Item 1. Business
General
Layne Christensen Company (the "Company") provides drilling services and related products and services in four principal markets: water resources, mineral exploration, geoconstruction and energy. Layne Christensen's customers include municipalities, industrial companies, mining companies, consulting and engineering firms and oil and gas companies located principally in the United States, Canada, Mexico, Australia, Africa and South America.
The Company maintains its executive offices at 1900 Shawnee Mission Parkway, Mission Woods, Kansas 66205. The Company's telephone number is (913) 362-0510. The Company's web site address is www.laynechristensen.com. The Company's periodic and current reports are available, free of charge, on its website as soon as reasonably practicable after such material is filed with or furnished to the Securities and Exchange Commission.
Market Overview
The characteristics of each of the four markets in which the Company operates vary, particularly with respect to the maturity and cyclicality of the market in various geographic areas. In each of the markets, however, the purchaser of drilling services and products generally demands technical expertise, knowledge of local geological conditions, project management skills, access to significant amounts of capital equipment and cost effective pricing. See Note 16 to the Consolidated Financial Statements for certain financial information about the Company's operating segments and its foreign operations.
Water Resources
Through its water resources division, the Company provides a full line of water-related services and products, including hydrological studies and related engineering services, water well design, water well drilling and development, pump sales, installation and service, and repair and maintenance. The Company has expanded this market to include the design and construction of water treatment facilities and the manufacture and sale of water treatment products. The Company's services are marketed on an individual and a turnkey basis. For the design and construction of water treatment facilities and the sale of products, the Company is targeting the same customer base it has serviced in its traditional water service businesses. The Company competes with engineering and consulting firms in this market. In addition, the Company's environmental services related to the assessment and monitoring of groundwater contaminants are included within this market.
Demand for water well drilling services is driven by the need to access groundwater, which is affected by many factors including population movements and expansions, such as new housing developments, deteriorating water quality and limited availability of surface water. Groundwater is a vital natural resource that is pumped from the earth for drinking water, irrigation and industrial use. In many parts of the United States and other parts of the world, groundwater is the only reliable source of water. Groundwater is located
in saturated geological zones at varying depths beneath the surface and accumulates in subsurface strata (aquifers). Surface water, the other major source of potable water, comes principally from large lakes and rivers.
The water well drilling market is highly fragmented, consisting of several thousand water well drilling contractors in the United States. However, the Company believes that a substantial majority of these contractors are regionally and locally based, and are primarily involved in drilling low volume water wells for agricultural and residential customers, markets in which the Company does not generally compete. The Company's target groundwater drilling market consists of high volume water wells drilled principally for municipal and industrial customers. These wells have more stringent design specifications and are deeper and larger in diameter than low-volume residential and agricultural wells. Drillers for high-volume wells must have strong technical expertise, expert knowledge of local geology, large drilling equipment and the ability to procure sizable performance bonds.
The demand for well and pump repair and maintenance depends upon the age and use of the well and pump, the quality of material and workmanship applied in the original well installation and changes in the depth and quality of the aquifer. Repair and rehabilitation work is often required on an emergency basis or within a relatively short period of time after a performance decline is recognized and is often awarded to the firm that initially drilled the well. Scheduling flexibility, together with appropriate expertise and equipment, are critical for a repair and maintenance service provider. Like the water well drilling market, the market for repair and maintenance is highly fragmented. It consists of most well drilling companies as well as firms that provide solely repair and maintenance services.
Demand for the Company's environmental products and environmental drilling services is driven by public concern over groundwater contamination and resulting regulatory requirements to investigate and remediate contaminated sites and aquifers. Environmental drilling services are utilized to assess, investigate, monitor and improve water quality and pumping capacity. Customers are typically national and regional consulting firms engaged by federal and state agencies as well as industrial companies that need to assess or clean up groundwater contamination sources.
Mineral Exploration
Demand for mineral exploration drilling is driven by the need for identifying, defining and developing underground mineral deposits. Factors influencing the demand for mineral-related drilling services include growth in the economies of developing countries, international political conditions, inflation and foreign exchange levels, commodity prices, the economic feasibility of mineral exploration and production, the discovery rate of new mineral reserves and the ability of mining companies to access capital for their activities.
Important changes in the international mining industry have led to the development and growth of mineral exploration in developing regions of the world, including Africa, Asia and South America. At the same time, stricter environmental permitting rules in the United States and Canada have delayed or blocked the development of certain projects forcing mining companies to look
overseas for growth. In addition, technological advancements now allow development of mineral resources previously regarded as uneconomical. The mining industry has also increased its focus on these areas due to their early stage of mining development, relative to the more mature mining regions of the world such as the United States and South Africa.
Mining companies hire exploration drillers to extract samples from sites that the mining companies analyze for mineral content. Mineral exploration drilling requires a high level of expertise and technical competence because the samples extracted must be free of contamination and accurately reflect the underlying mineral deposit. Familiarity with the local geology is critical to acquiring this competence. Mineral exploration drilling consists of exploratory drilling and definitional drilling. Exploratory drilling is conducted to determine if there is a minable mineral deposit (an orebody) on the site. Definitional drilling is typically conducted at a site to assess whether it would be economical to mine and to assist in mapping the mine layout. The demand for definitional drilling has increased in recent years as new and less expensive mining techniques have made it feasible to mine previously uneconomical orebodies.
Geoconstruction
The Company's geoconstruction services are used to modify weak and unstable soils, decrease water flow in bedrock and provide support and groundwater control for excavation. Methods used include cement and chemical grouting and vibratory ground improvement, techniques for stabilizing soils; jet grouting, a high-pressure method for providing subsurface support; and dewatering, a method for lowering the water table. Geoconstruction services are important during the construction of dams, tunnels, shafts, water lines, subways and other civil construction projects. Demand for geoconstruction services is driven primarily by the demand for these infrastructure improvements. The customers for these services are primarily heavy civil construction contractors, governmental agencies, mining companies and the industrial sector. The geoconstruction services industry is highly fragmented.
Energy
The Company's main energy operations include the acquisition, development, and production activities associated with natural gas properties, primarily focusing on coalbed methane projects located in the Midwestern United States. The energy division also includes an oil and gas services sector primarily focusing on resonance technology solutions for stuck tubulars.
Factors influencing the demand for coalbed methane gas include consumption levels for natural gas, commodity prices, the economic feasibility of gas exploration and production and the discovery rate of new gas reserves. Demand for oil and gas services is driven by the demand for identifying, defining and developing underground oil and gas reserves.
Business Strategy
The Company's growth strategy is to expand its current product and service offerings and enter into new business lines that build on the Company's core competencies. Key elements of this strategy are as follows:
In the Water Resources Division, Expand Design and Build Services as well as Water Treatment Products and Services.
Layne Christensen believes it is currently the largest provider of water well drilling services in the United States, operating in all regions of the country. In addition, the Company offers many services related to water well drilling including hydrological studies, site selection, well design, design and construction of water treatment facilities and water treatment products. The Company's growth strategy is to bundle its traditional products and service offerings and market the combination downstream to water treatment and distribution facilities. The Company believes that by combining these services into one turnkey project, the customer can expedite the typical design, build project and achieve economies and efficiencies over traditional unbundled services. The Company is also actively seeking additional water treatment technologies through acquisitions, partnerships and strategic alliances.
Maximize Benefit of Market Rebound in Mineral Exploration
The Company believes that it is positioned in strategic geographic locations of the world, especially in Africa and South America, to take advantage of a market rebound in mineral exploration created by rising prices of gold and base metals. The Company's ability to maximize this opportunity is created in part by leveraging the Company's local market expertise and technical competence, combined with access to transferable drilling equipment and employee training and safety programs.
Expand Presence in Geoconstruction
In the geoconstruction market, the Company intends to leverage its drilling capabilities, industry contacts, reputation, project management skills and growing geographic presence to expand this business. In particular, the Company's strategy is to focus on relatively larger, technically demanding projects using its grouting, jet grouting and vibratory ground improvement capabilities.
Develop Existing Coalbed Methane Opportunities and Expand Presence in Coalbed Methane Markets
The Company expects to continue to develop its existing projects and to consider other coalbed methane development and production opportunities within the United States. The Company is actively developing its coalbed methane properties as well as creating pipeline and gas gathering system infrastructure. The Company has the ability to move major coalbed methane development projects forward by leveraging its internal resources, technical expertise and experience. The Company anticipates significant growth during the next five years based on development agreements already in place. However, future revenue and profits will be dependent upon a number of factors including consumption levels for natural gas, commodity prices, the economic feasibility of gas exploration and production and the discovery rate of new gas reserves.
Services and Products
Overview of the Company's Drilling Techniques
The types of drilling techniques employed by the Company in its drilling activities have different applications:
- Conventional and reverse circulation rotary rigs are used in water well and mineral exploration drilling primarily for drilling large diameter wells and employ air or drilling fluid circulation for removal of cuttings and borehole stabilization.
- Dual tube drilling, an innovation advanced by the Company primarily for mineral exploration and environmental drilling, conveys the drill cuttings to the surface inside the drill pipe. This drilling method is critical in mineral exploration drilling and environmental sampling because it provides immediate representative samples and because the drill cuttings do not contact the surrounding formation thus avoiding contamination of the borehole while providing reliable, uncontaminated samples. Because this method involves circulation of the drilling fluid inside the casing, it is highly suitable for penetration of underground voids or faults where traditional drilling methods would result in the loss of circulation of the drilling fluid, thereby preventing further penetration.
- Diamond core drilling is used in mineral exploration drilling to core solid rock, thereby providing geologists and engineers with solid rock samples for evaluation.
- Cable tool drilling, which requires no drilling fluid, is used primarily in water well drilling for larger diameter wells. While slower than other drilling methods, it is well suited for penetrating boulders, cobble and rock.
- Auger drilling is used principally in water well and environmental drilling for efficient completion of relatively small diameter, shallow wells. Auger rigs are equipped with a variety of auger sizes and soil sampling equipment.
Water Resources
The Company has the capability to design and build complete water supply systems including products to treat various groundwater contaminants. The Company provides a full range of services for the design and construction of water supply and treatment facilities, including hydrological studies, site selection, well field design and facilities construction. In addition to water treatment plants, these services are provided in connection with surface water intakes, pumping stations and well houses. The Company also offers nonrecourse financing options for these services to its traditional municipal and industrial customers.
The Company has the capability to design and build complete water supply systems including products to treat various groundwater contaminants. The Company provides a full range of services for the design and construction of water supply and treatment facilities, including hydrological studies, site selection, well field design and facilities construction. In addition to water treatment plants, these services are provided in connection with surface water intakes, pumping stations and well houses. The Company also offers nonrecourse financing options for these services to its traditional municipal and industrial customers.
The Company provides complete water well systems on a turnkey basis, offering the comprehensive range of services required to provide professionally designed, constructed and maintained municipal, industrial and, to a lesser extent, agricultural water wells. Although it may not perform each of the services it offers on every project, the Company has the capability to provide every element of a water well system, including test hole drilling, well casing and screen selection and installation, gravel packing, grout sealing, well development and testing and pump selection, equipment sales and installation. Layne Christensen provides water well drilling services in most regions of the United States.
Water well drilling requires the integration of hydrogeology and engineering with the techniques of well drilling because the drilling methods and size and type of equipment depend upon the depth of the wells and the geological formations encountered at the project site. The Company has extensive well archives and equipment in addition to technical personnel to determine geological conditions and aquifer characteristics in most locations in the United States, enabling it to locate suitable water-bearing formations to meet a wide variety of customer requirements. The Company provides feasibility studies using complex geophysical survey methods and has the expertise to analyze the survey results and define the source, depth and magnitude of an aquifer. It can then estimate recharge rates, specify required well design features, plan well field design and develop water management plans. To conduct these services, the Company maintains a staff of professional employees including geological engineers, geologists, hydrogeologists and geophysicists.
As part of its water well drilling and installation business, the Company sells a wide variety of pumps manufactured by third parties, including vertical turbine, submersible, shortcoupled and horizontal centrifugal pumps. In addition, the Company sells miscellaneous supplies manufactured by third parties for use in the water well drilling industry, including well casing, well screens and well cleaning supplies.
Periodic repair and maintenance of well equipment is required during the life of a well. In locations where the groundwater contains both bacteria and iron, screen openings may become blocked with organic growth, reducing the capacity and productivity of the well. Similarly, groundwater with high mineral content may cause the buildup of scale on well screens, also reducing the capacity and productivity of the well.
The Company offers complete repair and maintenance services for existing wells, pumps and related equipment through a network of local offices throughout its geographic markets in the United States. In addition to its well service rigs, the Company has equipment capable of conducting downhole closed circuit
televideo inspections (one of the most effective methods for investigating water well problems), enabling the Company to diagnose better and respond more quickly to well and maintenance problems.
The Company's trained and experienced personnel can perform a variety of well rehabilitation techniques, including chemical and mechanical methods, and can perform bacteriological well evaluation and water chemistry analysis. The Company also has the capability and inventory to repair, in its own machine shops, most water well pumps, regardless of manufacturer, as well as to repair well screens, casings and related equipment such as chlorinators, aerators and filtration systems.
The Company also offers complete water treatment solutions for various contaminants such as volatile organics, nitrates, iron, manganese, arsenic, radium and radon. These solutions typically involve proprietary treatment media and filtration methods, as well as treatment equipment installed at or near the wellhead, including chlorinators, aerators, filters and controls.
