April 30, |
|
|
|
2005 |
|
|
2004 |
|
Revenues |
|
$ |
1,778 |
|
|
$ |
289 |
|
Income (loss) from continuing operations
before income taxes |
|
|
65 |
|
|
|
(735 |
) |
19
Energy revenues increased 515.2% to $1,778,000 for the three months ended April 30, 2005, compared
to revenues of $289,000 for the three months ended April 30, 2004. The increase in revenues was
primarily attributable to increased production of natural gas from the Companys CBM properties
resulting from an increase in the number of producing wells.
The income from continuing operations for the energy division was $65,000 for the three months
ended April 30, 2005, compared to a loss from continuing operations of $735,000 for the three
months ended April 30, 2004. The increase in income from continuing operations is due to the
increase in production and certain overhead cost reductions.
Unallocated Corporate Expenses
Corporate expenses not allocated to individual divisions were $3,125,000 for the three months ended
April 30, 2005 compared to $2,641,000 for the three months ended April 30, 2004. The increase in
unallocated corporate expenses was primarily due to increases in professional fees incurred in
connection with Sarbanes-Oxley requirements and a contemplated financing transaction which was
terminated. While overall Sarbanes-Oxley professional fees have increased in the current quarter
as compared to the prior year, the fees are expected to be less for this full year and more
consistently incurred over the year rather than primarily in the second half of last year.
Changes in Financial Condition
Management exercises discretion regarding the liquidity and capital resource needs of its business
segments. This includes the ability to prioritize the use of capital and debt capacity, to
determine cash management policies and to make decisions regarding capital expenditures.
The Company maintains an agreement (the Master Shelf Agreement) whereby it can issue up to
$60,000,000 in unsecured notes. The Company also holds a revolving credit facility (the Credit
Agreement) composed of an unsecured $30,000,000 revolving facility. Borrowings under the Master
Shelf and Credit Agreements were used to refinance borrowings outstanding under the Companys
previous credit facilities. At April 30, 2005, the Company had $5,300,000 outstanding under the
Credit Agreement and outstanding notes of $60,000,000 under the Master Shelf Agreement (see Note 3
of the Notes to Consolidated Financial Statements). The Company was in compliance with its
financial covenants at April 30, 2005 and expects to remain in compliance through the foreseeable
future.
The Companys working capital as of April 30, 2005 and January 31, 2005 was $58,988,000 and
$54,455,000, respectively. The increase in working capital at April 30, 2005 was primarily
attributable to the increase in the balance of accounts receivable as a result of the growth in
revenues. The Company believes it will have sufficient cash from operations and access to credit
facilities to meet the Companys operating cash requirements and to fund its budgeted capital
expenditures for fiscal 2006.
Operating Activities
Cash used in operating activities, excluding discontinued operations, increased $6,959,000 to
$7,302,000 for the three months ended April 30, 2005 as compared
20
to April 30, 2004. The increase
in cash used in operating activities was primarily attributable to the increased working capital
necessitated by the increased revenues. The cash used in discontinued operations for the three
months ended April 30, 2004 included the payment of lease termination liabilities and closing costs
related to the sale of Layne Canada, partially offset by collection of receivables related to Layne
Canada.
Investing Activities
The Companys capital expenditures of $5,911,000 for the three months ended April 30, 2005 were
directed primarily toward the Companys expansion and upgrading of equipment and facilities
primarily in the water resources and mineral exploration divisions. Additionally, the Company
continued its investment in CBM exploration and production. CBM expenditures in the first quarter
were lower than in the prior year primarily due to a significant expansion in the prior year of gas
transportation facilities and equipment and the timing of drilling and completing wells.
Financing Activities
For the three months ended April 30, 2005, the Company borrowed $5,300,000 under its credit
facilities primarily for working capital requirements. For the three months ended April 30, 2004,
the Company used available cash for the repayment of $2,000,000 under the Companys revolving
credit facility and to fund its working capital and investing needs.
The Companys contractual obligations and commercial commitments are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments/Expiration by Period |
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
5 years |
|
Contractual Obligations and
Other Commercial Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit facilities |
|
$ |
65,300 |
|
|
$ |
|
|
|
$ |
18,633 |
|
|
$ |
40,000 |
|
|
$ |
6,667 |
|
Operating leases |
|
|
22,608 |
|
|
|
8,756 |
|
|
|
11,664 |
|
|
|
2,188 |
|
|
|
|
|
Mineral interest
obligations |
|
|
378 |
|
|
|
57 |
|
|
|
152 |
|
|
|
66 |
|
|
|
103 |
|
DrillCorp promissory note |
|
|
720 |
|
|
|
720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash
obligations |
|
|
89,006 |
|
|
|
9,533 |
|
|
|
30,449 |
|
|
|
42,254 |
|
|
|
6,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of
credit |
|
|
10,470 |
|
|
|
10,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset retirement
obligations |
|
|
414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual
obligations and
commercial commitments |
|
$ |
99,890 |
|
|
$ |
20,003 |
|
|
$ |
30,449 |
|
|
$ |
42,254 |
|
|
$ |
7,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company expects to meet its contractual cash obligations in the ordinary course of operations,
and that the standby letters of credit will be renewed in connection with its annual insurance
renewal process. Payments related to the credit facilities do not include interest payments. The
credit facilities bear fixed interest rates of 6.05% and 5.40% (see Note 3 of the Notes to
Consolidated Financial Statements).
