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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended January 31, 2003
[ ] 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)
Delaware 48-0920712
--------------------------------- -----------------
State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1900 Shawnee Mission Parkway, Mission Woods, Kansas 66205
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (913) 362-0510
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 126-2 of the Act. Yes [X] No [ ]
The aggregate market value of the 4,231,637 shares of Common Stock of the
registrant held by non-affiliates of the registrant on July 31, 2002, the last
business day of the registrant's second fiscal quarter, computed by reference to
the closing sale price of such stock on the NASDAQ National Market System, was
$41,173,828. The aggregate market value of the 3,955,139 shares of Common Stock
of the Registrant held by non-affiliates of the Registrant on March 20, 2003,
computed by reference to the closing sale price of such stock as reported on the
NASDAQ National Market System, was $30,256,813.
At March 20, 2003, there were 11,852,650 shares of the Registrant's Common
Stock outstanding.
Documents Incorporated by Reference
1. Portions of the following document are incorporated by reference into the
indicated parts of this report: Definitive Proxy Statement for the 2003
Annual Meeting of Stockholders to be filed with the Commission pursuant to
Regulation 14ACPart III.
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PART I
Item 1. Business
General
Layne Christensen Company (the "Company") provides drilling services and
related products and services in four principal markets: water resources,
mineral exploration, geoconstruction services and energy services and
production. Layne Christensen's customers include municipalities, industrial
companies, mining companies, oil and gas companies and consulting and
engineering firms located principally in the United States, Canada, Mexico,
Australia, Africa and South America.
The Company acquired Christensen Boyles Corporation ("CBC") in December
1995, which expanded the Company's mineral exploration drilling business
domestically and marked the Company's entry into Chile and Peru and other South
American countries through CBC's affiliated companies. As a result of this
acquisition, the Company acquired CBC's drill rig and diamond drill bit design
and manufacturing business. On August 8, 2001, the Company sold its design and
manufacturing business to a subsidiary of Atlas Copco (see Note 14 of the Notes
to Consolidated Financial Statements).
On July 25, 1997, the Company, through its wholly owned subsidiary Layne
Christensen Australia Pty Limited, consummated a tender offer to the security
holders of Stanley Mining Services Limited ("Stanley"), a company listed on the
Australian Stock Exchange. Stanley is an Australian mineral exploration company
that provides services predominantly to gold mining companies in Australia and
Africa. In October 1996, Stanley acquired 51% of Glindemann & Kitching Pty Ltd.
("G&K"), a drilling contractor based and operating in Western Australia that
specializes in diamond core exploration drilling for gold projects. On September
5, 1997, G&K repurchased the remaining 49% of G&K's outstanding stock thereby
making G&K a wholly owned subsidiary of Stanley. The acquisition by the Company
of all the outstanding capital stock of Stanley and the repurchase by G&K of all
of G&K's capital stock not previously owned by Stanley are referred to as the
"Stanley Acquisition."
On August 19, 1997, the Company completed a secondary stock offering of
5,750,000 shares of its common stock, par value $0.01 per share, 2,756,565 of
which were sold by the Company and the balance of which were sold by certain of
the Company's existing stockholders. The proceeds received by the Company from
the shares it sold were used to reduce the debt incurred in connection with the
Stanley Acquisition.
The Company maintains its executive offices at 1900 Shawnee Mission
Parkway, Mission Woods, Kansas 66205. The Company's telephone number is (913)
362-0510. The Company's web site address is www.laynechristensen.com. The
Company's periodic and current reports are available, free of charge, on our
website as soon as reasonably practicable after such material is filed with or
furnished to the Securities and Exchange Commission.
Market Overview
The principal markets in which the Company operates are: water resources,
mineral exploration, geoconstruction services, and energy services and
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production. The characteristics of each of these markets vary, particularly with
respect to the maturity and cyclicality of the market in various geographic
areas. In each of these markets, however, the purchaser of drilling services and
products generally demands technical expertise, knowledge of local geological
conditions, project management skills, access to significant amounts of capital
equipment and cost effective pricing. See Note 14 to the Consolidated Financial
Statements for certain financial information about the Company's operating
segments and its foreign operations.
Water Resources
Through its water resources division, the Company provides a full line of
water-related services and products, including hydrological studies and related
engineering services, water well design, water well drilling and development,
pump sales, installation and service, and repair and maintenance. The Company
has expanded this market to include the design and construction of water
treatment facilities and the manufacture and sale of water treatment products.
These services are marketed on a turnkey basis. In addition, the Company's
environmental services related to the assessment and monitoring of groundwater
contaminants are included within this market as are the services provided by
Layne Water Development & Storage, LLC ("LWDS"), a limited liability company
formed between the Company and Western Development & Storage, LLC on September
25, 2001. LWDS intends to pursue opportunities in the areas of risk management
and financial services for water resources, water rights, resource acquisition,
development and management.
Demand for the design and construction of water treatment facilities is
driven by the economies and efficiencies gained through the bundling of design,
build and operate services traditionally performed by independent service
providers. The Company is targeting the same customer base it has serviced in
its traditional water service businesses. The Company competes with engineering
and consulting firms in this market.
Demand for water well drilling services is driven by the need to access
groundwater, which is affected by many factors including population movements
and expansions, such as new housing developments, deteriorating water quality
and limited availability of surface water. Groundwater is a vital natural
resource that is pumped from the earth for drinking water, irrigation and
industrial use. In many parts of the United States and other parts of the world,
groundwater is the only reliable source of water. Groundwater is located in
saturated geological zones at varying depths beneath the surface and accumulates
in subsurface strata (aquifers). Surface water, the other major source of
potable water, comes principally from large lakes and rivers.
The water well drilling market is highly fragmented, consisting of several
thousand water well drilling contractors in the United States. However, the
Company believes that a substantial majority of these contractors are regionally
and locally based, and are primarily involved in drilling low volume water wells
for agricultural and residential customers, markets in which the Company does
not generally compete. The Company's target groundwater drilling market consists
of high volume water wells drilled principally for municipal and industrial
customers. These wells have more stringent design specifications and are deeper
and larger in diameter than low-volume residential and agricultural wells.
Drillers for high-volume wells must have strong technical expertise,
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expert knowledge of local geology, large drilling equipment and the ability to
procure sizable performance bonds.
The demand for well and pump repair and maintenance depends upon the age
and use of the well and pump, the quality of material and workmanship applied in
the original well installation and changes in the depth and quality of the
aquifer. Repair and rehabilitation work is often required on an emergency basis
or within a relatively short period of time after a performance decline is
recognized and is often awarded to the firm that initially drilled the well.
Scheduling flexibility, together with appropriate expertise and equipment, are
critical for a repair and maintenance service provider. Like the water well
drilling market, the market for repair and maintenance is highly fragmented. It
consists of most well drilling companies as well as firms that provide solely
repair and maintenance services.
Demand for the Company's environmental products and environmental drilling
services is driven by public concern over groundwater contamination and
resulting regulatory requirements to investigate and remediate contaminated
sites and aquifers. Environmental drilling services are utilized to assess,
investigate, monitor and improve water quality and pumping capacity. Customers
are typically national and regional consulting firms engaged by federal and
state agencies as well as industrial companies that need to assess or clean up
groundwater contamination sources.
Mineral Exploration
Demand for mineral exploration drilling is driven by the need for
identifying, defining and developing underground mineral deposits. Factors
influencing the demand for mineral-related drilling services include growth in
the economies of developing countries, international political conditions,
inflation and foreign exchange levels, commodity prices, the economic
feasibility of mineral exploration and production, the discovery rate of new
mineral reserves and the ability of mining companies to access capital for their
activities.
Important changes in the international mining industry have led to the
development and growth of mineral exploration in developing regions of the
world, including Africa, Asia and South America. At the same time, stricter
environmental permitting rules in the United States and Canada have delayed or
blocked the development of certain projects forcing mining companies to look
overseas for growth. In addition, technological advancements now allow
development of mineral resources previously regarded as uneconomical. The mining
industry has also increased its focus on these areas due to their early stage of
mining development, relative to the more mature mining regions of the world such
as the United States and South Africa.
Mining companies hire exploration drillers to extract samples from sites
that the mining companies analyze for mineral content. Mineral exploration
drilling requires a high level of expertise and technical competence because the
samples extracted must be free of contamination and accurately reflect the
underlying mineral deposit. Familiarity with the local geology is critical to
acquiring this competence. Mineral exploration drilling consists of exploratory
drilling and definitional drilling. Exploratory drilling is conducted to
determine if there is a minable mineral deposit (an orebody) on the site.
Definitional drilling is typically conducted at a site to assess whether it
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would be economical to mine. The demand for definitional drilling has increased
in recent years as new and less expensive mining techniques have made it
feasible to mine previously uneconomical orebodies.
Geoconstruction Services
Geoconstruction services are used to modify weak and unstable soils,
decrease water flow in bedrock and provide support and groundwater control for
excavation. Methods used include cement and chemical grouting, vibratory ground
improvement and ground freezing, techniques for stabilizing soils; jet grouting,
a high-pressure method for providing subsurface support; and dewatering, a
method for lowering the water table. Geoconstruction services are important
during the construction of dams, tunnels, shafts, water lines, subways and other
civil construction projects. Demand for geoconstruction services is driven
primarily by the demand for these infrastructure improvements. The customers for
these services are primarily heavy civil construction contractors, governmental
agencies, mining companies and the industrial sector. The geoconstruction
services industry is highly fragmented.