The Company offers a wide range of environmental drilling services including: investigative drilling, installation and testing of wells that monitor the extent of groundwater contamination, installation of recovery wells that extract contaminated groundwater for treatment (pump and treat remediation) and specialized site safety programs associated with drilling at contaminated sites. Monitoring wells are installed to determine the nature and extent of known or suspected subsurface contamination as well as to monitor an area for future contamination. In addition, monitoring wells are often installed surrounding underground petroleum or chemical storage tanks to monitor for possible future tank leaks or product spills. After monitoring and testing the groundwater, recovery wells may be installed to extract contaminated water from the aquifer for treatment or disposal.
In its environmental health sciences department, the Company employs a full-time staff qualified to prepare site specific health and safety plans for customers who have workers employed on hazardous waste cleanup sites as required by the Occupation and Safety Health Administration ("OSHA") and the Mine Safety and Health Administration of the Department of Labor ("MSHA").
The Company also offers artificial ground-freezing capabilities, typically utilized as an alternative method to dewatering large diameter excavation and tunneling projects.
Mineral Exploration
The Company provides drilling services for exploratory and definitional drilling. These services are used primarily by major gold and copper producers based in the United States, Europe and Canada, and to a lesser extent, iron ore producers. In response to a shift by many of these producers to foreign markets in search of economically minable orebodies, the Company has established mineral exploration drilling operations in Mexico, Australia and Africa. The Company also has an ownership interest in foreign affiliates operating in South America.
Geoconstruction
Geoconstruction includes those services provided by the Company to the heavy civil construction market to provide ground modification for construction work in unstable soils during the construction of dams, tunnels, shafts and other civil construction projects. Services offered include cement and chemical grouting, jet grouting, vibratory ground improvement, drain hole drilling, installation of ground anchors, tiebacks, rock bolts and instrumentation. The Company offers expertise in selecting the appropriate support techniques to be applied in various geological conditions. In addition, the Company has extensive experience in the placement of measuring devices capable of monitoring water levels and ground movement.
Energy
The Company's main energy operations include the acquisition, development, and production activities associated with natural gas properties, primarily focusing on coalbed methane projects located in the Midwestern United States. The energy division also includes an oil and gas services sector primarily focusing on resonance technology solutions for stuck tubulars.
Operations
The Company operates on a decentralized basis, with approximately 80 sales and operations offices located in most regions of the United States as well as in Australia, Africa, Mexico and Italy. In addition, the Company's foreign affiliates operate out of locations in South America and Mexico.
The Company is primarily organized around division presidents responsible for water resources, mineral exploration, geoconstruction and energy. Division vice presidents are responsible for geographic regions within each division and district managers are in charge of individual district office profit centers. The district managers report to their respective divisional vice president on a regular basis. Each district office employs a field superintendent who is in charge of projects in the field and sales engineers who are responsible for marketing the Company's services in their district as well as for monitoring the progress of projects. The Company does not conduct significant marketing activities for its traditional water well and mineral exploration drilling services. Instead, the Company's sales engineers cultivate and maintain contacts with existing and potential customers. In this way, the Company learns of and is in a position to compete for proposed drilling projects in the region.
In its foreign affiliates, where the Company does not have majority ownership or operating control, day-to-day operating decisions are made by local management. The Company's interests in its foreign affiliates are overseen by the mineral division president. The Company manages its interests in its foreign affiliates through regular management meetings and analysis of comprehensive operating and financial information. For its significant foreign affiliates, the Company has entered into shareholder agreements that give it limited board representation rights and require super-majority votes in certain circumstances.
Customers and Contracts
Each of the Company's service and product lines has major customers; however, no single customer accounted for 10% or more of the Company's revenues in any of the past three fiscal years.
Generally, the Company negotiates its service contracts with industrial and mining companies and other private entities, while its service contracts with municipalities are generally awarded on a bid basis. The Company's contracts vary in length depending upon the size and scope of the project. The majority of such contracts are awarded on a fixed price basis, subject to change of circumstance and force majeure adjustments, while a smaller portion are awarded on a cost plus basis. Substantially all of the contracts are cancelable for, among other reasons, the convenience of the customer.
In the water resources product line, the Company's customers are typically municipalities and local operations of industrial businesses. Of the Company's water resources revenues in fiscal 2004, approximately 63% were derived from municipalities and approximately 22% were derived from industrial customers while the balance was derived from other customer groups. The term "municipalities" includes local water districts, water utilities, cities, counties and other local governmental entities and agencies that have the responsibility to provide water supplies to residential and commercial users. In the drilling of new water wells, the Company targets customers that require compliance with detailed and demanding specifications and regulations and that often require bonding and insurance, areas in which the Company believes it has competitive advantages due to its drilling expertise and financial resources.
Customers for the Company's mineral exploration services in the United States, Mexico, Australia, Africa and South America are primarily gold and copper producers. The Company's largest customers in its mineral exploration drilling business are multi-national corporations headquartered primarily in the United States, Europe and Canada.
In its geoconstruction product lines, the Company's customers are primarily heavy civil construction contractors, governmental agencies, mining companies and industrial companies. The Company often acts as a specialty subcontractor when it provides geoconstruction services.
The Company is marketing its coalbed methane production to large energy pipeline companies and local industrial customers. In its oil and gas services sector, the Company's customers are primarily oil and gas companies that conduct exploration and production activities in the Gulf of Mexico region.
Backlog
The Company's backlog consists of executed service contracts, or portions thereof, not yet performed by the Company. The Company believes that its backlog does not have any significance other than as a short-term business indicator because substantially all of the contracts comprising the backlog are cancelable for, among other reasons, the convenience of the customer. The Company's backlog for its continuing operations was approximately $51,143,000 at January 31, 2004, compared to approximately $49,677,000 at January 31, 2003.
The Company's backlog as of year-end is generally completed within the following fiscal year.
Competition
The Company's competition for its water resource division's design and build services are primarily local and national engineering and consulting firms which have traditionally performed engineering services and, in some cases, construction oversight for these activities.
The Company's competition in the water well drilling business consists primarily of small, local water well drilling operations and some regional competitors. Oil and natural gas well drillers generally do not compete in the water well drilling business because the typical well depths are greater for oil and gas and, to a lesser extent, the technology and equipment utilized in these businesses are different. Only a small percentage of all companies that perform water well drilling services have the technical competence and drilling expertise to compete effectively for high-volume municipal and industrial projects, which typically are more demanding than projects in the agricultural or residential well markets. In addition, smaller companies often do not have the financial resources or bonding capacity to compete for large projects. However, there are no proprietary technologies or other significant factors which prevent other firms from entering these local or regional markets or from consolidating together into larger companies more comparable in size to the Company. Water well drilling work is usually obtained on a competitive bid basis for municipalities, while work for industrial customers is obtained on a negotiated or informal bid basis.
As is the case in the water well drilling business, the well repair and maintenance business is characterized by a large number of relatively small competitors. The Company believes only a small percentage of the companies performing these services have the technical expertise necessary to diagnose complex problems, perform many of the sophisticated rehabilitation techniques offered by the Company or repair a wide range of pumps in their own facilities. In addition, many of these companies have only a small number of pump service rigs. Repair and maintenance projects are typically negotiated at the time of repair or contracted for in advance depending upon the lead time available for the repair work. Since pump repair and rehabilitation work is typically negotiated on an emergency basis or within a relatively short period of time, those companies with available rigs and the requisite expertise have a competitive advantage by being able to respond quickly to repair requests.
In its mineral exploration division, the Company competes with a number of drilling companies as well as vertically integrated mining companies that conduct their own exploration drilling activities; some of these competitors have greater capital and other resources than the Company. In the mineral exploration drilling market, the Company competes based on price, technical expertise and reputation. The Company believes it has a well-recognized reputation for expertise and performance in this market. Mineral exploration drilling work is typically performed on a negotiated basis.
The geoconstruction market is highly fragmented as a result of the large area served, the wide range of techniques offered and the large number and
variety of contractors. In this market, the Company competes based upon a combination of reputation, innovation and price.
In the energy production market, principally coalbed methane gas, the Company competes with many energy production companies, many of which have greater capital and other resources than the Company. In its current operations, the Company is not constrained by the availability of a market for its production, but does compete with other exploration and production companies for mineral leases and rights-of-way in its areas of interest. In the oil and gas services market, the Company believes it has proprietary resonance technology for removing stuck tubulars for oil and gas customers. The Company also believes that it is the only company pursuing this type of technology.
Employees and Training
At January 31, 2004, the Company had 2,331 employees, 173 of whom were members of collective bargaining units represented by locals affiliated with major labor unions in the United States. The Company believes that its relationship with its employees is satisfactory.
In all of the Company's service lines, an important competitive factor is technical expertise. As a result, the Company emphasizes the training and development of its personnel. Periodic technical training is provided for senior field employees covering such areas as pump installation, drilling technology and electrical troubleshooting. In addition, the Company emphasizes strict adherence to all health and safety requirements and offers incentive pay based upon achievement of specified safety goals. This emphasis encompasses developing site-specific safety plans, ensuring regulatory compliance and training employees in regulatory compliance and good safety practices. Training includes an OSHA-mandated 40-hour hazardous waste and emergency response training course as well as the required annual eight-hour updates. The Company has an environmental health sciences staff which allows it to offer such training in-house. This staff also prepares health and safety plans for specific sites and provides input and analysis for the health and safety plans prepared by others.
On average, the Company's field supervisors and drillers have 19 and 14 years, respectively, of experience with the Company. Many of the Company's professional employees have advanced academic backgrounds in agricultural, chemical, civil, industrial, geological and mechanical engineering, geology, geophysics and metallurgy. The Company believes that its size and reputation allow it to compete effectively for highly qualified professionals.
Regulatory and Environmental Matters
The services provided by the Company are subject to various licensing, permitting, approval and reporting requirements imposed by federal, state, local and foreign laws. Its operations are subject to inspection and regulation by various governmental agencies, including the Department of Transportation, OSHA and MSHA in the United States as well as their counterparts in foreign countries. In addition, the Company's activities are subject to regulation under various environmental laws regarding emissions to air, discharges to water and management of wastes and hazardous substances. To the extent the Company fails to comply with these various regulations, it could be subject to monetary
fines, suspension of operations and other penalties. In addition, these and other laws and regulations affect the Company's mineral exploration customers and influence their determination whether to conduct mineral exploration and development.
Many localities require well operating licenses which typically specify that wells be constructed in accordance with applicable regulations. Various state, local and foreign laws require that water wells and monitoring wells be installed by licensed well drillers. The Company maintains well drilling and contractor's licenses in those jurisdictions in which it operates and in which such licenses are required. In addition, the Company employs licensed engineers, geologists and other professionals necessary to the conduct of its business. In those circumstances in which the Company does not have a required professional license, it subcontracts that portion of the work to a firm employing the necessary professionals.
Potential Liability and Insurance
The Company's drilling activities involve certain operating hazards that can result in personal injury or loss of life, damage and destruction of property and equipment, damage to the surrounding areas, release of hazardous substances or wastes and other damage to the environment, interruption or suspension of drill site operations and loss of revenues and future business. The magnitude of these operating risks is amplified when the Company, as is frequently the case, conducts a project on a fixed-price, "turnkey" basis where the Company delegates certain functions to subcontractors but remains responsible to the customer for the subcontracted work. In addition, the Company is exposed to potential liability under foreign, federal, state and local laws and regulations, contractual indemnification agreements or otherwise in connection with its services and products. For example, the Company could be held responsible for contamination caused by an accident which occurs as a result of the Company drilling through a contaminated water source and creating a channel through which the contaminants migrate to an uncontaminated water source. Litigation arising from any such occurrences may result in the Company's 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.
Applicable Legislation
There are a number of complex foreign, federal, state and local environmental laws which impact the demand for the Company's mining and environmental drilling services. For example, the Company currently provides a variety of services for individuals and entities that have either been ordered by the Environmental Protection Agency or a comparable state agency to clean up certain contaminated property, or are investigating whether a particular piece of property contains any contaminants. These services include soil and groundwater testing done in connection with environmental audits, investigative
drilling to determine the presence of hazardous substances, monitoring wells to detect the extent of contamination present in the groundwater and recovery wells to recover certain contaminants from the groundwater. A change in these laws, or changes in governmental policies regarding the funding, implementation or enforcement of the laws, could have a material effect on the Company.
Item 2.
Item 2. Properties and Equipment
The Company's corporate headquarters are located in Mission Woods, Kansas (a suburb of Kansas City, Missouri), in approximately 41,000 square feet of office space leased by the Company pursuant to a written lease agreement which expires December 31, 2008.
As of January 31, 2004, the Company (excluding foreign affiliates) owned or leased approximately 560 drill and well service rigs throughout the world, a substantial majority of which were located in the United States. This includes rigs used primarily in each of its service lines as well as multi-purpose rigs. In addition, as of January 31, 2004, the Company's foreign affiliates owned or leased approximately 120 drill rigs.
Item 3.
Item 3. Legal Proceedings
The Company is involved in various matters of litigation, claims and disputes which have arisen in the ordinary course of the Company's business. While the resolution of any of these matters may have an impact on the financial results for the period in which the matter is resolved, the Company believes that the ultimate disposition of these matters will not, in the aggregate, have a material adverse effect on the Company's business or consolidated financial position, results of operations or cash flows.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the stockholders of the Company during the last quarter of the fiscal year ended January 31, 2004.
