Layne Christensen Company 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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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, 2007
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
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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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) |
(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 a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer 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 15,517,724 shares of common stock, $.01 par value per share, outstanding on May 25,
2007.
TABLE OF CONTENTS
PART I
Item 1. Financial Statements
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
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April 30, |
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January 31, |
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2007 |
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2007 |
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(unaudited) |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
19,744 |
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$ |
13,007 |
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Customer receivables, less allowance of
$7,065 and $7,020, respectively |
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116,865 |
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109,615 |
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Costs and estimated earnings in excess of billings on
uncompleted contracts |
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59,419 |
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51,210 |
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Inventories |
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19,729 |
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18,456 |
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Deferred income taxes |
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17,192 |
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16,551 |
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Income taxes receivable |
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449 |
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521 |
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Restricted cash-current |
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8,372 |
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8,270 |
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Other |
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3,026 |
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5,578 |
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Total current assets |
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244,796 |
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223,208 |
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Property and equipment: |
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Land |
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8,507 |
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8,180 |
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Buildings |
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21,326 |
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21,457 |
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Machinery and equipment |
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270,753 |
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263,049 |
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Gas transportation facilities and equipment |
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25,652 |
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24,939 |
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Oil and gas properties |
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60,998 |
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58,458 |
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Mineral interests in oil and gas properties |
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14,100 |
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12,515 |
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401,336 |
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388,598 |
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Less Accumulated depreciation and depletion |
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(183,647 |
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(174,081 |
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Net property and equipment |
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217,689 |
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214,517 |
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Other assets: |
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Investment in affiliates |
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25,249 |
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24,280 |
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Goodwill |
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65,184 |
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65,184 |
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Other intangible assets, net |
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15,725 |
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16,017 |
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Other |
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5,269 |
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3,958 |
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Total other assets |
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111,427 |
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109,439 |
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$ |
573,912 |
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$ |
547,164 |
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See Notes to Consolidated Financial Statements.
- Continued -
2
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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2007 |
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2007 |
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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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$ |
61,851 |
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$ |
52,156 |
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Accrued compensation |
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21,466 |
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29,616 |
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Accrued insurance expense |
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7,388 |
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7,303 |
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Other accrued expenses |
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17,332 |
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14,462 |
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Acquisition escrow obligation-current |
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9,496 |
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9,395 |
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Income taxes payable |
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6,259 |
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9,045 |
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Billings in excess of costs and estimated
earnings on uncompleted contracts |
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32,910 |
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34,242 |
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Total current liabilities |
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156,702 |
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156,219 |
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Noncurrent and deferred liabilities: |
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Long-term debt |
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162,400 |
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151,600 |
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Accrued insurance expense |
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7,966 |
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8,160 |
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Deferred income taxes |
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23,861 |
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23,302 |
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Other |
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8,558 |
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2,849 |
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Total noncurrent and deferred liabilities |
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202,785 |
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185,911 |
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Common stock, par value $.01 per share,
30,000,000 shares authorized, 15,517,724
and 15,517,724 shares issued and
outstanding, respectively |
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155 |
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155 |
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Capital in excess of par value |
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149,707 |
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149,187 |
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Retained earnings |
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72,763 |
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64,145 |
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Accumulated other comprehensive loss |
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(8,200 |
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(8,453 |
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Total stockholders equity |
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214,425 |
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205,034 |
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$ |
573,912 |
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$ |
547,164 |
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See Notes to Consolidated Financial Statements.
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and 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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2007 |
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2006 |
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Revenues |
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$ |
201,615 |
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$ |
156,717 |
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Cost of revenues (exclusive of depreciation shown below) |
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147,318 |
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117,037 |
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Selling, general and administrative expenses |
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29,408 |
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22,364 |
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Depreciation, depletion and amortization |
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10,338 |
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7,066 |
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Other income (expense): |
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Equity in earnings of affiliates |
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1,491 |
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365 |
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Interest |
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(2,430 |
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(2,131 |
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Other income, net |
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207 |
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274 |
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Income before income taxes |
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13,819 |
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8,758 |
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Income tax expense |
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5,666 |
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4,116 |
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Net income |
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$ |
8,153 |
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$ |
4,642 |
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Basic income per share |
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$ |
0.53 |
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$ |
0.30 |
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Diluted income per share |
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$ |
0.52 |
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$ |
0.30 |
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Weighted average shares outstanding |
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15,517,000 |
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15,233,000 |
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Dilutive stock options |
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235,000 |
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222,000 |
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15,752,000 |
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15,455,000 |
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See Notes to Consolidated Financial Statements.
4
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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2007 |
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2006 |
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Cash flow from operating activities: |
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Net income |
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$ |
8,153 |
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$ |
4,642 |
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Adjustments to reconcile net income to cash from operations: |
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Depreciation, depletion and amortization |
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10,338 |
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7,066 |
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Deferred income taxes |
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(359 |
) |
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(1,125 |
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Share-based compensation |
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511 |
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454 |
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Equity in earnings of affiliates |
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(1,491 |
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(365 |
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Dividends received from affiliates |
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522 |
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354 |
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Gain from disposal of property and equipment |
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(18 |
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(113 |
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Changes in current assets and liabilities, net of effects of acquisitions: |
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Increase in customer receivables |
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(6,996 |
) |
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(7,453 |
) |
Increase in costs and estimated earnings in excess
of billings on uncompleted contracts |
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(8,412 |
) |
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(7,619 |
) |
(Increase) decrease in inventories |
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(1,208 |
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273 |
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Decrease in other current assets |
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2,759 |
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1,529 |
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Increase in accounts payable and accrued expenses |
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7,255 |
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375 |
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Decrease in billings in excess of costs and
estimated earnings on uncompleted contracts |
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(1,332 |
) |
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(2,288 |
) |
Other, net |
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(1,210 |
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(4,264 |
) |
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Cash provided (used) by operating activities |
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8,512 |
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(8,534 |
) |
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Cash flow from investing activities: |
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Additions to property and equipment |
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(7,779 |
) |
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(5,760 |
) |
Additions to gas transportation facilities and equipment |
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(713 |
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(3,330 |
) |
Additions to oil and gas properties |
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(2,540 |
) |
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(5,051 |
) |
Additions to mineral interests in oil and gas properties |
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(1,584 |
) |
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(397 |
) |
Proceeds from disposal of property |
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99 |
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133 |
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Deposit of cash into restricted accounts |
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(1,320 |
) |
Release of cash from restricted account |
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5,597 |
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Cash used in investing activities |
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(12,517 |
) |
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(10,128 |
) |
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Cash flow from financing activities: |
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Borrowings under revolving credit facility |
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111,200 |
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79,900 |
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Repayments under revolving credit facility |
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(100,400 |
) |
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(67,600 |
) |
Excess tax benefit on exercise of share-based instruments |
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154 |
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Issuance of common stock upon exercise of stock options |
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198 |
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Cash provided by financing activities |
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10,800 |
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12,652 |
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Effects of exchange rate changes on cash |
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(58 |
) |
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(187 |
) |
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Net increase (decrease) in cash and cash equivalents |
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6,737 |
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(6,197 |
) |
Cash and cash equivalents at beginning of period |
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13,007 |
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|
17,983 |
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Cash and cash equivalents at end of period |
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$ |
19,744 |
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$ |
11,786 |
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See Notes to Consolidated Financial Statements.