Energy Services and Production
The Company's energy operations offer drilling services to the shallow,
unconventional oil and gas market, conventional oil field fishing services, coil
tubing fishing services, resonance technology solutions for stuck tubulars and
oil and gas well workover related activities. The Company's services in these
operations are offered to oil and gas companies. The market for these services
includes both land and offshore open-hole and cased-hole activities. In
addition, these operations include land-based oil and gas exploration activities
in the Gulf of Mexico regions. These operations also include the Company's
acquisition, development, and production activities associated with natural gas
properties, primarily focusing on coalbed methane projects located in the
Midwestern United States.
Demand for oil and gas services is driven by the demand for identifying,
defining and developing underground oil and gas reserves. Factors influencing
the demand for oil and gas services include consumption levels for these
commodities, growth in the economies of developing countries, international
political conditions, commodity prices, the economic feasibility of oil and gas
exploration and production, the discovery rate of new oil and gas reserves and
the ability of oil and gas companies to access capital for their activities.
Business Strategy
The Company's growth strategy is to expand its current geographic markets
and enter into new business lines that build on the Company's core competencies.
Key elements of this strategy are as follows:
In the Water Resources Division, Expand Design, Build, Own and Operate
Services as well as Water Resource Development and Management Services
Layne Christensen believes it is currently the largest provider of water
well drilling services in the United States, operating in all regions of the
country. In addition, the Company offers many services related to water well
drilling including hydrological studies, site selection, well design, design and
construction of water treatment facilities and water treatment products. The
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Company's growth strategy is to bundle its traditional products and service
offerings and market the combination downstream to the design, build, own and
operate market for water treatment and distribution facilities. The Company
believes that by combining these services into one turnkey project, the customer
can expedite the typical design, build project and achieve economies and
efficiencies over traditional unbundled services. Through LWDS, its joint
venture, the Company intends to expand growth in the water services market
through the pursuit of opportunities related to the acquisition, development and
management of water resources.
Position Mineral Exploration for Future Growth
The Company believes that its best mineral exploration drilling
opportunities exist in Africa and South America. The Company believes that the
foreign enterprises and their local affiliates acquired through the acquisitions
of CBC and Stanley create the opportunity to expand their businesses by
leveraging their local market expertise and the Company's technical competence,
combined with access to transferable drilling equipment and employee training
and safety programs. With the additional resources and capabilities provided by
its acquisitions, the Company believes it is positioned to expand its operations
in South America and Africa once growth returns to these markets.
Expand Presence in Geoconstruction Services
In the geoconstruction services market, the Company intends to leverage its
drilling capabilities, industry contacts, reputation, project management skills
and growing geographic presence to expand this business. In particular, the
Company's strategy is to focus on relatively larger, technically demanding
projects using its grouting, jet grouting, vibratory ground improvement and
ground-freezing capabilities.
Develop Existing Coalbed Methane Opportunities and Expand Presence in Coalbed
Methane Markets
The Company expects to continue to invest in coalbed methane development
and production opportunities within the United States. The Company has the
ability to move major coalbed methane development projects forward by leveraging
its internal resources, technical expertise and experience. The Company
anticipates significant growth during the next five years based on development
agreements already in place.
Services and Products
Layne Christensen's current business is divided into four primary areas:
water resources; mineral exploration; geoconstruction services; and energy
services and production.
Overview of the Company's Drilling Techniques
The types of drilling techniques employed by the Company in its drilling
activities have different applications:
- Conventional and reverse circulation rotary rigs are used in water
well and mineral exploration drilling primarily for drilling large
diameter
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wells and employ air or drilling fluid circulation for removal of
cuttings and borehole stabilization.
- Dual tube drilling, an innovation advanced by the Company primarily
for mineral exploration and environmental drilling, conveys the drill
cuttings to the surface inside the drill pipe. This drilling method is
critical in mineral exploration drilling and environmental sampling
because it provides immediate representative samples and because the
drill cuttings do not contact the surrounding formation thus avoiding
contamination of the borehole while providing reliable, uncontaminated
samples. Because this method involves circulation of the drilling
fluid inside the casing, it is highly suitable for penetration of
underground voids or faults where traditional drilling methods would
result in the loss of circulation of the drilling fluid, thereby
preventing further penetration.
- Diamond core drilling is used in mineral exploration drilling to core
solid rock, thereby providing geologists and engineers with solid rock
samples for evaluation.
- Cable tool drilling, which requires no drilling fluid, is used
primarily in water well drilling for larger diameter wells. While
slower than other drilling methods, it is well suited for penetrating
boulders, cobble and rock.
- Auger drilling is used principally in water well and environmental
drilling for efficient completion of relatively small diameter,
shallow wells. Auger rigs are equipped with a variety of auger sizes
and soil sampling equipment.
Water Resources
The Company provides a full range of services for the design and
construction of water treatment facilities, including hydrological studies, site
selection, well field design and facilities construction and operation. In
addition to water treatment plants, these services are provided in connection
with surface water intakes, pumping stations and well houses. The Company has
the capability to design, build, own and operate the complete water supply
system. In addition, the Company offers nonrecourse financing options for these
services to its traditional municipal and industrial customers.
Drilling Services
The Company provides complete water well systems on a turnkey basis,
offering the comprehensive range of services required to provide professionally
designed, constructed and maintained municipal, industrial and, to a lesser
extent, agricultural water wells. Although it may not perform each of the
services it offers on every project, the Company has the capability to provide
every element of a water well system, including test hole drilling, well casing
and screen selection and installation, gravel packing, grout sealing, well
development and testing and pump selection, equipment sales and installation.
Layne Christensen provides water well drilling services in most regions of the
United States and in certain foreign countries.
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Water well drilling requires the integration of hydrogeology and
engineering with the techniques of well drilling because the drilling methods
and size and type of equipment depend upon the depth of the wells and the
geological formations encountered at the project site. The Company has extensive
well archives and equipment in addition to technical personnel to determine
geological conditions and aquifer characteristics in most locations in the
United States, enabling it to locate suitable water-bearing formations to meet a
wide variety of customer requirements. The Company provides feasibility studies
using complex geophysical survey methods and has the expertise to analyze the
survey results and define the source, depth and magnitude of an aquifer. It can
then estimate recharge rates, specify required well design features, plan well
field design and develop water management plans. To conduct these services, the
Company maintains a staff of professional employees including geological
engineers, geologists, hydrogeologists and geophysicists.
As part of its water well drilling and installation business, the Company
sells a wide variety of pumps manufactured by third parties, including vertical
turbine, submersible, shortcoupled and horizontal centrifugal pumps. The Company
also sells and installs water treatment equipment, which is typically installed
at or near the wellhead, including chlorinators, aerators, filters and controls.
In addition, the Company sells miscellaneous supplies manufactured by third
parties for use in the water well drilling industry, including well casing, well
screens, drill pipe and bits, drilling fluids and well cleaning supplies.
Well and Pump Repair and Maintenance
Periodic repair and maintenance of well equipment is required during the
life of a well. In locations where the groundwater contains both bacteria and
iron, screen openings may become blocked with organic growth, reducing the
capacity and productivity of the well. Similarly, groundwater with high mineral
content may cause the buildup of scale on well screens, also reducing the
capacity and productivity of the well.
The Company offers complete repair and maintenance services for existing
wells, pumps and related equipment through a network of local offices throughout
its geographic markets in the United States. In addition to its well service
rigs, the Company has equipment capable of conducting downhole closed circuit
televideo inspections (one of the most effective methods for investigating water
well problems), enabling the Company to diagnose better and respond more quickly
to well and maintenance problems.
The Company's trained and experienced personnel can perform a variety of
well rehabilitation techniques, including chemical and mechanical methods, and
can perform bacteriological well evaluation and water chemistry analysis. The
Company also has the capability and inventory to repair, in its own machine
shops, most water well pumps, regardless of manufacturer, as well as to repair
well screens, casings and related equipment such as chlorinators, aerators and
filtration systems.
Environmental Drilling
The Company offers a wide range of environmental drilling services
including: investigative drilling, installation and testing of wells that
monitor the extent of groundwater contamination, installation of recovery wells
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that extract contaminated groundwater for treatment (pump and treat remediation)
and specialized site safety programs associated with drilling at contaminated
sites. Monitoring wells are installed to determine the nature and extent of
known or suspected subsurface contamination as well as to monitor an area for
future contamination. In addition, monitoring wells are often installed
surrounding underground petroleum or chemical storage tanks to monitor for
possible future tank leaks or product spills. After monitoring and testing the
groundwater, recovery wells may be installed to extract contaminated water from
the aquifer for treatment or disposal.
In its environmental health services department, the Company employs a
full-time staff qualified to prepare site specific health and safety plans for
customers who have workers employed on hazardous waste cleanup sites as required
by the Occupation and Safety Health Administration ("OSHA") and the Mine Safety
and Health Administration of the Department of Labor ("MSHA").
Mineral Exploration
The Company provides drilling services for geological assessment, in situ
mining and mineral exploration. These services are used primarily by major gold
and copper producers based in the United States, Europe and Canada, and to a
lesser extent, iron ore producers. In response to a shift in recent years by
many of these producers to foreign markets in search of economically minable
orebodies, the Company commenced mineral exploration drilling operations in
Mexico in 1991. With its acquisition of CBC in December 1995, the Company
acquired an ownership interest in foreign affiliates operating in South America
with facilities in Chile and Peru. These affiliates work in various South
American countries, including, but not limited to, Argentina, Bolivia, Chile,
Mexico and Peru. In addition, with the Stanley Acquisition, the Company has
operations in Australia and Africa.