Item 4A. Executive Officers of the Registrant
Executive officers of the Company are appointed by the Board of Directors or the President for such terms as shall be determined from time to time by the Board or the President, and serve until their respective successors are selected and qualified or until their respective earlier death, retirement, resignation or removal.
Set forth below are the name, age and position of each executive officer of the Company.
Set forth below are the name, age and position of other significant employees of the Company.
The business experience of each of the executive officers and significant employees of the Company is as follows:
Andrew B. Schmitt has served as President and Chief Executive Officer since October 1993. For approximately two years prior to joining the Company, Mr. Schmitt managed two privately-owned hydrostatic pump and motor manufacturing companies and an oil and gas service company. He served as President of the Tri-State Oil Tools Division of Baker Hughes Incorporated from February 1988 to October 1991.
Gregory F. Aluce has served as Senior Vice President since April 14, 1998. Since September 1, 2001, Mr. Aluce has also served as President of the Company's water resource division and is responsible for the Company's water-related services and products. Mr. Aluce has over 22 years experience in various areas of the Company's operations.
Eric R. Despain has served as Senior Vice President since February 1996. Since September 1, 2001, Mr. Despain has also served as President of the Company's mineral exploration division and is responsible for the Company's mineral exploration operations. Prior to joining the Company in December 1995, Mr. Despain was President and a member of the Board of Directors of Christensen Boyles Corporation since 1986.
Steven F. Crooke has served as Vice President, Secretary and General Counsel since May 2001. For the period of June 2000 through April 2001, Mr. Crooke served as Corporate Legal Affairs Manager of Huhtamaki Van Leer. Prior to that, he served as Assistant General Counsel of the Company from 1995 to May 2000.
Jerry W. Fanska has served as Vice President-Finance and Treasurer since April 1994 and as Controller since December 1993. Prior to joining Layne Christensen, Mr. Fanska served as corporate controller of The Marley Company since October 1992 and as its Internal Audit Manager since April 1984.
Pier L. Iovino has served as President of the Company's geoconstruction division since September 1, 2001, and is responsible for the Company's
geoconstruction services. Prior to becoming President of the Company's geoconstruction division, Mr. Iovino was district manager of the Company's Boston district, which included the Company's geoconstruction operations.
Colin B. Kinley has served as President of the Company's energy division since September 1, 2001, and is responsible for the Company's energy operations. Prior to becoming President of the Company's energy division, Mr. Kinley also served as President of Layne Christensen Canada, a wholly-owned subsidiary of the Company, from 1990 until January 30, 2004 when substantially all of the assets of Layne Christensen Canada were sold.
There is no arrangement or understanding between any executive officer and any other person pursuant to which such executive officer was selected as an executive officer of the Company.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded in the over-the-counter market through the NASDAQ National Market System under the symbol LAYN. The stock has been traded in this market since the Company became a publicly-held company on August 20, 1992. The following table sets forth the range of high and low sales prices of the Company's stock by quarter for fiscal 2004 and 2003, as reported by the NASDAQ National Market System. These quotations represent prices between dealers and do not include retail mark-up, mark-down or commissions.
At March 23, 2004, there were 173 owners of record of the Company's common stock.
The Company has not paid any cash dividends on its common stock. Moreover, the Board of Directors of the Company does not anticipate paying any cash dividends in the foreseeable future. The Company's future dividend policy will depend on a number of factors including future earnings, capital requirements, financial condition and prospects of the Company and such other factors as the Board of Directors may deem relevant, as well as restrictions under the Credit Agreement between the Company and LaSalle Bank National Association, as agent, the Master Shelf Agreement between the Company and Prudential Investment Management, Inc., The Prudential Insurance Company of America, Pruco Life Insurance Company and Security Life of Denver Insurance Company, and other
restrictions which may exist under other credit arrangements existing from time to time. The Credit Agreement and the Master Shelf Agreement limit the cash dividends payable by the Company.
Item 6.
Item 6. Selected Financial Data
The following selected historical financial information as of and for each of the five fiscal years ended January 31, 2004, has been derived from the Company's audited Consolidated Financial Statements. The Company completed various acquisitions in each of the fiscal years, except for 2001, which are more fully described in Note 2 of the Notes to Consolidated Financial Statements or in previously filed Forms 10-K. The acquisitions have been accounted for under the purchase method of accounting and, accordingly, the Company's consolidated results include the effects of the acquisitions from the date of each acquisition. During fiscal year 2003, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," and recorded a non-cash charge of $14,429,000, net of income taxes, as a cumulative effect of a change in accounting principle (see Note 5 of the Notes to Consolidated Financial Statements). The Company also sold various operating companies during 2003 and 2004 and classified their results as discontinued operations for all years presented (see Note 4 of the Notes to Consolidated Financial Statements). The information below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Item 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto under Item 8.
Cautionary Language Regarding Forward-Looking Statements
This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Such statements are those concerning the strategic plans, expectations and objectives for future operations and are generally indicated by words or phrases such as "anticipate," "estimate," "project," "believe," "intend," "expect," "plan" and similar words or phrases. Such statements are based on current expectations and are subject to certain risks, uncertainties and assumptions, including but not limited to prevailing prices for various commodities, unanticipated slowdowns in the Company's major markets, the risks and uncertainties normally incident to the exploration for and development and production of oil and gas, the impact of competition, the effectiveness of operational changes expected to increase efficiency and productivity, worldwide economic and political conditions and foreign currency fluctuations that may affect worldwide results of operations. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially and adversely from those anticipated, estimated or projected. These forward-looking statements are made as of the date of this filing, and the Company assumes no obligation to update such forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.
Management Overview of Reportable Operating Segments
The Company is a multinational company which provides sophisticated services and related products to a variety of markets. Management defines the Company's 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. Although individual offices within a division may periodically perform services normally provided by another division, the results of those services are recorded in the office's own division. For example, if a water resources division office performed geoconstruction services, the revenues would be recorded in the water resources division rather than the geoconstruction division. Should an office's primary responsibility move from
one division president to another, that office's results going forward would be reclassified between divisions at that time. The Company's reportable segments are defined as follows:
Water Resources Division
This division provides a full line of water-related services and products including hydrological studies, site selection, well design, drilling and well development, pump installation, and repair and maintenance. The division's offerings include the design and construction of water treatment facilities and the manufacture and sale of products to treat volatile organics and other contaminants such as nitrates, iron, manganese, arsenic, radium and radon in groundwater. The division also offers environmental services to assess and monitor groundwater contaminants. Effective February 1, 2003, the Company's ground freezing services were included in the division on a prospective basis due to a change in reporting responsibility.
The division's operations rely heavily on the municipal sector as approximately 63% of the division's fiscal 2004 revenues were derived from the municipal market. The municipal sector has been adversely impacted by the slow U.S. economy. Reduced tax revenues have limited spending and new development by local municipalities. Generally, spending levels in the municipal sector lag an economic recovery and are expected to remain at reduced levels for the first half of next year.
In addition to the reduced spending levels in the municipal market, the Company has also experienced reduced demand for its services in the industrial markets. The soft markets have increased the competitive challenges for the division as competitors have been very aggressive on pricing. The division's margins have been adversely affected as the result of a focused effort to maintain market share in a difficult environment. As the U.S. economy begins to recover, the Company expects activity levels within the water markets to improve along with pricing. The division is also expanding its water treatment product offerings and expects to see growth in water treatment sales in fiscal 2005.
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.
Demand for the Company's mineral exploration drilling services depends upon the level of mineral exploration and development activities conducted by mining companies, particularly with respect to gold and copper. Mineral exploration is highly speculative and is influenced by a variety of factors, including the prevailing prices for various metals that often fluctuate widely. In this connection, the level of mineral exploration and development activities conducted by mining companies could have a material adverse effect on the Company.
In fiscal 2004, the mineral exploration division experienced the first increase in worldwide exploration spending since 1997, driven primarily by increased gold and base metals prices. The division relies heavily on mining activity in Africa as 57% of total division revenues for fiscal 2004 were
generated in Africa. The Company believes this concentration of risk is mitigated by working for larger international mining companies and the establishment of permanent operating facilities in Africa. Operating difficulties in Africa, including but not limited to, political instability, workforce instability, harsh environment, disease and remote locations, all create natural barriers to entry in this market by competitors. The Company believes it has positioned itself as the market leader in Africa and has established the infrastructure to operate effectively. The division expects to experience continued growth next year as mining activity accelerates.
Geoconstruction Division
This division focuses on services that improve soil stability, primarily jet grouting, grouting, vibratory ground improvement, drilled micropiles, stone columns, anchors and tie backs. The division also manufactures a line of high-pressure pumping equipment used in grouting operations and geotechnical drilling rigs used for directional drilling. Effective February 1, 2003, the division no longer includes the Company's ground freezing services due to a change in reporting responsibility.
The geoconstruction division frequently acts as a subcontractor to heavy civil construction contractors and governmental agencies. In many cases, circumstances outside of the Company's control are inherent in a subcontractor relationship. Consequently, the division could experience delays on projects that could have a material adverse effect on the division. The Company expects the volume of large, construction-type projects utilizing the Company's services to improve next year in conjunction with the U.S. economic recovery.
Energy Division
This division primarily focuses on exploration and production of coalbed methane ("CBM") properties in the United States. To date it has been concentrated on projects in the mid-continent region of the United States. Historically, the division has also included service businesses in shallow gas and tar sands exploration drilling, conventional oilfield fishing services and coil tubing fishing services. During fiscal 2004, the division's strategy shifted to focus mainly on resource development rather than providing services to external customers. Accordingly, in January 2004, the Company sold its Canadian drilling unit to Ensign Drilling and its oilfield fishing services to Smith International. The results of operations for these units have been reclassified to discontinued operations for all years presented (see Note 4 of the Notes to Consolidated Financial Statements). The division is now composed of the Company's CBM development activities and two small, specialty energy service companies.
Upon the sale of the two businesses in fiscal 2004, the Company has re-positioned the division to focus mainly on exploration and production activities associated with its CBM properties. The expansion of the Company's energy segment is contingent upon significant cash investments to develop the Company's unproved acreage. As of January 31, 2004, the Company has invested $14,084,000 in oil and gas related assets and expects to spend approximately $8,000,000 in development activities associated with its CBM efforts in fiscal 2005. The production curve for a typical CBM well is generally 15-20 years. Accordingly, the Company expects to earn a return on its investment through production
proceeds over the next 15-20 years. However, future revenues and profits will be dependent upon a number of factors including consumption levels for natural gas, commodity prices, the economic feasibility of gas exploration and production and the discovery rate of new gas reserves. The Company expects to have approximately 80 gross producing wells on-line by the end of the first quarter of fiscal 2005. Operating losses in the division are expected through the third quarter of fiscal 2005 until sufficient production volumes are generated to offset the division's level of fixed costs.
Products and Other
This grouping has historically included the Company's supply operation which distributed drilling equipment, parts and supplies; a manufacturing operation producing diamond drilling rigs, diamond bits, core barrels and drill rods ("Christensen Products") and other miscellaneous operations which do not fall into the above divisions. On January 23, 2003, the Company sold its supply operation to Boart Longyear. Upon the sale, the results of operations were reclassified to discontinued operations for all years presented (see Note 4 of the Notes to Consolidated Financial Statements). On August 8, 2001, the Company sold its Christensen Products business to a subsidiary of Atlas Copco (see Note 6 of the Notes to Consolidated Financial Statements).
The following table, which is derived from the Company's Consolidated Financial Statements as discussed in Item 6, presents, for the periods indicated, the percentage relationship which certain items reflected in the Company's Statements of Income bear to revenues and the percentage increase or decrease in the dollar amount of such items period-to-period.
* Not meaningful
Comparison of Fiscal 2004 to Fiscal 2003
Revenues for fiscal 2004 increased $16,530,000, or 6.5%, to $272,053,000 compared to $255,523,000 for fiscal 2003. The increase was primarily the result of increases in the Company's mineral exploration division. See further discussion of results of operations by division presented below.
Gross profit as a percentage of revenues was 27.8% for fiscal 2004 compared to 29.4% for fiscal 2003. The decrease in gross profit percentage for the year was primarily related to the negative impact of competitive pricing pressures on the Company's water resources division. The municipal, industrial, energy and agricultural market segments were weak throughout the year. Decreases in gross profit in the water resources division were partially offset by improved margins in the Company's mineral exploration division due to increased activity levels associated with higher gold and base metal prices.
Selling, general and administrative expenses increased to $53,920,000 for fiscal 2004 compared to $52,425,000 for fiscal 2003 (19.8% and 20.5% of revenues, respectively). The increase for the year was primarily the result of severance-related benefits of $1,244,000 accrued during the second quarter (see Note 7 of the Notes to Consolidated Financial Statements), start-up expenses related to the Company's groundwater transfer project in Texas and increased insurance costs. These expenses were partially offset by lower incentive compensation expense and cost savings associated with the workforce reductions completed during the second quarter.
Depreciation and amortization decreased to $11,877,000 for fiscal 2004 compared to $13,204,000 for fiscal 2003. The decrease in depreciation and amortization was the result of assets becoming fully depreciated in prior periods primarily in the geoconstruction and mineral exploration divisions.
Interest expense increased to $2,604,000 for fiscal 2004 compared to $2,490,000 for fiscal 2003. The increase was a result of an increase in the Company's average borrowings during the year.
The Company recorded debt extinguishment costs of $2,320,000 for fiscal 2004 and $1,135,000 for fiscal 2003. The losses for the periods represent prepayment penalties and the write-off of associated deferred fees in connection with refinancing of the Company's credit facilities.