5
LAYNE CHRISTENSEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies and Basis of Presentation
Principles of Consolidation - 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, 2007 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.
Use of Estimates in Preparing Financial Statements - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue Recognition - Revenues are recognized on large, long-term construction contracts meeting
the criteria of Statement of Position 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts (SOP 81-1), 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 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, change orders and final contract
settlements may result in revisions to costs and income and are recognized in the period in which
the revisions are determined. As allowed by SOP 81-1, revenue is recognized on smaller, short-term
construction contracts using the completed contract method. Provisions for estimated losses on
uncompleted construction contracts are made in the period in which such losses are determined.
Revenues for direct sales of equipment and other ancillary products not provided in conjunction
with the performance of construction contracts are recognized at the date of delivery to, and
acceptance by, the customer. Provisions for estimated warranty obligations are made in the period
in which the sales occur.
Contracts for the Companys mineral exploration drilling services are billable based on the
quantity of drilling performed. Thus, revenues for these drilling contracts are recognized on the
basis of actual footage or meterage drilled.
Revenues for the sale of oil and gas by the Companys energy division are recognized on the basis
of volumes sold at the time of delivery to an end user or an interstate pipeline, net of amounts
attributable to royalty or working interest holders.
The Companys revenues are presented net of taxes imposed on revenue-producing transactions with
its customers, such as, but not limited to, sales, use, value-added, and some excise taxes.
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% (the Ceiling
Test). Application of the ceiling test generally requires pricing future revenue at the
unescalated prices in effect as
6
of the last day of the quarter, with effect given to the Companys
fixed-price natural gas contracts, 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 believes at this time that the
carrying value of its oil and gas properties is appropriate.
Reserve Estimates - The Companys estimates of natural 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 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 natural gas prices, 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 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.
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, or more frequently if events or changes in
circumstances indicate that an asset might be impaired. 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.
Other Long-lived Assets In the event of an indication of possible impairment, the Company
evaluates the fair value and future benefits of long-lived assets, including the Companys gas
transportation facilities and equipment, by performing an analysis of the anticipated future net
cash flows of the related long-lived assets and reducing their carrying value by the excess, if
any, of the result of such calculation. The Company believes at this time that the carrying values
and useful lives of its long-lived assets continues to be appropriate.
Restricted Cash - Included in restricted cash as of April 30, 2007 are escrow funds associated with
the acquisition of Reynolds, Inc.
Accrued Insurance Expense The Company maintains insurance programs where it is responsible for a
certain amount of each claim up to a self-insured limit. Estimates are recorded for health and
welfare, property and casualty insurance costs that are associated with these programs. These
costs are estimated based on actuarially determined projections of future payments under these
programs. Should a greater amount of claims occur compared to what was estimated or costs of the
medical profession increase beyond what was anticipated, reserves recorded may not be sufficient
and additional costs to the consolidated financial statements could be required.
Costs estimated to be incurred in the future for employee medical benefits, property, 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 affiliates is made only on those
amounts in excess of funds considered to be invested indefinitely.
7
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement 109 (FIN 48), effective February 1, 2007.
FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition of income tax assets or liabilities, classification of current and
deferred income tax assets and liabilities, accounting for interest and penalties associated with
tax positions, accounting for income taxes in interim periods and income tax disclosures. The
cumulative effects of applying FIN 48 have been recorded as an increase to retained earnings and a
decrease to income taxes payable of $465,000 as of February 1, 2007. As of April 30, and February
1, 2007, the total amount of unrecognized tax benefits was $5,556,000 and $6,061,000, respectively
of which substantially all would affect the effective tax rate if recognized. The Company does not
expect the unrecognized tax benefits to change materially within the next 12 months.
In conjunction with the adoption of FIN 48, the Company has classified uncertain tax positions as
non-current income tax liabilities unless expected to be paid in one year. Consistent with its
historical financial reporting, the Company reports income tax-related interest and penalties as a
component of income tax expense. As of April 30 and February 1, 2007, the total amount of accrued
income tax-related interest and penalties included in the balance sheet was $1,269,000 and
$1,489,000, respectively.
The Company has been examined for federal income tax purposes for the 1999-2003 tax years. During
the current quarter, the Company has effectively settled certain tax years which resulted in the
recognition of $706,000 in previously unrecognized tax benefits. The 2004-2007 tax years are open
to possible federal and state examination. The Company is also open to examination in various
foreign jurisdictions for various tax years ranging from 2002-2007 subject to the normal statute of
limitation rules in each country. Tax liabilities are recorded based on estimates of additional
taxes which will be due upon the conclusion of these examinations. Estimates of these tax
liabilities are made based upon prior experience and are updated in light of changes in facts and
circumstances. However, due to the uncertain and complex application of tax regulations,
examination outcomes and the timing of settlements are subject to significant uncertainty.
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
business, financial position, results of operations or cash flows. 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.
Derivatives - The Company follows SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), as amended, which requires 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. In addition, the Company has entered into fixed-price
natural gas contracts to manage fluctuations in the price of natural gas. These contracts result
in the Company physically delivering 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 5 for disclosure regarding the fair value
of derivative instruments). The Company does not enter into derivative financial instruments for
speculative or trading purposes.
Earnings per share 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.
8
Share-based compensation The Company adopted SFAS No. 123R (revised December 2004), Shared-Based
Compensation effective February 1, 2006, which requires the recognition of all share-based
instruments in the financial statements and establishes a fair-value measurement of the associated
costs. The Company elected to adopt the standard using the Modified Prospective Method which
requires recognition of all unvested share-based instruments as of the effective date over the
remaining term of the instrument. As of April 30, 2007, the Company had unrecognized compensation
expense of $4,503,000 to
be recognized over a weighted average period of 2.43 years. The Company determines the fair value
of stock-based compensation using the Black-Scholes model.
Consolidated Statements of Cash Flows - Highly liquid investments with an original maturity of
three months or less at the time of purchase are considered cash equivalents.
Supplemental Cash Flow Information - The amounts paid for income taxes, net of refunds, and
interest are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Ended April 30, |
|
|
2007 |
|
2006 |
Income taxes |
|
$ |
1,573 |
|
|
$ |
773 |
|
Interest |
|
|
2,363 |
|
|
|
1,414 |
|
2. Acquisitions
On November 20, 2006, the Company acquired 100% of the stock of American Water Services
Underground Infrastructure, Inc. (UIG), a wholly-owned subsidiary of American Water (USA), Inc.
UIG is engaged in the business of providing trenchless pipeline rehabilitation services for sewer
and stormwater systems and will be combined with a similar service line acquired in the acquisition
of Reynolds, Inc. The purchase price for UIG was $27,662,000, consisting of cash of $27,524,000 and
costs of $138,000. The cash portion of the purchase price is net of certain purchase price
adjustments based on the amount of tangible net worth at the closing date, $1,101,000 of which was
received by the Company in February 2007.