21
The Company incurs additional obligations in the ordinary course of operations. These obligations,
including but not limited to, interest payments on debt, income tax payments and pension fundings
are expected to be met in the normal course of operations.
Critical Accounting Policies and Estimates
Managements Discussion and Analysis of Financial Condition and Results of Operations discusses the
Companys 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 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, 2005. 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 the ratio of costs incurred to total estimated costs at completion.
Contract price and cost estimates are reviewed periodically as work progresses and adjustments
proportionate to the percentage of completion are reflected in contract revenues and gross profit
in the reporting period when such estimates are revised. Changes in job performance, job
conditions and estimated profitability, including those arising from contract penalty provisions,
and final contract settlements may result in revisions to costs and income and are recognized in
the period in which the revisions are determined. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined.
Goodwill and Other Intangibles - Goodwill and other intangible assets with indefinite useful lives
are not amortized, and instead are periodically tested for impairment. The Company performs its
annual impairment test as of December 31 each year. The process of evaluating goodwill for
impairment involves the determination of the fair value of the Companys 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 Companys strategic
plans with regard to its operations. The Company believes at this time that the carrying value of
the remaining goodwill is appropriate, although to the extent additional information arises or the
Companys strategies change, it is possible that the Companys conclusions regarding impairment of
the remaining goodwill could change and result in a material effect on its financial position or
results of operations.
22
Other Long-lived assets - In evaluating the fair value and future benefits of long-lived assets,
including the Companys gas transportation facilities and equipment, the Company performs an
analysis of the anticipated future net cash flows of the related long-lived assets and reduces
their carrying value by the excess, if any, of the result of such calculation. The Company
believes at this time that the long-lived assets carrying values and useful lives continue to be
appropriate.
Accrued Insurance Expense The Company maintains insurance programs where it is responsible for a
certain amount of each claim up to a self-insured limit. Estimates are recorded for health and
welfare, property and casualty insurance costs that are associated with these programs. These
costs are estimated based on actuarially determined projections of future payments under these
programs. Should a greater amount of claims occur compared to what was estimated or costs of the
medical profession increase beyond what was anticipated, reserves recorded may not be sufficient
and additional costs to the consolidated financial statements could be required.
Costs estimated to be incurred in the future for employee medical benefits, workers compensation
and casualty insurance programs resulting from claims which have occurred are accrued currently.
Under the terms of the Companys 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.
Reserve Estimates The Companys estimates of coalbed methane gas reserves, by necessity, are
projections based on geologic and engineering data, and there are uncertainties inherent in the
interpretation of such data as well as the projection of future rates of production and the timing
of development expenditures. Reserve engineering is a subjective process of estimating underground
accumulations of gas that are difficult to measure. The accuracy of any reserve estimate is a
function of the quality of available data, engineering and geological interpretation and judgment.
Estimates of economically recoverable gas reserves and future net cash flows necessarily depend
upon a number of variable factors and assumptions, such as historical production from the area
compared with production from other producing areas, the assumed effects of regulations by
governmental agencies and assumptions governing future operating costs, severance, ad valorem and
excise taxes, development costs and workover and remedial costs, all of which may in fact vary
considerably from actual results. For these reasons, estimates of the economically recoverable
quantities of gas attributable to any particular group of properties, classifications of such
reserves based on risk of recovery, and estimates of the future net cash flows expected there from
may vary substantially. Any significant variance in the assumptions could materially affect the
estimated quantity and value of the reserves, which could affect the carrying value of the
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Companys oil and gas properties and the rate of depletion of the oil and gas properties. Actual
production, revenues and expenditures with respect to the Companys reserves will likely vary from
estimates, and such variances may be material.
The Companys estimated proved reserves at January 31, 2005 were prepared by independent petroleum
engineering consultants Cawley, Gillespie & Associates, Inc.
Oil and gas properties and mineral interests - The Company follows the full-cost method of
accounting for oil and gas 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, and salaries, benefits and
other internal salary-related costs directly attributable to these activities. Costs associated
with production and general corporate activities are expensed in the period incurred. Normal
dispositions of oil and gas properties are accounted for as adjustments of capitalized costs, with
no gain or loss recognized.