Other, net was income of $358,000 for fiscal 2004 compared to income of $1,694,000 for fiscal 2003. The variance in income from last year was primarily due to gains from insurance proceeds, fixed asset sales, and investment sales that have not recurred at the same levels in the current year.
Income tax expense related to continuing operations of $4,265,000 was recorded for fiscal 2004 (an effective rate of 64.4%), compared to $5,084,000 for the same period last year (an effective rate of 60.1%). Exclusive of the impact of the debt extinguishment costs, the effective rate would have been 57.7% compared to 57.6% for the twelve months ended January 31, 2004 and 2003, respectively. The remaining difference in the effective rate versus the statutory federal rate was due primarily to the impact of nondeductible expenses and the tax treatment of certain foreign operations.
Net income for fiscal 2004 included income related to discontinued operations of $290,000. During the fourth quarter of fiscal 2004, the Company sold its Layne Christensen Canada and Toledo Oil and Gas subsidiaries. Both entities were historically reported as part of the Company's energy segment. In connection with the sales, the Company recorded a gain of $1,746,000, net of income taxes of $1,034,000. The gains related to the sale of these operations were offset by operating losses of $1,456,000, net of income taxes of $215,000 (see Note 4 of the Notes to Consolidated Financial Statements).
Water Resources Division (in thousands)
Water resources revenues increased 1.5% to $169,631,000 for the year ended January 31, 2004, from $167,080,000 for the year ended January 31, 2003. The increase in revenues was primarily the result of a concerted effort to maintain market share in the division's markets, especially the soft municipal market where activity has been impacted by competitive pressures and reduced spending. The increase is also attributable to increased infrastructure needs as a result of population expansion in certain areas of the United States, especially metropolitan areas in California and Illinois.
Income from continuing operations for the water resources division decreased 26.9% to $20,942,000 for the year ended January 31, 2004, compared to $28,654,000 last year. The decrease in income from continuing operations for the twelve months ended January 31, 2004, was primarily attributable to competitive pricing pressures in the municipal, industrial, energy and agricultural market segments, reduced margins due to a difficult winter drilling season and earnings from a large, multi-divisional project in the prior year which was not replaced in fiscal 2004.
Mineral Exploration Division (in thousands)
Mineral exploration revenues increased 22.3% to $68,218,000 for the year ended January 31, 2004, compared to revenues of $55,769,000 for the year ended January 31, 2003. The increase in revenues was attributable to increased exploration activity in the Company's markets as a result of higher gold and base metals prices. The increased activity levels had the greatest impact at the Company's locations in Africa.
Income from continuing operations for the mineral exploration division was $3,343,000 for the year ended January 31, 2004, compared to a loss from continuing operations of $1,082,000 for the year ended January 31, 2003. The improved profitability in the division was primarily due to the increased activity levels noted above. The division also benefited from improved earnings
by its Latin American affiliates and lower depreciation from assets that were fully depreciated in prior periods. These items were partially offset by increased expenses in Australia to bring equipment into compliance with changes in transportation regulations.
Geoconstruction Division (in thousands)
Geoconstruction revenues increased 5.6% to $31,285,000 for the year ended January 31, 2004, compared to $29,621,000 for the year ended January 31, 2003. The increase in revenues was primarily a result of a large project in the northwest United States for the Department of Energy and increased sales at the Company's manufacturing unit in Italy. The increased sales in Italy were primarily the result of the weakened value of the U.S. dollar against the euro, the functional currency of the subsidiary. The movement of the euro versus the dollar resulted in an increase of approximately $1,000,000 upon conversion to the Company's reporting currency.
The geoconstruction division had income from continuing operations of $2,246,000 for the year ended January 31, 2004, compared to $2,631,000 for the year ended January 31, 2003. The decrease in income from continuing operations was attributable to delays and work suspensions on certain public sector projects partially offset by reduced depreciation expense from assets that were fully depreciated in prior periods.
Energy Division (in thousands)
Energy division revenues increased 11.5% to $2,919,000 for the year ended January 31, 2004, compared to revenues of $2,617,000 for the year ended January 31, 2003. The increase in revenues for the division was primarily attributable to increased market penetration of the Company's resonance technology process. Revenues for the division in fiscal 2004 include approximately $73,000 related to the Company's coalbed methane projects in the mid-continent region of the United States.
The division had a loss from continuing operations of $1,500,000 for the year ended January 31, 2004, compared to a loss from continuing operations of $1,223,000 for the year ended January 31, 2003. The increased loss for the division is the result of increased expenses related to the Company's coalbed methane development activities.
Corporate Expenses
Corporate expenses not allocated to individual divisions, primarily included in selling, general and administrative expenses, were $13,481,000 and $14,759,000 for the years ended January 31, 2004 and 2003, respectively. The decrease in Corporate expenses for the year ended January 31, 2004, was primarily the result of lower division incentive-related accruals for the year, workforce reductions in the second quarter (see Note 7 of the Notes to Consolidated Financial Statements), and cost reduction measures implemented late in fiscal 2003. The decreases noted above were partially offset by severance-related costs (see Note 7 of the Notes to Consolidated Financial Statements) of approximately $800,000 incurred during the second quarter.
Comparison of Fiscal 2003 to Fiscal 2002
The financial comparison and discussion of fiscal 2003 versus fiscal 2002 has been reclassified to reflect discontinued operations.
Results of Operations
Revenues for fiscal 2003 decreased $11,091,000, or 4.2%, to $255,523,000 compared to $266,614,000 for fiscal 2002. The decrease was primarily the result of decreases in the Company's water resources and products divisions. See further discussion of results of operations by division presented below.
Gross profit as a percentage of revenues was 29.4% for fiscal 2003 compared to 28.4% for fiscal 2002. The increase in gross profit was primarily attributable to improved pricing and margins at the Company's domestic water locations partially offset by expenses associated with the Company's domestic oil and gas exploration activities.
Selling, general and administrative expenses decreased to $52,425,000 for fiscal 2003 compared to $53,069,000 for fiscal 2002 (20.5% and 19.9% of revenues, respectively). The decrease was primarily a result of lower incentive-related accruals partially offset by start-up expenses related to a water development and storage venture and expenses associated with the Company's coalbed methane exploration and development activities. The increase as a percentage of revenues is attributable to start-up expenses associated with the water development and storage venture and the relative level of fixed costs in the Company's operating divisions.
Depreciation and amortization decreased to $13,204,000 for fiscal 2003 compared to $16,711,000 for fiscal 2002. The decrease in depreciation and amortization was the result of assets becoming fully depreciated in prior periods in the mineral exploration division and ceasing to amortize goodwill upon adoption of SFAS No. 142 (see Note 5 of the Notes to Consolidated Financial Statements).
Interest expense decreased to $2,490,000 for fiscal 2003 compared to $3,934,000 for fiscal 2002. The decrease was a result of decreases in the Company's average borrowings and in interest rates during the year.
The Company recorded debt extinguishment costs of $1,135,000 for the year ended January 31, 2003, for prepayment penalties associated with the refinancing
of the Company's credit facilities. The loss was initially recorded in fiscal 2003 as an extraordinary item and was reclassified to income from continuing operations in fiscal 2004 upon adoption of SFAS No. 145, "Rescission of FASB Statement No. 4, 44 and 64, Amendment to FASB Statement No. 13 and Technical Corrections."
Other, net increased to income of $1,694,000 for the year ended January 31, 2003, compared to income of $71,000 for the year ended January 31, 2002. The increase was primarily due to a gain on the sale of the Company's investment in a gold exploration project in Africa, and gains as a result of a Company initiative to monetize excess property and equipment. These gains were partially offset by a write-down of the Company's former Christensen Products plant.
Income tax expense related to continuing operations of $5,084,000 was recorded for the year ended January 31, 2003 (an effective rate of 60.1%), compared to $1,837,000 (an effective rate of 62.2%) for the same period last year. The effective rate in excess of the statutory federal rate was a result of the impact of nondeductible expenses and the tax treatment of certain foreign operations.
The net loss for fiscal 2003 included losses related to discontinued operations of $2,248,000 and a $14,429,000 non-cash impairment loss related to goodwill recorded as the cumulative effect of an accounting change upon the adoption of SFAS No. 142.
Water Resources Division (in thousands)
Water resources revenues decreased 3.3% to $167,080,000 for the year ended January 31, 2003, from $172,806,000 for the year ended January 31, 2002. The decrease in revenues was primarily the result of reduced municipal spending in certain of the Company's markets and the resulting competitive pressures, partially offset by increased demand for the Company's services due to increased infrastructure needs created by population growth in the western United States.
Income from continuing operations for the water resources division increased 4.3% to $28,654,000 for the year ended January 31, 2003, compared to $27,474,000 for last year. The increase was primarily attributable to improved pricing and margins at certain of the Company's domestic water supply locations, a large, multi-divisional drilling project performed in the oil and gas sector and certain gains on the sale of property and equipment, partially offset by start-up expenses associated with a water development and storage venture.
Mineral Exploration Division (in thousands)
Mineral exploration revenues decreased 3.8% to $55,769,000 for the year ended January 31, 2003, compared to revenues of $57,945,000 for the year ended January 31, 2002. Increased activity levels in North America and Australia due to rising precious metal prices were not sufficient to offset reduced exploration activity in certain areas of Africa.
The loss from continuing operations for the mineral exploration division was $1,082,000 for the year ended January 31, 2003, compared to a loss of $7,313,000 for the year ended January 31, 2002. Results of operations for the year ended January 31, 2003, reflect losses in Africa partially offset by improved operating performance and increased activity levels in North America and Australia. Included in the African losses was the impact of losing two significant contracts and approximately $1,000,000 of costs associated with relocating the West African operations base. The division benefited in fiscal 2003 from reduced depreciation and amortization of $2,753,000 due to assets that were fully depreciated in prior periods and ceasing to amortize goodwill upon the adoption of SFAS No. 142. Also included in the year was a gain of $901,000 on the sale of an investment in a gold exploration project in Africa. The prior year loss includes a $3.3 million charge related to the sale of the Company's investment in Ausdrill Limited (see Note 6 of the Notes to Consolidated Financial Statements).
Geoconstruction Division (in thousands)
Geoconstruction revenues increased 9.7%, to $29,621,000 for the year ended January 31, 2003, compared to $27,006,000 for last year. The increase in revenues was a result of two large construction projects in Hawaii, the large multi-divisional project in the oil and gas sector and increased equipment sales as a result of new product offerings at the Company's manufacturing facility in Italy.
The geoconstruction division had income from continuing operations of $2,631,000 for the year ended January 31, 2003, compared to $1,194,000 for the year ended January 31, 2002. The increased profits were primarily attributable to the margins associated with increased revenues and the elimination of costs incurred in the prior year associated with complications on certain of the Company's groundfreezing projects.
Energy Division (in thousands)
Energy revenues decreased 28.6% to $2,617,000 for the year ended January 31, 2003, compared to revenues of $3,667,000 for the year ended January 31, 2002. Revenues for the division were negatively impacted by depressed market conditions for our oil and gas services in the Gulf of Mexico region of the United States.
The division had a loss from continuing operations of $1,223,000 for the year ended January 31, 2003, compared to a loss from continuing operations of $260,000 for the year ended January 31, 2002. The increased loss was the result of expenses related to the Company's energy exploration activities and coalbed methane development efforts and reduced income due to depressed market conditions.
Products and Other (in thousands)
Products and other revenues decreased 91.6% to $436,000 for the year ended January 31, 2003, compared to $5,190,000 for the year ended January 31, 2002. The decrease in revenues was the result of the sale of Christensen Products to a subsidiary of Atlas Copco in the third quarter of last year and two large specialty construction projects completed last year.
The loss for products and other of $2,142,000 for the year ended January 31, 2003, includes a write-down of the Christensen Products land and building to reflect further declines in fair market value and residual expenses associated with closing Christensen Products. Income for the year ended January 31, 2002, includes a $4.0 million gain on the sale of Christensen Products to Atlas Copco (see Note 6 of the Notes to Consolidated Financial Statements).
Corporate Expenses
Corporate expenses not allocated to individual divisions, primarily included in selling, general and administrative expenses, were $14,759,000 and $15,596,000 for the years ended January 31, 2003 and 2002, respectively. The decrease in unallocated corporate expenses was primarily the result of lower incentive-related accruals for the year.
Fluctuation in Quarterly Results
The Company historically has experienced fluctuations in its quarterly results arising from the timing of the award and completion of contracts, the recording of related revenues and unanticipated additional costs incurred on projects. The Company's revenues on large, long-term drilling contracts are
recognized on a percentage of completion basis for individual contracts based upon the ratio of costs incurred to total estimated costs at completion. Contract price and cost estimates are reviewed periodically as work progresses and adjustments proportionate to the percentage of completion are reflected in contract revenues and gross profit in the reporting period when such estimates are revised. Changes in job performance, job conditions and estimated profitability (including those arising from contract penalty provisions) and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. A significant number of the Company's contracts contain fixed prices and assign responsibility to the Company for cost overruns for the subject projects; as a result, revenues and gross margin may vary from those originally estimated and, depending upon the size of the project, variations from estimated contract performance could affect the Company's operating results for a particular quarter. Many of the Company's contracts are also subject to cancellation by the customer upon short notice with limited damages payable to the Company. In addition, adverse weather conditions, natural disasters, force majeure and other similar events can curtail Company operations in various regions of the world throughout the year, resulting in performance delays and increased costs. Moreover, the Company's domestic drilling activities and related revenues and earnings tend to decrease in the winter months when adverse weather conditions interfere with access to drilling sites and the ability to drill; as a result, the Company's revenues and earnings in its second and third quarters tend to be higher than revenues and earnings in its first and fourth quarters. Accordingly, as a result of the foregoing as well as other factors, quarterly results should not be considered indicative of results to be expected for any other quarter or for any full fiscal year. See the Company's Consolidated Financial Statements and Notes thereto.