Geoconstruction Services
Geoconstruction services include those services provided by the Company to
the heavy civil construction market to provide ground modification for
construction work in unstable soils during the construction of dams, tunnels,
shafts and other civil construction projects. Services offered include cement
and chemical grouting, jet grouting, drain hole drilling, installation of ground
anchors, tie backs, rock bolts and instrumentation. The Company offers expertise
in selecting the appropriate support techniques to be applied in various
geological conditions. In addition, the Company has extensive experience in the
placement of measuring devices capable of monitoring water levels and ground
movement. The Company also offers artificial ground-freezing capabilities,
typically utilized as an alternative method to dewatering large diameter
excavation and tunneling projects.
Energy Services and Production
The Company provides a variety of specialized services to the oil and gas
industry through its energy services and production division. Such services
include shallow gas and tar sands exploration drilling, conventional oil field
fishing services, coil tubing fishing services, resonance technology solutions
for stuck tubulars and land-based oil and gas search and development. Beginning
with the third quarter of 2003, the Company's land-based oil and gas search and
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development activities principally focus on coalbed methane development projects
in the Midwest Region of the United States.
Operations
The Company operates on a decentralized basis, with approximately 80 sales
and operations offices located in most regions of the United States as well as
in Canada, Australia, Africa, Mexico and Italy. In addition, the Company,
through its foreign affiliates, operates out of locations in Mexico and South
America.
The Company is primarily organized around division presidents responsible
for water resources, mineral exploration, geoconstruction services, and energy
services and production. Division vice presidents are responsible for geographic
regions within each division and district managers are in charge of individual
district office profit centers. The district managers report to their respective
divisional vice president on a regular basis. Each district office employs a
field superintendent who is in charge of projects in the field and sales
engineers who are responsible for marketing the Company's services in their
district as well as for monitoring the progress of projects. The Company does
not conduct significant marketing activities for its traditional water well and
mineral exploration drilling services. Instead, the Company's sales engineers
cultivate and maintain contacts with existing and potential customers. In this
way, the Company learns of and is in a position to compete for proposed drilling
projects in the region.
In its foreign affiliates, where the Company does not have majority
ownership or operating control, day-to-day operating decisions are made by local
management. The Company's interests in its foreign affiliates are overseen by an
executive vice president. The Company manages its interests in its foreign
affiliates through regular management meetings and analysis of comprehensive
operating and financial information. For its significant foreign affiliates, the
Company has entered into shareholder agreements that give it limited board
representation rights and require super-majority votes in certain circumstances.
Customers and Contracts
Each of the Company's service and product lines has major customers;
however, no single customer accounted for 10% or more of the Company's revenues
in any of the past three fiscal years.
Generally, the Company negotiates its service contracts with industrial and
mining companies and other private entities, while its service contracts with
municipalities are generally awarded on a bid basis. The Company's contracts
vary in length depending upon the size and scope of the project. The majority of
such contracts are awarded on a fixed price basis, subject to change of
circumstance and force majeure adjustments, while a smaller portion are awarded
on a cost plus basis. Substantially all of the contracts are cancelable for,
among other reasons, the convenience of the customer.
In the water resources product line, the Company's customers are typically
municipalities and local operations of industrial businesses. Of the Company's
water resources revenues in fiscal 2003, approximately 57% were derived from
municipalities and approximately 14% were derived from industrial businesses
while the balance was derived from other customer groups. The term
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"municipalities" includes local water districts, water utilities, cities,
counties and other local governmental entities and agencies that have the
responsibility to provide water supplies to residential and commercial users. In
the drilling of new water wells, the Company targets customers that require
compliance with detailed and demanding specifications and regulations and that
often require bonding and insurance, areas in which the Company believes it has
competitive advantages due to its drilling expertise and financial resources.
Customers for the Company's mineral exploration services in the United
States, Mexico, Canada, Australia, Africa and South America are primarily gold
and copper producers. The Company's largest customers in its mineral exploration
drilling business are multi-national corporations headquartered primarily in the
United States, Europe and Canada.
In its geoconstruction services product line, the Company's customers are
primarily heavy civil construction contractors, governmental agencies, mining
companies and industrial companies. The Company often acts as a specialty
subcontractor when it provides geoconstruction services.
In its energy services line, the Company's customers are primarily oil and
gas companies that conduct exploration and production activities in Canada and
the Gulf of Mexico region. The Company expects to market its coalbed methane
production to large energy pipeline companies and local industrial customers.
Backlog
The Company's backlog consists of executed service contracts, or portions
thereof, not yet performed by the Company. The Company believes that its backlog
does not have any significance other than as a short-term business indicator
because substantially all of the contracts comprising the backlog are cancelable
for, among other reasons, the convenience of the customer. The Company's backlog
was approximately $57,198,000 at January 31, 2003, compared to approximately
$61,465,000 at January 31, 2002. The Company's backlog as of year-end is
generally completed within the following fiscal year.
Competition
The Company's competition for its water resource division's design and
build services are primarily local and national engineering and consulting firms
which have traditionally performed engineering services and, in some cases,
construction oversight for these activities.
The Company's competition in the water well drilling business consists
primarily of small, local water well drilling operations and some regional
competitors. Oil and natural gas well drillers generally do not compete in the
water well drilling business because the typical well depths are greater for oil
and gas and, to a lesser extent, the technology and equipment utilized in these
businesses are different. Only a small percentage of all companies that perform
water well drilling services have the technical competence and drilling
expertise to compete effectively for high-volume municipal and industrial
projects, which typically are more demanding than projects in the agricultural
or residential well markets. In addition, smaller companies often do not have
the financial resources or bonding capacity to compete for large projects.
However, there are no proprietary technologies or other significant factors
which prevent other firms from entering these local or regional markets or from
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consolidating together into larger companies more comparable in size to the
Company. Water well drilling work is usually obtained on a competitive bid basis
for municipalities, while work for industrial customers is obtained on a
negotiated or informal bid basis.
As is the case in the water well drilling business, the well repair and
maintenance business is characterized by a large number of relatively small
competitors. The Company believes only a small percentage of the companies
performing these services have the technical expertise necessary to diagnose
complex problems, perform many of the sophisticated rehabilitation techniques
offered by the Company or repair a wide range of pumps in their own facilities.
In addition, many of these companies have only a small number of pump service
rigs. Repair and maintenance projects are typically negotiated at the time of
repair or contracted for in advance depending upon the lead time available for
the repair work. Since pump repair and rehabilitation work is typically
negotiated on an emergency basis or within a relatively short period of time,
those companies with available rigs and the requisite expertise have a
competitive advantage by being able to respond quickly to repair requests.
In its mineral exploration division, the Company competes with a number of
drilling companies as well as vertically integrated mining companies that
conduct their own exploration drilling activities; some of these competitors
have greater capital and other resources than the Company. In the mineral
exploration drilling market, the Company competes based on price, technical
expertise and reputation. The Company believes it has a well-recognized
reputation for expertise and performance in this market. Mineral exploration
drilling work is typically performed on a negotiated basis.
The geoconstruction services market is highly fragmented as a result of the
large area served, the wide range of techniques offered and the large number and
variety of contractors. In this market, the Company competes based upon a
combination of reputation, innovation and price.
In the energy services market, Layne Christensen competes with a number of
oil and gas service companies, many of which have greater capital and other
resources than the Company. The Company competes in this market based on quality
of service, technology, responsiveness and, to a lesser extent, price. The
Company's primary competitors in this market are Baker Hughes, Inc., Weatherford
International and Smith International, Inc. In the energy production market,
principally coalbed methane gas, the Company competes with many energy
production companies.
Employees and Training
At January 31, 2003, the Company had 2,414 employees, 165 of whom were
members of collective bargaining units represented by locals affiliated with
major labor unions in the United States. The Company believes that its
relationship with its employees is satisfactory.
In all of the Company's service lines, an important competitive factor is
technical expertise. As a result, the Company emphasizes the training and
development of its personnel. Periodic technical training is provided for senior
field employees covering such areas as pump installation, drilling technology
and electrical troubleshooting. In addition, the Company emphasizes strict
adherence to all health and safety requirements and offers incentive pay
12
based upon achievement of specified safety goals. This emphasis encompasses
developing site-specific safety plans, ensuring regulatory compliance and
training employees in regulatory compliance and good safety practices. Training
includes an OSHA-mandated 40-hour hazardous waste and emergency response
training course as well as the required annual eight-hour updates. The Company
has an environmental health sciences staff which allows it to offer such
training in-house. This staff also prepares health and safety plans for specific
sites and provides input and analysis for the health and safety plans prepared
by others.
On average, the Company's field supervisors and drillers have 19 and 14
years, respectively, of experience with the Company. Many of the Company's
professional employees have advanced academic backgrounds in agricultural,
chemical, civil, industrial, geological and mechanical engineering, geology,
geophysics and metallurgy. The Company believes that its size and reputation
allow it to compete effectively for highly qualified professionals.
Regulatory and Environmental Matters
The services provided by the Company are subject to various licensing,
permitting, approval and reporting requirements imposed by federal, state, local
and foreign laws. Its operations are subject to inspection and regulation by
various governmental agencies, including the Department of Transportation, OSHA
and MSHA in the United States as well as their counterparts in foreign
countries. In addition, the Company's activities are subject to regulation under
various environmental laws regarding emissions to air, discharges to water and
management of wastes and hazardous substances. To the extent the Company fails
to comply with these various regulations, it could be subject to monetary fines,
suspension of operations and other penalties. In addition, these and other laws
and regulations affect the Company's mineral drilling services and influence
their determination whether to conduct mineral exploration and development.