The purchase price has been allocated based on the fair value of the assets and liabilities
acquired, determined based on UIGs historical cost basis of assets and liabilities, appraisals and
other analyses. Such amounts may be subject to revision as UIG is integrated into the Company and
the revisions may be significant and will be recorded by the Company as further adjustments to the
purchase price allocation.
Based on the Companys preliminary allocation of the purchase price, the acquisition had the
following effect on the Companys consolidated financial position (in thousands):
|
|
|
|
|
Working capital |
|
$ |
11,723 |
|
Property and equipment |
|
|
13,602 |
|
Goodwill |
|
|
3,891 |
|
Trade names |
|
|
143 |
|
Other intangible assets |
|
|
69 |
|
Deferred income taxes |
|
|
(1,766 |
) |
|
|
|
|
Total purchase price |
|
$ |
27,662 |
|
|
|
|
|
The results of operations of UIG have been included in the Companys consolidated statements of
income commencing with the closing date. Assuming UIG had been acquired as of the beginning of each
period, the unaudited consolidated revenues, net income from continuing operations, net income and
net income per share would have been as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
April 30, |
|
|
2007 |
|
2006 |
Revenues |
|
$ |
201,615 |
|
|
$ |
168,832 |
|
Net income |
|
|
8,153 |
|
|
|
4,958 |
|
Basic earnings per share |
|
|
0.53 |
|
|
|
0.33 |
|
Diluted earnings per share |
|
|
0.52 |
|
|
|
0.32 |
|
9
The pro forma information provided above is not necessarily indicative of the results of operations
that would actually have resulted if the acquisition was made as of those dates or of results that
may occur in the future. Pro forma results include adjustments for interest expense on the cash
purchase price and depreciation and amortization expense on the acquisition adjustments to property
and equipment and other intangible assets.
In July 2006 and January 2007, the Company purchased certain gas wells and mineral interests in oil
and gas properties from unrelated operators totaling $1,988,000 in cash. The acquisitions
complemented the Companys existing operation in the mid-continent region of the United States. The
purchase price was allocated $1,376,000 to oil and gas properties and $612,000 to mineral interests
in oil and gas properties.
On June 16, 2006 (the CWI Closing Date), the Company acquired 100% of the stock of Collector
Wells International, Inc. (CWI), a privately held specialty water services company that designs
and constructs water supply systems. CWI will be combined with a similar service line acquired in
the acquisition of Reynolds, Inc. The purchase price for CWI was $5,442,000, consisting of
$3,150,000 cash, 45,563 shares of Layne common stock (valued at $1,263,000), cash purchase price
adjustments and costs of $1,029,000. Layne common stock was valued in the transaction based upon a
five-day average of the closing price of the stock two days before and two days after the CWI
Closing Date. The stock was placed in escrow to secure certain representations, warranties and
indemnifications under the purchase agreement and will be released in three annual installments.
The cash purchase price adjustments were based on the amount by which working capital at the CWI
Closing Date exceeded a threshold amount established in the purchase agreement.
In addition, there is contingent consideration up to a maximum of $1,400,000 (the CWI Earnout
Amount), which is based on a percentage of the amount by which CWIs earnings before interest,
taxes, depreciation and amortization exceed a threshold amount during the thirty-six months
following the acquisition. If earned, up to 20% of the CWI Earnout Amount may be paid with Layne
common stock, at the Companys discretion. Any portion of the CWI Earnout Amount which is
ultimately paid will be accounted for as additional purchase consideration.
The purchase price has been allocated based on the fair value of the assets and liabilities
acquired, determined based on CWIs historical cost basis of assets and liabilities and other
analyses. Such amounts may be subject to revision as CWI is integrated into the Company and the
revisions may be significant and will be recorded by the Company as further adjustments to the
purchase price allocation.
Based on the Companys allocation of the purchase price, the acquisition had the following effect
on the Companys consolidated financial position (in thousands):
|
|
|
|
|
Working capital |
|
$ |
1,016 |
|
Property and equipment |
|
|
1,580 |
|
Goodwill |
|
|
3,436 |
|
Deferred income taxes |
|
|
(590 |
) |
|
|
|
|
Total Purchase Price |
|
$ |
5,442 |
|
|
|
|
|
The results of operations of CWI have been included in the Companys consolidated statements of
income commencing with the CWI Closing Date. The acquisition did not have a significant effect on
the Companys results of operations or cash flows.
10
3. Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2007 |
|
|
January 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Gross |
|
|
|
|
|
|
Amortization |
|
|
Gross |
|
|
|
|
|
|
Amortization |
|
|
|
Carrying |
|
|
Accumulated |
|
|
Period in |
|
|
Carrying |
|
|
Accumulated |
|
|
Period in |
|
|
|
Amount |
|
|
Amortization |
|
|
years |
|
|
Amount |
|
|
Amortization |
|
|
years |
|
Goodwill (non tax deductible) |
|
$ |
65,184 |
|
|
$ |
|
|
|
|
|
|
|
$ |
65,184 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other amortizable intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames |
|
$ |
16,000 |
|
|
$ |
(971 |
) |
|
|
32 |
|
|
$ |
16,000 |
|
|
$ |
(818 |
) |
|
|
32 |
|
Customer-related |
|
|
332 |
|
|
|
(213 |
) |
|
|
3 |
|
|
|
332 |
|
|
|
(134 |
) |
|
|
3 |
|
Patents |
|
|
359 |
|
|
|
(189 |
) |
|
|
3 |
|
|
|
359 |
|
|
|
(160 |
) |
|
|
3 |
|
Non-competition agreements |
|
|
379 |
|
|
|
(238 |
) |
|
|
5 |
|
|
|
379 |
|
|
|
(227 |
) |
|
|
5 |
|
Other |
|
|
762 |
|
|
|
(496 |
) |
|
|
23 |
|
|
|
762 |
|
|
|
(476 |
) |
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets |
|
$ |
17,832 |
|
|
$ |
(2,107 |
) |
|
|
|
|
|
$ |
17,832 |
|
|
$ |
(1,815 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets are being amortized over their estimated useful lives of one to
40 years with a weighted average amortization period of 30 years. Total amortization expense for
other intangible assets was $292,000 and $246,000 for the quarters ended April 30, 2007 and 2006,
respectively.
The carrying amount of goodwill attributed to each operating segment was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water and Wastewater |
|
|
|
Energy |
|
|
Infrastructure |
|
|
Total |
|
Balance February 1, 2007 |
|
$ |
950 |
|
|
$ |
64,234 |
|
|
$ |
65,184 |
|
Additions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 30, 2007 |
|
$ |
950 |
|
|
$ |
64,234 |
|
|
$ |
65,184 |
|
|
|
|
|
|
|
|
|
|
|
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 (Series A Senior Notes) under the Master Shelf Agreement. The Series A 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 the issuance were used to refinance borrowings
outstanding under the Companys previous term loan and revolving credit facility. The Company
issued an additional $20,000,000 of notes under the Master Shelf Agreement in October 2004 (Series
B Senior Notes). The Series B Senior Notes bear a fixed interest rate of 5.40% and are due on
September 29, 2011, with annual principal payments of $6,667,000 beginning September 29, 2009.