Inflation
Management believes that the Company's operations for the periods discussed have not been adversely affected by inflation or changing prices from its suppliers.
Liquidity and Capital Resources
Management exercises discretion regarding the liquidity and capital resource needs of its business segments. This includes the ability to prioritize the use of capital and debt capacity, to determine cash management policies and to make decisions regarding capital expenditures.
The Company's primary sources of liquidity have historically been cash from operations, supplemented by borrowings under its credit facilities. Cash from operating activities was $4,770,000, $19,083,000 and $25,509,000 in fiscal 2004, 2003 and 2002, respectively. Cash from operations and borrowings under the credit facilities in 2004 were used to fund capital spending of $20,628,000 during the year. In fiscal 2005, the Company expects to continue its expansion into the production of coalbed methane gas. Capital expenditure estimates for fiscal 2005 include approximately $8,000,000 related to coalbed methane development and $14,000,000 to upgrade equipment and facilities in the Company's other divisions. As of January 31, 2004, the Company had no material commitments outstanding for capital assets.
The Company maintains an agreement (the "Master Shelf Agreement") whereby it can issue up to $60,000,000 in unsecured notes. The Company also holds a revolving credit facility (the "Credit Agreement") composed of an unsecured $30,000,000 revolving facility. Borrowings under the Master Shelf and Credit Agreements were used to refinance borrowings outstanding under the Company's previous credit facilities. At January 31, 2004, the Company had outstanding notes of $40,000,000 under the Master Shelf Agreement and borrowings of $2,000,000 under the Credit Agreement (see Note 12 of the Notes to Consolidated Financial Statements). The remaining $20,000,000 of notes under the Master Shelf Agreement are available for issuance at market rates until July 2005. Issuance of the notes is contingent on, among other things, compliance with financial covenants in the Master Shelf and Credit Agreements. The Company was in compliance with its financial covenants at January 31, 2004 and expects to remain in compliance through the foreseeable future.
The Company's working capital as of January 31, 2004, 2003 and 2002, was $52,406,000, $33,675,000 and $15,513,000, respectively. A portion of the reason for the increases in working capital at January 31, 2004 and 2003 was the receipt of proceeds from the sale of businesses near the end of January in each year. Excluding cash and cash equivalents, working capital as of January 31, 2004, 2003 and 2002 would have been $30,804,000, $22,905,000 and $12,530,000, respectively. Working capital was also comparatively lower at January 31, 2002 due to $16,500,000 in current maturities under then existing credit facilities, which were refinanced on a long-term basis in fiscal 2003. The increased working capital at January 31, 2004 is discussed in more detail below. The Company believes it will have sufficient cash from operations and access to credit facilities to meet the Company's operating cash requirements and to fund its budgeted capital expenditures for fiscal 2005.
Operating Activities
Cash from operating activities, including discontinued operations, decreased $14,313,000 to $4,770,000 for the year ended January 31, 2004. The decrease in cash from operations in 2004 was primarily attributable to increased working capital, primarily caused by increased receivable balances in the Company's operating divisions. The increased receivables for fiscal 2004 were primarily a result of increased balances related to Layne Canada due to a busier winter drilling season compared to last year, increased activity levels in the mineral exploration division, and a slowing of collections from water resources and geoconstruction division customers. The increased receivables were also attributable to receivables from our joint interest partners on coalbed methane projects. The increased receivable balances were partially offset by an increase in accounts payable due to increased activity levels in the minerals division, costs related to the Company's pipeline construction on a CBM project in the Midwest and closing accruals and lease termination liabilities associated with the sale of Layne Canada.
Investing Activities
The Company's capital expenditures of $20,628,000 for fiscal 2004 were directed primarily toward the Company's expansion into coalbed methane exploration and production, including the construction of gas pipeline infrastructure near the Company's development projects. Expenditures related to the Company's CBM efforts totaled $10,539,000 during fiscal 2004. The remaining
capital expenditures were directed towards expansion and upgrading of the Company's equipment and facilities primarily in the water resources and mineral exploration divisions.
Investing activities for fiscal 2004 also include the proceeds from the sale of businesses of $18,114,000 and business acquisitions of $1,150,000. The Company sold Layne Canada on January 30, 2004, and received $15,914,000 upon closing. On January 6, 2004, the Company sold Toledo Oil and Gas and received $2,200,000 upon closing. An additional payment of $300,000 related to the sale of Toledo was received in February 2004. During fiscal 2004, the Company acquired Mohajir Engineering Group for $1,150,000 (see Note 2 of the Notes to Consolidated Financial Statements). The acquisition positioned the Company to take advantage of growth opportunities in the coalbed methane development market.
Financing Activities
The Company's financing activities primarily related to the issuance of $40,000,000 in notes under the Master Shelf Agreement, borrowings of $2,000,000 under the Company's revolving credit facility and proceeds from the issuance of common stock related to the exercise of stock options during the year. Proceeds from option exercises were unusually high in fiscal 2004 due to increases in the Company's stock price and a large number of options with impending expiration dates. The proceeds from issuance of the notes were used to pay the outstanding borrowings under the Company's previous credit facilities, a prepayment penalty related to the previous loan facilities and issuance costs related to the Master Shelf Agreement and the Company's new revolving credit facility. Financing activities also include note payments related to the Company's acquisition of the DrillCorp assets in November 2003 (see Note 2 of the Notes to Consolidated Financial Statements).
Contractual Obligations and Commercial Commitments
The Company's contractual obligations and commercial commitments are summarized as follows (in thousands):
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.
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
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Accounting policies are more fully described in Note 1 of the Notes to the Consolidated Financial Statements, located elsewhere in this Annual Report on Form 10-K. The Company believes that the following represents the more critical estimates and assumptions used in the preparation of its consolidated financial statements.
Revenue Recognition - Revenue is recognized on large, long-term contracts using the percentage of completion method based upon materials installed and labor costs incurred. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Goodwill and Other Intangibles - In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, which was effective for the Company as of February 1, 2002. SFAS No. 142 substantially changed the accounting for goodwill, requiring that goodwill and other intangible assets with indefinite useful lives cease to be amortized, and instead periodically tested for impairment. The Company performs its annual impairment test as of December 31 each year. The process of evaluating goodwill for impairment involves the determination of the fair value of the Company's reporting units. Inherent in such fair value determinations are certain judgments and estimates, including the interpretation of current economic indicators and market valuations, and assumptions about the Company's strategic plans with regard to its operations. The Company believes at this time that the carrying value of the remaining goodwill is appropriate, although to the extent additional information arises or the Company's strategies change, it is possible that the Company's conclusions regarding impairment of the remaining goodwill could change and result in a material effect on its financial position or results of operations.
Other Long-lived Assets - In evaluating the fair value and future benefits of long-lived assets, including the Company's coalbed methane assets, the Company performs an analysis of the anticipated future net cash flows of the related long-lived assets and reduce their carrying value by the excess, if any, of the result of such calculation. The Company believes at January 31, 2004, that the long-lived assets' carrying values and useful lives continue to be appropriate.
Accrued Insurance Expense - The Company maintains insurance programs where it is responsible for a certain amount of each claim up to a self-insured limit. Estimates are recorded for health and welfare, property and casualty insurance costs that are associated with these programs. These costs are estimated based on actuarially determined projections of future payments under these programs. Should a greater amount of claims occur compared to what was estimated or costs of the medical profession increase beyond what was anticipated, reserves recorded may not be sufficient and additional costs to the consolidated financial statements could be required.
Costs estimated to be incurred in the future for employee medical benefits, property and casualty insurance programs resulting from claims which have occurred are accrued currently. Under the terms of the Company's agreement with the various insurance carriers administering these claims, the Company is not required to remit the total premium until the claims are actually paid by the insurance companies. These costs are not expected to significantly impact liquidity in future periods (see Note 15 of the Notes to Consolidated Financial Statements).
Income Taxes - Income taxes are provided using the asset/liability method, in which deferred taxes are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and tax bases of existing assets and liabilities. Deferred tax assets are reviewed for recoverability and valuation allowances are provided as necessary. Provision for U.S. income taxes on undistributed earnings of foreign subsidiaries and foreign affiliates is made only on those amounts in excess of those funds considered to be invested indefinitely (see Note 9 of the Notes to Consolidated Financial Statements).
Litigation and Other Contingencies - The Company is involved in litigation incidental to its business, the disposition of which is expected to have no material effect on the Company's financial position or results of operations. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in the Company's assumptions related to these proceedings. The Company accrues its best estimate of the probable cost for the resolution of legal claims. Such estimates are developed in consultation with outside counsel handling these matters and are based upon a combination of litigation and settlement strategies. To the extent additional information arises or the Company's strategies change, it is possible that the Company's estimate of its probable liability in these matters may change.
See Note 17 of the Notes to Consolidated Financial Statements for a discussion of new accounting pronouncements and their impact on the Company.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The principal market risks to which the Company is exposed are interest rate risk on variable rate debt and foreign exchange rate risk that could give rise to translation and transaction gains and losses.
The Company centrally manages its debt portfolio considering overall financing strategies and tax consequences. A description of the Company's debt is included in Notes 12 of the Notes to Consolidated Financial Statements of this Form 10-K. As of January 31, 2004, the $40,000,000 of the Company's debt outstanding is fixed-rate debt and $2,000,000 is variable rate debt. Accordingly, an instantaneous change in interest rates of one percentage point would not significantly impact the Company's annual interest expense.
Operating in international markets involves exposure to possible volatile movements in currency exchange rates. Currently, the Company's primary international operations are in Australia, Africa, Mexico and Italy. The operations are described in Notes 1 and 16 to the Consolidated Financial Statements. The Company's affiliates also operate in South America and Mexico (see Note 3 of the Notes to Consolidated Financial Statements). The majority of the Company's contracts in Africa and Mexico are U.S. dollar-based, providing a natural reduction in exposure to currency fluctuations. The Company also may utilize various hedge instruments, primarily foreign currency option contracts, to manage the exposures associated with fluctuating currency exchange rates (see Note 13 of the Notes to Consolidated Financial Statements). As of January 31, 2004, the Company held option contracts with an aggregate U.S. dollar notional value of $16,140,000.
As currency exchange rates change, translation of the income statements of the Company's international operations into U.S. dollars may affect year-to-year comparability of operating results. We estimate that a 10% change in foreign exchange rates would impact income from continuing operations approximately $240,000, $45,000 and $184,000 for the years ended January 31, 2004, 2003 and 2002, respectively. This represents approximately ten percent of the international segment operating income after adjusting for primarily U.S. dollar-based operations. This quantitative measure has inherent limitations, as it does not take into account any governmental actions, changes in customer purchasing patterns or changes in the Company's financing and operating strategies.
Foreign exchange gains and losses in the Company's Consolidated Statements of Income reflect transaction gains and losses and translation gains and losses from the Company's Mexican and African operations which use the U.S. dollar as their functional currency. Net foreign exchange gains and (losses) for the years ended January 31, 2004, 2003 and 2002, were $(232,000), $(52,000) and $112,000, respectively.
Item 8.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
All other schedules have been omitted because they are not applicable or not required as the required information is included in the Consolidated Financial Statements of the Company or the Notes thereto.
INDEPENDENT AUDITORS' REPORT
Layne Christensen Company:
We have audited the accompanying consolidated balance sheets of Layne Christensen Company and subsidiaries as of January 31, 2004 and 2003, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended January 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the companies as of January 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Notes 1 and 5 to the financial statements, in fiscal 2003 the Company changed its method of accounting for goodwill to conform with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Kansas City, Missouri April 12, 2004
Layne Christensen Company and Subsidiaries Consolidated Balance Sheets As of January 31, 2004 and 2003 (in thousands)
See Notes to Consolidated Financial Statements.
- Continued -
Layne Christensen Company and Subsidiaries Consolidated Balance Sheets(Continued) As of January 31, 2004 and 2003 (in thousands, except share data)
See Notes to Consolidated Financial Statements.
- Concluded -
Layne Christensen Company and Subsidiaries Consolidated Statements of Income For the Years Ended January 31, 2004, 2003 and 2002 (in thousands, except per share data)
- Continued -
See Notes to Consolidated Financial Statements.
Layne Christensen Company and Subsidiaries Consolidated Statements of Income (Continued) For the Years Ended January 31, 2004, 2003 and 2002 (in thousands, except per share data)
- Concluded -
See Notes to Consolidated Financial Statements.
Layne Christensen Company and Subsidiaries Consolidated Statements of Stockholders' Equity For the Years Ended January 31, 2004, 2003 and 2002 (in thousands, except share data)
- Continued-
See Notes to Consolidated Financial Statements.
Layne Christensen Company and Subsidiaries Consolidated Statements of Stockholders' Equity (Continued) For the Years Ended January 31, 2004, 2003 and 2002 (in thousands, except share data)
- Concluded -
See Notes to Consolidated Financial Statements.