Many localities require well operating licenses which typically specify
that wells be constructed in accordance with applicable regulations. Various
state, local and foreign laws require that water wells and monitoring wells be
installed by licensed well drillers. The Company maintains well drilling and
contractor's licenses in those jurisdictions in which it operates and in which
such licenses are required. In addition, the Company employs licensed engineers,
geologists and other professionals necessary to the conduct of its business. In
those circumstances in which the Company does not have a required professional
license, it subcontracts that portion of the work to a firm employing the
necessary professionals.
Potential Liability and Insurance
The Company's drilling activities involve certain operating hazards that
can result in personal injury or loss of life, damage and destruction of
property and equipment, damage to the surrounding areas, release of hazardous
substances or wastes and other damage to the environment, interruption or
suspension of drill site operations and loss of revenues and future business.
The magnitude of these operating risks is amplified when the Company, as is
frequently the case, conducts a project on a fixed-price, "turnkey" basis where
the Company delegates certain functions to subcontractors but remains
responsible to the customer for the subcontracted work. In addition, the
13
Company is exposed to potential liability under foreign, federal, state and
local laws and regulations, contractual indemnification agreements or otherwise
in connection with its provision of services and products. For example, the
Company could be held responsible for contamination caused by an accident which
occurs as a result of the Company drilling through a contaminated water source
and creating a channel through which the contaminants migrate to an
uncontaminated water source. Litigation arising from any such occurrences may
result in the Company's being named as a defendant in lawsuits asserting large
claims. Although the Company maintains insurance protection that it considers
economically prudent, there can be no assurance that any such insurance will be
sufficient or effective under all circumstances or against all claims or hazards
to which the Company may be subject or that the Company will be able to continue
to obtain such insurance protection. A successful claim or damage resulting from
a hazard for which the Company is not fully insured could have a material
adverse effect on the Company. In addition, the Company does not maintain
political risk insurance with respect to its foreign operations.
Applicable Legislation
There are a number of complex foreign, federal, state and local
environmental laws which impact the demand for the Company's mining and
environmental drilling services. For example, under Environmental Protection
Agency regulations and comparable state laws, the potential liability of real
property buyers and lenders secured by real property for the cost of responding
to past or present release of hazardous substances at or from that property has
prompted a widespread practice of phased environmental audits as a condition to
the sale and financing of real estate. These audits may include soil and
groundwater testing to determine the nature and extent of contamination that may
impact the value of the property or give rise to liability for the new owner. A
change in these laws, or changes in governmental policies regarding the funding,
implementation or enforcement of the laws, could have a material adverse effect
on the Company.
Item 2. Properties and Equipment
The Company's corporate headquarters are located in Mission Woods, Kansas
(a suburb of Kansas City, Missouri), in approximately 41,000 square feet of
office space leased by the Company pursuant to a written lease agreement which
expires December 31, 2008.
As of January 31, 2003, the Company (excluding foreign affiliates) owned or
leased approximately 570 drill and well service rigs throughout the world, a
substantial majority of which were located in the United States. This includes
rigs used primarily in each of its service lines as well as multi-purpose rigs.
In addition, as of January 31, 2003, the Company's foreign affiliates owned or
leased approximately 110 drill rigs.
14
Item 3. Legal Proceedings
The Company is involved in various matters of litigation, claims and
disputes which have arisen in the ordinary course of the Company's business.
While the resolution of any of these matters may have an impact on the financial
results for the period in which the matter is resolved, the Company believes
that the ultimate disposition of these matters will not, in the aggregate, have
a material adverse effect on the Company's business or consolidated financial
position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the stockholders of the Company
during the last quarter of the fiscal year ended January 31, 2003.
Item 4A. Executive Officers of the Registrant
Executive officers of the Company are appointed by the Board of Directors
or the President for such terms as shall be determined from time to time by the
Board or the President, and serve until their respective successors are selected
and qualified or until their respective earlier death, retirement, resignation
or removal.
Set forth below are the name, age and position of each executive officer of
the Company.
Name Age Position
---- --- --------
Andrew B. Schmitt 54 President, Chief Executive Officer and
Director
H. Edward Coleman 65 Executive Vice President
Norman E. Mehlhorn 62 Executive Vice President
Gregory F. Aluce 47 Senior Vice President and Division
President - Water Resources
Eric R. Despain 54 Senior Vice President and Division
President - Mineral Exploration
Steven F. Crooke 46 Vice President, Secretary and General
Counsel
Jerry W. Fanska 54 Vice President-Finance and Treasurer
Set forth below are the name, age and position of each significant
employee of the Company.
Name Age Position
---- --- --------
Pier L. Iovino 57 Division President - Geoconstruction
Colin B. Kinley 43 Division President - Energy
The business experience of each of the executive officers and significant
employees of the Company is as follows:
Andrew B. Schmitt has served as President and Chief Executive Officer since
October 1993. For approximately two years prior to joining the Company, Mr.
Schmitt managed two privately-owned hydrostatic pump and motor manufacturing
companies and an oil and gas service company. He served as President of the
Tri-State Oil Tools Division of Baker Hughes Incorporated from February 1988 to
October 1991.
H. Edward Coleman has served as an officer of the Company since 1976 and as
Executive Vice President since September 1, 2001. Mr. Coleman has over 40 years
experience in various areas of the Company's operations.
15
Norman E. Mehlhorn has served as Executive Vice President since September
1, 2001, and as Senior Vice President from 1992 to September 2001. Mr. Mehlhorn
has over 40 years experience in the drilling business, with particular emphasis
on dual tube drilling technology.
Gregory F. Aluce has served as Senior Vice President since April 14, 1998.
Since September 1, 2001, Mr. Aluce has also served as President of the Company's
water resource division. Mr. Aluce is responsible for the Company's
water-related services and products. Mr. Aluce has over 22 years experience in
various areas of the Company's operations.
Eric R. Despain has served as Senior Vice President since February 1996.
Since September 1, 2001, Mr. Despain has also served as President of the
Company's mineral exploration division and is responsible for the Company's
mineral exploration operations. Prior to joining the Company in December 1995,
Mr. Despain was President and a member of the Board of Directors of CBC since
1986.
Steven F. Crooke has served as Vice President, Secretary and General
Counsel since May 2001. For the period of June 2000 through April 2001, Mr.
Crooke served as Corporate Legal Affairs Manager of Huhtamaki Van Leer. Prior to
that, he served as Assistant General Counsel of the Company from 1995 to May
2000.
Jerry W. Fanska has served as Vice President-Finance and Treasurer since
April 1994 and as Controller since December 1993. Prior to joining Layne
Christensen, Mr. Fanska served as corporate controller of The Marley Company
since October 1992 and as its Internal Audit Manager since April 1984.
Pier L. Iovino has served as President of the Company's geoconstruction
division since September 1, 2001, and is responsible for the Company's
geoconstruction services. Prior to becoming President of the Company's
geoconstuction division, Mr. Iovino was district manager of the Company's Boston
district, which included the Company's geoconstruction operations.
Colin B. Kinley has served as President of Layne Christensen Canada, a
wholly-owned subsidiary of the Company, since 1990. Since September 1, 2001, Mr.
Kinley has also served as President of the Company's energy division. Mr. Kinley
is responsible for the Company's energy services and production operations.
There is no arrangement or understanding between any executive officer and
any other person pursuant to which such executive officer was selected as an
executive officer of the Company.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded in the over-the-counter market through
the NASDAQ National Market System under the symbol LAYN. The stock has been
traded in this market since the Company became a publicly-held company on August
20, 1992. The following table sets forth the range of high and low sales prices
of the Company's stock by quarter for fiscal 2003 and 2002, as reported
16
by the NASDAQ National Market System. These quotations represent prices between
dealers and do not include retail mark-up, mark-down or commissions.
Fiscal Year 2003 High Low
---------------- ---- ---
First Quarter $10.60 $7.35
Second Quarter 10.80 8.60
Third Quarter 10.00 5.47
Fourth Quarter 8.70 7.35
Fiscal Year 2002 High Low
---------------- ---- ---
First Quarter $ 7.50 $4.00
Second Quarter 8.88 6.15
Third Quarter 8.60 7.10
Fourth Quarter 8.30 7.35
At March 20, 2003, there were 133 owners of record of the Company's common
stock.
The Company has not paid any cash dividends on its common stock. Moreover,
the Board of Directors of the Company does not anticipate paying any cash
dividends in the foreseeable future. The Company's future dividend policy will
depend on a number of factors including future earnings, capital requirements,
financial condition and prospects of the Company and such other factors as the
Board of Directors may deem relevant, as well as restrictions under the Credit
Agreement between the Company, various financial institutions and General
Electric Capital Corporation as agent, and other restrictions which may exist
under other credit arrangements existing from time to time. The Credit Agreement
limits the cash dividends payable by the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations' Liquidity and
Capital Resources" under Item 7 and Note 11 of the Notes to Consolidated
Financial Statements.
Item 6. Selected Financial Data
The following selected historical financial information as of and for each
of the five fiscal years ended January 31, 2003, has been derived from the
Company's audited Consolidated Financial Statements. The Company completed
various acquisitions in each of the fiscal years, except for 2001, which are
more fully described in Note 2 of the Notes to Consolidated Financial Statements
or in previously filed Forms 10-K. The acquisitions have been accounted for
under the purchase method of accounting and, accordingly, the Company's
consolidated results include the effects of the acquisitions from the date of
each acquisition. During fiscal year 2003, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 142 and recorded a non-cash charge
of $14,429,000, net of tax, as a cumulative effect of a change in accounting
principle (see Note 5 of the Notes to Consolidated Financial Statements). The
Company also sold two operating companies during 2003 and classified their
results as discontinued operations for all years presented (see Note 4 of the
Notes to Consolidated Financial Statements). The information below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under Item 7 and the Consolidated Financial
Statements and Notes thereto included elsewhere in this Form 10-K.
17
Fiscal Years Ended
January 31,
--------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Income Statement Data
(in thousands, except
per share data):
Revenues $269,922 $289,958 $293,966 $265,893 $271,489
Cost of revenues
(exclusive of
depreciation
shown below) 191,983 209,112 219,600 195,624 194,848
-------- -------- -------- -------- --------
Gross profit 77,939 80,846 74,366 70,269 76,641
Selling, general and
administrative expenses 55,624 55,877 55,080 50,160 47,431
Depreciation and
amortization 14,565 17,956 21,065 22,706 22,086
Other income (expense):
Equity in earnings (losses)
of affiliates 842 925 894 (27) 1,128
Interest (2,490) (3,934) (6,205) (4,818) (4,987)
Other, net 2,089 224 1,054 (69) 603
-------- -------- -------- -------- -------
Income (loss) from
continuing operations
before income taxes 8,191 4,228 (6,036) (7,511) 3,868
Income tax expense
(benefit) 5,171 2,498 238 (39) 2,525
Minority interest,
net of taxes (188) (70) 118 (255) (79)
-------- -------- -------- -------- -------
Net income (loss) from
continuing operations
before discontinued
operations,
extraordinary item
and cumulative effect
of accounting change 2,832 1,660 (6,156) (7,727) 1,264
Income (loss) from
discontinued operations,
net of taxes (1,179) (582) 230 62 (63)
Loss on sale of
discontinued operations,
net of taxes (23) - - - -
-------- ---- -------- -------- --------
Net income (loss) before
extraordinary item
and cumulative effect
of accounting change 1,630 1,078 (5,926) (7,665) 1,201
Extraordinary loss on
early extinguishment
of debt, net of taxes (696) - - - -
Cumulative effect of
accounting change,
net of taxes (14,429) - - - -
-------- -------- -------- -------- ------
Net income (loss) $(13,495) $ 1,078 $ (5,926) $ (7,665) $ 1,201
======== ======== ======== ======== ========
Basic earnings (loss)
per share $ (1.14) $ 0.09 $ (0.50) $ (0.66) $ 0.10
======== ======== ======== ======== =======
Diluted earnings (loss)
per share $ (1.11) $ 0.09 $ (0.50) $ (0.66) $ 0.10
======== ======== ======== ======== =======
18
At January 31,
-------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Balance Sheet Data
(in thousands):
Working capital,
excluding debt $ 37,613 $ 35,584 $ 50,531 $ 48,816 $ 46,211
Total assets 178,100 202,342 233,868 245,335 251,503
Total debt 32,370 34,357 61,928 63,500 63,500
Total stockholders'
equity 83,373 95,892 93,925 106,840 113,270
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto under Item 8.
Cautionary Language Regarding Forward-Looking Statements
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of
1934. Such statements are indicated by words or phrases such as "anticipate,"
"estimate," "project," "believe," "intend," "expect," "plan" and similar words
or phrases. Such statements are based on current expectations and are subject to
certain risks, uncertainties and assumptions, including but not limited to
prevailing prices for various metals, unanticipated slowdowns in the Company's
major markets, the impact of competition, the effectiveness of operational
changes expected to increase efficiency and productivity, worldwide economic and
political conditions and foreign currency fluctuations that may affect worldwide
results of operations. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially and adversely from those anticipated, estimated or
projected. These forward-looking statements are made as of the date of this
filing, and the Company assumes no obligation to update such forward-looking
statements or to update the reasons why actual results could differ materially
from those anticipated in such forward-looking statements.
Results of Operations
Demand for the Company's mineral exploration drilling services depends upon
the level of mineral exploration and development activities conducted by mining
companies, particularly with respect to gold and copper. Mineral exploration is
highly speculative and is influenced by a variety of factors, including the
prevailing prices for various metals that often fluctuate widely. In this
connection, the level of mineral exploration and development activities
conducted by mining companies has had, and could continue to have, a material
adverse effect on the Company.
Overview of Reportable Operating Segments
The Company is a multinational company which provides sophisticated
services and related products to a variety of markets. During fiscal 2002,
management redefined the Company's operational organization structure into
discrete divisions based on its primary product lines. Each division comprises
19
a combination of individual district offices, which primarily offer similar
types of services and serve similar types of markets. Although individual
offices within a division may periodically perform services normally provided by
another division, the results of those services are recorded in the offices' own
division. For example, if a water resources division office performed
geoconstruction services, the revenues would be recorded in the water resources
division rather than the geoconstruction services division. Should an office's
primary responsibility move from one division president to another, that
office's results going forward would be reclassified between divisions at that
time. The Company's reportable segments under the new operational structure are
defined as follows:
Water Resources Division
This division provides a full line of water-related services and products
including hydrological studies, site selection, well design, drilling and well
development, pump installation, and repair and maintenance. The division's
offerings include design and construction of water treatment facilities and the
manufacture and sale of products to treat volatile inorganics in groundwater.
The division also offers environmental services to assess and monitor
groundwater contaminants.
Mineral Exploration Division
This division provides a complete range of drilling services for the
mineral exploration industry. Its aboveground and underground drilling
activities include all phases of core drilling, diamond, reverse circulation,
dual tube, hammer and rotary air-blast methods.
Geoconstruction Services Division
This division focuses on services that improve soil stability, primarily
jet grouting, grouting, vibratory ground improvement and ground-freezing
services. The division also manufactures a line of high-pressure pumping
equipment used in grouting operations and geotechnical drilling rigs used for
directional drilling.
Energy Services and Production Division
This division offers a variety of specialized services including shallow
gas and tar sands exploration drilling, conventional oilfield fishing services,
coil tubing fishing services, resonance technology solutions for stuck tubulars
and land-based oil and gas search and development. The division's land-based oil
and gas search and development activities focus primarily on natural gas
properties, principally coalbed methane projects located in the Midwest region
of the United States.
Products and Other
This grouping has historically included the Company's supply operation
which distributed drilling equipment, parts and supplies, a manufacturing
operation producing diamond drilling rigs, diamond bits, core barrels and drill
rods ("Christensen Products") and other miscellaneous operations which do not
fall into the above divisions. On January 23, 2003, the Company sold its supply
operations to Boart Longyear. Upon the sale, the results of operations were
20
reclassified to discontinued operations for all years presented (see Note 4 of
the Notes to Consolidated Financial Statements). On August 8, 2001, the Company
sold its Christensen Products business to a subsidiary of Atlas Copco (see Note
6 of the Notes to Consolidated Financial Statements).
The following table, which is derived from the Company's Consolidated
Financial Statements as discussed in Item 6, presents, for the periods
indicated, the percentage relationship which certain items reflected in the
Company's statements of income bear to revenues and the percentage increase or
decrease in the dollar amount of such items period-to-period.
Period-to-Period
Change
Fiscal Years Ended ------------------
January 31, 2003 2002
------------------------------- vs. vs.
Revenues: 2003 2002 2001 | 2002 2001
---- ---- ---- | ---- ----
Water resources 61.9% 59.6% 56.1% | (3.3)% 4.8%
Mineral exploration 20.6 20.0 22.5 | (3.8) (12.4)
Geoconstruction services 11.0 9.3 12.9 | 9.7 (29.0)
Energy services and production 6.3 9.3 7.2 | (37.0) 27.2
Products and other 0.2 1.8 1.3 | (91.6) 40.7
----- ----- ----- |
Total revenues 100.0% 100.0% 100.0% | (6.9) (1.4)
===== ===== ===== |
Cost of revenues 71.1% 72.1% 74.7% | (8.2) (4.8)
----- ----- ----- |
Gross profit 28.9 27.9 25.3 | (3.6) 8.7
Selling, general and |
administrative expenses 20.6 19.3 18.7 | (0.5) 1.5
Depreciation and amortization 5.4 6.2 7.2 | (18.9) (14.8)
|
Other income (expense): |
Equity in earnings of |
affiliates 0.3 0.3 0.3 | (9.0) 3.5
Interest (0.9) (1.3) (2.1) | (36.7) (36.6)
Other, net 0.8 0.1 0.4 | * (78.7)
----- ---- ----- |
Income (loss) from continuing operations |
before income taxes 3.1 1.5 (2.0) | 93.7 *
Income tax expense 1.9 0.9 0.1 | * *
Minority interest, net of taxes (0.1) 0.0 0.0 | * *
----- ---- ----- |
Net income (loss) from continuing |
operations before discontinued operations, |
extraordinary item and cumulative |
accounting change 1.1 0.6 (2.1) | 70.6 *
Income (loss) from discontinued |
operations, net of taxes (0.4) (0.2) 0.1 | * *
Loss from sale of discontinued |
operations, net of taxes 0.0 0.0 0.0 | * *
----- ---- ----- |
Net income (loss) before extraordinary |
item and cumulative accounting |
change 0.7 0.4 (2.0) | * *
Extraordinary item, net of taxes (0.3) 0.0 0.0 | * *
Cumulative effect of accounting |
change, net of taxes (5.3) 0.0 0.0 | * *
----- ---- ----- |
Net income (loss) (4.9)% 0.4% (2.0)% | * *
===== ==== ===== |
* Not meaningful
21
Comparison of Fiscal 2003 to Fiscal 2002
Revenues for fiscal 2003 decreased $20,036,000, or 6.9%, to $269,922,000
compared to $289,958,000 for fiscal 2002. The decrease was primarily the result
of decreases in the Company's water resources, energy services and production,
and products divisions. See further discussion of results of operations by
division presented below.