Proceeds of the issuance were used to finance an acquisition and for general corporate purposes.
Concurrent with the acquisition of Reynolds, the Company amended the Master Shelf Agreement to
increase the amount of senior notes available to be issued from $60,000,000 to $100,000,000, thus,
creating an available facility amount of $40,000,000, and reinstated and extended the available
issuance period to September 15, 2007.
Also, concurrent with the acquisition of Reynolds, the Company expanded its existing revolving
credit facility with LaSalle Bank National Association, as Administrative Agent, and a group of
additional banks by entering into an Amended and Restated Loan Agreement (the Credit Agreement)
with LaSalle Bank National Association, as Administrative Agent and as Lender (the Administrative
Agent), and the other Lenders listed therein (the Lenders), which increased the Companys
revolving loan commitment from $70,000,000 to $130,000,000, less any outstanding letter of credit
commitments (which are subject to a $30,000,000 sublimit). Approximately $80,000,000 of the
facility was used to pay the cash portion of the acquisition of Reynolds and refinance the
outstanding borrowings under the previous credit agreement. The Credit Agreement was also amended
in November 2006, concurrent with the acquisition of UIG, and the revolving loan commitment was
increased to $200,000,000.
The Credit Agreement provides for interest at variable rates equal to, at the Companys option, a
LIBOR rate plus 0.75% to 2.00%, or a base rate, as defined in the Credit Agreement plus up to
0.50%, depending upon the Companys leverage ratio. The Credit Agreement is unsecured and is due
and payable November 15, 2011. On April 30, 2007, there were letters of credit of $9,194,000 and
borrowings of $102,400,000 outstanding on the Credit Agreement resulting in available capacity of
$88,406,000.
11
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 and minimum tangible net worth. The Company was in compliance with its covenants as of
April 30, 2007.
Debt outstanding as of April 30, 2007 and January 31, 2007 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
|
January 31, |
|
|
|
2007 |
|
|
2007 |
|
Long-term debt: |
|
|
|
|
|
|
|
|
Credit Agreement |
|
$ |
102,400 |
|
|
$ |
91,600 |
|
Senior Notes |
|
|
60,000 |
|
|
|
60,000 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
162,400 |
|
|
$ |
151,600 |
|
|
|
|
|
|
|
|
5. Derivatives
The Companys energy division is exposed to fluctuations in the price of natural gas and has
entered into fixed-price physical delivery contracts to manage natural gas price risk for a portion
of its production. As of April 30, 2007, the Company had committed to deliver 6,674,000 million
British Thermal Units (MMBtu) of natural gas through March 2010. The prices on these contracts
range from $7.41 to $9.025 per MMBtu.
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, 2007 was $1, 233,000.
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.
6. Other Comprehensive Income (Loss)
Components of other comprehensive income (loss) are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 30, |
|
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
8,153 |
|
|
$ |
4,642 |
|
Other comprehensive income (loss), net of taxes: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
253 |
|
|
|
(109 |
) |
Unrealized gain on foreign exchange contracts |
|
|
|
|
|
|
154 |
|
|
|
|
|
|
|
|
Other comprehensive income |
|
$ |
8,406 |
|
|
$ |
4,687 |
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive loss for the three months ended April 30, 2007
and 2006 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Accumulated |
|
|
|
Cumulative |
|
|
Unrecognized |
|
|
Gain |
|
|
Other |
|
|
|
Translation |
|
|
Pension |
|
|
on Exchange |
|
|
Comprehensive |
|
|
|
Adjustment |
|
|
Liability |
|
|
Contracts |
|
|
Loss |
|
Balance, February 1, 2007 |
|
$ |
(7,151 |
) |
|
$ |
(1,302 |
) |
|
$ |
|
|
|
$ |
(8,453 |
) |
Period change |
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 30, 2007 |
|
$ |
(6,898 |
) |
|
$ |
(1,302 |
) |
|
$ |
|
|
|
$ |
(8,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Accumulated |
|
|
|
Cumulative |
|
|
Unrecognized |
|
|
Gain |
|
|
Other |
|
|
|
Translation |
|
|
Pension |
|
|
on Exchange |
|
|
Comprehensive |
|
|
|
Adjustment |
|
|
Liability |
|
|
Contracts |
|
|
Loss |
|
Balance, February 1, 2006 |
|
$ |
(7,442 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(7,442 |
) |
Period change |
|
|
(109 |
) |
|
|
|
|
|
|
154 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 30, 2006 |
|
$ |
(7,551 |
) |
|
$ |
|
|
|
$ |
154 |
|
|
$ |
(7,397 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
7. 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. Benefits will no longer be accrued after December 31, 2003, and no further
employees will be added to the Plan. The Company expects to maintain the assets of the Plan to pay
normal benefits accrued through December 31, 2003. Assets of the plan consist primarily of stocks,
bonds and government securities.
Net periodic pension cost for the three months ended April 30, 2007 and 2006 includes the following
components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended April 30, |
|
|
|
2007 |
|
|
2006 |
|
Service cost |
|
$ |
22 |
|
|
$ |
18 |
|
Interest cost |
|
|
113 |
|
|
|
109 |
|
Expected return on assets |
|
|
(132 |
) |
|
|
(121 |
) |
Net amortization |
|
|
68 |
|
|
|
67 |
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
71 |
|
|
$ |
73 |
|
|
|
|
|
|
|
|
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 or
maintain any investment assets related to the expected benefit obligation. The Company has
recognized the full amount of its actuarially determined pension liability. Net periodic pension
cost of the supplemental retirement benefits for the three months ended April 30, 2007 and 2006
include the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended April 30, |
|
|
|
2007 |
|
|
2006 |
|
Service cost |
|
$ |
25 |
|
|
$ |
30 |
|
Interest cost |
|
|
22 |
|
|
|
19 |
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
47 |
|
|
$ |
49 |
|
|
|
|
|
|
|
|
8. Stock and Stock Option Plans
In October 1998, the Company adopted a Rights Agreement whereby the Company has authorized and
declared a dividend of one preferred share purchase right (Right) for each outstanding common
share of the Company. Subject to limited exceptions, the Rights are exercisable if a person or
group acquires or announces a tender offer for 25% or more of the Companys common stock. Each
Right will entitle shareholders to buy one one-hundredth of a share of a newly created Series A
Junior Participating Preferred Stock of the Company at an exercise price of $45.00. The Company is
entitled to redeem the Right at $0.01 per Right at any time before a person has acquired 25% or
more of the Companys outstanding common stock. The Rights expire 10 years from the date of grant.
The Company has stock option and employee incentive plans that provide for the granting of options
to purchase or the issuance of shares of common stock up to an aggregate of 2,600,000 shares of
common stock at a price fixed by the Board of Directors or a committee. As of April 30, 2007, there
were 513,000 shares available to be granted under the plans. The Company has the
13
ability to issue shares under the plans either from new issuances or from treasury, although it has
previously always issued new shares and expects to continue to issue new shares in the future.