Layne Christensen Company and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended January 31, 2004, 2003 and 2002 (in thousands)
See Notes to Consolidated Financial Statements.
-Continued -
Layne Christensen Company and Subsidiaries Consolidated Statements of Cash Flows (Continued) For the Years Ended January 31, 2004, 2003 and 2002 (in thousands)
See Notes to Consolidated Financial Statements.
-Concluded-
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
(1) Summary of Significant Accounting Policies
Description of Business - Layne Christensen Company and subsidiaries (together, the "Company") provide comprehensive services and products to the water resources, mineral exploration, geoconstruction and energy markets through its four primary operating divisions (see Note 16). The Company operates throughout North America as well as in Africa, Australia and Europe. Its customers include municipalities, industrial companies, mining companies, environmental consulting and engineering firms, heavy civil construction contractors and, to a lesser extent, agribusiness. In mineral exploration, the Company has ownership interest in certain foreign affiliates operating in South America, with facilities in Chile and Peru (see Note 3).
Fiscal Year - References to years are to the fiscal years then ended.
Investment in Affiliated Companies - Investments in affiliates (20% to 50% owned) in which the Company has the ability to exercise significant influence over operating and financial policies are accounted for on the equity method.
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany transactions have been eliminated. Financial information for the Company's foreign affiliates and certain foreign subsidiaries is reported in the Company's consolidated financial statements with a one-month lag in reporting periods. The effect of this one-month lag on the Company's financial results is not significant.
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.
Foreign Currency Transactions and Translation - The cash flows and financing activities of the Company's Mexican and African operations are primarily denominated in the U.S. dollar. Accordingly, these operations use the U.S. dollar as their functional currency and translate monetary assets and liabilities at year-end exchange rates while nonmonetary items are translated at historical rates. Income and expense accounts are translated at the average rates in effect during the year, except for depreciation, certain cost of revenues and selling expenses which are translated at historical rates. Gains or losses from changes in exchange rates are recognized in consolidated income in the year of occurrence.
Other foreign subsidiaries and affiliates use local currencies as their functional currency. Assets and liabilities have been translated to U.S. dollars at year-end exchange rates. Income and expense items have been translated at exchange rates which approximate the weighted average of the rates prevailing
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
during each year. Translation adjustments are reported as a separate component of accumulated other comprehensive loss.
Net foreign currency transaction gains and (losses) for 2004, 2003 and 2002 were $(232,000), $(52,000) and $112,000, respectively.
Revenue Recognition - Revenue is recognized on large, long-term contracts using the percentage of completion method based upon materials installed and labor costs incurred. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Revenue is recognized on smaller, short-term contracts using the completed contract method. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Inventories - The Company values inventories at the lower of cost (first-in, first-out) or market. Allowances are recorded for inventory considered to be excess or obsolete. Inventories consist primarily of parts and supplies.
Property and Equipment and Related Depreciation - Property and equipment (including major renewals and improvements) are recorded at cost. Depreciation is provided using the straight-line method. Depreciation expense was $11,877,000, $13,204,000 and $15,672,000 in 2004, 2003 and 2002, respectively. The lives used for the items within each property classification are as follows:
Through its energy division, the Company engages in the operation, development, production and acquisition of oil and gas properties, principally focusing on coalbed methane gas projects. The Company follows the full-cost method of accounting for these properties. Under this method, all productive and nonproductive costs incurred in connection with the exploration for and development of oil and gas reserves are capitalized. Such capitalized costs include lease acquisition, geological and geophysical work, delay rentals, drilling, completing and equipping oil and gas wells, including salaries, benefits and other internal costs directly attributable to these activities. The capitalized costs associated with the Company's oil and gas properties are depleted using the units of production method. Costs associated with production and general corporate activities are expensed in the period incurred. As of January 31, 2004 and 2003, the Company has capitalized $11,817,000 and $3,545,000, respectively, related to oil and gas properties and land acquisition costs. The company has also capitalized $2,267,000 as of January 31, 2004, related to gas transportation facilities and equipment. The Company's projects are in the early stages of completion and the Company does not have sufficient production information by which reserves can be established.
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
Goodwill - Goodwill relates to acquisitions completed by the Company. In 2003, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which resulted in the Company ceasing to amortize goodwill. Amortization expense for goodwill was $1,039,000 for 2002. At least annually as of December 31, goodwill is tested for impairment by applying a fair value based test. In assessing the value of goodwill, assets and liabilities are assigned to reporting units and a discounted cash flow analysis is used to determine fair value.
Investments - The Company, through its wholly owned subsidiaries owned certain common stock of publicly traded companies in Australia and Mexico. The Company classified these investments as available-for-sale. The noncurrent investments had a cost basis of $172,000 and were reported at their fair values of approximately $12,000 at January 31, 2003. During 2004, the Company sold certain investments for $167,000 and recorded a net gain of $138,000. The gain was included in Other, net in the Company's Consolidated Statements of Income for the year ended January 31, 2004.
During the year, management determined that the Company's remaining investments had no fair value and that such decline in value was other-than-temporary. Accordingly, the Company recognized an impairment loss of $130,000 on these investments which is included in Other, net in the Company's Consolidated Statements of Income.
Impairment of Long-Lived Assets - At each balance sheet date or as circumstances indicate necessary, a determination is made by management as to whether the value of long-lived assets, including assets to be disposed of, has been impaired. The determination is based on several criteria, including, but not limited to, revenue trends, undiscounted operating cash flows and other operating factors. Effective February 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The adoption of SFAS No. 144 did not have a significant effect on the Company's impairment policy.
Accrued Insurance Expense - Costs estimated to be incurred in the future for employee medical benefits, property and casualty insurance programs resulting from claims which have been incurred are accrued currently. Under the terms of the Company's agreement with the various insurance carriers administering these claims, the Company is not required to remit the total premium until the claims are actually paid by the insurance companies (see Note 15).
Fair Value of Financial Instruments - The carrying amounts of financial instruments including cash and cash equivalents, customer receivables and accounts payable approximate fair value at January 31, 2004 and 2003, because of the relatively short maturity of those instruments. Investments in equity securities are carried at quoted market values. See Note 12 for disclosure regarding the fair value of indebtedness and the interest rate swap of the Company.
The Company follows SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended, which requires all derivative
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
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 (see Note 13 for disclosure regarding the fair value of foreign currency derivative instruments).
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. As of January 31, 2004, cash and cash equivalents included approximately $8,000,000 related to the sale of Layne Canada which was held in escrow pending final settlement of the lease termination costs incurred in connection with the sale (see Note 4).
The amounts paid for income taxes and interest are as follows (in thousands):
Supplemental Noncash Transactions - In 2004, the Company issued 217,504 shares of common stock related to compensation awards and 50,761 shares in connection with an acquisition made in 1999. In 2003 and 2002, the Company did not issue shares of common stock or stock options related to compensation awards.
Income Taxes - Income taxes are provided using the asset/liability method, in which deferred taxes are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and tax bases of existing assets and liabilities. Deferred tax assets are reviewed for recoverability and valuation allowances are provided as necessary. Provision for U.S. income taxes on undistributed earnings of foreign subsidiaries and foreign affiliates is made only on those amounts in excess of those funds considered to be invested indefinitely (see Note 9).
Earnings Per Share - Earnings per common share are based upon the weighted average number of common and dilutive equivalent shares outstanding. Options to purchase common stock are included based on the treasury stock method for dilutive earnings per share except when their effect is antidilutive. Options to purchase 313,597, 390,900 and 398,454 shares have been excluded from weighted average shares in 2004, 2003 and 2002, respectively, as their effect was antidilutive.
Stock-Based Compensation - Stock-based compensation may be accounted for either based on the estimated fair value of the awards at the date they are granted (the "SFAS 123 Method") or based on the difference, if any, between the market price of the stock at the date of grant and the amount the employee must
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
pay to acquire the stock (the "APB 25 Method"). The Company uses the APB 25 Method to account for its stock-based compensation programs (see Note 14). Pro forma net income (loss) and earnings per share for 2004, 2003 and 2002, determined as if the SFAS 123 Method had been applied, are presented in the following table (in thousands, except per share amounts):
Other Comprehensive Loss - Accumulated balances, net of income taxes, of Other Comprehensive Loss are as follows (in thousands):
Reclassifications - Certain 2003 and 2002 amounts, primarily related to discontinued operations, have been reclassified to conform with the 2004 presentation.
(2) Acquisitions
On June 3, 2003, the Company acquired substantially all the assets of Mohajir Engineering Group, Inc., a full service engineering, geophysical, and geological consulting firm serving the energy industry for $1,150,000. The acquisition was made to enhance the Company's internal coalbed methane resources.
On November 10, 2003, the Company acquired certain assets and inventory of DrillCorp Tanzania Ltd ("DrillCorp"), a mineral exploration drilling operation in Tanzania, for $3,500,000. The Company issued a non-interest bearing promissory note for $3,500,000 to a related entity of DrillCorp to finance the
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
acquisition. The acquisition was made to expand the Company's capital equipment resources and to assist in meeting the needs of recently awarded drilling contracts.
Had the 2004 acquisitions taken place as of February 1, 2003, pro forma operating results would not have been significantly different from those reported. The 2004 acquisitions had the following effect on the Company's consolidated financial position (in thousands):
On December 13, 2002, the Company acquired the remaining 35% ownership in International Directional Services ("IDS") from its joint venture partner Silver States Survey, Inc. for approximately $246,000 in cash. The acquisition has been accounted for using the purchase method of accounting and did not have a significant effect on the Company's consolidated financial position or results of operations.
(3) Investments in Affiliates
The Company's investments in affiliates are carried at the Company's equity in the underlying net assets plus an additional $4,607,000 as a result of purchase accounting. This additional amount was being amortized over lives ranging from 20 to 35 years, however, amortization was ceased effective February 1, 2002 upon adoption of SFAS No. 142. These affiliates, which generally are engaged in mineral exploration drilling and the manufacture and supply of drilling equipment, parts and supplies, are as follows at January 31, 2004:
In 2003, the Company sold its investment in Technidrill, Ltd. and Christensen Boyles GmbH for $860,000. At the time of sale, the investment had a cost basis of $845,000.
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
Financial information from foreign affiliates is reported with a one-month lag in the reporting period. Summarized financial information of the Company's foreign affiliates, as of January 31, 2004, 2003 and 2002, and for the years then ended, was as follows (in thousands):
The Company has transactions and balances with foreign affiliates which resulted in the following amounts being included in the Consolidated Financial Statements as of January 31, 2004, 2003 and 2002, and for the years then ended (in thousands):
Undistributed equity in earnings of foreign affiliates totaled $3,419,000, $2,820,000 and $3,925,000 as of January 31, 2004, 2003 and 2002, respectively.
In September 2002, the Company invested in a joint venture with a privately-held limited partnership to develop a water storage bank on property located in California. The Company invested $1,059,000 to acquire 10% ownership in the joint venture. The joint venture had total assets of $10,824,000 as of January 31, 2004. The investment was accounted for using the equity method until June 2003 as the Company exercised significant influence over the joint venture through a management contract. After June 2003, the investment is accounted for using the cost method as the management contract terminated and the Company no longer exercises significant influence over the joint venture.
(4) Discontinued Operations
During the third quarter of 2004, the Company reclassified the results of operations of its Toledo Oil and Gas ("Toledo") business to discontinued operations. Toledo was historically reported in the Company's energy segment and offered conventional oilfield fishing services and coil tubing fishing services (see Note 16). On January 6, 2004, the Company sold the Toledo operation for $2,500,000 and recorded a gain on the sale of $57,000, net of income taxes of $30,000, for the year ended January 31, 2004. The Company received $2,200,000 upon the sale and an additional $300,000 in February 2004 at the end of a contingency period.
In connection with the sale of Toledo, the Company recorded a contract termination liability for a long-term lease of the Toledo facilities. The contract termination liability represents the present value of the rental payments specified in the lease reduced by an estimate for sublease rentals (based
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
on market value of similar properties). The Company will record accretion expense due to the passage of time for the difference between the expected lease obligations, net of sublease rentals, and the present value of such operations. The contract termination costs are included in the Loss from Discontinued Operations in the Company's Consolidated Statements of Income. A summary of the lease liability follows (in thousands):
Lease obligations of $135,000, net of sublease rentals, are expected to be paid over the term of the lease which extends to 2008.
On January 30, 2004, the Company sold its Layne Christensen Canada Ltd. ("Layne Canada") subsidiary for $15,914,000. Layne Canada was a component of the Company's energy segment (see Note 16) and provided drilling services to the shallow, unconventional oil and gas market. The Company recorded a gain on the sale of $1,652,000, net of income taxes of $994,000 for the year ended January 31, 2004.
On December 10, 2002, the Company sold its Ranney(R) collector well business to Reynolds, Inc. for $1,575,000. The Ranney(R) business was a component of the Company's Water Resources Division (see Note 16). The Company recorded a gain on the sale of approximately $827,000, net of income taxes of $520,000, for the year ended January 31, 2003.