The Company is required to review the carrying value of its oil and gas properties each quarter
under the full cost accounting rules of the SEC. Under these rules, capitalized costs of proved
oil and gas properties, as adjusted for asset retirement obligations, may not exceed the present
value of estimated future net revenues from proved reserves, discounted at 10%. Application of the
ceiling test generally requires pricing future revenues at the unescalated prices in effect as of
the last day of the quarter, with effect given to the Companys cash flow hedge positions, and
requires a write-down for accounting purposes if the ceiling is exceeded. Unproved oil and gas
properties are not amortized, but are assessed for impairment either individually or on an
aggregated basis using a comparison of the carrying values of the unproved properties to net future
cash flows.
Litigation and Other Contingencies The Company is involved in litigation incidental to its
business, the disposition of which is not expected to have a material effect on the Companys
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 Companys 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 Companys strategies
change, it is possible that the Companys estimate of its probable liability in these matters may
change.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The principal market risks to which the Company is exposed are interest rates on variable rate
debt, foreign exchange rates giving rise to translation and transaction gains and losses and
fluctuations in the price of natural gas.
The Company centrally manages its debt portfolio considering overall financing strategies and tax
consequences. A description of the Companys debt is in Note
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12 of the Notes to Consolidated
Financial Statements appearing in the Companys January 31, 2005 Form 10-K and Note 3 of this Form
10-Q. As of April 30, 2005, $60,000,000 of the Companys long-term debt outstanding carries a
fixed-rate and $5,300,000 is variable rate debt. An instantaneous change in interest rates of one
percentage point would not significantly impact the Companys annual interest expense.
Operating in international markets involves exposure to possible volatile movements in currency
exchange rates. Currently, the Companys primary international operations are in Australia, Africa,
Mexico and Italy. The operations are described in Note 1 of the Notes to Consolidated Financial
Statements appearing in the Companys January 31, 2005 Form 10-K and Note 7 of this Form 10-Q. The
majority of the Companys contracts in Africa and Mexico are U.S. dollar based, providing a natural
reduction in exposure to currency fluctuations. The Company also may utilize various hedge
instruments, primarily foreign currency option contracts, to manage the exposures associated with
fluctuating currency exchange rates (see Note 4 of the Notes to Consolidated Financial Statements).
As currency exchange rates change, translation of the income statements of the Companys
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, 2005 and 2004. 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 Companys financing and
operating strategies.
The Company is also exposed to fluctuations in the price of natural gas, which result from the sale
of the energy divisions natural gas production. The price of natural gas is volatile and the
Company has entered into fixed-price physical contracts covering a portion of its production to
manage price fluctuations and to achieve a more predictable cash flow. As of April 30, 2005, the
Company held contracts for physical delivery of 738,000 million British Thermal Units (MMBtu) of
natural gas at prices ranging from $6.30 to $8.45 per MMBtu. The estimated fair value of such
contracts at April 30, 2005 was $(74,000).
We estimate that a 10% change in the price of natural gas would impact income from continuing
operations before taxes by approximately $178,000 for the three months ended April 30, 2005.
ITEM 4. Controls and Procedures
Based on an evaluation of disclosure controls and procedures for the period ended April 30, 2005
conducted under the supervision and with the participation of the Companys management, including
the Principal Executive Officer and the Principal Financial Officer, the Company concluded that its
disclosure controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
Based on an evaluation of internal controls over financial reporting conducted under the
supervision and the participation of the Companys management, including the Principal Executive
Officer and Principal Financial Officer, for
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the period ended April 30, 2005, the Company concluded that its internal control over
financial reporting is effective as of April 30, 2005. The Company has not made any significant
changes in internal controls or in other factors that could significantly affect internal controls
since such evaluation.
PART II
ITEM 1 Legal Proceedings
NONE
ITEM 2 Changes in Securities
NOT APPLICABLE
ITEM 3 Defaults Upon Senior Securities
NOT APPLICABLE
ITEM 4 Submission of Matters to a Vote of Security Holders
NONE
ITEM 5 Other Information
NONE
ITEM 6 Exhibits and Reports on Form 8-K
a) Exhibits
31(1) Section 302 Certification of Chief Executive Officer of the Company
31(2) Section 302 Certification of Chief Financial Officer of the Company
32(1) Section 906 Certification of Chief Executive Officer of the Company
32(2) Section 906 Certification of Chief Financial Officer of the Company
b) Reports on Form 8-K
Form 8-K filed on March 31, 2005 related to the Companys fiscal year ended January 31, 2005
press release.
*
* * * * * * * * *
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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.
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Layne Christensen Company
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(Registrant) |
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DATE: November 21, 2005
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/s/ A. B. Schmitt
A.B. Schmitt, President
and Chief Executive Officer
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DATE: November 21, 2005
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/s/ Jerry W. Fanska
Jerry W. Fanska, Vice President
Finance and Treasurer
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