Significant option groups outstanding at April 30, 2007, related exercise price and remaining
contractual term follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual |
Grant |
|
Options |
|
Options |
|
Exercise |
|
Term |
Date |
|
Outstanding |
|
Exercisable |
|
Price |
|
(Months) |
|
2/98 |
|
|
20,900 |
|
|
|
20,900 |
|
|
$ |
14.000 |
|
|
|
9 |
|
4/98 |
|
|
5,144 |
|
|
|
5,144 |
|
|
|
10.290 |
|
|
|
12 |
|
4/99 |
|
|
9,773 |
|
|
|
9,773 |
|
|
|
4.125 |
|
|
|
24 |
|
4/99 |
|
|
112,375 |
|
|
|
112,375 |
|
|
|
5.250 |
|
|
|
24 |
|
2/00 |
|
|
3,500 |
|
|
|
3,500 |
|
|
|
5.500 |
|
|
|
34 |
|
4/00 |
|
|
14,794 |
|
|
|
14,794 |
|
|
|
3.495 |
|
|
|
36 |
|
8/00 |
|
|
2,500 |
|
|
|
2,500 |
|
|
|
5.125 |
|
|
|
40 |
|
6/04 |
|
|
25,000 |
|
|
|
25,000 |
|
|
|
16.600 |
|
|
|
86 |
|
6/04 |
|
|
216,589 |
|
|
|
81,589 |
|
|
|
16.650 |
|
|
|
87 |
|
6/05 |
|
|
12,000 |
|
|
|
12,000 |
|
|
|
17.540 |
|
|
|
99 |
|
9/05 |
|
|
245,000 |
|
|
|
57,500 |
|
|
|
23.050 |
|
|
|
103 |
|
1/06 |
|
|
210,231 |
|
|
|
52,558 |
|
|
|
27.870 |
|
|
|
106 |
|
6/06 |
|
|
12,000 |
|
|
|
12,000 |
|
|
|
29.290 |
|
|
|
111 |
|
6/06 |
|
|
70,000 |
|
|
|
|
|
|
|
29.290 |
|
|
|
111 |
|
10/06 |
|
|
3,000 |
|
|
|
3,000 |
|
|
|
30.110 |
|
|
|
114 |
|
|
|
|
|
962,806 |
|
|
|
412,633 |
|
|
|
|
|
|
|
|
|
|
All options were granted at an exercise price equal to the fair market value of the Companys
common stock at the date of grant. The options have terms of 5 to 10 years from the date of grant
and generally vest ratably over periods of 4 to 5 years. Transactions for stock options for the
period ended April 30, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Number of |
|
|
Average |
|
|
Contractual Term |
|
|
Value |
|
|
|
Shares |
|
|
Exercise Price |
|
|
(years) |
|
|
(in thousands) |
|
Stock Option Activity Summary: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 1, 2007 |
|
|
963,529 |
|
|
$ |
20.028 |
|
|
|
7.410 |
|
|
$ |
14,454 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
723 |
|
|
|
11.400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at April 30, 2007 |
|
|
962,806 |
|
|
$ |
20.035 |
|
|
|
7.170 |
|
|
$ |
17,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Exercisable |
|
|
412,633 |
|
|
$ |
15.208 |
|
|
|
5.550 |
|
|
$ |
9,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value was calculated using the difference between the current market
price and the exercise price for only those options that have an exercise price less than the
current market price.
9. Operating Segments
The Company is a multinational company that provides sophisticated services and related
products to a variety of markets, as well as being a producer of unconventional natural gas for the
energy market. Management defines the Companys operational organizational structure into discrete
divisions based on its primary product lines. Each division comprises a combination of individual
district offices, which primarily offer similar types of services and serve similar types of
markets. The Companys reportable segments are defined as follows:
14
Water and Wastewater Infrastructure Division
This division provides a full line of water-related services and products including
hydrological studies, site selection, well design, drilling and development, pump installation, and
well rehabilitation. The divisions offerings include the design and construction of water
treatment facilities and the provision of filter media and membranes 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.
With the acquisition of CWI in June 2006 and UIG in November 2006, the division expanded its
capabilities in the area of the design and build of water and wastewater treatment plants, Ranney
collector wells, sewer rehabilitation and water and wastewater transmission lines.
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.
Energy Division
This division focuses on exploration and production of unconventional gas properties in the
United States. To date this division has primarily been concentrating on projects in the
mid-continent region of the United States.
Other
Other includes two small specialty energy service companies and any other specialty operations
not included in one of the other divisions.
Financial information (in thousands) for 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 performed
on a company-wide basis and benefiting all operating segments. These costs include accounting,
financial reporting, internal audit, safety, treasury, corporate and securities law, tax
compliance, certain executive management (chief executive officer, chief financial officer and
general counsel) and board of directors.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 30, |
|
|
|
2007 |
|
|
2006 |
|
Revenues |
|
|
|
|
|
|
|
|
Water and wastewater infrastructure |
|
$ |
153,509 |
|
|
$ |
116,695 |
|
Mineral exploration |
|
|
37,097 |
|
|
|
33,628 |
|
Energy |
|
|
9,552 |
|
|
|
5,064 |
|
Other |
|
|
1,457 |
|
|
|
1,330 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
201,615 |
|
|
$ |
156,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of affiliates |
|
|
|
|
|
|
|
|
Mineral exploration |
|
$ |
1,491 |
|
|
$ |
365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
|
|
|
|
|
|
Water and wastewater infrastructure |
|
$ |
11,834 |
|
|
$ |
7,983 |
|
Mineral exploration |
|
|
5,751 |
|
|
|
4,985 |
|
Energy |
|
|
3,819 |
|
|
|
2,057 |
|
Other |
|
|
224 |
|
|
|
305 |
|
Unallocated corporate expenses |
|
|
(5,379 |
) |
|
|
(4,441 |
) |
Interest |
|
|
(2,430 |
) |
|
|
(2,131 |
) |
|
|
|
|
|
|
|
Total income from continuing operations before income taxes
and minority interest |
|
$ |
13,819 |
|
|
$ |
8,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Information: |
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
United States |
|
$ |
170,649 |
|
|
$ |
126,824 |
|
Africa/Australia |
|
|
17,911 |
|
|
|
18,993 |
|
Mexico |
|
|
8,212 |
|
|
|
6,590 |
|
Other foreign |
|
|
4,843 |
|
|
|
4,310 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
201,615 |
|
|
$ |
156,717 |
|
|
|
|
|
|
|
|
15
10. 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 drill site operations and loss of revenues and future business. The
magnitude of these operating risks is amplified when the Company, as is frequently the case,
conducts a project on a fixed-price, turnkey basis where the Company delegates certain functions
to subcontractors but remains responsible to the customer for the subcontracted work. In addition,
the Company is exposed to potential liability under foreign, federal, state and local laws and
regulations, contractual indemnification agreements or otherwise in connection with its services
and products. Litigation arising from any such occurrences may result in the Company being named
as a defendant in lawsuits asserting large claims. Although the Company maintains insurance
protection that it considers economically prudent, there can be no assurance that any such
insurance will be sufficient or effective under all circumstances or against all claims or hazards
to which the Company may be subject or that the Company will be able to continue to obtain such
insurance protection. A successful claim or damage resulting from a hazard for which the Company
is not fully insured could have a material adverse effect on the Company. In addition, the Company
does not maintain political risk insurance with respect to its foreign operations.