On January 23, 2003, the Company sold its Drilling Equipment Supply, Inc. ("DESI") division to Boart Longyear for $2,616,000. DESI was a supply operation that distributed drilling equipment, parts and supplies and was the last remaining component of the Company's products segment (see Note 16). The Company recorded a loss on the disposal of $850,000, net of income taxes of $535,000, for the year ended January 31, 2003.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the results of operations for Layne Canada, Toledo, Ranney(R) and DESI have been classified as discontinued operations. Revenues and income (loss) from discontinued operations before income taxes for 2004, 2003 and 2002 were as follows (in thousands):
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
(5) Goodwill
Effective February 1, 2002, the Company adopted SFAS No. 142. SFAS No. 142 requires that upon adoption and at least annually thereafter, goodwill be tested for impairment by applying a fair value based test. Periodic amortization of goodwill is no longer permitted under SFAS No. 142. Thus, the Company's Consolidated Statements of Income for 2004 and 2003 include no periodic amortization of goodwill.
SFAS No. 142 required companies to make an initial assessment of goodwill for impairment for each of its reporting units within six months after adoption. The Company completed this initial assessment of goodwill during the second quarter of 2003 and determined a transitional impairment charge was required. At February 1, 2002, the Company had $21,884,000 of goodwill recorded in its consolidated balance sheet, consisting primarily of goodwill associated with its mineral exploration segment. In assessing goodwill, the Company assigned assets and liabilities to its reporting units and developed a discounted cash flow analysis to determine the fair value of the reporting units. Based on this model, the Company determined that the mineral exploration goodwill was impaired. As a result, the Company recorded a non-cash charge of $14,429,000, net of income taxes of $5,796,000, as a cumulative effect of a change in accounting principle at February 1, 2002, in accordance with SFAS No. 142. The Company completed its annual impairment test on the remaining goodwill of its other businesses as of December 31, 2002, and no further impairment was indicated.
In connection with the decision to reclassify its Toledo Oil and Gas business as discontinued operations in the third quarter of 2004, the Company reassessed the recoverability of the goodwill associated with that business and recorded an impairment charge of $160,000. The Company completed its annual impairment test on the remaining goodwill of its other businesses as of December 31, 2003, and no further impairment was indicated.
The carrying amount of goodwill attributed to each operating segment with goodwill balances follows (in thousands):
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
Pro forma results of operations for 2004, 2003 and 2002 had the Company applied the nonamortization provisions of SFAS No. 142 in those periods follows (in thousands, except per share amounts):
(6) Other Income (Expense)
Other income (expense) consisted of the following for the years ended January 31 (in thousands):
The gain from disposal of property and equipment for 2003 includes gains of approximately $1,419,000 as a result of a Company initiative to monetize excess property and equipment, as well as gains from disposals in the ordinary course of business. These gains were partially offset by a $1,800,000 write-down of the Company's former Christensen Products plant to reflect current estimates of net realizable value.
In 2003, the Company, through its wholly owned subsidiary Layne Christensen Australia Pty Limited ("Layne Australia"), recognized a gain of $901,000 on the sale of its investment in a gold exploration project in Africa.
In 2002, the Company sold its Christensen Products business to a subsidiary of Atlas Copco. The Company received $8,165,000 and recorded a gain on the sale
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
of $3,991,000. Approximately $1,800,000 in additional cash was received on February 1, 2002 upon the sale of certain additional assets and inventory at book value.
In 2002, the Company, through Layne Australia, sold its investment in Ausdrill Limited, a publicly traded company on the Australian Stock Exchange. The investment was classified as available-for-sale and had a cost basis of $3,535,000. The Company recorded a loss on the sale of $3,329,000 and removed the related loss of $1,880,000, net of income taxes, from accumulated other comprehensive income in the Consolidated Statement of Stockholders' Equity.
In 2002, the Company closed certain unprofitable locations and recognized a loss of $1,697,000. In 2003 the Company received higher than expected proceeds from the final settlement of certain of the assets and recorded a gain of $517,000.
(7) Severance Costs
During the second quarter of 2004, the Company announced involuntary workforce reductions of 189 employees. The actions were primarily necessary to align the Company's cost structure with current market conditions. As of July 31, 2003, the Company had notified all applicable employees affected by these actions. The Company recorded severance and benefit charges of approximately $530,000 related to these actions in the second quarter of 2004 in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The severance costs are recorded in the Company's Consolidated Statements of Income as selling, general and administrative expenses for the year ended January 31, 2004. A reconciliation of the severance costs by segment follows (in thousands):
As of January 31, 2004, the Company had paid $502,000 in costs associated with these workforce reductions. A summary of the severance costs and related activity follows:
The Company also provided termination benefits to certain employees in exchange for employees' voluntary termination of service. These benefits were
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
offered to align the Company's cost structure with current market conditions. The Company recorded charges of approximately $714,000 as selling, general and administrative expenses in the Consolidated Statements of Income related to the voluntary termination benefits in accordance with SFAS No. 88, "Employers Accounting for Settlement and Curtailments of Defined Benefit Pension Plans and for Termination Benefits."
(8) Costs and Estimated Earnings on Uncompleted Contracts (in thousands):
The Company generally does not bill contract retainage amounts until the contract is completed. The Company bills its customers based on specific contract terms. Substantially all billed amounts are collectible within one year.
(9) Income Taxes
Income (loss) from continuing operations before income taxes is as follows (in thousands):
Components of income tax expense are as follows (in thousands):
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
Deferred income taxes result from temporary differences between the financial statement and tax bases of the Company's assets and liabilities. The sources of these differences and their cumulative tax effects are as follows (in thousands):
The Company has several Australian and African subsidiaries which have generated tax losses. The majority of these losses have been utilized to reduce the Company's federal and state income tax expense. The Company has tax loss carryforwards from its Mexican subsidiary of $1,500,000 which expire between 2010 and 2013, and from its Canadian subsidiary of $800,000 which expires in 2011.
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
At January 31, 2004, undistributed earnings of foreign subsidiaries and certain foreign affiliates included $9,460,000 for which no federal income or foreign withholding taxes have been provided. These earnings, which are considered to be invested indefinitely, become subject to income tax if they were remitted as dividends or if the Company were to sell its stock in the affiliates or subsidiaries. It is not practicable to determine the amount of income or withholding tax that would be payable upon remittance of these earnings.
Deferred income taxes were provided on undistributed earnings of certain foreign affiliates where the earnings are not considered to be invested indefinitely. Income taxes and foreign withholding taxes were also provided on dividends received and gains recognized on the sale of certain affiliates during the year.
The Company's Federal income tax returns for the years ended January 31, 2000 and 2001, are currently under examination by the Internal Revenue Service ("IRS"). The Company has received a notice of proposed adjustments from the IRS for the years under examination and is in the process of challenging these adjustments. The Company believes the ultimate outcome of the examination will not result in a material impact on the Company's consolidated results of operations or financial position.
A reconciliation of the total income tax expense to the statutory federal rate is as follows (in thousands):
(10) Operating Leases
Future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year from January 31, 2004, are as follows (in thousands):
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
Operating leases are primarily for automobiles, light trucks, and office and shop facilities. Rent expense under operating leases (including insignificant amounts of contingent rental payments) was $12,383,000, $10,632,000 and $6,475,000 in 2004, 2003 and 2002, respectively.
(11) Employee Benefit Plans
The Company sponsors a pension plan covering certain hourly employees not covered by union-sponsored, multi-employer plans. Benefits are computed based mainly on years of service. The Company makes annual contributions to the plan substantially equal to the amounts required to maintain the qualified status of the plans. Contributions are intended to provide for benefits related to past and current service with the Company. Effective December 31, 2003, the Company froze the pension plan and recorded a curtailment loss of approximately $20,000. 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.
The following table sets forth the plan's funded status as of December 31, 2003 and 2002 (the measurement dates) and the amounts recognized in the Company's Consolidated Balance Sheets at January 31, 2004 and 2003 (in thousands):
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
Amounts recognized in the Company's Consolidated Balance Sheets at January 31, 2004 and 2003 (in thousands) consist of:
Net periodic pension cost for 2004, 2003 and 2002 includes the following components (in thousands):
The Company has recognized the full amount of its actuarially determined pension liability and the related intangible asset (if applicable). The unrecognized pension cost has been recorded as a charge to consolidated stockholders' equity after giving effect to the related future tax benefit.
The weighted average assumptions used to determine the benefit obligation and the net periodic pension cost for the years ending January 31, 2004, 2003 and 2002, are as follows:
The estimated long-term rate of return on assets was developed based on the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. Benefit level assumptions for 2004, 2003 and 2002 are based on fixed amounts per year of credited service.
The percentage of the fair value of total plan assets for each major category of plan assets as of the measurement date follows:
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
The Company's investment policy includes the following asset allocation guidelines and were effective for both periods presented:
The asset allocation policy was developed in consideration of the following long-term investment objectives: to achieve long-term inflation-adjusted growth in asset values through investments in common stock and fixed income obligations, to minimize risk by maintaining an allocation to cash equivalents, to manage the portfolio to conform to ERISA requirements, to manage plan assets on a total return basis, and to maximize total returns consistent with an appropriate level of risk. Risk is to be controlled via diversification of investments among and within asset classes.
The Company contracts with a financial institution to provide investment management services. Full discretion in portfolio investments is given to the investment manager subject to the asset allocation guidelines and the following additional guidelines:
- Equity Securities - Allowable equity securities include common stocks listed on any U.S. stock exchange or over-the-counter common stocks, preferred and convertible securities. The equity holdings of any single issuer should aggregate to no more than 10% of the total market value of the Plan.
- International Securities - Allowable international securities include common stocks, preferred stocks, warrants, convertible securities, as well as government and corporate debt securities.
- Mutual Funds - Mutual funds may be utilized for investments in fixed income, equity and international securities to enhance diversification and performance.
- Fixed Income Securities - Allowable fixed income securities include U.S. Treasury securities, U.S. Agency securities and corporate bonds. All fixed income securities shall be rated "A" or better at the time of purchase. No fixed income security shall continue to be held if its rating falls below "BBB." The securities of any single issuer, with
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
the exception of U.S. Treasuries and Agencies, should aggregate to no more than 10% of the total market value of the Plan. The fixed income segment of the portfolio will generally have an intermediate average maturity (five to ten years) and a maximum permitted maturity for an individual issue of fifteen years.
The Company's policy with respect to funding the qualified pension plan is to fund at least the minimum required by ERISA and not more than the maximum deductible for tax purposes. No contribution is expected to be required by ERISA for the January 1 to December 31, 2004 plan year. The Company expects calendar year 2004 contributions to the plan will be approximately $850,000.
The Company also provides supplemental retirement benefits to the chief executive officer. Benefits are computed based on the compensation earned during the highest five consecutive years of employment reduced for a portion of Social Security benefits and an annuity equivalent of the chief executive's defined contribution plan balance. The Company does not contribute to the plan or maintain any investment assets related to the expected benefit obligation. The Company has recognized the full amount of its actuarially determined pension liability as of January 31, 2004 and 2003, respectively. The amounts recognized in the Company's Consolidated Balance Sheets at January 31, 2004 and 2003, were $1,190,000 and $1,023,000. Net periodic pension cost of the supplemental retirement benefits for 2004, 2003 and 2002 include the following components (in thousands):
The Company also participates in a number of defined benefit, multi-employer plans. These plans are union-sponsored, and the Company makes contributions equal to the amounts accrued for pension expense. Total union pension expense for these plans was $1,368,000, $1,316,000 and $1,285,000 in 2004, 2003 and 2002, respectively. Information regarding assets and accumulated benefits of these plans has not been made available to the Company.
The Company's salaried and certain hourly employees participate in Company-sponsored, defined contribution plans. Total expense for the Company's portion of these plans was $1,576,000, $1,560,000 and $1,205,000 in 2004, 2003 and 2002, respectively.
(12) Indebtedness
On July 31, 2003, the Company entered into an agreement ("Master Shelf Agreement") whereby it could issue up to $60,000,000 in unsecured notes. Upon closing, the Company issued $40,000,000 of notes ("Senior Notes") under the Master Shelf Agreement. The remaining $20,000,000, subject to terms and conditions and acceptance by the lender, is available for issuance by the Company at market rates until July 31, 2005. The Senior Notes bear a fixed interest rate of 6.05% and will be due on July 31, 2010, with annual principal payments of
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
$13,333,000 beginning July 31, 2008. Proceeds from issuance of the Senior Notes were used to refinance borrowings outstanding under the Company's previous term loan and revolving credit facility ("Previous Loan Facilities").
Concurrent with the signing of the Master Shelf Agreement, the Company closed on a new bank revolving credit facility ("Credit Agreement"). The Credit Agreement is an unsecured $30,000,000 revolving facility to be used for working capital requirements and general corporate purposes. The maximum available under the Credit Agreement is $30,000,000, less any outstanding letter of credit commitments (which are subject to a $15,000,000 sublimit). The Credit Agreement provides interest at variable rates equal to, at the Company's option, a Eurodollar rate plus 1.75% to 2.75% (depending upon certain ratios) or an alternative reference rate as defined in the Credit Agreement. The Credit Agreement will be due and payable on July 31, 2006. On January 31, 2004, there were loans of $2,000,000, at an average interest rate of 4.0%, and letters of credit of $8,958,000 outstanding on the Credit Agreement.
The Master Shelf Agreement and the Credit Agreement contain certain covenants including restrictions on the incurrence of additional indebtedness and liens, investments, acquisitions, transfer or sale of assets, transactions with affiliates, payment of dividends and certain financial maintenance covenants, including among others, fixed charge coverage, maximum debt to EBITDA, minimum tangible net worth and minimum asset coverage. The Company was in compliance with its covenants as of January 31, 2004.