Gross profit as a percentage of revenues was 28.9% for fiscal 2003 compared
to 27.9% for fiscal 2002. The increase in gross profit was primarily
attributable to improved pricing and margins at the Company's domestic water
locations partially offset by expenses associated with the Company's domestic
oil and gas exploration activities.
Selling, general and administrative expenses decreased to $55,624,000 for
fiscal 2003 compared to $55,877,000 for fiscal 2002 (20.6% and 19.3% of
revenues, respectively). The decrease was primarily a result of lower
incentive-related accruals partially offset by start-up expenses related to LWDS
and expenses associated with the Company's coalbed methane exploration and
development activities. The increase as a percentage of revenues is attributable
to start-up expenses associated with LWDS and the relative level of fixed costs
in the Company's operating divisions.
Depreciation and amortization decreased to $14,565,000 for fiscal 2003
compared to $17,956,000 for fiscal 2002. The decrease in depreciation and
amortization was the result of less depreciation from assets fully depreciated
in prior periods in the mineral exploration division and ceasing to amortize
goodwill upon adoption of SFAS No. 142 (see Note 5 to the Notes to Consolidated
Financial Statements).
Interest expense decreased to $2,490,000 for fiscal 2003 compared to
$3,934,000 for fiscal 2002. The decrease was a result of decreases in the
Company's average borrowings and in interest rates during the year.
Other, net increased to $2,089,000 for the year ended January 31, 2003
compared to $224,000 for the year ended January 31, 2002. The increase was
primarily due to a gain on the sale of the Company's investment in a gold
exploration project in Africa, and gains as a result of a Company initiative to
monetize excess property and equipment. These gains were partially offset by a
write-down of the Company's former Christensen Products plant.
Income tax expense related to continuing operations of $5,171,000 was
recorded for the year ended January 31, 2003 (an effective rate of 63.1%),
compared to $2,498,000 for the same period last year (an effective rate of
59.1%). The effective rate in excess of the statutory federal rate was a result
of the impact of nondeductible expenses and the tax treatment of certain foreign
operations.
Net income (loss) for 2003 included losses related to discontinued
operations of $1,202,000, an extraordinary loss of $696,000 due to debt
extinguishment costs incurred in connection with a refinancing of the Company's
credit facilities, and a $14,429,000 non-cash impairment loss related to
goodwill recorded as the cumulative effect of an accounting change upon the
adoption of SFAS No. 142.
22
Water Resources Division
(in thousands)
Year ended January 31,
-----------------------
2003 2002
---- ----
Revenues $167,080 $172,806
Income from continuing operations 28,654 27,474
Water resources revenues decreased 3.3% to $167,080,000 for the year ended
January 31, 2003 from $172,806,000 for the year ended January 31, 2002. The
decrease in revenues was primarily the result of reduced municipal spending in
certain of the Company's markets and the resulting competitive pressures,
partially offset by increased demand for the Company's services due to increased
infrastructure needs created by population growth in the western United States.
Income from continuing operations for the water resources division
increased 4.3% to $28,654,000 for the year ended January 31, 2003, compared to
$27,474,000 for last year. The increase was primarily attributable to improved
pricing and margins at certain of the Company's domestic water supply locations,
a large drilling project performed in the oil and gas sector and certain gains
on the sale of property and equipment, partially offset by start-up expenses
associated with a water development and storage venture.
Mineral Exploration Division
(in thousands)
Year ended January 31,
------------------------
2003 2002
---- ----
Revenues $55,769 $57,945
Loss from continuing operations (1,082) (7,313)
Mineral exploration revenues decreased 3.8% to $55,769,000 for the year
ended January 31, 2003, compared to revenues of $57,945,000 for the year ended
January 31, 2002. Increased activity levels in North America and Australia due
to rising precious metal prices were not sufficient to offset reduced
exploration activity in certain areas of Africa.
The loss from continuing operations for the mineral exploration division
was $1,082,000 for the year ended January 31, 2003, compared to a loss of
$7,313,000 for the year ended January 31, 2002. Results of operations for the
year ended January 31, 2003 reflect losses in Africa partially offset by
improved operating performance and increased activity levels in North America
and Australia. Included in the African losses was the impact of losing two
significant contracts and approximately $1,000,000 of costs associated with
relocating the West African operations base. The division benefited in fiscal
2003 from reduced depreciation and amortization of $2,753,000 due to assets
fully depreciated in prior periods and ceasing to amortize goodwill upon the
adoption of SFAS No. 142. Also included in the year was a gain of $901,000 on
the sale of an investment in a gold exploration project in Africa. The prior
year loss includes a $3.3 million charge related to the sale of the Company's
investment in Ausdrill Limited (see Note 6 of the Notes to Consolidated
Financial Statements).
23
Geoconstruction Services Division
(in thousands)
Year ended January 31,
-------------------------
2003 2002
---- ----
Revenues $29,621 $27,006
Income from continuing operations 2,631 1,194
Geoconstruction services revenues increased 9.7%, to $29,621,000 for the
year ended January 31, 2003 compared to $27,006,000 for last year. The increase
in revenues was a result of two large construction projects in Hawaii, the large
multi-divisional project in the oil and gas sector and increased equipment sales
as a result of new product offerings at the Company's manufacturing facility in
Italy.
The geoconstruction services division had income from continuing operations
of $2,631,000 for the year ended January 31, 2003, compared to $1,194,000 for
the year ended January 31, 2002. The increased profits were primarily
attributable to the margins associated with increased revenues and the
elimination of costs incurred in the prior year associated with complications on
certain of the Company's groundfreezing projects.
Energy Services and Production Division
(in thousands)
Year ended January 31,
---------------------------
2003 2002
---- ----
Revenues $17,016 $27,011
Income (loss) from continuing operations (2,621) 1,014
Energy services revenues decreased 37.0% to $17,016,000 for the year ended
January 31, 2003, compared to revenues of $27,011,000 for the year ended January
31, 2002. Revenues for the division were negatively impacted by decreased oil
and gas exploration spending in Canada and depressed market conditions for our
oil and gas services in the Gulf of Mexico region of the United States.
The division had a loss from continuing operations of $2,621,000 for the
year ended January 31, 2003, compared to income from continuing operations of
$1,014,000 for the year ended January 31, 2002. The decrease in profits was the
result of expenses related to the Company's energy exploration activities and
coalbed methane development efforts, start-up expenses for a new service
location in Louisiana, and reduced profits due to depressed market conditions.
Products and Other
(in thousands)
Year ended January 31,
--------------------------
2003 2002
---- ----
Revenues $ 436 $5,190
Income (loss) from continuing operations (2,142) 1,389
Products and other revenues decreased 91.6% to $436,000 for the year ended
January 31, 2003, compared to $5,190,000 for the year ended January 31, 2002.
The decrease in revenues was the result of the sale of Christensen Products to a
subsidiary of Atlas Copco in the third quarter of last year and two large
specialty construction projects completed last year.
24
The loss for products and other of $2,142,000 for the year ended January
31, 2003, includes a write-down of the Christensen Products land and building to
reflect further declines in fair market value and residual expenses associated
with closing Christensen Products. Income for the year ended January 31, 2002
includes a $4.0 million gain on the sale of Christensen Products to Atlas Copco
(see Note 6 to the Notes to Consolidated Financial Statements).
Corporate expenses not allocated to individual divisions (primarily
included in selling, general and administrative expenses) were $14,759,000 and
$15,596,000 for the years ended January 31, 2003 and 2002, respectively. The
decrease in unallocated corporate expenses was primarily the result of lower
incentive-related accruals for the year.
Comparison of Fiscal 2002 to Fiscal 2001
The financial comparison and discussion of fiscal 2002 versus fiscal 2001
has been reclassified to reflect discontinued operations and to conform to the
2003 presentation of income measures.
Results of Operations
Revenues for fiscal 2002 decreased $4,008,000 or 1.4% to $289,958,000
compared to $293,966,000 for fiscal 2001. The decrease was primarily the result
of decreases in the Company's mineral exploration and geoconstruction services
divisions, partially offset by increased revenues in the water resources and
energy services and production divisions.
Gross profit as a percentage of revenues was 27.9% for fiscal 2002 compared
to 25.3% for fiscal 2001. The increase in gross profit was primarily
attributable to improved margins at the Company's domestic water locations and
certain international mineral exploration locations, combined with reduced
expenses associated with the Company's domestic oil and gas exploration
activities. The increases above were partially offset by reduced margins at the
Company's products locations in the United States.
Selling, general and administrative expenses increased to $55,877,000 for
fiscal 2002 compared to $55,080,000 for fiscal 2001. The increase was primarily
a result of increased employee benefit, insurance premium and legal costs for
the year.
Depreciation and amortization decreased to $17,956,000 for fiscal 2002
compared to $21,065,000 for fiscal 2001. The decrease in depreciation and
amortization was attributable to the disposal of assets in certain international
locations and the application of purchase accounting resulting in negative
goodwill reducing assets associated with the purchase of the remaining 50% of
WADS from Ausdrill (see Note 2 to the Notes to Consolidated Financial
Statements).
Interest expense decreased to $3,934,000 for fiscal 2002 compared to
$6,205,000 for fiscal 2001. The decrease was primarily a result of decreases in
the Company's average borrowings and in interest rates during the year.
25
Income tax expense of $2,498,000 was recorded for the year ended January
31, 2002 (an effective rate of 59.1%), compared to $238,000 for the same period
last year (an effective rate of (3.9%)). The effective rate in excess of the
statutory federal rate for the year ended January 31, 2002, was a result of the
impact of nondeductible expenses and the tax treatment of certain foreign
operations.
Water Resources Division
(in thousands)
Year ended January 31,
----------------------------
2002 2001
---- ----
Revenues $172,806 $164,883
Income from continuing operations 27,474 20,650
Water resources revenues increased 4.8% to $172,806,000 for the year ended
January 31, 2002 from $164,883,000 for the year ended January 31, 2001. The
increase in revenues was primarily the result of the Company's project for the
City of Azusa, California, combined with increased demand for the Company's
water-related services, partially due to drought conditions in certain areas of
the United States.
Income from continuing operations for the water resources division
increased 33.0% to $27,474,000 for the year ended January 31, 2002, compared to
$20,650,000 for last year. The increase was primarily attributable to improved
pricing and margins at the Company's domestic water supply locations.
Mineral Exploration Division
(in thousands)
Year ended January 31,
-----------------------------
2002 2001
---- ----
Revenues $57,945 $66,153
Loss from continuing operations (7,313) (6,898)
Mineral exploration revenues decreased 12.4% to $57,945,000 for the year
ended January 31, 2002 from $66,153,000 for the year ended January 31, 2001. The
decrease in revenue was primarily a result of continued softness in the
exploration market in the United States, Australia and Mexico, partially offset
by increased activity in certain areas of Africa.
The loss from continuing operations for the mineral exploration division
was $7,313,000 for the year ended January 31, 2002, compared to $6,898,000 for
the year ended January 31, 2001. The increased losses in the division were
primarily the result of a $3,329,000 charge related to the sale of the Company's
investment in Ausdrill Limited in fiscal 2002, partially offset by improved
margins at certain of the Company's international locations and cost reductions
in Australia.
Geoconstruction Services Division
(in thousands)
Year ended January 31,
-----------------------------
2002 2001
---- ----
Revenues $27,006 $38,010
Income from continuing operations 1,194 5,926
26
Geoconstruction services revenues decreased 29.0%, to $27,006,000 for the
year ended January 31, 2002, compared to $38,010,000 for last year. The decrease
in revenues was a result of slowing construction activity in certain areas of
the United States combined with competitive pricing pressures in certain markets
served by the Company.
The geoconstruction services division had income from continuing operations
of $1,194,000 for the year ended January 31, 2002, compared to $5,926,000 for
the year ended January 31, 2001. The reduced profits were primarily attributable
to lower revenues and to costs associated with complications on certain of the
Company's ground-freezing projects.
Energy Services and Production Division
(in thousands)
Year ended January 31,
-----------------------------
2002 2001
---- ----
Revenues $27,011 $21,232
Income (loss) from continuing operations 1,014 (1,866)
Energy services revenues increased 27.2% to $27,011,000 for the year ended
January 31, 2002, compared to revenues of $21,232,000 for the year ended January
31, 2001. The increase was primarily the result of increased oil and gas
exploration activity in Canada and increased capacity in the Company's service
operations in the Gulf of Mexico region of the United States.
Income from continuing operations for the energy services and production
division was $1,014,000 for the year ended January 31, 2002, compared to a loss
from continuing operating loss of $1,866,000 for the year ended January 31,
2001. The improved profits were the result of lower expenditures attributable to
the Company's oil and gas exploration activities and improved results from the
Company's oil and gas service businesses in the United States, combined with
increased levels of activity in Canada.
Products and Other
(in thousands)
Year ended January 31,
---------------------------
2002 2001
---- ----
Revenues $5,190 $ 3,688
Income (loss) from continuing operations 1,389 (2,454)
Products and other revenues increased 40.7% to $5,190,000 for the year
ended January 31, 2002, compared to $3,688,000 for the year ended January 31,
2001. The increase in revenues was primarily the result of increased demand for
drill rigs manufactured by the Company for the mineral exploration market and
two significant projects completed by the Company's specialty products group.
Income from continuing operations for products and other was $1,389,000 for
the year ended January 31, 2002, compared to a loss from continuing operations
of $2,454,000 for the year ended January 31, 2001. The improved results were
primarily the result of a $4.0 million gain on the sale of Christensen Products
recorded in 2002.
Corporate expenses not allocated to individual divisions (primarily
included in selling, general and administrative expenses) were $15,596,000 and
27
$15,189,000 for the years ended January 31, 2002 and 2001, respectively. The
increase in unallocated corporate expenses was primarily the result of increased
employee benefit and insurance premium costs.
Fluctuation in Quarterly Results
The Company historically has experienced fluctuations in its quarterly
results arising from the timing of the award and completion of contracts, the
recording of related revenues and unanticipated additional costs incurred on
projects. The Company's revenues on large, long-term drilling contracts are
recognized on a percentage of completion basis for individual contracts based
upon the ratio of costs incurred to total estimated costs at completion.
Contract price and cost estimates are reviewed periodically as work progresses
and adjustments proportionate to the percentage of completion are reflected in
contract revenues and gross profit in the reporting period when such estimates
are revised. Changes in job performance, job conditions and estimated
profitability (including those arising from contract penalty provisions) and
final contract settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. A significant
number of the Company's contracts contain fixed prices and assign responsibility
to the Company for cost overruns for the subject projects; as a result, revenues
and gross margin may vary from those originally estimated and, depending upon
the size of the project, variations from estimated contract performance could
affect the Company's operating results for a particular quarter. Many of the
Company's contracts are also subject to cancellation by the customer upon short
notice with limited damages payable to the Company. In addition, adverse weather
conditions, natural disasters, force majeure and other similar events can
curtail Company operations in various regions of the world throughout the year,
resulting in performance delays and increased costs. Moreover, the Company's
domestic drilling activities and related revenues and earnings tend to decrease
in the winter months when adverse weather conditions interfere with access to
drilling sites and the ability to drill; as a result, the Company's revenues and
earnings in its second and third quarters tend to be higher than revenues and
earnings in its first and fourth quarters. Accordingly, as a result of the
foregoing as well as other factors, quarterly results should not be considered
indicative of results to be expected for any other quarter or for any full
fiscal year. See the Company's Consolidated Financial Statements and Notes
thereto.
Inflation
Management believes that the Company's operations for the periods discussed
have not been adversely affected by inflation or changing prices from its
suppliers.
Liquidity and Capital Resources
The primary source of the Company's liquidity in fiscal 2003, 2002 and 2001
was its cash from operating activities of $18,818,000, $25,509,000 and
$12,952,000, respectively. The decrease in cash from operations in 2003 was
primarily attributable to incentive compensation payments paid in 2003 related
to fiscal 2002, note payments to Ausdrill Limited and payment of closing costs
related to certain subsidiaries closed at the end of fiscal 2002. In fiscal
2003, cash from operations was primarily used to pay debt issuance costs related
to the Credit Agreement, a prepayment penalty on early redemption of the Senior
28
Notes, and additions to property and equipment of $17,505,000. Capital
expenditures during the fiscal years were directed primarily toward expansion
and upgrading of the Company's equipment and facilities and the Company's
expansion into coalbed methane exploration and production. In fiscal 2004, the
Company expects to accelerate its expansion into the production of coalbed
methane gas. Capital expenditure estimates for fiscal 2004 include up to
$13,000,000 related to the Company's coalbed methane development efforts and
approximately $8,000,000 to upgrade equipment and facilities in the Company's
water resources, mineral exploration, and geoconstruction divisions. As of
January 31, 2003, the Company had no material commitments outstanding for
capital assets.
The Company maintains a cash borrowing facility (the "Credit Agreement")
comprised of a term loan and a $35,000,000 revolving credit facility. Borrowings
under the Credit Agreement were used to refinance borrowings outstanding under
the Company's previous credit facilities. The Company's borrowings under the
Credit Agreement were $32,370,000 at January 31, 2003 (see Note 11 to the
Consolidated Financial Statements).
The Company's working capital as of January 31, 2003, 2002 and 2001, was
$33,675,000, $15,513,000 and $46,960,000, respectively. Working capital at
January 31, 2002 was reduced by outstanding balances of $16,500,000 under its
previous revolving credit facility, which was refinanced during 2003. The
Company believes it will have sufficient cash from operations and access to
credit facilities to meet the Company's operating cash requirements and to fund
its budgeted capital expenditures for fiscal 2004. The Company also expects to
defray the cash cost of its fiscal 2003 incentive compensation awards by making
a portion of the payments in common stock.