The Company is involved in various matters of litigation, claims and disputes which have arisen in
the ordinary course of the Companys business. The Company believes that the ultimate disposition
of these matters will not, individually and in the aggregate, have a material adverse effect upon
its business or consolidated financial position, results of operations or cash flows.
Item 1A. Risk Factors
There have been no significant changes to the risk factors disclosed under Item 1A in our
Annual Report on Form 10-K for the year ended January 31, 2007.
Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
Cautionary Language Regarding Forward-Looking Statements
This Form 10-Q may contain 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 may include,
but are not limited to, statements of plans and objectives, statements of future economic
performance and statements of assumptions underlying such statements, and statements of
managements intentions, hopes, beliefs, expectations or predictions of the future. Forward looking
statements can often be identified by the use of forward-looking terminology, such as should,
intended, continue, believe, may, hope, anticipate, goal, forecast, plan,
estimate and similar words or phrases. Such statements are based on current expectations and are
subject to certain risks, uncertainties and assumptions, including but not limited to prevailing
prices for various commodities, unanticipated slowdowns in the Companys major markets, the risks
and uncertainties normally incident to the construction industry and exploration for and
development and production of oil and gas, the impact of competition, the effectiveness of
operational changes expected to increase efficiency and productivity, worldwide economic and
political conditions and foreign currency fluctuations that may affect worldwide results of
operations. Should one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially and adversely from those
anticipated, estimated or projected. These forward-looking statements are made as of the date of
this filing, and the Company assumes no obligation to update such forward-looking statements or to
update the reasons why actual results could differ materially from those anticipated in such
forward-looking statements.
16
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 |
|
|
2007 |
|
2006 |
|
Three Months |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Water and wastewater infrastructure |
|
|
76.2 |
% |
|
|
74.5 |
% |
|
|
31.5 |
% |
Mineral exploration |
|
|
18.4 |
|
|
|
21.5 |
|
|
|
10.3 |
|
Energy |
|
|
4.7 |
|
|
|
3.2 |
|
|
|
88.6 |
|
Other |
|
|
0.7 |
|
|
|
0.8 |
|
|
|
9.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
28.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
73.1 |
% |
|
|
74.7 |
% |
|
|
25.9 |
|
Gross profit, as adjusted* |
|
|
26.9 |
|
|
|
25.3 |
|
|
|
36.8 |
|
Selling, general and administrative expenses |
|
|
14.6 |
|
|
|
14.3 |
|
|
|
31.5 |
|
Depreciation, depletion and amortization |
|
|
5.1 |
|
|
|
4.5 |
|
|
|
46.3 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of affiliates |
|
|
0.7 |
|
|
|
0.2 |
|
|
|
308.5 |
|
Interest |
|
|
(1.2 |
) |
|
|
(1.4 |
) |
|
|
14.0 |
|
Other, net |
|
|
0.1 |
|
|
|
0.3 |
|
|
|
(24.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before
income taxes |
|
|
6.9 |
|
|
|
5.6 |
|
|
|
57.8 |
|
Income tax expense |
|
|
2.9 |
|
|
|
2.6 |
|
|
|
37.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
4.0 |
% |
|
|
3.0 |
% |
|
|
75.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
As used, gross profit is defined as revenues less cost of revenues, excluding depreciation,
depletion and amortization. |
Revenues, equity in earnings of affiliates and income from continuing operations before income
taxes 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 performed on a company-wide
basis and benefiting all operating segments. These costs include accounting, financial reporting,
internal audit, safety, treasury, corporate and securities law, tax compliance, certain executive
management (chief executive officer, chief financial officer and general counsel), and board of
directors. Operating segment revenues and income before income taxes are summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 30, |
|
|
|
2007 |
|
|
2006 |
|
Revenues |
|
|
|
|
|
|
|
|
Water and wastewater infrastructure |
|
$ |
153,509 |
|
|
$ |
116,695 |
|
Mineral exploration |
|
|
37,097 |
|
|
|
33,628 |
|
Energy |
|
|
9,552 |
|
|
|
5,064 |
|
Other |
|
|
1,457 |
|
|
|
1,330 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
201,615 |
|
|
$ |
156,717 |
|
|
|
|
|
|
|
|
Equity in earnings of affiliates |
|
|
|
|
|
|
|
|
Mineral exploration |
|
$ |
1,491 |
|
|
$ |
365 |
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
|
|
|
|
|
|
Water and wastewater infrastructure |
|
$ |
11,834 |
|
|
$ |
7,983 |
|
Mineral exploration |
|
|
5,751 |
|
|
|
4,985 |
|
Energy |
|
|
3,819 |
|
|
|
2,057 |
|
Other |
|
|
224 |
|
|
|
305 |
|
Unallocated corporate expenses |
|
|
(5,379 |
) |
|
|
(4,441 |
) |
Interest |
|
|
(2,430 |
) |
|
|
(2,131 |
) |
|
|
|
|
|
|
|
Total income before income taxes |
|
$ |
13,819 |
|
|
$ |
8,758 |
|
|
|
|
|
|
|
|
17
Revenues for the three months ended April 30, 2007 increased $44,898,000, or 28.6%, to $201,615,000
compared to $156,717,000 for the same period last year. Revenues were up across all divisions with
the main increase in the water and wastewater infrastructure division, including the impact of the
acquisitions of American Water Services Underground Infrastructure, Inc. (UIG) in November 2006
and Collector Wells International Inc. (CWI) in June 2006. A further discussion of results of
operations by division is presented below.
Gross profit, as adjusted, as a percentage of revenues was 26.9% for the three months ended April
30, 2007 compared to 25.3% for the three months ended April 30, 2006. The increase in gross profit
percentage was primarily the result of improved margins in the water and wastewater infrastructure
division and the energy division.
Selling, general and administrative expenses increased 31.5% to $29,408,000 for the three months
ended April 30, 2007 compared to $22,364,000 for the three months ended April 30, 2006. The
increase was primarily the result of $1,638,000 in expenses added from the acquisitions of UIG and
CWI and from various other categories including additional incentive compensation expense of
$1,985,000 from increased profitability in the quarter, wage and benefit increases of $1,502,000
and an increase in legal and professional fees of $535,000.
Equity in earnings of affiliates increased $1,126,000 to $1,491,000 for the three months ended
April 30, 2007 from $365,000 in the prior year. The increase reflects continued strong performance
in the mineral exploration division by our affiliates in Latin America and the absence of inclement
weather which occurred in the prior year.
Depreciation, depletion and amortization increased to $10,338,000 for the three months ended April
30, 2007 compared to $7,066,000 for the same period last year. The increase was primarily the
result of increased depletion expense of $1,553,000 resulting from the increase in production of
unconventional gas from the Companys energy operations and additional depreciation of assets
acquired in the UIG and CWI acquisitions.
Interest expense increased to $2,430,000 for the three months ended April 30, 2007 compared to
$2,131,000 for the three months ended April 30, 2006. The increase was primarily a result of
increases in the Companys average borrowings for the period in conjunction with the financing of
the UIG and CWI acquisitions.
Income tax expense of $5,666,000 (an effective rate of 41.0%) was recorded for the three months
ended April 30, 2007, compared to $4,116,000 (an effective rate of 47.0%) for the same period last
year. The improvement in the effective rate is primarily attributable to increased pre-tax
earnings, especially in international operations, and the resolution of certain tax contingencies.
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 and Wastewater Infrastructure Division
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
April 30, |
|
|
2007 |
|
2006 |
Revenues |
|
$ |
153,509 |
|
|
$ |
116,695 |
|
Income before income taxes |
|
|
11,834 |
|
|
|
7,983 |
|
Water and wastewater infrastructure revenues increased 31.5% to $153,509,000 for the three months
ended April 30, 2007 from $116,695,000 for the three months ended April 30, 2006. The increase in
revenues was primarily attributable to additional revenues of $14,716,000 from the Companys
acquisitions of UIG and CWI, additional revenues of $3,161,000 from the Companys continued
expansion into water treatment markets, and an increase in revenues of approximately $12,355,000
from certain water supply and wastewater plant projects in the Atlanta area.
Income before income taxes for the water and wastewater infrastructure division increased 48.2% to
$11,834,000 for the three months ended April 30, 2007, compared to $7,983,000 for the three months
ended April 30, 2006. The increase in income before income taxes is primarily attributable to
income of $804,000 from the acquisitions of UIG and CWI, an increase in income of approximately
$2,352,000 from the wastewater plant projects in Atlanta, and income of $1,626,000 from recovery of
previously written off costs associated with a groundwater transfer project in Texas, partially
offset by incentive compensation and legal and professional fees.
18
Mineral Exploration Division
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
April 30, |
|
|
2007 |
|
2006 |
Revenues |
|
$ |
37,097 |
|
|
$ |
33,628 |
|
Income before income taxes |
|
|
5,751 |
|
|
|
4,985 |
|
Mineral exploration revenues increased 10.3% to $37,097,000 for the three months ended April 30,
2007 from $33,628,000 for the three months ended April 30, 2006. The increase was primarily
attributable to continued strength in the Companys North American markets due to relatively high
gold and base metal prices.
Income before income taxes for the mineral exploration division was up 15.4% to $5,751,000 for the
three months ended April 30, 2007, compared to $4,985,000 for the three months ended April 30,
2006. The improved earnings in the division were primarily attributable to the impact of increased
exploration activity in the Companys North American markets and an increase of $1,126,000 in
equity earnings of affiliates in Latin America, partially offset by an increase in accrued
incentive compensation expense of $264,000 due to higher profitability in the current year.
Energy Division
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
April 30, |
|
|
2007 |
|
2006 |
Revenues |
|
$ |
9,552 |
|
|
$ |
5,064 |
|
Income before income taxes |
|
|
3,819 |
|
|
|
2,057 |
|
Energy revenues increased 88.6% to $9,552,000 for the three months ended April 30, 2007, compared
to revenues of $5,064,000 for the three months ended April 30, 2006. The increase in revenues was
primarily attributable to increased production from the Companys unconventional gas properties.
The income before income taxes for the energy division was $3,819,000 for the three months ended
April 30, 2007, compared to $2,057,000 for the three months ended April 30, 2006. The increase in
income before income taxes is due to the increase in production noted above.
Unallocated Corporate Expenses
Corporate expenses not allocated to individual divisions, primarily included in selling,
general and administrative expenses, were $5,379,000 and $4,441,000 for the three months ended
April 30, 2007 and 2006, respectively. The increase for the quarter was primarily due to wage and
benefit increases of $378,000 and increased incentive compensation of $284,000.
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 has $100,000,000 of
unsecured notes available to be issued before September 15, 2007. At April 30, 2007, the Company
had $60,000,000 in notes outstanding under the Master Shelf Agreement. Additionally, the Company
holds a revolving credit facility (the Credit Agreement) composed of an unsecured $200,000,000
revolving facility, less any outstanding letter of credit commitments (which are subject to a
$30,000,000 sublimit). At April 30, 2007, the Company had $102,400,000 outstanding under the Credit
Agreement (see Note 4 of the Notes to Consolidated Financial Statements). The Company was in
compliance with its financial covenants at April 30, 2007 and expects to remain in compliance
through the foreseeable future.
The
Companys working capital as of April 30, 2007 and
April 30, 2006 was $88,094,000 and
$82,481,000, respectively. 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 2008.
19
Operating Activities
Cash provided by operating activities was $8,512,000 for the three months ended April 30, 2007
as compared to cash used by operating activities of ($8,534,000) for the three months ended April
30, 2006. The improvement was primarily due to increased earnings.
Investing Activities
The Companys capital expenditures, net of disposals, of $12,517,000 for the three months
ended April 30, 2007, were directed primarily toward the Companys expansion into unconventional
gas exploration and production. Expenditures related to the Companys unconventional gas efforts
totaled $4,837,000 for the three months ended April 30, 2007, including the construction of gas
pipeline infrastructure near the Companys development projects.
Financing Activities
For the three months ended April 30, 2007, the Company had net borrowings of $10,800,000 under
its credit facilities primarily to fund capital expenditures
The Companys contractual obligations and commercial commitments as of April 30, 2007, are
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments/Expiration by Period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
5 years |
|
Contractual obligations and other
commercial commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Notes |
|
$ |
60,000 |
|
|
$ |
|
|
|
$ |
33,333 |
|
|
$ |
26,667 |
|
|
$ |
|
|
Credit Agreement |
|
|
102,400 |
|
|
|
|
|
|
|
|
|
|
|
102,400 |
|
|
|
|
|
Operating leases |
|
|
17,652 |
|
|
|
6,951 |
|
|
|
7,815 |
|
|
|
2,886 |
|
|
|
|
|
Mineral interest obligations |
|
|
552 |
|
|
|
118 |
|
|
|
211 |
|
|
|
208 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
|
180,604 |
|
|
|
7,069 |
|
|
|
41,359 |
|
|
|
132,161 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
|
9,194 |
|
|
|
9,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligations |
|
|
825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
and commercial commitments |
|
$ |
190,623 |
|
|
$ |
16,263 |
|
|
$ |
41,359 |
|
|
$ |
132,161 |
|
|
$ |
840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Agreement and Senior Notes do not include interest
payments. Interest is payable on the senior notes at fixed interest rates of 6.05% and 5.40%.
Interest is payable on the Credit Agreement at variable interest rates equal to, at the Companys
option, a LIBOR rate plus 0.75% to 2.00%, or a base rate, as defined in the Credit Agreement plus
up to 0.50%, depending on the Companys leverage ratio (See Note 4 of the Notes to Consolidated
Financial Statements).
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.
20
Our accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial
Statements, located in Item 1 of this Form 10-Q. 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 Revenues are recognized on large, long-term construction
contracts meeting the criteria of Statement of Position 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts (SOP 81-1), 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 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, change orders
and final contract settlements may result in revisions to costs and income and are recognized in
the period in which the revisions are determined. As allowed by SOP 81-1, revenue is recognized on
smaller, short-term construction contracts using the completed contract method. Provisions for
estimated losses on uncompleted construction contracts are made in the period in which such losses
are determined.
