Layne Christensen Company 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended April 30, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-20578
Layne Christensen Company
(Exact name of
registrant as specified in its charter)
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Delaware
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48-0920712 |
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(State or other jurisdiction
of
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(I.R.S. Employer
Identification No.) |
incorporation or organization) |
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1900 Shawnee Mission Parkway,
Mission Woods, Kansas
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66205 |
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(Address of principal
executive offices)
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(Zip Code) |
(Registrants
telephone number, including area code) (913) 362-0510
Not Applicable
(Former
name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
There were 15,259,016 shares of common stock, $.01 par value per share, outstanding on May 25,
2006.
TABLE OF CONTENTS
PART I
Item 1. Financial Statements
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
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April 30, |
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January 31, |
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2006 |
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2006 |
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(unaudited) |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
11,786 |
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$ |
17,983 |
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Customer receivables, less allowance of
$5,723 and $5,573, respectively |
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98,673 |
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91,159 |
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Costs and estimated earnings in excess of billings on
uncompleted contracts |
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44,157 |
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36,538 |
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Inventories |
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16,457 |
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16,663 |
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Deferred income taxes |
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15,301 |
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11,976 |
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Income taxes receivable |
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200 |
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1,284 |
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Other |
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4,456 |
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5,975 |
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Total current assets |
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191,030 |
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181,578 |
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Property and equipment: |
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Land |
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9,480 |
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9,486 |
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Buildings |
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20,586 |
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19,595 |
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Machinery and equipment |
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225,344 |
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222,531 |
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Gas transportation facilities and equipment |
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15,856 |
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12,526 |
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Oil and gas properties |
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39,359 |
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34,308 |
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Mineral interest in oil and gas properties |
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8,827 |
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8,430 |
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319,452 |
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306,876 |
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Less Accumulated depreciation and depletion |
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(153,605 |
) |
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(148,751 |
) |
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Net property and equipment |
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165,847 |
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158,125 |
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Other assets: |
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Investment in affiliates |
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21,752 |
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21,741 |
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Goodwill |
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57,857 |
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57,857 |
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Other intangible assets, net |
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16,702 |
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16,948 |
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Restricted cash |
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8,950 |
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9,143 |
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Other |
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4,324 |
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3,943 |
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Total other assets |
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109,585 |
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109,632 |
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$ |
466,462 |
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$ |
449,335 |
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See Notes to Consolidated Financial Statements.
Continued -
2
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except per share data)
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April 30, |
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January 31, |
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2006 |
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2006 |
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(unaudited) |
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(unaudited) |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
45,183 |
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$ |
43,695 |
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Accrued compensation |
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14,291 |
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20,025 |
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Cash purchase price adjustments |
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6,120 |
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Accrued insurance expense |
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6,274 |
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5,562 |
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Other accrued expenses |
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17,836 |
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12,212 |
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Income taxes payable |
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5,891 |
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2,606 |
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Billings in excess of costs and estimated
earnings on uncompleted contracts |
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19,074 |
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21,362 |
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Total current liabilities |
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108,549 |
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111,582 |
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Noncurrent and deferred liabilities: |
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Long-term debt |
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141,200 |
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128,900 |
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Acquisition escrow obligations |
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9,164 |
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9,143 |
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Accrued insurance expense |
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6,340 |
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6,228 |
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Deferred income taxes |
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21,656 |
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19,555 |
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Other |
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2,367 |
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2,301 |
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Total noncurrent and deferred liabilities |
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180,727 |
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166,127 |
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Common stock, par value $.01 per share, 30,000,000
shares authorized, 15,259,016 and 15,233,472
shares issued and outstanding, respectively |
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153 |
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152 |
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Capital in excess of par value |
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141,922 |
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141,067 |
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Retained earnings |
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42,535 |
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37,893 |
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Accumulated other comprehensive loss |
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(7,397 |
) |
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(7,442 |
) |
Unearned compensation |
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(27 |
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(44 |
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Total stockholders equity |
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177,186 |
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171,626 |
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$ |
466,462 |
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$ |
449,335 |
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See Notes to Consolidated Financial Statements.
3
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
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Three Months |
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Ended April 30, |
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(unaudited) |
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2006 |
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2005 |
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Revenues |
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$ |
156,717 |
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$ |
96,658 |
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Cost of revenues (exclusive of depreciation shown below) |
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117,037 |
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71,080 |
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Gross profit |
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39,680 |
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25,578 |
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Selling, general and administrative expenses |
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22,364 |
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16,890 |
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Depreciation, depletion and amortization |
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7,066 |
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4,013 |
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Other income (expense): |
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Equity in earnings of affiliates |
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365 |
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1,119 |
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Interest |
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(2,131 |
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(970 |
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Other income, net |
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274 |
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520 |
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Income from continuing operations before income taxes and minority interest |
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8,758 |
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5,344 |
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Income tax expense |
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4,116 |
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2,567 |
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Minority interest |
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(23 |
) |
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Net income from continuing operations before discontinued operations |
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4,642 |
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2,754 |
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Loss from discontinued operations, net of income tax |
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(1 |
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Net income |
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$ |
4,642 |
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$ |
2,753 |
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Basic income per share: |
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Net income from continuing operations |
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$ |
0.30 |
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$ |
0.22 |
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Loss from discontinued operations, net of income taxes |
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Net income per share |
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$ |
0.30 |
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$ |
0.22 |
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Diluted income per share: |
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Net income from continuing operations |
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$ |
0.30 |
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$ |
0.21 |
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Loss from discontinued operations, net of income taxes |
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Net income per share |
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$ |
0.30 |
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$ |
0.21 |
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Weighted average shares outstanding |
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15,233,000 |
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12,595,000 |
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Dilutive stock options |
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222,000 |
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405,000 |
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15,455,000 |
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13,000,000 |
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See Notes to Consolidated Financial Statements.
4
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
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Three Months |
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Ended April 30, |
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(unaudited) |
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2006 |
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2005 |
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Cash flow used in operating activities: |
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Net income |
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$ |
4,642 |
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$ |
2,753 |
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Adjustments to reconcile net income to cash from operations: |
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Loss from discontinued operations, net of tax |
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1 |
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Depreciation, depletion and amortization |
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7,066 |
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|
4,013 |
|
Deferred income taxes |
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(1,125 |
) |
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|
(595 |
) |
Share-based compensation |
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|
454 |
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Equity in earnings of affiliates |
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(365 |
) |
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(1,119 |
) |
Dividends received from affiliates |
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354 |
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|
354 |
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Minority interest |
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23 |
|
Gain from disposal of property and equipment |
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(113 |
) |
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|
(443 |
) |
Changes in current assets and liabilities, net of effects of acquisitions: |
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Increase in customer receivables |
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(7,453 |
) |
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(11,631 |
) |
Increase in costs and estimated earnings in excess
of billings on uncompleted contracts |
|
|
(7,619 |
) |
|
|
(2,373 |
) |
(Increase) decrease in inventories |
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|
273 |
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|
|
(2,258 |
) |
Decrease in other current assets |
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|
1,529 |
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|
208 |
|
Increase in accounts payable and accrued expenses |
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|
375 |
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|
4,689 |
|
Decrease in billings in excess of costs and
estimated earnings on uncompleted contracts |
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(2,288 |
) |
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|
(970 |
) |
Other, net |
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13 |
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|
46 |
|
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Cash used in continuing operations |
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(4,257 |
) |
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|
(7,302 |
) |
Cash from discontinued operations |
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25 |
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Cash used in operating activities |
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(4,257 |
) |
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|
(7,277 |
) |
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Cash flow used in investing activities: |
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Additions to property and equipment |
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(5,760 |
) |
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(4,368 |
) |
Additions to gas transportation facilities and equipment |
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(3,330 |
) |
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(93 |
) |
Additions to oil and gas properties |
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(5,051 |
) |
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|
(1,261 |
) |
Additions to mineral interests in oil and gas properties |
|
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(397 |
) |
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|
(189 |
) |
Proceeds from disposal of property and equipment |
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|
133 |
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|
|
515 |
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Cash used in investing activities |
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(14,405 |
) |
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|
(5,396 |
) |
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Cash flow from financing activities: |
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|
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Borrowings under revolving credit facility |
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79,900 |
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|
12,100 |
|
Repayments under revolving credit facility |
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(67,600 |
) |
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|
(6,800 |
) |
Payments on DrillCorp promissory note |
|
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(360 |
) |
Excess tax benefit on exercise of share-based instruments |
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|
154 |
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|
|
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|
Issuance of common stock upon exercise of stock options |
|
|
198 |
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|
12 |
|
|
|
|
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|
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Cash from financing activities |
|
|
12,652 |
|
|
|
4,952 |
|
|
|
|
|
|
|
|
Effects of exchange rate changes on cash |
|
|
(187 |
) |
|
|
(56 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(6,197 |
) |
|
|
(7,777 |
) |
Cash and cash equivalents at beginning of period |
|
|
17,983 |
|
|
|
14,408 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
11,786 |
|
|
$ |
6,631 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
5
LAYNE CHRISTENSEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies and Basis of Presentation
Principles of Consolidation - The consolidated financial statements include the accounts of
Layne Christensen Company and its subsidiaries (together, the Company). All significant
intercompany transactions have been eliminated. Investments in affiliates (20% to 50% owned) in
which the Company exercises influence over operating and financial policies are accounted for by
the equity method. The unaudited consolidated financial statements should be read in conjunction
with the consolidated financial statements of the Company for the year ended January 31, 2006 as
filed in its Annual Report on Form 10-K.