The Company's contractual obligations and commercial commitments are summarized
as follows:
Payments/Expiration by Period
Less than
Total 1 year 1-3 years 4-5 years
------ ------- --------- ---------
Contractual Obligations and Other
Commercial Commitments
Debt $32,370 $ 3,938 $10,938 $17,494
Operating leases 15,798 5,975 6,557 3,266
Ausdrill promissory note 900 900 - -
------- ------- ------- -------
Total contractual cash
obligations 49,068 10,813 17,495 20,760
------- ------- ------- -------
Standby letters of credit 6,911 6,911 - -
------- ------- ------- -------
Total contractual obligations
and commercial commitments $55,979 $17,724 $17,495 $20,760
======= ======= ======= =======
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
29
during the reporting period. On an on-going basis, management evaluates its
estimates and judgments, which are based on historical experience and on various
other factors that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Accounting policies are more fully described in Note 1 to the financial
statements, located elsewhere in this Annual Report on Form 10-K for the year
ended January 31, 2003. We believe that the following represent our more
critical estimates and assumptions used in the preparation of our consolidated
financial statements.
Revenue Recognition -- Revenue is recognized on large, long-term contracts using
the percentage of completion method based upon materials installed and labor
costs incurred. Changes in job performance, job conditions and estimated
profitability, including those arising from contract penalty provisions, and
final contract settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined.
Goodwill and Other Intangibles -- In June 2001, the Financial Accounting
Standards Board issued SFAS No. 142, which was effective for the Company as of
February 1, 2002. SFAS No. 142 substantially changes the accounting for
goodwill, requiring that goodwill and other intangible assets with indefinite
useful lives cease to be amortized, and, instead periodically tested for
impairment. This statement also requires that within six months of adoption,
goodwill be tested for impairment at the reporting unit level as of the date of
adoption.
As disclosed in the consolidated financial statements, the Company had goodwill
of $21,884,000 at January 31, 2002. The goodwill was primarily attributable to
the Company's Mineral Exploration Division. The process of evaluating goodwill
for impairment involves the determination of the fair value of the Company's
reporting units. Inherent in such fair value determinations are certain
judgments and estimates, including the interpretation of current economic
indicators and market valuations, and assumptions about the Company's strategic
plans with regard to its operations. The Company completed the initial
assessment of goodwill during the second quarter of fiscal year 2003 and
determined a transitional impairment charge was required. As a result, the
Company recorded a non-cash charge of $14,429,000, which was recorded, net of
taxes of $5,796,000, as a cumulative effect of a change in accounting principle
in accordance with SFAS No. 142. The Company completed its annual impairment
test as of December 31, 2002 and no further impairment was indicated. We believe
at this time that the carrying value of the remaining goodwill is appropriate,
although to the extent additional information arises or the Company's strategies
change, it is possible that the Company's conclusions regarding impairment of
the remaining goodwill could change and result in a material effect on its
financial position or results of operations.
Other Long-lived Assets -- In evaluating the fair value and future benefits of
long-lived assets, we perform an analysis of the anticipated future net cash
flows of the related long-lived assets and reduce their carrying value by the
30
excess, if any, of the result of such calculation. We believe at January 31,
2003 that the long-lived assets' carrying values and useful lives continue to be
appropriate.
Accrued Insurance Expense -- We record estimates for certain health and welfare,
workers' compensation, and casualty insurance costs that are self-insured
programs. Should a greater amount of claims occur compared to what was estimated
or costs of the medical profession increase beyond what was anticipated,
reserves recorded may not be sufficient and additional costs to the consolidated
financial statements could be required.
Costs estimated to be incurred in the future for employee medical benefits,
workers' compensation and casualty insurance programs resulting from claims
which have occurred are accrued currently. Under the terms of the Company's
agreement with the various insurance carriers administering these claims, the
Company is not required to remit the total premium until the claims are actually
paid by the insurance companies. These costs are not expected to significantly
impact liquidity in future periods (see Note 13 to the Consolidated Financial
Statements).
Income Taxes -- Income taxes are provided using the asset/liability method, in
which deferred taxes are recognized for the tax consequences of temporary
differences between the financial statement carrying amounts and tax bases of
existing assets and liabilities. Deferred tax assets are reviewed for
recoverability and valuation allowances are provided as necessary. Provision for
U.S. income taxes on undistributed earnings of foreign subsidiaries and foreign
affiliates is made only on those amounts in excess of those funds considered to
be invested indefinitely (see Note 8 of the Notes to Consolidated Financial
Statements).
Litigation and Other Contingencies -- The Company is involved in litigation
incidental to its business, the disposition of which is expected to have no
material effect on the Company's financial position or results of operations. It
is possible, however, that future results of operations for any particular
quarterly or annual period could be materially affected by changes in the
Company's assumptions related to these proceedings. The Company accrues its best
estimate of the probable cost for the resolution of legal claims. Such estimates
are developed in consultation with outside counsel handling these matters and
are based upon a combination of litigation and settlement strategies. To the
extent additional information arises or the Company's strategies change, it is
possible that the Company's estimate of its probable liability in these matters
may change.
See Note 15 of the Notes to Consolidated Financial Statements for a
discussion of new accounting pronouncements and their impact on the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The principal market risks to which the Company is exposed are interest
rate risk on variable rate debt, equity risk on marketable investments, and
foreign exchange rate risk that could give rise to translation and transaction
gains and losses.
The Company centrally manages its debt and investment portfolios
considering overall financing strategies and tax consequences. A description of
31
the Company's variable rate debt and an associated interest rate swap agreement
appear in Note 11 to the Consolidated Financial Statements of this Form 10-K.
Assuming then existing debt levels and the swap agreement, an instantaneous
change in interest rates of one percentage point would impact the Company's
annual interest expense by $157,000 and $165,000 at January 31, 2003 and 2002,
respectively. The Company's investments are described in Note 1 to the
Consolidated Financial Statements. Marketable investments are carried at market
value and are held for long-term investing purposes rather than trading
purposes.
Operating in international markets involves exposure to possible volatile
movements in currency exchange rates. Currently, the Company's primary
international operations are in Australia, Africa, Mexico, Canada and Italy. The
operations are described in Notes 1 and 14 to the Consolidated Financial
Statements. The Company's affiliates also operate in Chile, Peru, Mexico and
Panama (see Note 3 to the Notes to Consolidated Financial Statements). The
majority of the Company's contracts in Africa and Mexico are U.S. dollar-based,
providing a natural reduction in exposure to currency fluctuations.
As currency exchange rates change, translation of the income statements of
the Company's international operations into U.S. dollars may affect year-to-year
comparability of operating results. We estimate that a 10% change in foreign
exchange rates would not significantly impact income from continuing operations
for the years ended January 31, 2003 and 2002. This quantitative measure has
inherent limitations, as it does not take into account any governmental actions,
changes in customer purchasing patterns or changes in the Company's financing
and operating strategies.
Foreign exchange gains and losses in the Company's Consolidated Statements of
Income reflect transaction gains and losses and translation gains and losses
from the Company's Mexican and African operations which use the U.S. dollar as
their functional currency. Net foreign exchange gains and losses for 2003, 2002
and 2001 were not significant.
32
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
Independent Auditors' Report .......................................... 34
Financial Statements:
Consolidated Balance Sheets as of January 31, 2003 and 2002......... 35
Consolidated Statements of Income for the Years
Ended January 31, 2003, 2002 and 2001............................ 37
Consolidated Statements of Stockholders' Equity for the Years
Ended January 31, 2003, 2002 and 2001............................ 39
Consolidated Statements of Cash Flows for the Years Ended
January 31, 2003, 2002 and 2001 ................................. 40
Notes to Consolidated Financial Statements.......................... 42
Financial Statement Schedule II..................................... 64
All other schedules have been omitted because they are not applicable or
not required as the required information is included in the Consolidated
Financial Statements of the Company or the Notes thereto.
33
INDEPENDENT AUDITORS' REPORT
Layne Christensen Company:
We have audited the accompanying consolidated balance sheets of Layne
Christensen Company and subsidiaries as of January 31, 2003 and 2002, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended January 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the company as of January 31,
2003 and 2002, and the results of their operations and their cash flows for each
of the three years in the period ended January 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 5 to the financial statements, in 2003 the Company
changed its method of accounting for goodwill to conform with Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Kansas City, Missouri
March 31, 2003
34
Layne Christensen Company and Subsidiaries
Consolidated Balance Sheets
As of January 31, 2003 and 2002
(in thousands)
January 31, January 31,
ASSETS 2003 2002
------ ----------- -----------
Current assets:
Cash and cash equivalents $ 10,770 $ 2,983
Customer receivables, less allowance
of $4,078 and $3,596, respectively 39,117 43,603
Costs and estimated earnings in excess of
billings on uncompleted contracts 8,711 11,912
Inventories12,738 21,885
Deferred income taxes 11,514 10,181
Income taxes receivable 463 3,074
Other 4,867 2,738
---------- ---------
Total current assets 88,180 96,376
---------- ---------
Property and equipment:
Land 6,801 8,163
Buildings 12,967 16,112
Machinery and equipment 167,043 162,967
Uncompleted wells, equipment and facilities 3,176 -
Mineral interest in properties 369 -
---------- ---------
190,356 187,242
Less-accumulated depreciation (132,167) (128,460)
---------- ---------
Net property and equipment 58,189 58,782
---------- ---------
Other assets:
Investment in affiliates 18,587 19,504
Goodwill 1,659 21,884
Deferred income taxes 8,262 4,270
Other 3,223 1,526
---------- ---------
Total other assets 31,731 47,184
---------- ---------
$ 178,100 $ 202,342
========== =========
See Notes to Consolidated Financial Statements.
- Continued -
35
Layne Christensen Company and Subsidiaries
Consolidated Balance Sheets(Continued)
As of January 31, 2003 and 2002
(in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
------------------------------------ ----------