Revenues for direct sales of equipment and other ancillary products not provided in conjunction
with the performance of construction contracts are recognized at the date of delivery to, and
acceptance by, the customer. Provisions for estimated warranty obligations are made in the period
in which the sales occur.
Contracts for the Companys mineral exploration drilling services are billable based on the
quantity of drilling performed. Thus, revenues for these drilling contracts are recognized on the
basis of actual footage or meterage drilled.
Revenues for the sale of oil and gas by the Companys energy division are recognized on the basis
of volumes sold at the time of delivery to an end user or an interstate pipeline, net of amounts
attributable to royalty or working interest holders.
The Companys revenues are presented net of taxes imposed on revenue-producing transactions with
its customers, such as, but not limited to, sales, use, value-added, and some excise taxes.
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 period, with effect given to the Companys fixed-price physical delivery
contracts, 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.
Reserve Estimates The Companys estimates of natural 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 natural gas prices, 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 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.
21
Goodwill and Other Intangibles The Company accounts for goodwill and other intangible
assets in accordance with the Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets. Other intangible assets primarily consist of trademarks, customer-related
intangible assets and patents obtained through business acquisitions. Amortizable intangible
assets are being amortized over their estimated useful lives, which range from two to 40 years.
The impairment evaluation for goodwill is conducted annually, or more frequently, if events or
changes in circumstances indicate that an asset might be impaired. The evaluation is performed by
using a two-step process. In the first step, the fair value of each reporting unit is compared with
the carrying amount of the reporting unit, including goodwill. The estimated fair value of the
reporting unit is generally determined on the basis of discounted future cash flows. If the
estimated fair value of the reporting unit is less than the carrying amount of the reporting unit,
then a second step must be completed in order to determine the amount of the goodwill impairment
that should be recorded. In the second step, the implied fair value of the reporting units
goodwill is determined by allocating the reporting units fair value to all of its assets and
liabilities other than goodwill (including any unrecognized intangible assets) in a manner similar
to a purchase price allocation. The resulting implied fair value of the goodwill that results from
the application of this second step is then compared to the carrying amount of the goodwill and an
impairment charge is recorded for the difference.
The impairment evaluation of the carrying amount of intangible assets with indefinite lives is
conducted annually or more frequently if events or changes in circumstances indicate that an asset
might be impaired. The evaluation is performed by comparing the carrying amount of these assets to
their estimated fair value. If the estimated fair value is less than the carrying amount of the
intangible assets with indefinite lives, then an impairment charge is recorded to reduce the asset
to its estimated fair value. The estimated fair value is generally determined on the basis of
discounted future cash flows.
The assumptions used in the estimate of fair value are generally consistent with the past
performance of each reporting unit and are also consistent with the projections and assumptions
that are used in current operating plans. Such assumptions are subject to change as a result of
changing economic and competitive conditions.
Other Long-lived Assets In the event of an indication of possible impairment, the
Company evaluates the fair value and future benefits of long-lived assets, including the Companys
gas transportation facilities and equipment, by performing an analysis of the anticipated future
net cash flows of the related long-lived assets and reducing their carrying value by the excess, if
any, of the result of such calculation. The Company believes at this time that the carrying values
and useful lives of its long-lived assets 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
medical costs increase beyond what was anticipated, reserves recorded may not be sufficient and
additional costs to the consolidated financial statements could be required.
Costs estimated to be incurred in the future for employee medical benefits, property, 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 affiliates is
made only on those amounts in excess of funds considered to be invested indefinitely.
Due to the breadth of the Companys international operations, numerous tax examinations may be
ongoing throughout the world at any point in time. Tax liabilities are recorded based on estimates
of additional taxes which will be due upon the conclusion of these examinations. Estimates of
these tax liabilities are made based upon prior experience and are updated in light of changes in
facts and circumstances. However, due to the uncertain and complex application of tax regulations,
examination outcomes and the timing of settlements are subject to significant uncertainty.
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
22
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 11 of the Notes to Consolidated
Financial Statements appearing in the Companys January 31, 2007 Form 10-K and Note 4 of this Form
10-Q. As of April 30, 2007, $60,000,000 of the Companys long-term debt outstanding carries a
fixed-rate and $102,400,000 is variable rate debt. An instantaneous change in interest rates of
one percentage point would change the Companys annual interest expense by $1,024,000.
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, 2007 Form 10-K and Note 9 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.
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 have
significantly impacted income from continuing operations for the three months ended April 30, 2007.
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 unconventional 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, 2007, the
Company held contracts for physical delivery of 6,674,000 million British Thermal Units (MMBtu)
of natural gas through March 2010 at prices ranging from $7.41 to $9.025 per MMBtu. The estimated
fair value of such contracts at April 30, 2007 was $1,233,000. We estimate that a ten percent
change in the price of natural gas would have impacted income from continuing operations before
taxes by approximately $402,000 for the three months ended April 30, 2007.
ITEM 4. Controls and Procedures
Based on an evaluation of disclosure controls and procedures for the period ended April 30,
2007, 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 accumulated and communicated to the Companys management (including the
Principal Executive Officer and the Principal Financial Officer) to allow timely decisions
regarding required disclosure, and 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 the Principal Financial Officer, for the period ended April 30, 2007, the Company
concluded that its internal control over financial reporting is effective as of April 30, 2007. The
Company has not made any significant changes in internal controls or in other factors that could
significantly affect internal controls since such evaluation. The Company excluded from its
assessment any changes in internal control over financial reporting at American Water Services
Underground Infrastructure, Inc. (UIG), which was acquired on November 20, 2006, and whose
financial statements reflect total assets and revenues constituting 6% and 4%, respectively, of the
related consolidated financial statement amounts as of and for the three months ended April 30,
2007. The Company will include UIG in its evaluation of the design and effectiveness of internal
control over financial reporting as of January 31, 2008.
23
PART II
ITEM 1 Legal Proceedings
NONE
ITEM 2 Changes in Securities
NOT APPLICABLE
ITEM 3 Defaults Upon Senior Securities
NOT APPLICABLE
ITEM 4 Submission of Matters to a Vote of Security Holders
NONE
ITEM 5 Other Information
NONE
ITEM 6 Exhibits and Reports on Form 8-K
|
|
|
|
|
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 April 3, 2007, related to the Companys fiscal year ended January 31,
2007 press release. |
|
|
|
|
Form 8-K filed on April 4, 2007, disclosing the Companys goals to earn bonuses under
the Executive Incentive Compensation Plan for fiscal 2008. |
|
|
|
|
Form 8-K filed on April 18, 2007, related to the Companys press release announcing the
energy division Chilean CBM Project. |
24
* * * * * * * * * *
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
Layne Christensen Company |
|
|
|
|
(Registrant) |
|
|
|
|
|
DATE: June 8, 2007
|
|
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/s/ A.B. Schmitt |
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A.B. Schmitt, President |
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and Chief Executive Officer |
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DATE: June 8, 2007
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/s/ Jerry W. Fanska |
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Jerry W. Fanska, Sr. Vice President |
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Finance and Treasurer |
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