The accompanying unaudited consolidated financial statements include all adjustments (consisting
only of normal recurring accruals) which, in the opinion of management, are necessary for a fair
presentation of financial position, results of operations and cash flows. Results of operations
for interim periods are not necessarily indicative of results to be expected for a full year.
Use of Estimates in Preparing Financial Statements The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue Recognition Revenue is recognized on large, long-term contracts using the percentage of
completion method based upon the ratio of costs incurred to total estimated costs at completion.
Contract price and cost estimates are reviewed periodically as work progresses and adjustments
proportionate to the percentage of completion are reflected in contract revenues and gross profit
in the reporting period when such estimates are revised. Changes in job performance, job
conditions and estimated profitability, including those arising from contract penalty provisions,
change orders and final contract settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. 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.
Goodwill and Other Intangibles Goodwill and other intangible assets with indefinite useful lives
are not amortized, and instead are periodically tested for impairment. The Company performs its
annual impairment test as of December 31 each year. The process of evaluating goodwill for
impairment involves the determination of the fair value of the Companys reporting units. Inherent
in such fair value determinations are certain judgments and estimates, including the interpretation
of current economic indicators and market valuations, and assumptions about the Companys strategic
plans with regard to its operations. The Company believes at this time that the carrying value of
the remaining goodwill is appropriate, although to the extent additional information arises or the
Companys strategies change, it is possible that the Companys conclusions regarding impairment of
the remaining goodwill could change and result in a material effect on its financial position or
results of operations.
Other Long-lived Assets - In evaluating the fair value and future benefits of long-lived assets,
including the Companys gas transportation facilities and equipment, the Company performs an
analysis of the anticipated future net cash flows of the related long-lived assets and reduces
their carrying value by the excess, if any, of the result of such calculation. The Company
believes at this time that the carrying values and useful lives of its long-lived assets continues
to be appropriate.
Restricted Cash - Included in restricted cash as of April 30, 2006 are escrow funds associated with
the acquisition of Reynolds as described in Note 2 of the Notes to Consolidated Financial
Statements of $5,102,000 and customer deposits held by the bank of $4,062,000.
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
6
medical profession increase beyond what was anticipated, reserves recorded may not be sufficient
and additional costs to the consolidated financial statements could be required.
Costs estimated to be incurred in the future for employee medical benefits, property, workers
compensation and casualty insurance programs resulting from claims which have occurred are accrued
currently. Under the terms of the Companys agreement with the various insurance carriers
administering these claims, the Company is not required to remit the total premium until the claims
are actually paid by the insurance companies. These costs are not expected to significantly impact
liquidity in future periods.
Income Taxes - Income taxes are provided using the asset/liability method, in which deferred taxes
are recognized for the tax consequences of temporary differences between the financial statement
carrying amounts and tax bases of existing assets and liabilities. Deferred tax assets are
reviewed for recoverability and valuation allowances are provided as necessary. Provision for U.S.
income taxes on undistributed earnings of foreign subsidiaries and affiliates is made only on those
amounts in excess of funds considered to be invested indefinitely.
Oil and gas properties and mineral interests - The Company follows the full-cost method of
accounting for oil and gas properties. Under this method, all productive and nonproductive costs
incurred in connection with the exploration for and development of oil and gas reserves are
capitalized. Such capitalized costs include lease acquisition, geological and geophysical work,
delay rentals, drilling, completing and equipping oil and gas wells, and salaries, benefits and
other internal salary-related costs directly attributable to these activities. Costs associated
with production and general corporate activities are expensed in the period incurred. Normal
dispositions of oil and gas properties are accounted for as adjustments of capitalized costs, with
no gain or loss recognized.
The Company is required to review the carrying value of its oil and gas properties each quarter
under the full cost accounting rules of the SEC. Under these rules, capitalized costs of proved
oil and gas properties, as adjusted for asset retirement obligations, may not exceed the present
value of estimated future net revenues from proved reserves, discounted at 10% (the Ceiling
Test). Application of the ceiling test generally requires pricing future revenue at the
unescalated prices in effect as of the last day of the quarter, with effect given to the Companys
fixed-price natural gas contracts, and requires a write-down for accounting purposes if the ceiling
is exceeded. Unproved oil and gas properties are not amortized, but are assessed for impairment
either individually or on an aggregated basis using a comparison of the carrying values of the
unproved properties to net future cash flows. The Company believes at this time that the carrying
value of its oil and gas properties is appropriate.
Reserve Estimates The Companys estimates of unconventional gas reserves, by necessity, are
projections based on geologic and engineering data, and there are uncertainties inherent in the
interpretation of such data as well as the projection of future rates of production and the timing
of development expenditures. Reserve engineering is a subjective process of estimating underground
accumulations of gas that are difficult to measure. The accuracy of any reserve estimate is a
function of the quality of available data, engineering and geological interpretation and judgment.
Estimates of economically recoverable gas reserves and future net cash flows depend upon a number
of variable factors and assumptions, such as historical production from the area compared with
production from other producing areas, the assumed effects of regulations by governmental agencies
and assumptions governing natural gas prices, future operating costs, severance, ad valorem and
excise taxes, development costs and workover and remedial costs, all of which may in fact vary
considerably from actual results. For these reasons, estimates of the economically recoverable
quantities of gas attributable to any particular group of properties, classifications of such
reserves based on risk of recovery, and estimates of the future net cash flows expected there from
may vary substantially. Any significant variance in the assumptions could materially affect the
estimated quantity and value of the reserves, which could affect the carrying value of the
Companys oil and gas properties and the rate of depletion of the oil and gas properties. Actual
production, revenues and expenditures with respect to the Companys reserves will likely vary from
estimates, and such variances may be material.
Litigation and Other Contingencies - The Company is involved in litigation incidental to its
business, the disposition of which is not expected to have a material effect on the Companys
business, financial position, results of operations or cash flows. It is possible, however, that
future results of operations for any particular quarterly or annual period could be materially
affected by changes in the Companys assumptions related to these proceedings. The Company accrues
its best estimate of the probable cost for the resolution of legal claims. Such estimates are
developed in consultation with outside counsel handling these matters and are based upon a
combination of litigation and settlement strategies. To the extent additional information arises or
the Companys strategies change, it is possible that the Companys estimate of its probable
liability in these matters may change.
7
Derivatives The Company follows SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), as amended, which requires derivative financial instruments to be
recorded on the balance sheet at fair value and
establishes criteria for designation and effectiveness of hedging relationships. Under SFAS 133,
the Company accounts for its unrealized hedges of forecasted costs as cash flow hedges, such that
changes in fair value for the effective portion of hedge contracts, if material, are recorded in
accumulated other comprehensive income in stockholders equity. Changes in the fair value of the
effective portion of hedge contracts are recognized in accumulated other comprehensive income until
the hedged item is recognized in operations. The ineffective portion of the derivatives change in
fair value, if any, is immediately recognized in operations. In addition, the Company has entered
into fixed-price natural gas contracts to manage fluctuations in the price of natural gas. These
contracts result in the Company physically delivering gas, and as a result, are exempt from the
requirements of SFAS 133 under the normal purchases and sales exception. Accordingly, the contracts
are not reflected in the balance sheet at fair value and revenues from the contracts are recognized
as the natural gas is delivered under the terms of the contracts (see Note 6 for disclosure
regarding the fair value of derivative instruments). The Company does not enter into derivative
financial instruments for speculative or trading purposes.
Earnings per share Earnings per share are based upon the weighted average number of common and
dilutive equivalent shares outstanding. Options to purchase common stock are included based on the
treasury stock method for dilutive earnings per share, except when their effect is antidilutive.
Unearned Compensation Unearned compensation expense associated with the issuance of restricted
stock is amortized on a straight-line basis as the restrictions on the stock expire.
Stock-based compensation The Company adopted SFAS No. 123R (revised December 2004), Shared-Based
Payment effective February 1, 2006, which requires the recognition of all share-based instruments
in the financial statements and establishes a fair-value measurement of the associated costs. The
Company has elected to adopt the new standard using the Modified Prospective Method which requires
recognition of all unvested share-based instruments as of the effective date over the remaining
term of the instrument. An expense of $454,000 was recognized in the three months ended April 30,
2006, as a result of the adoption of this method. The total income
tax benefit recognized in the three months ended April 30, 2006 was $203,000.
The Modified Prospective Method has no financial
impact on prior fiscal years. As of April 30, 2006, the Company had unrecognized compensation
expense of $5,631,000 to be recognized over a weighted average period of 3.24 years. The Company
determines the fair value of stock-based compensation using the Black-Scholes model.
Stock-based compensation vested prior to the effective date of SFAS No. 123R may be accounted for
either based on the estimated fair value of the awards at the date they are granted (the SFAS 123
Method) or based on the difference, if any, between the market price of the stock at the date of
grant and the amount the employee must pay to acquire the stock (the APB 25 Method). The Company
used the APB 25 Method to account for its stock-based compensation programs that were vested prior
to the effective date of SFAS No. 123R and recognized no compensation expense under this method.
Pro forma net income and earnings per share for the three months ended April 30, 2005, determined
as if the SFAS No. 123 Method had been applied, is presented in the following table (in thousands,
except per share amounts):
|
|
|
|
|
|
|
2005 |
|
Net income, as reported |
|
$ |
2,753 |
|
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards not yet recognized, net of tax |
|
|
(114 |
) |
|
|
|
|
Pro forma net income |
|
$ |
2,639 |
|
|
|
|
|
Income per share: |
|
|
|
|
Basic as reported |
|
$ |
0.22 |
|
|
|
|
|
Basic pro forma |
|
$ |
0.21 |
|
|
|
|
|
Diluted as reported |
|
$ |
0.21 |
|
|
|
|
|
Diluted pro forma |
|
$ |
0.20 |
|
|
|
|
|
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.
8
Supplemental Cash Flow Information - The amounts paid for income taxes, net of refunds, and
interest are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Ended April 30, |
|
|
2006 |
|
2005 |
Income taxes |
|
$ |
773 |
|
|
$ |
972 |
|
Interest |
|
|
1,414 |
|
|
|
351 |
|
2. Acquisitions
On September 28, 2005 (the Closing Date), the Company acquired 100% of the outstanding stock
of Reynolds, Inc. (Reynolds), a privately held company and a major supplier of products and
services to the water and wastewater industries. The acquisition will expand the capabilities of
the Company in the areas of water and wastewater infrastructure. Reynolds primary service lines
include designing and building of water and wastewater treatment plants, water and wastewater
transmission lines, cured in place pipe (CIPP) services for sewer rehabilitation, water supply
wells and Ranney collector wells.
The purchase price for Reynolds was $112,356,000, consisting of $60,000,000 cash, 2,222,216 shares
of Layne common stock (valued at $45,053,000), cash purchase price adjustments of $6,120,000 and
costs of $1,183,000. Layne common stock was valued in the transaction based upon a five-day
average of the closing price of the stock two days before and two days after the terms of the
acquisition were agreed to and publicly announced. Of the cash and stock consideration, $9,000,000
and 333,333 shares of Layne common stock were placed in escrow to secure certain representations,
warranties and indemnifications under the purchase agreement (the Escrow Fund). The cash purchase
price adjustments consist primarily of an adjustment based on the amount by which working capital
at the Closing Date exceeded a threshold amount established in the purchase agreement. Pursuant to
the purchase agreement, this amount was paid to the Reynolds shareholders during April 2006 from
the Escrow Fund, which will be replenished during the twenty-four months following the Closing Date
based on the collection of certain contract retainage amounts. The balance of the Escrow Fund will
be released to the Reynolds shareholders twenty four months following the Closing Date, subject to
any pending claims. The cash portion of the Escrow Fund and related obligations to the Reynolds
shareholders are recorded in the Companys consolidated balance sheet as Restricted cash and
Acquisition escrow obligation.
In addition, there is contingent consideration up to a maximum of $15,000,000 (the Earnout
Amount), which is based on Reynolds operating performance over a period of thirty-six months
following the Closing Date (the Earnout Period). The Earnout Amount is based on a multiple of
Reynolds earnings before interest, taxes, depreciation and amortization which exceed a threshold
amount during the Earnout Period. If earned, the contingent payment will be paid 60% in cash and
40% in Layne common stock, subject to stockholder approval of the shares to be issued, if required.
Any shares not approved for issuance will be paid in cash. Any portion of the Earnout Amount
which is ultimately paid will be accounted for as additional purchase consideration.
The purchase price has been allocated based on the fair value of the assets and liabilities
acquired, determined based on Reynolds historical cost basis of assets and liabilities, appraisals
and other analyses. Such amounts may be subject to revision as Reynolds is integrated into the
Company and the revisions may be significant and will be recorded by the Company as further
adjustments to the purchase price allocation.
Based on the Companys allocation of the purchase price, the acquisition had the following effect
on the Companys consolidated financial position (in thousands):
|
|
|
|
|
Working capital |
|
$ |
20,998 |
|
Property and equipment |
|
|
40,508 |
|
Goodwill |
|
|
49,832 |
|
Tradenames |
|
|
16,000 |
|
Other intangible assets |
|
|
586 |
|
Deferred income taxes |
|
|
(15,568 |
) |
|
|
|
|
Total purchase price |
|
$ |
112,356 |
|
|
|
|
|
9
The results of operations of Reynolds have been included in the Companys consolidated Statements
of Income as of the Closing Date. Assuming Reynolds had been acquired as of the beginning of the
period, the unaudited proforma consolidated revenues, net income from continuing operations, net
income and net income per share would have been as follows (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
April 30, |
|
|
2006 |
|
2005 |
Revenues |
|
$ |
156,717 |
|
|
$ |
143,141 |
|
Net income from continuing operations |
|
|
4,642 |
|
|
|
5,355 |
|
Net income |
|
|
4,642 |
|
|
|
5,354 |
|
Basic earnings per share from continuing operations |
|
|
0.30 |
|
|
|
0.36 |
|
Diluted earnings per share from continuing operations |
|
|
0.30 |
|
|
|
0.35 |
|
Basic earnings per share |
|
|
0.30 |
|
|
|
0.36 |
|
Diluted earnings per share |
|
|
0.30 |
|
|
|
0.35 |
|
The pro forma information provided above is not necessarily indicative of the results of operations
that would actually have resulted if the acquisition were made as of those dates or of results that
may occur in the future.
In October 2005, the Company purchased the remaining 25% working interest in various gas wells,
saltwater disposal wells and a pipeline from Colt Natural Gas LLC and Colt Pipeline LLC (Colt),
which are affiliates of a working interest partner, for $6,149,000 in cash. An additional $257,000
is payable by the Company upon satisfaction of certain conditions by Colt. The acquisition furthers
the Companys expansion of its energy presence in the mid-continent region of the United States.
The acquisition did not have a significant effect on the Companys results of operations or cash
flows and had the following effect on the Companys consolidated financial position (in thousands):
|
|
|
|
|
Mineral interest in oil and gas properties |
|
$ |
2,479 |
|
Oil and gas properties |
|
|
2,428 |
|
Gas transportation facilities and equipment |
|
|
987 |
|
Minority interest |
|
|
512 |
|
|
|
|
|
Total purchase price |
|
$ |
6,406 |
|
|
|
|
|
The Company made two acquisitions in March and June 2005 to broaden its membrane technologies
capabilities. The total purchase price for the acquisitions was $453,000, which consisted of cash
payments of $359,000 and a note payable to the shareholder of one of the entities. The
acquisitions did not have a significant effect on the Companys results of operations or cash flows
and had the following effect on the Companys consolidated financial position (in thousands)
|
|
|
|
|
Working capital |
|
$ |
(10 |
) |
Property and equipment |
|
|
84 |
|
Other intangible assets |
|
|
379 |
|
|
|
|
|
Total purchase price |
|
$ |
453 |
|
|
|
|
|
3. Discontinued Operations
During the third quarter of fiscal 2004, the Company reclassified the results of operations of
its Toledo Oil and Gas (Toledo) business to discontinued operations based on its intent to sell
the operation, which occurred in January 2004. Toledo was historically reported in the Companys
energy segment and offered conventional oilfield fishing services and coil tubing fishing services.
On January 30, 2004, the Company sold its Layne Christensen Canada Ltd. (Layne Canada) subsidiary
for $15,914,000. Layne Canada was a component of the Companys energy segment and provided
drilling services to the shallow, unconventional oil and gas market.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
the results of operations for Toledo and Layne Canada have been classified as discontinued
operations. The discontinued operations had no revenue for the three months ended April 30, 2006
or 2005. The loss from discontinued operations before income taxes was $1,000 for the three months
ended April 30, 2005.
10
4. Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2006 |
|
|
January 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Gross |
|
|
|
|
|
|
Amortization |
|
|
Gross |
|
|
|
|
|
|
Amortization |
|
|
|
Carrying |
|
|
Accumulated |
|
|
Period in |
|
|
Carrying |
|
|
Accumulated |
|
|
Period in |
|
|
|
Amount |
|
|
Amortization |
|
|
years |
|
|
Amount |
|
|
Amount |
|
|
years |
|
Goodwill
(non-tax deductible) |
|
$ |
57,857 |
|
|
$ |
|
|
|
|
|
|
|
$ |
57,857 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
amortizable intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames |
|
$ |
16,000 |
|
|
$ |
(358 |
) |
|
|
32 |
|
|
$ |
16,000 |
|
|
$ |
(204 |
) |
|
|
32 |
|
Customer-related |
|
|
227 |
|
|
|
(59 |
) |
|
|
2 |
|
|
|
227 |
|
|
|
(34 |
) |
|
|
2 |
|
Patents |
|
|
359 |
|
|
|
(70 |
) |
|
|
3 |
|
|
|
359 |
|
|
|
(40 |
) |
|
|
3 |
|
Non-competition agreements |
|
|
379 |
|
|
|
(77 |
) |
|
|
5 |
|
|
|
379 |
|
|
|
(58 |
) |
|
|
5 |
|
Other |
|
|
730 |
|
|
|
(429 |
) |
|
|
23 |
|
|
|
730 |
|
|
|
(411 |
) |
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
amortizable intangible assets |
|
$ |
17,695 |
|
|
$ |
(993 |
) |
|
|
|
|
|
$ |
17,695 |
|
|
$ |
(747 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets are being amortized over their estimated useful lives of two to 40
years with a weighted average amortization period of 30 years. Total amortization expense for
other intangible assets was $246,000 and $11,000 for the quarters ended April 30, 2006 and 2005,
respectively.
The carrying amount of goodwill attributed to each operating segment was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water and Wastewater |
|
|
|
|
|
|
Energy |
|
|
Infrastructure |
|
|
Total |
|
Balance February 1, 2006 |
|
$ |
950 |
|
|
$ |
56,907 |
|
|
$ |
57,857 |
|
Additions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 30, 2006 |
|
$ |
950 |
|
|
$ |
56,907 |
|
|
$ |
57,857 |
|
|
|
|
|
|
|
|
|
|
|
5. Indebtedness
On July 31, 2003, the Company entered into an agreement (Master Shelf Agreement) whereby it
could issue up to $60,000,000 in unsecured notes. Upon closing, the Company issued $40,000,000 of
notes (Series A Senior Notes) under the Master Shelf Agreement. The Series A Senior Notes bear a
fixed interest rate of 6.05% and are due on July 31, 2010, with annual principal payments of
$13,333,000 beginning July 31, 2008. Proceeds from the issuance were used to refinance borrowings
outstanding under the Companys previous term loan and revolving credit facility. The Company
issued an additional $20,000,000 of notes under the Master Shelf Agreement in October 2004 (Series
B Senior Notes). The Series B Senior Notes bear a fixed interest rate of 5.40% and are due on
September 29, 2011, with annual principal payments of $6,667,000 beginning September 29, 2009.
Proceeds of the issuance were used to finance the acquisition of Beylik and general corporate
purposes. Concurrent with the acquisition of Reynolds, the Company amended the Master Shelf
Agreement to increase the amount of senior notes available to be issued from $60,000,000 to
$100,000,000, thus, creating an available facility amount of $40,000,000, and reinstated and
extended the available issuance period to September 15, 2007.
Also, concurrent with the acquisition of Reynolds, the Company expanded its existing revolving
credit facility with LaSalle Bank National Association, as Administrative Agent, and a group of
additional banks by entering into an Amended and Restated Loan Agreement (the Credit Agreement)
with LaSalle Bank National Association, as Administrative Agent and as Lender (the Administrative
Agent), and the other Lenders listed therein (the Lenders), which increased the Companys
revolving loan commitment from $40,000,000 to $130,000,000, less any outstanding letter of credit
commitments (which are subject to a $30,000,000 sublimit). Approximately $80 million of the
facility was used to pay the cash portion of the acquisition of Reynolds and refinance the
outstanding borrowings under the previous credit agreement. The Credit Agreement provides for
interest at variable rates equal to, at the Companys option, a LIBOR rate plus 1.00% to 2.00%, or
a base rate, as defined in the Credit Agreement plus up to 0.50%, depending upon the Companys
leverage ratio. The Credit Agreement is unsecured and is due and payable September 24, 2010. On
April 30, 2006, there were letters of credit of $6,914,000 and borrowings of $81,200,000
outstanding on the Credit Agreement resulting in available capacity of $41,886,000.
11
The Master Shelf Agreement and the Credit Agreement contain certain covenants including
restrictions on the incurrence of additional indebtedness and liens, investments, acquisitions,
transfer or sale of assets, transactions with affiliates, payment of dividends and certain
financial maintenance covenants, including among others, fixed charge coverage, maximum debt to
EBITDA and minimum tangible net worth. The Company was in compliance with its covenants as of
April 30, 2006.
Debt outstanding as of April 30, 2006 and January 31, 2006 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
|
January 31, |
|
|
|
2006 |
|
|
2006 |
|
Long-term debt: |
|
|
|
|
|
|
|
|
Credit Agreement |
|
$ |
81,200 |
|
|
$ |
68,900 |
|
Senior Notes |
|
|
60,000 |
|
|
|
60,000 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
141,200 |
|
|
$ |
128,900 |
|
|
|
|
|
|
|
|
6. Derivatives
The Companys energy division is exposed to fluctuations in the price of natural gas and has
entered into fixed-price physical delivery contracts to manage natural gas price risk for a portion
of its production. As of April 30, 2006, the Company had committed to deliver 4,048,000 million
British Thermal Units (MMBtu) of natural gas through March 2008. The prices on these contracts
range from $8.89 to $9.65 per MMBtu.
The fixed-price physical delivery contracts will result in the physical delivery of natural gas,
and as a result, are exempt from the requirements of SFAS 133 under the normal purchases and sales
exception. Accordingly, the contracts are not reflected in the balance sheet at fair value and
revenues from the contracts are recognized as the natural gas is delivered under the terms of the
contracts. The estimated fair value of such contracts at April 30, 2006 was $4,025,000.
Additionally, the Company has foreign operations that have significant costs denominated in foreign
currencies, and thus is exposed to risks associated with changes in foreign currency exchange
rates. At any point in time, the Company might use various hedge instruments, primarily foreign
currency option contracts, to manage the exposures associated 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.
The Company held option contracts with an aggregate U.S. dollar notional value of $8,500,000 as of
April 30, 2006 to hedge the risks associated with forecasted Australian dollar denominated costs in
its African operations. The contracts settle in various increments through January 2007. The fair
value of the instruments of $252,000 at April 30, 2006 was recorded in other current assets and in
accumulated other comprehensive income net of income taxes of $98,000. Aggregate losses of $11,000
on foreign currency hedging transactions were recognized for the three months ended April 30, 2006
as the forecasted transactions being hedged occured and were recorded primarily in cost of revenues
in the Companys Consolidated Statements of Income.
7. Other Comprehensive Income (Loss)
Components of other comprehensive income (loss) are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 30, |
|
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
4,642 |
|
|
$ |
2,753 |
|
Other comprehensive income (loss),net of taxes: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(109 |
) |
|
|
(133 |
) |
Change in unrecognized pension liability |
|
|
|
|
|
|
(154 |
) |
Unrealized gain on foreign exchange contracts |
|
|
154 |
|
|
|
|
|
Other comprehensive income |
|
$ |
4,687 |
|
|
$ |
2,466 |
|
12
The components of accumulated other comprehensive loss for the three months ended April 30, 2006
and 2005 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Accumulated |
|
|
|
Cumulative |
|
|
Unrecognized |
|
|
Gain |
|
|
Other |
|
|
|
Translation |
|
|
Pension |
|
|
on Exchange |
|
|
Comprehensive |
|
|
|
Adjustment |
|
|
Liability |
|
|
Contracts |
|
|
Loss |
|
Balance, February 1, 2006 |
|
$ |
(7,442 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(7,442 |
) |
Period change |
|
|
(109 |
) |
|
|
|
|
|
|
154 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 30, 2006 |
|
$ |
(7,551 |
) |
|
$ |
|
|
|
$ |
154 |
|
|
$ |
(7,397 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Accumulated |
|
|
|
Cumulative |
|
|
Unrecognized |
|
|
Gain |
|
|
Other |
|
|
|
Translation |
|
|
Pension |
|
|
on Exchange |
|
|
Comprehensive |
|
|
|
Adjustment |
|
|
Liability |
|
|
Contracts |
|
|
Loss |
|
Balance, February 1, 2005 |
|
$ |
(7,165 |
) |
|
$ |
(1,902 |
) |
|
$ |
|
|
|
$ |
(9,067 |
) |
Period change |
|
|
(133 |
) |
|
|
(154 |
) |
|
|
|
|
|
|
(287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 30, 2005 |
|
$ |
(7,298 |
) |
|
$ |
(2,056 |
) |
|
$ |
|
|
|
$ |
(9,354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Employee Benefit Plans
The Company sponsors a pension plan covering certain hourly employees not covered by
union-sponsored, multi-employer plans. Benefits are computed based mainly on years of service.
The Company makes annual contributions to the plan substantially equal to the amounts required to
maintain the qualified status of the plans. Contributions are intended to provide for benefits
related to past and current service with the Company. Effective December 31, 2003, the Company
froze the pension plan. Benefits will no longer be accrued after December 31, 2003, and no further
employees will be added to the Plan. The Company expects to maintain the assets of the Plan to pay
normal benefits accrued through December 31, 2003. Assets of the plan consist primarily of stocks,
bonds and government securities.
Net periodic pension cost for the three months ended April 30, 2006 and 2005 includes the following
components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended April 30, |
|
|
|
2006 |
|
|
2005 |
|
Service cost |
|
$ |
18 |
|
|
$ |
18 |
|
Interest cost |
|
|
109 |
|
|
|
109 |
|
Expected return on assets |
|
|
(121 |
) |
|
|
(121 |
) |
Net amortization |
|
|
67 |
|
|
|
67 |
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
73 |
|
|
$ |
73 |
|
|
|
|
|
|
|
|
The Company has recognized the full amount of its actuarially determined pension liability and the
related intangible asset (if applicable). The unrecognized pension cost has been recorded as a
charge to consolidated stockholders equity after giving effect to the related future tax benefit.
The Company also provides supplemental retirement benefits to its chief executive officer.
Benefits are computed based on the compensation earned during the highest five consecutive years of
employment reduced for a portion of Social Security benefits
and an annuity equivalent of the chief executives defined contribution plan balance. The Company
does not contribute to the plan or maintain any investment assets related to the expected benefit
obligation. The Company has recognized the full amount of its actuarially determined pension
liability. Net periodic pension cost of the supplemental retirement benefits for the three months
ended April 30, 2006 and 2005 include the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended April 30, |
|
|
|
2006 |
|
|
2005 |
|
Service cost |
|
$ |
30 |
|
|
$ |
30 |
|
Interest cost |
|
|
19 |
|
|
|
19 |
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
49 |
|
|
$ |
49 |
|
|
|
|
|
|
|
|
13
9. Stock and Stock Option Plans
In October 1998, the Company adopted a Rights Agreement whereby the Company has authorized and
declared a dividend of one preferred share purchase right (Right) for each outstanding common
share of the Company. Subject to limited exceptions, the Rights are exercisable if a person or
group acquires or announces a tender offer for 25% or more of the Companys common stock. Each
Right will entitle shareholders to buy one one-hundredth of a share of a newly created Series A
Junior Participating Preferred Stock of the Company at an exercise price of $45.00. The Company is
entitled to redeem the Right at $.01 per Right at any time before a person has acquired 25% or more
of the Companys outstanding common stock. The Rights expire 10 years from the date of grant.
The Company has reserved 750,000 shares of common stock for issuance under employee incentive
compensation plans. Issuance of shares under the plans is based on performance as determined
annually at the discretion of a committee appointed by the
Companys Board of Directors.
The
Company also has stock option plans that provide for the granting of options to purchase up to an
aggregate of 1,250,000 shares of common stock at a price fixed by the Board of Directors or a
committee. As of April 30, 2006, there are no shares available to be granted under the stock
option plans. The Company has the ability to issue shares under the
stock option plans
either from new issuances or from treasury, although it has
previously always issued new shares and expects to continue to issue
new shares in the future.
Significant option groups outstanding at April 30, 2006, and related exercise price and remaining
contractual term follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual |
Grant |
|
Options |
|
Options |
|
Exercise |
|
Term |
Date |
|
Outstanding |
|
Exercisable |
|
Price |
|
(Months) |
4/97 |
|
|
3,264 |
|
|
|
3,264 |
|
|
$ |
11.400 |
|
|
|
12 |
|
2/98 |
|
|
125,000 |
|
|
|
125,000 |
|
|
|
14.000 |
|
|
|
21 |
|
4/98 |
|
|
5,144 |
|
|
|
5,144 |
|
|
|
10.290 |
|
|
|
24 |
|
4/99 |
|
|
9,773 |
|
|
|
9,773 |
|
|
|
4.125 |
|
|
|
36 |
|
4/99 |
|
|
153,075 |
|
|
|
153,075 |
|
|
|
5.250 |
|
|
|
36 |
|
2/00 |
|
|
3,500 |
|
|
|
3,500 |
|
|
|
5.500 |
|
|
|
46 |
|
4/00 |
|
|
16,885 |
|
|
|
16,885 |
|
|
|
3.495 |
|
|
|
48 |
|
8/00 |
|
|
2,500 |
|
|
|
2,500 |
|
|
|
5.125 |
|
|
|
52 |
|
6/04 |
|
|
30,000 |
|
|
|
30,000 |
|
|
|
16.600 |
|
|
|
99 |
|
6/04 |
|
|
267,802 |
|
|
|
66,955 |
|
|
|
16.650 |
|
|
|
99 |
|
6/05 |
|
|
14,000 |
|
|
|
14,000 |
|
|
|
17.540 |
|
|
|
111 |
|
9/05 |
|
|
250,000 |
|
|
|
|
|
|
|
23.050 |
|
|
|
115 |
|
1/06 |
|
|
210,231 |
|
|
|
|
|
|
|
27.870 |
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,091,174 |
|
|
|
430,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All options were granted at an exercise price equal to the fair market value of the Companys
common stock at the date of grant. The options have terms
of five to ten years from the date of grant and generally vest ratably over periods of four to five
years. Certain option awards provide for accelerated vesting if there
is a change of control (as defined in the plans) and for equitable
adjustments in the event of changes in the Companys equity
structure. The Company does not expect any unvested shares to be
forfeited. Transactions for stock options for the period ended April 30, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Number of |
|
|
Average |
|
|
Contractual Term |
|
|
Value |
|
|
|
Options |
|
|
Exercise Price |
|
|
(years) |
|
|
(in thousands) |
|
Stock Option Activity Summary: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 1, 2006 |
|
|
1,116,718 |
|
|
$ |
17.728 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(25,544 |
) |
|
|
7.740 |
|
|
|
|
|
|
$ |
539 |
|
Canceled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at April 30, 2006 |
|
|
1,091,174 |
|
|
$ |
17.960 |
|
|
|
7.21 |
|
|
$ |
12,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Exercisable |
|
|
430,096 |
|
|
$ |
10.770 |
|
|
|
4.05 |
|
|
$ |
8,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
The aggregate intrinsic value was calculated using the difference between the current market price
and the exercise price for only those options that have an exercise price less than the current
market prices.
10. Operating Segments
The Company is a multinational company that provides sophisticated services and related
products to a variety of markets, as well as being a producer of unconventional natural gas for the
energy market. Management defines the Companys operational organizational structure into discrete
divisions based on its primary product lines. Each division comprises a combination of individual
district offices, which primarily offer similar types of services and serve similar types of
markets. Should an offices primary responsibility move from one division president to another,
that offices results going forward would be reclassified between divisions at that time. The
Companys reportable segments are defined as follows:
Water and Wastewater Infrastructure Division
This division provides a full line of water-related services and products including
hydrological studies, site selection, well design, drilling and well development, pump
installation, and repair and maintenance. The divisions 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. With the acquisition of Reynolds in September 2005, the division
expanded its capabilities in the area of the design and build of water and wastewater treatment
plants, Ranney collector wells, sewer rehabilitation and water and wastewater transmission lines.
Effective February 1, 2006, the Companys Geoconstruction division, previously a separate segment,
was reorganized under the operational leadership of the water and wastewater infrastructure
division. The Companys segment disclosures for all periods have been reorganized accordingly for
comparative purposes. 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.
Mineral Exploration Division
This division provides a complete range of drilling services for the mineral exploration
industry. Its aboveground and underground drilling activities include all phases of core drilling,
diamond, reverse circulation, dual tube, hammer and rotary air-blast methods.
Energy Division
This division focuses entirely on exploration and production of unconventional gas properties
in the United States. To date this division 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. In fiscal 2006, the division completed its shift in focus to
unconventional gas development activities and has reclassified the results of all other service
operations to the Other division.
Other
Other includes two small specialty energy service companies previously classified in the
energy division and any other specialty operations not included in one of the other divisions.
Revenues and income from continuing operations pertaining to the Companys operating segments are
presented below (in thousands). Intersegment revenues are accounted for based on the fair market
value of the services provided. Unallocated corporate expenses primarily consist of general and
administrative functions performed on a company-wide basis and benefiting all operating segments.
These costs include accounting, financial reporting, internal audit, safety, treasury, corporate
and securities law, tax compliance, certain executive management (chief executive officer, chief
financial officer and general counsel) and board of directors. Beginning February 1, 2006,
corporate expenses also include expenses associated with share-based payments.
15
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 30, |
|
|
|
2006 |
|
|
2005 |
|
Revenues |
|
|
|
|
|
|
|
|
Water and wastewater infrastructure |
|
$ |
116,695 |
|
|
$ |
63,667 |
|
Mineral exploration |
|
|
33,628 |
|
|
|
30,559 |
|
Energy |
|
|
5,064 |
|
|
|
1,778 |
|
Other |
|
|
1,330 |
|
|
|
654 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
156,717 |
|
|
$ |
96,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of affiliates |
|
|
|
|
|
|
|
|
Mineral exploration |
|
$ |
365 |
|
|
$ |
792 |
|
Water and wastewater infrastructure |
|
|
|
|
|
|
327 |
|
|
|
|
|
|
|
|
Total equity in earnings of affiliates |
|
$ |
365 |
|
|
$ |
1,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes and minority interest |
|
|
|
|
|
|
|
|
Water and wastewater infrastructure |
|
$ |
7,983 |
|
|
$ |
5,526 |
|
Mineral exploration |
|
|
4,985 |
|
|
|
4,128 |
|
Energy |
|
|
2,057 |
|
|
|
68 |
|
Other |
|
|
305 |
|
|
|
10 |
|
Unallocated corporate expenses |
|
|
(4,441 |
) |
|
|
(3,418 |
) |
Interest |
|
|
(2,131 |
) |
|
|
(970 |
) |
|
|
|
|
|
|
|
Total income from continuing operations before income taxes
and minority interest |
|
$ |
8,758 |
|
|
$ |
5,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Information: |
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
United States |
|
$ |
125,929 |
|
|
$ |
69,104 |
|
Africa/Australia |
|
|
18,993 |
|
|
|
19,126 |
|
Mexico |
|
|
6,590 |
|
|
|
4,863 |
|
Other foreign |
|
|
5,205 |
|
|
|
3,565 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
156,717 |
|
|
$ |
96,658 |
|
|
|
|
|
|
|
|
11. Contingencies
The Companys drilling activities involve certain operating hazards that can result in
personal injury or loss of life, damage and destruction of property and equipment, damage to the
surrounding areas, release of hazardous substances or wastes and other damage to the environment,
interruption or suspension of drill site operations and loss of revenues and future business. The
magnitude of these operating risks is amplified when the Company, as is frequently the case,
conducts a project on a fixed-price, turnkey basis where the Company delegates certain functions
to subcontractors but remains responsible to the customer for the subcontracted work. In addition,
the Company is exposed to potential liability under foreign, federal, state and local laws and
regulations, contractual indemnification agreements or otherwise in connection with its services
and products. Litigation arising from any such occurrences may result in the Company being named
as a defendant in lawsuits asserting large claims. Although the Company maintains insurance
protection that it considers economically prudent, there can be no assurance that any such
insurance will be sufficient or effective under all circumstances or against all claims or hazards
to which the Company may be subject or that the Company will be able to continue
to obtain such insurance protection. A successful claim or damage resulting from a hazard for
which the Company is not fully insured could have a material adverse effect on the Company. In
addition, the Company does not maintain political risk insurance with respect to its foreign
operations.
The Company is involved in various matters of litigation, claims and disputes which have arisen in
the ordinary course of the Companys business. The Company believes that the ultimate disposition
of these matters will not, individually and in the aggregate, have a material adverse effect upon
its business or consolidated financial position, results of operations or cash flows.
16
Item 1A. Risk Factors
There have been no significant changes to the risk factors disclosed under Item 1A in our
Annual Report on Form 10-K for the year ended January 31, 2006.
Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
Cautionary Language Regarding Forward-Looking Statements
This Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Such statements may include,
but are not limited to, statements of plans and objectives, statements of future economic
performance and statements of assumptions underlying such statements, and statements of
managements intentions, hopes, beliefs, expectations or predictions of the future. Forward looking
statements can often be identified by the use of forward-looking terminology, such as should,
intended, continue, believe, may, hope, anticipate, will, will be, goal,
forecast, plan, estimate and similar words or phrases. Such statements are based on current
expectations and are subject to certain risks, uncertainties and assumptions, including but not
limited to prevailing prices for various commodities, unanticipated slowdowns in the Companys
major markets, the risks and uncertainties normally incident to the construction industry and
exploration for and development and production of oil and gas, the impact of competition, the
effectiveness of operational changes expected to increase efficiency and productivity, worldwide
economic and political conditions and foreign currency fluctuations that may affect worldwide
results of operations. Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially and adversely from those
anticipated, estimated or projected. These forward-looking statements are made as of the date of
this filing, and the Company assumes no obligation to update such forward-looking statements or to
update the reasons why actual results could differ materially from those anticipated in such
forward-looking statements.
Results of Operations
The following table presents, for the periods indicated, the percentage relationship which
certain items reflected in the Companys consolidated statements of income bear to revenues and the
percentage increase or decrease in the dollar amount of such items period to period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Period-to-Period |
|
|
April 30, |
|
Change |
|
|
2006 |
|
2005 |
|
Three Months |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Water and wastewater infrastructure |
|
|
74.5 |
% |
|
|
65.9 |
% |
|
|
83.3 |
% |
Mineral exploration |
|
|
21.5 |
|
|
|
31.6 |
|
|
|
10.0 |
|
Energy |
|
|
3.2 |
|
|
|
1.8 |
|
|
|
184.8 |
|
Other |
|
|
0.8 |
|
|
|
0.7 |
|
|
|
103.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
62.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
74.7 |
% |
|
|
73.5 |
% |
|
|
64.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
25.3 |
|
|
|
26.5 |
|
|
|
55.1 |
|
Selling, general and administrative expenses |
|
|
14.3 |
|
|
|
17.5 |
|
|
|
32.4 |
|
Depreciation, depletion and amortization |
|
|
4.5 |
|
|
|
4.2 |
|
|
|
76.1 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of affiliates |
|
|
0.2 |
|
|
|
1.2 |
|
|
|
(67.4 |
) |
Interest |
|
|
(1.4 |
) |
|
|
(1.0 |
) |
|
|
119.7 |
|
Other, net |
|
|
0.3 |
|
|
|
0.5 |
|
|
|
(47.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before
income taxes and minority interest |
|
|
5.6 |
|
|
|
5.5 |
|
|
|
63.9 |
|
Income tax expense |
|
|
2.6 |
|
|
|
2.7 |
|
|
|
60.3 |
|
Minority interest |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
before discontinued operations |
|
|
3.0 |
|
|
|
2.8 |
|
|
|
68.6 |
|
Loss from discontinued operations, net of tax |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
3.0 |
% |
|
|
2.8 |
% |
|
|
68.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Revenues and income from continuing operations pertaining to the Companys operating segments are
presented below. Intersegment revenues are accounted for based on the fair market value of the
services provided. Unallocated corporate expenses primarily consist of general and administrative
functions performed on a company-wide basis and benefiting all operating segments. These costs
include accounting, financial reporting, internal audit, safety, treasury, corporate and securities
law, tax compliance, certain executive management (chief executive officer, chief financial officer
and general counsel) and board of directors. Beginning February 1, 2006, corporate expenses also
include expenses associated with share-based payments. Operating segment revenues and income from
continuing operations are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 30, |
|
|
|
2006 |
|
|
2005 |
|
Revenues |
|
|
|
|
|
|
|
|
Water and wastewater infrastructure |
|
$ |
116,695 |
|
|
$ |
63,667 |
|
Mineral exploration |
|
|
33,628 |
|
|
|
30,559 |
|
Energy |
|
|
5,064 |
|
|
|
1,778 |
|
Other |
|
|
1,330 |
|
|
|
654 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
156,717 |
|
|
$ |
96,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of affiliates |
|
|
|
|
|
|
|
|
Mineral exploration |
|
$ |
365 |
|
|
$ |
792 |
|
Water and wastewater infrastructure |
|
|
|
|
|
|
327 |
|
|
|
|
|
|
|
|
Total equity in earnings of affiliates |
|
$ |
365 |
|
|
$ |
1,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
Water and wastewater infrastructure |
|
$ |
7,983 |
|
|
$ |
5,526 |
|
Mineral exploration |
|
|
4,985 |
|
|
|
4,128 |
|
Energy |
|
|
2,057 |
|
|
|
68 |
|
Other |
|
|
305 |
|
|
|
10 |
|
Unallocated corporate expenses |
|
|
(4,441 |
) |
|
|
(3,418 |
) |
Interest |
|
|
(2,131 |
) |
|
|
(970 |
) |
|
|
|
|
|
|
|
Total income from continuing operations before income taxes |
|
$ |
8,758 |
|
|
$ |
5,344 |
|
|
|
|
|
|
|
|
Revenues for the three months ended April 30, 2006 increased $60,059,000, or 62.1%, to $156,717,000
compared to $96,658,000 for the same period last year. Revenues were up across all divisions with
the main increases in the mineral exploration and water and wastewater infrastructure divisions,
including the impact of the acquisition of Reynolds, Inc. (Reynolds) that closed on September 28,
2005. A further discussion of results of operations by division is presented below.
Gross profit as a percentage of revenues was 25.3% for the three months ended April 30, 2006
compared to 26.5% for the three months ended April 30, 2005. The decrease in gross profit
percentage was primarily the result of reduced margins in the water and wastewater infrastructure
division arising from a change in product mix with the acquisition of Reynolds. The impact of
this product mix shift was partially offset by improved margins in the mineral exploration division
due to improved pricing and efficiency and the energy division due to the increased sales of
unconventional gas as a result of increased production and pricing.
Selling, general and administrative expenses increased 32.4% to $22,364,000 for the three months
ended April 30, 2006
compared to $16,890,000 for the three months ended April 30, 2005. The increase was primarily the
result of $3,627,000 in expenses added from the acquisition of Reynolds and from various other
categories including an increase in compensation expense of $454,000 associated with stock options
under SFAS 123R Shared-Based Payments, additional incentive compensation expense of $399,000 from
increased profitability in the quarter and wage and benefit increases of $513,000.
Equity in earnings of affiliates decreased $754,000 to $365,000 for the three months ended April
30, 2006 from $1,119,000 in the prior year. The decrease reflects reduced earnings of $427,000
from foreign affiliates in mineral exploration and income in the prior year of $327,000 from a
non-recurring domestic joint venture in the water and wastewater infrastructure division.
18
Depreciation, depletion and amortization increased to $7,066,000 for the three months ended April
30, 2006 compared to $4,013,000 for the same period last year. The increase was primarily the
result of depreciation and amortization of $1,922,000 associated with the Reynolds acquisition and
increased depletion expense of $707,000 resulting from the increase in production of unconventional
gas from the Companys energy operations.
Interest expense increased to $2,131,000 for the three months ended April 30, 2006 compared to
$970,000 for the three months ended April 30, 2005. The increase was primarily a result of
increases in the Companys average borrowings for the period in conjunction with the financing of
the Reynolds acquisition.
Income tax expense of $4,116,000 (an effective rate of 47.0%) was recorded for the three months
ended April 30, 2006, compared to $2,567,000 (an effective rate of 48.0%) for the same period last
year. The improvement in the effective rate is primarily attributable to improved mix of pre-tax
earnings, especially in international operations. The effective rate in excess of the statutory
federal rate for the periods was due primarily to the impact of nondeductible expenses and the tax
treatment of certain foreign operations.
Water and Wastewater Infrastructure Division
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
April 30, |
|
|
2006 |
|
2005 |
Revenues |
|
$ |
116,695 |
|
|
$ |
63,667 |
|
Income from continuing operations before income taxes |
|
|
7,983 |
|
|
|
5,526 |
|
At the beginning of the first quarter the Company established the water and wastewater
infrastructure division. The division is a combination of the Companys legacy water businesses,
its geoconstruction division and the Reynolds company.
Water and wastewater infrastructure revenues increased 83.3% to $116,695,000 for the three months
ended April 30, 2006 from $63,667,000 for the three months ended April 30, 2005. The increase in
revenues was primarily attributable to additional revenues of $46,944,000 from the Companys
acquisition of Reynolds and additional revenues of $2,985,000 from the Companys continued
expansion into water treatment markets.
Income from continuing operations for the water and wastewater infrastructure division increased
44.5% to $7,983,000 for
the three months ended April 30, 2006, compared to $5,526,000 for the three months ended April 30,
2005. The increase in income from continuing operations is primarily attributable to income of
$2,147,000 from the acquisition of Reynolds and an increase in earnings of the Companys water
treatment initiatives to $1,130,000 from $852,000 in the prior year.
|
|
|
|
|
Mineral Exploration Division |
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
April 30, |
|
|
2006 |
|
2005 |
Revenues |
|
$ |
33,628 |
|
|
$ |
30,559 |
|
Income from continuing operations before income taxes |
|
|
4,985 |
|
|
|
4,128 |
|
Mineral exploration revenues increased 10.0% to $33,628,000 for the three months ended April 30,
2006 from $30,559,000 for the three months ended April 30, 2005. The increase was primarily
attributable to continued strength in most of the Companys markets due to relatively high gold and base metal prices.
Income from continuing operations for the mineral exploration division was up 20.8% to $4,985,000
for the three months ended April 30, 2006, compared to $4,128,000 for the three months ended April
30, 2005. The improved earnings in the division were primarily attributable to the impact of
increased exploration activity in most of the Companys markets partially offset by a decrease of
$427,000 in equity earnings of affiliates caused by weather related delays in Latin America and an
increase in accrued incentive compensation expense of $286,000 due to higher profitability in the
current year.
19
Energy Division
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
April 30, |
|
|
2006 |
|
2005 |
Revenues |
|
$ |
5,064 |
|
|
$ |
1,778 |
|
Income from continuing operations before income taxes |
|
|
2,057 |
|
|
|
68 |
|
Energy revenues increased 184.8% to $5,064,000 for the three months ended April 30, 2006, compared
to revenues of $1,778,000 for the three months ended April 30, 2005. The increase in revenues was
primarily attributable to increased production from the Companys unconventional gas properties and
higher natural gas prices.
The income from continuing operations for the energy division was $2,057,000 for the three months
ended April 30, 2006, compared to income from continuing operations of $68,000 for the three months
ended April 30, 2005. The increase in income from continuing operations is due to the increase in
production noted above.
Unallocated Corporate Expenses
Corporate expenses not allocated to individual divisions, primarily included in selling,
general and administrative expenses, were $4,441,000 and $3,418,000 for the three months ended
April 30, 2006 and 2005, respectively. The increase for the quarter was primarily due to the
recognition of compensation expense under SFAS No. 123R (revised December 2004), Share Based
Payments of $454,000 and an increase in consulting services of $244,000.
Changes in Financial Condition
Management exercises discretion regarding the liquidity and capital resource needs of its
business segments. This includes the ability to prioritize the use of capital and debt capacity, to
determine cash management policies and to make
decisions regarding capital expenditures.
The Company maintains an agreement (the Master Shelf Agreement) whereby it has $100,000,000 of
unsecured notes available to be issued before September 15, 2007. At April 30, 2006, the Company
has $60,000,000 in notes outstanding under the Master Shelf Agreement. Additionally, the Company
holds a revolving credit facility (the Credit Agreement) composed of an unsecured $130,000,000
revolving facility, less any outstanding letter of credit commitments (which are subject to a
$30,000,000 sublimit). Amounts outstanding under the Credit Agreement are due and payable September
28, 2010. At April 30, 2006, the Company had $81,200,000 outstanding under the Credit Agreement
(see Note 4 of the Notes to Consolidated Financial Statements). The Company was in compliance with
its financial covenants at April 30, 2006 and expects to remain in compliance through the
foreseeable future.
The Companys working capital as of April 30, 2006 and April 30, 2005 was $82,481,000 and
$69,996,000, respectively. The increase in working capital at April 30, 2006 was primarily
attributable to the increase in the balance of accounts receivable as a result of the growth in
revenues and working capital acquired in the Reynolds acquisition. The Company believes it will
have sufficient cash from operations and access to credit facilities to meet the Companys
operating cash requirements and to fund its budgeted capital expenditures for fiscal 2007.
Operating Activities
Cash used in operating activities was $4,257,000 for the three months ended April 30 2006 as
compared to $7,277,000 for the three months ended April 30, 2005. The improvement was primarily due
to increased earnings offset by an increase in working capital requirements.
Investing Activities
The Companys capital expenditures, net of disposals, of $14,405,000 for the three months
ended April 30, 2006, were directed primarily toward the Companys expansion into unconventional
gas exploration and production. Expenditures related to the Companys unconventional gas efforts
totaled $8,778,000 for the three months ended April 30, 2006, including the construction of gas
pipeline infrastructure near the Companys development projects.
20
Financing Activities
For the three months ended April 30, 2006, the Company had net borrowings of $12,300,000 under
its credit facilities primarily for working capital requirements and to fund capital expenditures.
Additionally, proceeds of $198,000 were received from issuance of common stock related to the
exercise of stock options.
The Companys contractual obligations and commercial commitments as of April 30, 2006, are
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments/Expiration by Period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
5 years |
|
Contractual obligations and other
commercial commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes |
|
$ |
60,000 |
|
|
$ |
|
|
|
$ |
13,333 |
|
|
$ |
40,000 |
|
|
$ |
6,667 |
|
Credit agreement |
|
|
81,200 |
|
|
|
|
|
|
|
|
|
|
|
81,200 |
|
|
|
|
|
Operating leases |
|
|
15,585 |
|
|
|
5,584 |
|
|
|
7,390 |
|
|
|
1,953 |
|
|
|
658 |
|
Mineral interest obligations |
|
|
507 |
|
|
|
103 |
|
|
|
284 |
|
|
|
96 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
|
157,292 |
|
|
|
5,687 |
|
|
|
21,007 |
|
|
|
123,249 |
|
|
|
7,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
|
6,914 |
|
|
|
6,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligations |
|
|
534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
and commercial commitments |
|
$ |
164,740 |
|
|
$ |
12,601 |
|
|
$ |
21,007 |
|
|
$ |
123,249 |
|
|
$ |
7,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company expects to meet its contractual cash obligations in the ordinary course of operations,
and that the standby letters of credit will be renewed in connection with its annual insurance
renewal process. Payments related to the credit agreement and senior notes do not include interest
payments. Interest is payable on the senior notes at fixed interest rates of 6.05% and 5.40%.
Interest is payable on the credit agreement at variable interest rates equal to, at the Companys
option, a LIBOR rate plus 1.00% to 2.00%, or a base rate, as defined in the Credit Agreement plus
up to 0.50%, depending on the Companys leverage ratio (See Note 5 of the Notes to Consolidated
Financial Statements).
The Company incurs additional obligations in the ordinary course of operations. These obligations,
including but not limited to, interest payments on debt, income tax payments and pension fundings
are expected to be met in the normal course of operations.
Critical Accounting Policies and Estimates
Managements Discussion and Analysis of Financial Condition and Results of Operations
discusses the Companys consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting
period. On an on-going basis, management evaluates its estimates and judgments, which are based on
historical experience and on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Our accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial
Statements, located in Item 1 of this Form 10-Q. We believe that the following represent our more
critical estimates and assumptions used in the preparation of our consolidated financial
statements, although not all inclusive.
Revenue Recognition Revenue is recognized on large, long-term contracts using
the percentage of completion method based upon the ratio of costs incurred to total estimated costs
at completion. Contract price and cost estimates are reviewed periodically as work progresses and
adjustments proportionate to the percentage of completion are reflected in contract revenues and
gross profit in the reporting period when such estimates are revised. Changes in job performance,
job conditions and estimated profitability, including those arising from contract penalty
provisions, change orders and final contract settlements may
21
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.
Goodwill and Other Intangibles The Company accounts for goodwill and other intangible
assets in accordance with the Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets. Other intangible assets primarily consist of trademarks, customer-related
intangible assets and patents obtained through business acquisitions. Amortizable intangible
assets are being amortized over their estimated useful lives, which range from two to 40 years.
The impairment evaluation for goodwill is conducted annually, or more frequently, if events or
changes in circumstances indicate that an asset might be impaired. The evaluation is performed by
using a two-step process. In the first step, the fair value of each reporting unit is compared with
the carrying amount of the reporting unit, including goodwill. The estimated fair value of the
reporting unit is generally determined on the basis of discounted future cash flows. If the
estimated fair value of the reporting unit is less than the carrying amount of the reporting unit,
then a second step must be completed in order to determine the amount of the goodwill impairment
that should be recorded. In the second step, the implied fair value of the reporting units
goodwill is determined by allocating the reporting units fair value to all of its assets and
liabilities other than goodwill (including any unrecognized intangible assets) in a manner similar
to a purchase price allocation. The resulting implied fair value of the goodwill that results from
the application of this second step is then compared to the carrying amount of the goodwill and an
impairment charge is recorded for the difference.
The impairment evaluation of the carrying amount of intangible assets with indefinite lives is
conducted annually or more frequently if events or changes in circumstances indicate that an asset
might be impaired. The evaluation is performed by comparing the carrying amount of these assets to
their estimated fair value. If the estimated fair value is less than the carrying amount of the
intangible assets
with indefinite lives, then an impairment charge is recorded to reduce the asset to its estimated
fair value. The estimated fair value is generally determined on the basis of discounted future cash
flows.
The assumptions used in the estimate of fair value are generally consistent with the past
performance of each reporting unit and are also consistent with the projections and assumptions
that are used in current operating plans. Such assumptions are subject to change as a result of
changing economic and competitive conditions.
Other Long-lived Assets In evaluating the fair value and future benefits of long-lived
assets, including the Companys gas transportation facilities and equipment, the Company performs
an analysis of the anticipated future net cash flows of the related long-lived assets and reduces
their carrying value by the excess, if any, of the result of such calculation.
Accrued Insurance Expense The Company maintains insurance programs where it is
responsible for a certain amount of each claim up to a self-insured limit. Estimates are recorded
for health and welfare, property and casualty insurance costs that are associated with these
programs. These costs are estimated based on actuarially determined projections of future payments
under these programs. Should a greater amount of claims occur compared to what was estimated or
medical costs increase beyond what was anticipated, reserves recorded may not be sufficient and
additional costs to the consolidated financial statements could be required.
Costs estimated to be incurred in the future for employee medical benefits, property, workers
compensation and casualty insurance programs resulting from claims which have occurred are accrued
currently. Under the terms of the Companys agreement with the various insurance carriers
administering these claims, the Company is not required to remit the total premium until the claims
are actually paid by the insurance companies. These costs are not expected to significantly impact
liquidity in future periods.
Income Taxes Income taxes are provided using the asset/liability method, in which
deferred taxes are recognized for the tax consequences of temporary differences between the
financial statement carrying amounts and tax bases of existing assets and liabilities. Deferred
tax assets are reviewed for recoverability and valuation allowances are provided as necessary.
Provision for U.S. income taxes on undistributed earnings of foreign subsidiaries and affiliates is
made only on those amounts in excess of funds considered to be invested indefinitely.
Oil and gas properties and mineral interests The Company follows the full-cost method of
accounting for oil and gas properties. Under this method, all productive and nonproductive costs
incurred in connection with the exploration for and development of oil and gas reserves are
capitalized. Such capitalized costs include lease acquisition, geological and geophysical work,
delay rentals, drilling, completing and equipping oil and gas wells, and salaries, benefits and
other internal salary-related costs directly attributable to these activities. Costs associated
with production and general corporate activities are expensed in the period incurred. Normal
dispositions of oil and gas properties are accounted for as adjustments of capitalized costs, with
no gain or loss recognized.
22
The Company is required to review the carrying value of its oil and gas properties each quarter
under the full cost accounting rules of the SEC. Under these rules, capitalized costs of proved
oil and gas properties, as adjusted for asset retirement
obligations, may not exceed the present value of estimated future net revenues from proved
reserves, discounted at 10%. Application of the ceiling test generally requires pricing future
revenues at the unescalated prices in effect as of the last day of the period, with effect given to
the Companys fixed-price physical delivery contracts, and requires a write-down for accounting
purposes if
the ceiling is exceeded. Unproved oil and gas properties are not amortized, but are assessed for
impairment either individually or on an aggregated basis using a comparison of the carrying values
of the unproved properties to net future cash flows.
Reserve Estimates The Companys estimates of natural gas reserves, by necessity, are
projections based on geologic and engineering data, and there are uncertainties inherent in the
interpretation of such data as well as the projection of future rates of production and the timing
of development expenditures. Reserve engineering is a subjective process of estimating underground
accumulations of gas that are difficult to measure. The accuracy of any reserve estimate is a
function of the quality of available data, engineering and geological interpretation and judgment.
Estimates of economically recoverable gas reserves and future net cash flows necessarily depend
upon a number of variable factors and assumptions, such as historical production from the area
compared with production from other producing areas, the assumed effects of regulations by
governmental agencies and assumptions governing natural gas prices, future operating costs,
severance, ad valorem and excise taxes, development costs and workover and remedial costs, all of
which may in fact vary considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of gas attributable to any particular group of properties,
classifications of such reserves based on risk of recovery, and estimates of the future net cash
flows expected there from may vary substantially. Any significant variance in the assumptions could
materially affect the estimated quantity and value of the reserves, which could affect the carrying
value of the Companys oil and gas properties and the rate of depletion of the oil and gas
properties. Actual production, revenues and expenditures with respect to the Companys reserves
will likely vary from estimates, and such variances may be material.
Litigation and Other Contingencies The Company is involved in litigation incidental to
its business, the disposition of which is not expected to have a material effect on the Companys
financial position or results of operations. It is possible, however, that future results of
operations for any particular quarterly or annual period could be materially affected by changes in
the Companys assumptions related to these proceedings. The Company accrues its best estimate of
the probable cost for the resolution of legal claims. Such estimates are developed in consultation
with outside counsel handling these matters and are based upon a combination of litigation and
settlement strategies. To the extent additional information arises or the Companys strategies
change, it is possible that the Companys estimate of its probable liability in these matters may
change.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The principal market risks to which the Company is exposed are interest rates on variable rate
debt, foreign exchange rates giving rise to translation and transaction gains and losses and
fluctuations in the price of natural gas.
The Company centrally manages its debt portfolio considering overall financing strategies and tax
consequences. A description of the Companys debt is in Note 12 of the Notes to Consolidated
Financial Statements appearing in the Companys January 31, 2006 Form 10-K and Note 5 of this Form
10-Q. As of April 30, 2006, $60,000,000 of the Companys long-term debt outstanding carries a
fixed-rate and $81,200,000 is variable rate debt. An instantaneous change in interest rates of one
percentage point would change the Companys annual interest expense by $812,000.
Operating in international markets involves exposure to possible volatile movements in currency
exchange rates. Currently, the Companys primary international operations are in Australia, Africa,
Mexico and Italy. The operations are described in Note 1 of the Notes to Consolidated Financial
Statements appearing in the Companys January 31, 2006 Form 10-K and Note 9 of this Form 10-Q. The
majority of the Companys contracts in Africa and Mexico are U.S. dollar based, providing a natural
reduction in exposure to currency fluctuations. The Company also may utilize various hedge
instruments, primarily foreign currency
option contracts, to manage the exposures associated with fluctuating currency exchange rates (see
Note 6 of the Notes to Consolidated Financial Statements).
As currency exchange rates change, translation of the income statements of the Companys
international operations into U.S. dollars may affect year-to-year comparability of operating
results. We estimate that a ten percent change in foreign exchange rates would not have
significantly impacted income from continuing operations for the three months ended April 30, 2006
and 2005. This quantitative measure has inherent limitations, as it does not take into account any
governmental actions, changes in customer purchasing patterns or changes in the Companys financing
and operating strategies.
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The Company is also exposed to fluctuations in the price of natural gas, which result from the sale
of the energy divisions
unconventional gas production. The price of natural gas is volatile and the Company has entered
into fixed-price physical contracts covering a portion of its production to manage price
fluctuations and to achieve a more predictable cash flow. As of April 30, 2006, the Company held
contracts for physical delivery of 4,048,000 million British Thermal Units (MMBtu) of natural gas
at prices ranging from $8.89 to $9.65 per MMBtu. The estimated fair value of such contracts at
April 30, 2006 was $4,025,000. We estimate that a ten percent change in the price of natural gas
would have impacted income from continuing operations before taxes by approximately $220,000 for
the three months ended April 30, 2006.
ITEM 4. Controls and Procedures
Based on an evaluation of disclosure controls and procedures for the period ended April 30,
2006, conducted under the supervision and with the participation of the Companys management,
including the Principal Executive Officer and the Principal Financial Officer, the Company
concluded that its disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
Based on an evaluation of internal controls over financial reporting conducted under the
supervision and the participation of the Companys management, including the Principal Executive
Officer and Principal Financial Officer, for the period ended April 30, 2006, the Company concluded
that its internal control over financial reporting is effective as of April 30, 2006. The Company
has not made any significant changes in internal controls or in other factors that could
significantly affect internal controls since such evaluation. The Company excluded from its
assessment any changes in internal control over financial reporting at the Reynolds, Inc. business,
which was acquired on September 28, 2005, and whose financial statements reflect total assets and
revenues constituting 37% and 30%, respectively, of the related consolidated financial statement
amounts as of and for the three months ended April 30, 2006. The Company will include Reynolds,
Inc. in its evaluation of the design and effectiveness of internal control over financial reporting
as of January 31, 2007.
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PART II
ITEM 1 Legal Proceedings
NONE
ITEM 2 Changes in Securities
NOT APPLICABLE
ITEM 3 Defaults Upon Senior Securities
NOT APPLICABLE
ITEM 4 Submission of Matters to a Vote of Security Holders
NONE
ITEM 5 Other Information
NONE
ITEM 6 Exhibits and Reports on Form 8-K
a) Exhibits
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31 |
(1) |
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Section 302 Certification of Chief Executive Officer of the Company. |
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31 |
(2) |
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Section 302 Certification of Chief Financial Officer of the Company. |
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32 |
(1) |
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Section 906 Certification of Chief Executive Officer of the Company. |
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32 |
(2) |
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Section 906 Certification of Chief Financial Officer of the Company. |
Reports on Form 8-K
Form 8-K filed on February 7, 2006 related to the Companys Board nominations and strategic
plan.
Form 8-K filed on April 4, 2006, related to the Companys fiscal year ended January 31, 2006
press release.
Form 8-K filed on April 5, 2006 related to the Companys Settlement Agreement with Steel
Partners II, L.P., Steel Partners, L.L.C. and Warren G. Lichtenstein.
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* * * * * * * * * *
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Layne Christensen Company |
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(Registrant) |
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DATE: June 7, 2006
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/s/ A.B. Schmitt
A.B. Schmitt, President and Chief Executive Officer
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DATE: June 7, 2006
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/s/ Jerry W. Fanska
Jerry W. Fanska, Sr. Vice President Finance and Treasurer
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