In connection with refinancing the Previous Loan Facilities on July 31, 2003, the Company recorded debt extinguishment costs of $2,320,000. The costs included a prepayment penalty of $671,000, the write-off of deferred loan costs related to the Previous Loan Facilities of $1,447,000 and the write-off of the unrealized loss on the Company's interest rate swap of $202,000. The debt extinguishment costs of $1,135,000 recorded in July 2002 were the result of refinancing a previous credit facility. The July 2002 loss, which was previously reported as an extraordinary item, was reclassified to income from continuing operations upon adoption of SFAS No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment to FASB Statement No. 13, and Technical Corrections," as of February 1, 2003.
The Company's previous floating rate debt exposed it to changes in interest rates going forward. During September 2002, the Company entered into an interest rate swap agreement (the "Swap Agreement"), as required by the Previous Loan Facilities. The Swap Agreement effectively converted a portion of the previous term loan to a fixed rate basis, thus reducing the impact of interest rate changes. Upon entering the Master Shelf Agreement, a fixed interest rate contract, the Swap Agreement no longer qualified for hedge accounting and gains and losses related to the Swap Agreement were included in Other, net in the Company's Consolidated Statements of Income as incurred. The Swap Agreement calls for quarterly interest payments which commenced on October 1, 2002, and will terminate September 9, 2004. The Swap Agreement is recorded at its fair market value of $127,000 as of January 31, 2004, in Other accrued expenses in the Company's Consolidated Balance Sheets.
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
Maximum borrowings outstanding under the Company's then-existing credit agreements during 2004, 2003 and 2002 were $42,000,000, $37,000,000 and $47,000,000, respectively, and the average outstanding borrowings were $37,838,000, $30,062,000 and $33,292,000, respectively. The weighted average interest rates were 5.7%, 6.6% and 7.0%, respectively.
Loan costs incurred for securing long-term financing are amortized using a method that approximates the effective interest method over the term of the respective loan agreement. Amortization of these costs for 2004, 2003 and 2002 was $205,000, $345,000 and $312,000, respectively. Amortization of loan costs is included in Interest expense in the Consolidated Statements of Income.
Debt outstanding as of January 31, 2004 and 2003, whose carrying value approximates fair market value, was as follows (in thousands):
As of January 31, 2004, debt outstanding will mature as follows (in thousands):
(13) Foreign Currency Derivatives
The Company has foreign operations that have significant costs denominated in foreign currencies, and thus is exposed to risks associated with changes in foreign currency exchange rates. At any point in time, the Company might use various hedge instruments, primarily foreign currency option contracts, to manage the exposures associated with forecasted expatriate labor costs and purchases of operating supplies. The Company does not enter into foreign currency derivative financial instruments for speculative or trading purposes.
As of January 31, 2004, the Company held option contracts with an aggregate U.S. dollar notional value of $16,140,000 to hedge the risks associated with forecasted Australian dollar denominated costs in its African operations. The contracts settle in various increments through January 2005. The fair value of the instruments of $1,395,000 at January 31, 2004, is recorded in other current
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
assets, and net of income taxes of $539,000, in accumulated other comprehensive income. Aggregate gains of $219,000 on foreign currency hedging transactions were recognized during 2004 as the forecasted transactions being hedged occurred and were recorded primarily in cost of revenues in the Company's Consolidated Statements of Income.
(14) 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 Company's 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 $.01 per Right at any time before a person has acquired 25% or more of the Company's outstanding common stock. The Rights expire 10 years from the date of grant.
The Company has reserved 500,000 shares of common stock for issuance under Employee Incentive Compensation Plans. Issuance of shares under the Plans is based on performance as determined annually by a committee appointed by the Company's Board of Directors.
The Company also has stock option plans which provide for the granting of options to purchase up to an aggregate of 2,500,000 shares of common stock at a price fixed by the Board of Directors or a committee. As of January 31, 2004, there are 784,981 shares available to be granted under the plans.
Significant option groups outstanding at January 31, 2004, and related weighted average price and life information follows:
All options were granted at an exercise price equal to the fair market value of the Company's common stock at the date of grant. The options have terms of five to ten years from the date of grant and vest ratably over periods of four
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
to five years. For purposes of pro forma disclosure, the weighted average fair value at the date of grant for options granted during 2002 was $4.16 per option. No options were granted during 2004 and 2003. The fair value of options at date of grant was estimated using the Black-Scholes model. The fair values are based on an expected life in years equal to the full option term, no dividend yield and the following weighted average assumptions:
(15) Contingencies
The Company's drilling activities involve certain operating hazards that can result in personal injury or loss of life, damage and destruction of property and equipment, damage to the surrounding areas, release of hazardous substances or wastes and other damage to the environment, interruption or suspension of drill site operations and loss of revenues and future business. The magnitude of these operating risks is amplified when the Company, as is frequently the case, conducts a project on a fixed-price, "turnkey" basis where the Company delegates certain functions to subcontractors but remains responsible to the customer for the subcontracted work. In addition, the Company is exposed to potential liability under foreign, federal, state and local laws and regulations, contractual indemnification agreements or otherwise in connection with its 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
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
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 Company's business. While the resolution of any of these matters may have an impact on the financial results for the period in which the matter is resolved, the Company believes that the ultimate disposition of these matters will not, in the aggregate, have a material adverse effect upon its business or consolidated financial position, results of operations or cash flows.
(16) Operating Segments and Foreign Operations
The Company is a multinational company which provides sophisticated services and related products to a variety of markets. Management defines the Company's 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. Although individual offices within a division may periodically perform services normally provided by another division, the results of those services are recorded in the offices' own division. For example, if a water resources division office performed geoconstruction services, the revenues would be recorded in the water resources division rather than the geoconstruction division. Should an office's primary responsibility move from one division president to another, that office's results going forward would be reclassified between divisions at that time. The Company's reportable segments are defined as follows:
Water Resources Division
This division provides a full line of water-related services and products including hydrological studies, site selection, well design, drilling and well development, pump installation, and repair and maintenance. The division's offerings include the design and construction of water treatment facilities and the manufacture and sale of products to treat volatile organics and other contaminants such as nitrates, iron, manganese, arsenic, radium and radon in groundwater. The division also offers environmental services to assess and monitor groundwater contaminants. Effective February 1, 2003, the Company's ground freezing services were included in the division on a prospective basis due to a change in reporting responsibility.
Mineral Exploration Division
This division provides a complete range of drilling services for the mineral exploration industry. Its aboveground and underground drilling activities include all phases of core drilling, diamond, reverse circulation, dual tube, hammer and rotary air-blast methods.
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
Geoconstruction Division
This division focuses on services that improve soil stability, primarily jet grouting, grouting, vibratory ground improvement, drilled micropiles, stone columns, anchors and tiebacks. The division also manufactures a line of high-pressure pumping equipment used in grouting operations and geotechnical drilling rigs used for directional drilling. Effective February 1, 2003, the division no longer includes the Company's ground freezing services due to a change in reporting responsibility.
Energy Division
This division primarily focuses on exploration and production of coalbed methane ("CBM") properties in the United States. To date it has been concentrated on projects in the Midwest region of the United States. Historically, the division has also included service businesses in shallow gas and tar sands exploration drilling, conventional oilfield fishing services and coil tubing fishing services. During fiscal 2004, the division's strategy shifted to focus mainly on resource development rather than providing services to external customers. Accordingly, in January 2004, the Company sold its Canadian drilling unit to Ensign Drilling and its oilfield fishing services to Smith International. The results of operations for these units have been reclassified to discontinued operations for all years presented (see Note 4). The division is now composed of the Company's CBM development activities and two small, specialty energy service companies.
Products and Other
This grouping has historically included the Company's supply operation which distributed drilling equipment, parts and supplies, a manufacturing operation producing diamond drilling rigs, diamond bits, core barrels and drill rods ("Christensen Products") and other miscellaneous operations which do not fall into the above divisions. On January 23, 2003, the Company sold its supply operation to Boart Longyear. Upon the sale, the results of operations were reclassified to discontinued operations (see Note 4). On August 8, 2001, the Company sold its Christensen Products business to a subsidiary of Atlas Copco.
Financial information for the Company's operating segments is presented below (in thousands). Intersegment revenues are accounted for based on the fair market value of the products sold or services provided. The Corporate loss from continuing operations consists of unallocated corporate expenses, primarily general and administrative functions and incentive compensation. Corporate assets are all assets of the Company not directly associated with an operating segment, and consist primarily of cash and deferred income taxes.
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
Income from continuing operations of the energy segment for 2003 and 2002, respectively, includes $815,000 and $53,000 of expenses related to the Company's energy exploration activities in the Gulf of Mexico region of the United States. No such expenses were incurred in 2004. These activities are unrelated to the Company's coalbed methane exploration and development efforts and were charged to expense as no reserves were identified. The Company is no longer pursuing these exploration activities.
(17) New Accounting Pronouncements
The Financial Accounting Standards Board has issued several statements which were effective in the current year or will be effective in future years. SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments and Hedging Activities Summary" amends and clarifies financial reporting for derivative instruments, including certain derivative instruments embedded in other contacts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003. Interpretation No. 46 Revised, "Consolidation of Variable Interest Entities" ("FIN 46R") requires consolidation of certain variable interest entities if certain conditions are met. The adoption of SFAS No. 149 and 150 and FIN 46R did not have significant impacts on the Company's results of operations or financial position. The Company adopted the disclosure requirements of SFAS No. 132 Revised, "Employers' Disclosures about Pensions and Other Postretirement Benefits" during 2004 related to pensions and other postretirement benefits (see Note 11).
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 2004, 2003 and 2002
(18) Quarterly Results (Unaudited)
Unaudited quarterly financial data are as follows (thousands of dollars, except per share data):
During 2004 and 2003, the Company sold certain operations and classified the results of those operations as discontinued operations (see Note 4). Revenues for the first three quarters of 2004 have been reduced by $6,602,000, $3,353,000 and $2,915,000, respectively, related to the discontinued operations. Gross profit for the first three quarters of 2004 have been reduced by $952,000, $893,000 and $157,000, respectively, related to the discontinued operations. Revenues for the four quarters of 2003 have been reduced by $4,796,000, $2,604,000, $2,164,000 and $4,174,000, respectively, related to the discontinued operations. Gross profit for the four quarters of 2003 have been reduced by $946,000, $535,000, $281,000 and $688,000, respectively, related to the discontinued operations.
SCHEDULE II
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Based on an evaluation of disclosure controls and procedures for the period ended January 31, 2004 conducted under the supervision and with the participation of the Company's management, including the Principal Executive Officer and the Principal Financial Officer, the Company concluded that its disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Based on an evaluation of internal controls conducted by management for the period ended January 31, 2004, no significant deficiencies or material weaknesses were identified and the Company has not made any significant changes in internal controls or in other factors that could significantly affect internal controls since such evaluation.
However, it should be noted that any system of controls, however well designed and operated, can provide only reasonable assurance regarding management's control objectives. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on June 3, 2004, (i) contains, under the caption "Election of Directors," certain information relating to the Company's directors and its Audit Committee financial experts required by Item 10 of Form 10-K and such information is incorporated herein by this reference (except that the information set forth under the subcaption "Compensation of Directors" is expressly excluded from such incorporation), (ii) contains, under the caption "Other Corporate Governance Matters", certain information relating to the Company's Code of Ethics required by Item 10 of Form 10-K and such information is incorporated herein by this reference, and (iii) contains, under the caption "Section 16(a) Beneficial Ownership Reporting Compliance," certain information required by Item 10 of Form 10-K and such information is incorporated herein by this reference. The information required by Item 10 of Form 10-K as to executive officers is set forth in Item 4A of Part I hereof.
Item 11.
Item 11. Executive Compensation
The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held June 3, 2004, contains, under the caption "Executive Compensation and Other Information," the information required by Item 11 of Form 10-K and such information is incorporated herein by this reference (except that the information set forth under the following subcaptions is expressly excluded from such incorporation: "Report of Board of Directors and Compensation Committee on Executive Compensation" and "Company Performance").
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on June 3, 2004, contains, under the captions "Ownership of Layne Christensen Common Stock," and "Equity Compensation Plan Information," the information required by Item 12 of Form 10-K and such information is incorporated herein by this reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on June 3, 2004, contains, under the captions "Executive Compensation and Other Information-Certain Change-In-Control Agreements," and "Certain Transactions - Transactions with Management," the information required by Item 13 of Form 10-K and such information is incorporated herein by this reference.
Item 14.
Item 14. Principal Accounting Fees and Services
The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on June 3, 2004, contains, under the caption "Principal Accounting Fees and Services," the information required by Item 14 of Form 10-K and such information is incorporated herein by this reference.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits:
1. Financial Statements:
The financial statements are listed in the index for Item 8 of this Form 10-K.
2. Financial Statement Schedules:
The applicable financial statement schedule is listed in the index for Item 8 of this Form 10-K.
3. Exhibits:
The exhibits filed with or incorporated by reference in this report are listed below:
- --------------------------- ** Management contracts or compensatory plans or arrangements required to be identified by Item 14(a)(3).
(b) Reports on Form 8-K:
Form 8-K filed on February 17, 2004 related to the Company's press release reporting a blackout period under certain of its employee benefit plans.
(c) Exhibits
The exhibits filed with this report on Form 10-K are identified above under Item 14(a)(3).
(d) Financial Statement Schedules
The financial statement schedule filed with this report on Form 10-K is identified above under Item 14(a)(2).
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/Andrew B. Schmitt ------------------------ Andrew B. Schmitt President and Dated: April 13, 2004 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: